Standards of Conduct and Referral of Known or Suspected Criminal Violations; Standards of Conduct, 9649-9661 [2014-03098]
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Federal Register / Vol. 79, No. 34 / Thursday, February 20, 2014 / Proposed Rules
3506; 5 CFR part 1320 Appendix A.1),
the Board reviewed the rule under the
authority delegated to the Federal
Reserve by the Office of Management
and Budget (OMB). The proposed rule
contains no collections of information
under the PRA. See 44 U.S.C. 3502(3).
Accordingly, there is no paperwork
burden associated with the proposed
rule.
List of Subjects in 12 CFR Part 230
Advertising, Banks, Banking,
Consumer protection, Reporting and
recordkeeping requirements, Truth in
savings.
Authority and Issuance
PART 230—[REMOVED AND
RESERVED]
For the reasons set forth in the
preamble, under the authority of 12
U.S.C. 5581, the Board proposes to
remove and reserve Regulation DD, 12
CFR part 230.
By order of the Board of Governors of the
Federal Reserve System, February 10, 2014.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2014–03266 Filed 2–19–14; 8:45 am]
BILLING CODE P
FARM CREDIT ADMINISTRATION
12 CFR Part 612
RIN 3052–AC44
Standards of Conduct and Referral of
Known or Suspected Criminal
Violations; Standards of Conduct
Farm Credit Administration.
Proposed rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, we, or our)
proposes to amend its regulations
governing standards of conduct of
directors, employees, and agents of
Farm Credit System (System)
institutions, excluding the Federal
Agricultural Mortgage Corporation. The
amendments would clarify and
strengthen reporting requirements and
prohibitions, require institutions to
establish a Code of Ethics, and enhance
the role of the Standards of Conduct
Official.
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SUMMARY:
You may send comments on or
before May 21, 2014.
ADDRESSES: We offer a variety of
methods for you to submit your
comments. For accuracy and efficiency
reasons, commenters are encouraged to
submit comments by email or through
the FCA’s Web site. As facsimiles (fax)
DATES:
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are difficult for us to process and
achieve compliance with section 508 of
the Rehabilitation Act, we are no longer
accepting comments submitted by fax.
Regardless of the method you use,
please do not submit your comment
multiple times via different methods.
You may submit comments by any of
the following methods:
• Email: Send us an email at regcomm@fca.gov.
• FCA Web site: https://www.fca.gov.
Select ‘‘Public Commenters,’’ then
‘‘Public Comments’’ and follow the
directions for ‘‘Submitting a Comment.’’
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• Mail: Barry F. Mardock, Deputy
Director, Office of Regulatory Policy,
Farm Credit Administration, 1501 Farm
Credit Drive, McLean, Virginia 22102–
5090.
You may review copies of comments
we receive at our office in McLean,
Virginia, or from our Web site at https://
www.fca.gov. Once you are in the Web
site, select ‘‘Public Commenters,’’ then
‘‘Public Comments’’ and follow the
directions for ‘‘Reading Submitted
Public Comments.’’ We will show your
comments as submitted but, for
technical reasons, we may omit items
such as logos and special characters.
Identifying information that you
provide, such as phone numbers and
addresses, will be publicly available.
However, we will attempt to remove
email addresses to help reduce Internet
spam.
FOR FURTHER INFORMATION CONTACT:
Jacqueline R. Melvin, Policy Analyst,
Office of Regulatory Policy, Farm
Credit Administration, McLean, VA
22102–5090, (703) 883–4498, TDD
(703) 883–4056,
or
Mary Alice Donner, Senior Counsel,
Office of General Counsel, Farm
Credit Administration, McLean, VA
22102–5090, (703) 883–4020, TDD
(703) 883–4056.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this proposed rule
are to:
• Clarify and strengthen the
regulations in part 612, subpart A,
regarding standards of conduct;
• Modify definitions;
• Clarify reporting requirements and
prohibitions on the purchase of System
institution acquired property and
lending transactions;
• Strengthen responsibility and
accountability requirements for System
institution Standards of Conduct
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Officials, boards of directors (or board),
employees, and agents; and
• Require each System institution to
adopt a Code of Ethics.
The FCA has not made significant
changes to its standards of conduct
regulations since 1994, and we have
determined that it is appropriate to
strengthen and modernize the rule. The
proposed rule would add new
provisions, clarify and augment some of
the current provisions and provide
additional flexibility for others. The
proposed rule is organized differently
from the current rule. Sections on
director and employee reporting and
prohibited conduct are repositioned to
improve the logical flow of the rule. The
proposed rule adds a new § 612.2136 on
conflicts of interest, a new § 612.2165(a)
on Code of Ethics, a new § 612.2165(c)
on allowing exceptions to certain rules
if no conflict of interest exists, and new
requirements in § 612.2180 addressing
standards of conduct for agents. It also
adds new standards of conduct
responsibilities to System institutions
(proposed § 612.2160) and to the
Standards of Conduct Official (proposed
§ 612.2170). We solicit comments on our
proposed amendments.
II. Section-by-Section Analysis
A. Definitions [§ 612.2130]
The proposed rule would have some
new and some modified definitions:
Code of Ethics. The proposed rule
would define ‘‘Code of Ethics’’ as a
written set of standards, rules, values,
and guidance that an institution uses to
ensure the ethical conduct of those who
sign it, and that reflects professionalism
and discourages misconduct so the best
interests of the institution are advanced.
Controlled entity and entity controlled
by. The proposed rule would continue
to provide that a controlled entity
includes an interest in an entity in
which the individual, directly or
indirectly or acting through or in
concert with one or more persons, owns
5 percent or more of the equity of the
entity; owns, controls, or has the power
to vote 5 percent or more of any class
of voting securities of the entity; or has
the power to exercise a controlling
influence over the management of the
entity. The FCA is aware that in other
contexts the definition of ‘‘controlled
entity’’ or ‘‘entity controlled by’’ may
mean having an ownership interest with
a greater threshold than 5 percent;
however, the purpose of this rule is to
ensure that institution directors and
employees are completely objective in
their decision-making, and are not in
any way influenced by personal
interests. The FCA believes that a
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reasonable person could conclude that a
director or employee could be
influenced to act favorably toward an
entity in which he or she had an
economic interest of 5 percent or more.
Therefore, directors and employees
should report these interests and should
abstain from decision-making with
regard to them. So, for the purpose of
this rule only, a ‘‘controlled entity’’ or
‘‘entity controlled by’’ is defined as an
entity in which the director or employee
has an interest of 5 percent or more,
alone or in concert with others, directly
or indirectly.
Employee. The proposed rule would
clarify the definition of ‘‘employee’’ to
include non-salaried employees such as
hourly wage earners.
Entity. The proposed rule would add
unincorporated business entities to the
definition of ‘‘entity’’.
Family. The proposed rule would add
to the current definition of ‘‘family’’
associations or relationships that are in
the nature of a family relationship. This
is intended to modernize the definition
of family to include non-traditional
relationships, and adoptions and other
relationships where an adult who is not
related to a child acts as a parent to a
child living in the home. Each System
institution is encouraged to provide
more explanation and discussion of the
regulatory definition in its standards of
conduct policies and procedures.
Material. The proposed rule would
not change the definition of ‘‘material.’’
However, each System institution must
set specific parameters on what
constitutes a material financial interest
or transaction. The value of a material
financial interest or transaction may
change depending on the circumstances
and, to some extent, the geographic
location of the institution involved. The
institution’s determination of
materiality would be subject to FCA
examination.
The institution’s policies and
procedures may include de minimis
values below which a financial interest
is determined by the board not to be
material. The de minimis amount is
necessarily System institution-specific,
and must be appropriate to the
institution’s size, location and risk
tolerance. A de minimis amount is an
amount or value representing an interest
that is so insignificant that no
reasonable person could conclude that it
would influence a director or
employee’s ability to act impartially and
in the best interests of the System
institution. The institution would need
to adequately support the values
established in its determination of de
minimis or not material, and this
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determination would be subject to FCA
examination.
Officer. We propose to replace
‘‘secretary’’ with corporate secretary.
Ordinary course of business. We
propose to remove ‘‘two’’ concerning
transactions between persons and add
‘‘agents’’ to those for whom preferential
treatment should be avoided.
Signed. We would add a definition of
‘‘signed’’ to have the same meaning as
set forth in § 620.1 of the chapter, to
provide for greater uniformity in our
regulations and to clarify electronic
signatures are acceptable.
Unincorporated business entities. We
would add a definition of
‘‘unincorporated business entities’’ to
have the same meaning as set forth in
§ 611.1151 of the chapter.
B. Director and Employee
Responsibilities and Conduct—
Generally [Proposed § 612.2135]
The section heading would be
replaced with ‘‘responsibilities and
conduct’’ but otherwise this section is
not substantively changed. The words
‘‘and guidance’’ are added to paragraph
(b) to make clear that in addition to
regulations, policy statements,
instructions and procedures, directors
and employees must observe guidance
of the FCA, to the best of their abilities.
C. Conflicts of Interest [Proposed
§ 612.2136]
The proposed rule would add a new
§ 612.2136 on conflicts of interest. This
section is added to require directors,
employees, and agents to take
affirmative action to report conflicts of
which they are aware. It is intended to
compel them to take ownership of and
invest in their ethical responsibilities.
Paragraph (a) would specifically require
directors, employees, and agents to
disclose any conflicts of interests they
may have in any matters, activities or
transactions pending at the System
institution to the Standards of Conduct
Official. It would require immediate
reporting of conflicts of interests and
would supplement employee’s and
director’s existing annual and periodic
reporting requirements. Paragraph (b)
would require recusal from any board
action on, discussion of, or any other
official action on or discussion of, those
matters. For example, if a director or
employee were to purchase farm
equipment such as a combine harvester
from a known borrower, the purchase
should be reported and reviewed by the
Standards of Conduct Official for
conflicts. If the borrower has a matter or
transaction pending at the institution,
the director or employee would be
recused from that matter. Note that if
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the purchase were financed it would be
a lending transaction covered by
§§ 612.2145 and 612.2155. Working
together with other provisions of the
rule, this section is intended to bolster
the directors’, employees’, and agents’
loyalty to the System institution and to
reinforce personal responsibility and
accountability in avoiding conflicts and
acting ethically.
The requirements of disclosure and
recusal in this section apply not only to
directors, employees, and agents, but
also those consultants, professionals or
experts who are hired to give advice on
a matter, transaction or activity but may
not necessarily meet our definition of
‘‘agent’’. If the consultant, professional
or expert has an interest that may
compromise his or her complete
impartiality in a matter, transaction or
activity for which his or her expertise is
sought, paragraph (a) requires that he or
she disclose that interest and paragraph
(b) requires that he or she refrain from
further discussion of System business
with respect to that matter, transaction
or activity.
System institutions must develop
policies and procedures to implement
this section. Such policies and
procedures could include procedures
for waiver of the recusal requirement if
the Standards of Conduct Official
determines in writing that the conflict
would not interfere with the person’s
ability to perform impartially and in the
best interest of the System institution. In
the absence of such waiver procedures,
recusal is required.
D. Director Reporting [Current
§ 612.2145 Is Proposed § 612.2140]
We would revise § 612.2140(b)(1) to
require that each director report all
‘‘material’’ financial interests with other
directors, employees, agents or
borrowers of the employing, supervised,
and supervising institution. We believe
this section is necessary to help
directors and Standards of Conduct
Officials identify and avoid potential
conflicts of interests. Because the
proposed rule would require directors to
report only material financial interests
we believe the requirement will not be
unduly burdensome or intrusive.
As discussed in the section-by-section
analysis above, each System institution
must develop policies and procedures
that provide parameters for that which
constitutes a ‘‘material’’ financial
interest, and may develop policies and
procedures that set forth a certain de
minimis value that would not be
considered material for reporting
requirements. Reporting of material
financial interests is intended to assist
the Standards of Conduct Official in
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identifying and resolving conflict
situations and to help a director identify
areas of prohibited conduct. A material
financial interest does not necessarily
mean that a conflict of interest exists or
that the interest would unduly influence
the director in his or her position.
Like the current rule, the proposed
rule would require directors to report
the name of any relative or person
residing in the director’s household, any
business partner, or any entity
controlled by the director or such
persons (alone or in concert) if the
director knows or has reason to know
that such individual or entity transacts
business with the institution or any
institution supervised by the director’s
institution. This rule does not require a
director to solicit information from
these persons or entities to determine
whether they had or have transactions
with the institution. However, the FCA
presumes that a director would know or
have reason to know whether or not a
relative or other persons residing in the
director’s household had or has
transactions with the institution.
E. Directors—Prohibited Conduct
[Current § 612.2140 Is Proposed
§ 612.2145]
In our current rule, director
prohibited conduct and the related
limited exceptions are included in the
same discussion. In proposed
§ 612.2145(a), we set forth the basic
rules for prohibited conduct. In
proposed § 612.2145(b), we set forth the
specific limitations and exceptions to
the prohibitions. We believe this change
is necessary to remove any possible
ambiguity from the meaning of the
prohibitions. Most of these changes are
straightforward, but proposed
§ 612.2145(a)(6) and (b)(3) regarding
acquired property and proposed
§ 612.2145(a)(7) and (b)(4) regarding
lending transactions require special
discussion.
The proposed rule would clarify the
circumstances under which directors
may and may not purchase property that
a System institution has owned or
acquired by foreclosure or similar
action. These proposed changes are not
substantive; they are clarifications of the
rule. Proposed § 612.2145(a)(6) would
provide that, among other things, a
director may not knowingly acquire,
directly or indirectly, property that was
owned or acquired by the employing,
supervising or supervised institution as
a result of foreclosure or similar action.
Proposed § 612.2145(b)(3) would set
forth an exception to the acquired
property prohibition in proposed
§ 612.2145(a)(6). The exception would
apply only if the director did not
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participate in the deliberations or
decision to foreclose, or to take similar
action, or to dispose of the property or
in establishing the terms of the sale, and
(1) the director acquired the property
through inheritance, or (2) the System
institution did not own the property or
an interest in the property at any time
during the 12-month period before the
director’s acquisition of the property, or
(3) the director acquired the property
through public auction with open
competitive bidding and the Standards
of Conduct Official determined, before
the director acquired the property, that
the director does not have an advantage
over other bidders as a result of the
director’s position and that no other
conflict of interest or the appearance
thereof exists.
By open competitive bidding, we
mean bidding that is both competitive,
allowing involvement of all interested
parties, and that is open and unsealed.
Open competitive bidding affords all
interested parties an opportunity to
counter-bid. The advantage to open
bidding is that it discourages unethical
behavior or favoritism. A public auction
can be accomplished on-line as long as
there is an opportunity for all who may
be interested to bid.
The proposed language does not
reflect a substantive change from the
intent of this original regulatory
provision regarding acquired property.
However, we believe that because of the
scope of misunderstanding and
misapplication of the original provision,
the revision is necessary.
Proposed § 612.2145(a)(7) would
provide that a director must not directly
or indirectly borrow from, lend to, or
become financially obligated with or on
behalf of a director, employee, or agent
of the employing, supervising or
supervised institution or a borrower or
loan applicant of the employing
institution. This section addresses
lending and borrowing relationships. It
prohibits a director from entering into a
lending or borrowing transaction with
those who may have a financial
relationship with the System institution.
Lending and borrowing relationships
include providing guarantees or standby letters of credit and similar forms of
financial obligation.
The FCA recognizes that there are
many situations in which a director may
enter into lending transactions or
business relationships that involve
financing with other directors,
employees, agents, borrowers or loan
applicants in the ordinary course of
business. Therefore, to keep the
provision from being unduly restrictive,
proposed § 612.2145(b)(4) would set
forth an exception to the proposed
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§ 612.2145(a)(7) prohibition. The
exception would apply if: (1) The
transaction is with a relative or any
person residing in the director’s
household; or (2) the transaction is
undertaken in an official capacity in
connection with the institution’s
discounting, lending or participation
relationships with OFIs and other
lenders; or (3) the Standards of Conduct
Official determines, as authorized under
board policy and in the manner outlined
in the rule, that the potential for a
conflict of interest is insignificant. The
Standards of Conduct Official’s
determination must be in writing;
document that the transaction is in the
ordinary course of business or is not
material in value or amount; document
that the director did not participate in
the determination of any matter
affecting the financial interests of the
other party to the transaction except
those matters affecting all shareholders/
borrowers in a nondiscriminatory way;
and most importantly, the Standards of
Conduct Official’s determination be
made before the director enters into the
transaction. The Standards of Conduct
Official must renew this determination
annually, as applicable. For example, if
a director and a borrower contemplate
an ongoing business relationship by
which the director purchases grain from
a borrower on credit on a regular basis,
the Standards of Conduct Official would
have to review this relationship for
conflicts. Once reviewed, to the extent
this is an ongoing relationship in the
ordinary course of business, the
Standards of Conduct Official would not
have to review each and every
transaction, but would renew on an
annual basis his or her determination
that the ongoing relationship remains in
the ordinary course of business and
does not create a conflict.
The Standards of Conduct Official
cannot ratify prohibited conduct after
the fact. If the transaction has been
entered into without a pre-existing
Standards of Conduct Official
determination, then the FCA could
consider the director to have violated
this provision of the regulation.
As discussed, each System institution
must set specific parameters on what
constitutes a material financial interest
or transaction and also what is in the
ordinary course of business in the local
environment. Whether or not to
establish a de minimis threshold for
review would be left to the discretion of
each System institution board; however,
as discussed above, if the institution
does establish a de minimis value, it
must do so under policies and
procedures subject to FCA examination.
The institution’s board must not
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establish the de minimis value to be so
high or so ambiguous as to circumvent
the intent of this rule.
F. Employee Reporting [Current
§ 612.2155 Is Proposed § 612.2150]
This provision would require
employees to report all ‘‘material’’
financial interests with directors,
employees, agents or borrowers of the
employing, supervised, and supervising
institution. This change can be found in
proposed § 612.2150(b)(1) and is
parallel to the change for directors in
proposed § 612.2140(b)(1).
G. Employees—Prohibited Conduct
[Current § 612.2150 Is Proposed
§ 612.2155]
This provision has been changed from
the current § 612.2150 and the revisions
are parallel to the changes for director
prohibited conduct, where applicable.
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H. Joint Employees [Proposed
§ 612.2157]
This section, like the current rule,
prohibits an officer of a Farm Credit
Bank (FCB) or agricultural credit bank
(ACB) from contemporaneously working
as an employee at an association in its
district. Also, this provision prohibits a
non-officer employee of a FCB or ACB
from serving as an officer of an
association in its district. The FCA
recognizes that occasionally the System
may benefit from having a FCB or an
ACB officer serve at an association.
Therefore, this provision is modified
from the original to allow joint
employee relationships with the written
approval of the Standards of Conduct
Official if the bank board of directors
agrees that the interests of both System
institutions outweighs the potential for
conflicts of interest or conflicts related
to devotion of time to official duties.
The bank must provide written notice to
the FCA before the joint relationship
begins, and the FCA may object within
10 calendar days of receiving the bank’s
notice.
I. Institution Responsibilities [Proposed
§ 612.2160]
The proposed rule would update this
section to require new responsibilities
and accountability of System
institutions in overseeing the standards
of conduct program.
Proposed § 612.2160(a)(1) would
require the institution to dedicate
appropriate resources to support the
standards of conduct program. The
Standards of Conduct Official has many
duties and responsibilities, and
depending on the size of the institution
it may not be possible for one person to
satisfactorily manage all of these
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responsibilities. Each System institution
should dedicate personnel and
resources as necessary to ensure that the
standards of conduct program is carried
out thoroughly and in compliance with
this rule.
Proposed § 612.2160(a)(3) would
require the institution to notify the FCA
immediately of any known or suspected
material standards of conduct
violations. This notification can come
directly from the board of directors, or
from the Standards of Conduct Official
as separately required in proposed
§ 612.2170(b)(7). The requirement is
added here to make clear that the
institution itself is accountable for
notifying the FCA of known or
suspected standards of conduct
violations.
Proposed § 612.2160(e) would require
the institution to ensure that directors
and employees certify annually that
they will adhere to the institution’s
standards of conduct policy and Code of
Ethics. System institutions would be
required under § 612.2160(f) to have
documentation that agents (1) are
subject to applicable industry or
professional ethics standards, or (2)
have certified to adhere to the
provisions of the System institution’s
Code of Ethics applicable to agents. The
certifications could be performed in
various ways including electronic
signatures.
Proposed § 612.2160(g) would require
that System institutions make
compliance with the standards of
conduct program a component of the
risk assessment process subject to
periodic audit, as established by the
audit committee, by a person or entity
independent of the standards of conduct
program. We would expect an
institution to audit the standards of
conduct program at least once every 3
to 4 years consistent with its risk
assessment and audit planning process.
The scope and depth of the audit would
be determined and documented by the
institution.
Proposed § 612.2160(h) would require
institutions to establish an effective
method of internal controls over the
reporting, disclosing, and other
requirements of this part, including
controls for the confidentiality of
information reported to and maintained
by the Standards of Conduct Official. It
would require institutions to establish
an effective method of internal controls
over the audit of the standards of
conduct program.
J. Code of Ethics, Policies and
Procedures [Proposed § 612.2165]
Many of the provisions in proposed
§ 612.2165 would be the same as the
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provisions in current § 612.2165.
However, each institution should have a
strong sense of its role in the System’s
mission and should have a culture of
corporate and personal responsibility to
further that mission. Therefore, in
addition to adopting internal standards
of conduct policies and procedures,
proposed § 612.2165(a) would require
each System institution to adopt a Code
of Ethics that applies to directors and
employees and that includes a provision
for the ethical conduct of agents. Each
institution would be required to provide
a copy of its Code of Ethics to directors,
employees, and agents. Directors and
employees would be required to sign the
institution’s Code of Ethics. Agents not
subject to industry or professional ethics
standards would be required to certify
that they will adhere to the institution’s
Code of Ethics provision applicable to
agents.
The proposed rule sets forth
minimum specific guidelines that each
System institution’s Code of Ethics
would be required to meet. The
institution’s Code of Ethics must
promote honest and ethical conduct
including the ethical handling of actual
or apparent conflicts of interest;
promote integrity and compliance with
laws and regulations; prohibit
dishonesty, fraud or deceit and
discourage any conduct or act that
would adversely reflect on the
reputation, integrity or competency of
the System; prohibit misuse of office
and provide for the prompt reporting of
any person or persons who violates the
institution’s Code of Ethics or engages
in any activity that may require further
investigation under § 612.2301, subpart
B of the part, to the Standards of
Conduct Official.
Proposed § 612.2165(a)(3) would
require each institution’s board to adopt
policies and procedures concerning the
use of unincorporated business entities
(UBEs) that, at a minimum, ensure that
all transactions between the UBE and
System institution directors, employees,
and agents are conducted at arm’s
length. These policies and procedures
must ensure that System institution
directors, employees, and agents comply
with their employing institution
standards of conduct policies and
procedures and this rule in their
interactions with the UBE. For example,
System institution directors, employees,
and agents cannot purchase acquired
property from a UBE except in
compliance with this rule and their
institution’s standards of conduct
policies and procedures.
The FCA believes that each System
institution must review and update its
standards of conduct policies and
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procedures, as necessary, to strengthen
them. The FCA expects each System
institution to modernize and augment
its existing standards of conduct
policies and procedures to ensure the
highest standards of honesty, ethics,
integrity, impartiality and conduct. In
doing this, each System institution
should establish reasonable criteria for
business relationships and transactions
relevant to its business, geographic
location, and customer base. The
standards outlined in this rule serve as
a minimum bar against which each
System institution should build and
develop stronger internal standards of
conduct policies and procedures.
Proposed § 612.2165(b)(2) would
require System institutions to outline
authorities and responsibilities of the
Standards of Conduct Official. Included
in this requirement would be the
authority and responsibility to review
for compliance with this subpart all
loans considered for approval by the
supervisory bank under §§ 614.4460 and
614.4470, respectively. System
institution loans to directors and
employees and loans to FCA employees
and others subject to §§ 614.4460 and
614.4470 present unique conflict of
interest issues. The System institutions
should ensure that credit decisions with
respect to these loans are made without
favoritism or special terms. These loans,
which include insider loans, warrant a
higher level of scrutiny for possible
conflict or undue influence than noninsider loans.
Proposed § 612.2165(b)(14) would
clarify the circumstances under which
an institution’s policies and procedures
must prohibit the purchase and
retirement of the institution’s preferred
stock. This section does not place a
restriction on the issuance or retirement
of borrower stock associated with a
director or employee loan transaction.
Proposed § 612.2165(b)(16) would
require the board in its policies and
procedures to provide for annual
training on standards of conduct.
Training presents an opportunity to
continually educate directors and
employees on standards of conduct
issues and the importance of ethical
behavior.
Proposed § 612.2165(b)(17) would
require the institution to report to the
FCA exceptions authorized by the
institution board under § 612.2165(c).
The FCA recognizes that some of the
provisions of the rule may prohibit
activity where no actual or apparent
conflict of interest exists. Therefore,
proposed § 612.2165(c)(1) would allow
each System institution to adopt
policies and procedures by which the
System institution board of directors
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may grant a written exception to certain
standards of conduct rules under this
subpart. The FCA proposes that rules for
which an exception may be granted on
a case-by-case basis are a reporting
requirement, an employee or director
prohibition on disclosure of information
not generally available to the public, an
employee prohibition on serving as an
officer of a non-System entity in the
district or of a non-System financial
institution, a restriction on an employee
serving jointly at a bank and association
as discussed in proposed § 612.2157,
and the 5-percent threshold for defining
a controlled entity. For example, under
proposed § 612.2165(c)(1) a board could
allow an exception to the prohibition
with respect to an individual director’s
interest in a ‘‘controlled entity’’ where
that director indirectly owns more than
5 percent of the equity and the
Standards of Conduct Official
determines based on the facts and
circumstances that there is no potential
for conflict of interest. As another
example, this provision would allow the
board to approve an exception to the
prohibition on an employee serving as
an officer or director of a non-System
entity that transacts business with the
System institution in its district
(proposed § 612.2155(a)(4)), if the
Standards of Conduct Official
determines that there is no conflict of
interest.
The exceptions under proposed
§ 612.2165(c)(1) would have to be
approved on a case-by-case basis by the
institution’s board, based on a
recommendation of the Standards of
Conduct Official. The Standards of
Conduct Official’s recommendation
would need to be strongly supported by
a written determination that the
prohibition is not necessary to avoid a
conflict or appearance of a conflict or to
ensure impartiality, objectivity and
public confidence in the System
institution. The determination would
have to be documented in the
institution’s files and renewed at least
annually. The institution board would
impose appropriate conditions, as the
circumstances may dictate. In addition,
the board would provide for periodic
review of the criteria to determine
whether the board continues to support
the Standards of Conduct Official’s
recommendation. The exceptions
approved would be subject to FCA
examination, and to its determination of
whether the prohibition of the activity
is necessary to avoid a conflict or
appearance of a conflict or to ensure
impartiality, objectivity and public
confidence in the System institution.
The FCA specifically requests
comment on whether the provisions
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proposed are appropriate for board
waiver and whether other provisions
should be considered. There are some
transactions so susceptible to conflicts
that the FCA would not consider
permitting a waiver of the rule
prohibiting them. The rules prohibiting
directors, employees, and agents from
acquiring property could not be waived.
The rules prohibiting an employee from
acting as a real estate agent or broker
could not be waived, and the rule
prohibiting an employee from acting as
an agent or broker in connection with
the sale and placement of insurance
could not be waived. Finally the
requirement to comply with the
institution’s standards of conduct
policies and Code of Ethics could not be
waived. As previously stated, there may
be other rules for which an institution
board may appropriately consider
granting a waiver, and the FCA
specifically requests comment on the
waiver provisions of this proposal and
what those rules may be.
Proposed paragraph (c)(2) of this
section would allow the institution
board to consider a standing exception
to director and employee reporting
requirements under proposed
§§ 612.2140 and 612.2150, respectively.
As an example, policies and procedures
under proposed § 612.2165(c)(2) could
allow an exception to the requirement
that a director report the name and
nature of a business or any entity on
whose board the director sits, if the
entity is a nonprofit organization such
as a Chamber of Commerce, or a place
of worship, and the Standards of
Conduct Official determines that the
potential for conflict is insignificant
with respect to that category of entity.
Proposed paragraph (c)(2) would also
permit the board to establish policies
and procedures that provide for a
standing exception to the restrictions in
proposed §§ 612.2145(b)(4) and
612.2155(b)(6) on lending transactions,
if the potential for conflict is
insignificant because the transaction is
not material, or it is in the ordinary
course of business. An institution may
identify certain lending transactions
that fall under a certain dollar value and
are de minimis or immaterial. Those
transactions falling below such
identified amounts would not have to be
reported to or reviewed by the
Standards of Conduct Official. In
addition, an institution may identify
certain types of transactions that are in
the ordinary course of business.
Directors and employees could enter
into those ordinary course of business
transactions without the prior review of
the Standards of Conduct Official.
However, where the ordinary course of
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business transaction exceeds the de
minimis or immaterial threshold set by
the institution, the directors and
employees must report such
transactions, by including them in
regular reports to the Standards of
Conduct Official, and the Standards of
Conduct Official must review them.
Putting the exceptions of proposed
§ 612.2165(c)(2) together, a transaction
that is in the ordinary course of business
and that also is de minimis or falls
below the immaterial amount would
require neither director or employee
reporting nor Standards of Conduct
Official review.
For example, the System institution
may find that certain goods and services
that are offered to the public in the
ordinary course of business at a fixed
price, such as diesel fuel, or equipment
repairs, do not raise conflict of interest
concerns, even if purchased from a
System borrower with credit. Institution
policies and procedures could provide
that these transactions would not have
to be reported or approved unless they
reached a certain dollar amount or value
threshold. By contrast, transactions
involving price negotiation, such as
purchasing a tractor or other heavy farm
equipment, could raise issues of
impartiality or favoritism and should be
subject to more scrutiny.
In addition to transactions covered in
the institution’s policies and procedures
under proposed § 612.2165(c)(2),
proposed §§ 612.2145 and 612.2155
retain the existing flexibility for an
institution’s Standards of Conduct
Official to review a transaction before it
is entered into and make a case-by-case
determination that there is no conflict.
The exceptions in proposed
§ 612.2165(c)(2) are designed to be
applied to all directors and employees
and as such, must be set on a
conservative basis. However, a
particular lending transaction that does
not fall within the institutions’
§ 612.2165(c)(2) exceptions may still be
a transaction that the Standards of
Conduct Official determines has little
potential for conflict when applying the
rules under §§ 612.2145 and 612.2155.
Proposed § 612.2165(f) reminds each
System institution that the FCA may
determine that a transaction or activity
constitutes a conflict of interest
notwithstanding the System
institution’s board of director finding to
the contrary. Section 612.2165(d) and
(e) are included to prevent misuse of the
requirements under this section to
evade conflict of interest rules and
situations. Finally, institution policies
and procedures should provide for
periodic review by the System
institution board.
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K. Standards of Conduct Official
[Proposed § 612.2170]
We would revise § 612.2170(a) to
require that there must be an internal
employee who also serves as the
institution’s Standards of Conduct
Official and who would be accountable
to the institution’s board for all
standards of conduct matters. The FCA
believes that an in-house Standards of
Conduct Official is in the best position
to advise the board because they are intune with the day-to-day operations of
the institution. In addition, in order to
foster a culture of highest integrity and
ethical conduct, it is important to have
a Standards of Conduct Official who has
a constant presence at, relationship
with, and respect of, the employees of
the institution. The proposed rule
would require the institution’s board of
directors to provide for other employees
to assist the Standards of Conduct
Official as needed to ensure the effective
operations of the institution’s standards
of conduct program.
Proposed § 612.2170(b) would
enhance and clarify the responsibility
and accountability of the Standards of
Conduct Official. The Standards of
Conduct Official must receive, actively
review, and maintain the reports
required by the rule. Proposed
§ 612.2170(b)(6) would require the
Standards of Conduct Official to report
to the board no less than annually on
the effectiveness of the institution’s
standards of conduct policy and its
implementation. This report should
include an evaluation of the extent to
which safeguards are in place to avoid
conflicts of interest and standards of
conduct policy violations and should
present the opportunity to make
improvements to the standards of
conduct program.
The Standards of Conduct Official
must also present any violations of the
standards of conduct policy to the board
for appropriate action. Section
612.2170(b)(7) would requires the
Standards of Conduct Official to report
to the institution’s board and to the FCA
all suspected criminal and, in addition,
any standards of conduct violations that
may have an adverse impact on
continued public confidence in the
System or any of its institutions.
Proposed § 612.2170(c) would provide
that a Farm Credit bank may provide
assistance to an affiliated association’s
board of directors and Standards of
Conduct Official in complying with this
part. Proposed § 612.2170(d) would
provide that an institution may use an
outside counsel or consultant to assist
the institution in meeting standards of
conduct requirements. However, the
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institution’s in-house Standards of
Conduct Official would be responsible
for overseeing the outside counsel or
consultant.
Proposed § 612.2170(e) would provide
that the Standards of Conduct Official
must coordinate appropriate training
with the institution’s board on an
annual basis.
L. Standards of Conduct for Agents
[Current § 612.2260 Is Proposed
§ 612.2180]
It is important for System institutions
to hold their agents to the same high
ethical standards held by their directors
and employees. The proposed rule
would require that institutions
document that agents representing
System institutions in contacts with
third parties or who provide
professional or consultant services such
as legal, accounting, and appraisal, are
subject to industry or professional ethics
standards and that the institution
provide each agent a copy of the
institution’s standards of conduct policy
and Code of Ethics. The proposed rule
would further require that an agent who
is not subject to industry or professional
ethics standards must certify to the
System institution that the agent will
adhere to the provisions of the
institution’s Code of Ethics applicable to
agents. Agents play an important role in
System institutions and this rule would
help achieve high ethical standards at
every level throughout the System.
To avoid the appearance of conflicts
in the disposition or purchase of
institution-owned or institutionacquired real or personal property, we
propose that agents must agree to
prohibitions similar to those that apply
to employees. The proposed rule would
prohibit agents from acquiring any
interest in real or personal property if it
was owned or acquired by the
employing institution or any supervised
or supervising institution as a result of
foreclosure or similar action at any time
during the agent’s employment. The
prohibition would apply for as long as
the property is owned or acquired by
the System institution, and for 12
months after the property is transferred
out of the System institution or after the
agency relationship is terminated,
whichever occurs first.
M. Purchase of System Obligations
[Current § 612.2270 Is Proposed
§ 612.2190]
We revised this section to clarify that
directors and employees may not
purchase any obligation of a System
institution except as specifically stated.
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III. Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), the FCA hereby certifies that the
proposed rule would not have a
significant economic impact on a
substantial number of small entities.
Each of the banks in the Farm Credit
System, considered together with its
affiliated associations, has assets and
annual income in excess of the amounts
that would qualify them as small
entities. Therefore, Farm Credit System
institutions are not ‘‘small entities’’ as
defined in the Regulatory Flexibility
Act.
List of Subjects in 12 CFR Part 612
Agriculture, Banks, Banking, Conflict
of interests, Crime, Investigations, Rural
areas.
For the reasons stated in the
preamble, part 612 of chapter VI, title 12
of the Code of Federal Regulations is
proposed to be amended as follows:
PART 612—STANDARDS OF
CONDUCT AND REFERRAL OF
KNOWN OR SUSPECTED CRIMINAL
VIOLATIONS
1. The authority citation for part 612
continues to read as follows:
■
Authority: Secs. 5.9, 5.17, 5.19 of the Farm
Credit Act (12 U.S.C. 2243, 2252, 2254).
2. Subpart A, consisting of
§§ 612.2130 through 612.2270, is
revised to read as follows:
■
Subpart A—Standards of Conduct
Sec.
612.2130 Definitions.
612.2135 Responsibilities and conduct.
612.2136 Conflicts of interest.
612.2140 Director reporting.
612.2145 Directors—prohibited conduct.
612.2150 Employee reporting.
612.2155 Employees—prohibited conduct.
612.2157 Joint employees.
612.2160 Institution responsibilities.
612.2165 Code of ethics, policies, and
procedures.
612.2170 Standards of Conduct Official.
612.2180 Standards of Conduct for agents.
612.2190 Purchase of System obligations.
612.2260 [Reserved]
612.2270 [Reserved]
Subpart A—Standards of Conduct
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§ 612.2130
Definitions.
For purposes of this part, the
following terms are defined:
Agent means any person, other than a
director or employee, who currently
represents a System institution in
contacts with third parties or who
currently provides professional services
to a System institution, such as legal,
accounting, appraisal, and other similar
services.
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Code of Ethics means a written set of
standards, rules, values, and guidance
that is used to ensure the ethical
conduct of those who sign it, and that
reflects professionalism and discourages
misconduct so that the best interests of
the institution are advanced.
Conflicts of interest or the appearance
thereof exists when a person has a
financial interest in a transaction,
relationship, or activity that actually
affects or has the appearance of affecting
the person’s ability to perform official
duties and responsibilities in a totally
impartial manner and in the best
interest of the employing institution
when viewed from the perspective of a
reasonable person with knowledge of
the relevant facts.
Controlled entity and entity controlled
by, for the purposes of this rule only,
means an interest in an entity in which
the individual, directly or indirectly, or
acting through or in concert with one or
more persons:
(1) Owns 5 percent or more of the
equity;
(2) Owns, controls, or has the power
to vote 5 percent or more of any class
of voting securities; or
(3) Has the power to exercise a
controlling influence over the
management of policies of such entity.
Employee means any salaried officer
or part-time, full-time, temporary
salaried employee or any non-salaried
employee who receives a wage.
Entity means a corporation, company,
association, firm, joint venture,
partnership (general or limited),
unincorporated business entity, society,
joint stock company, trust (business or
otherwise), fund or other organization or
institution.
Family means an individual and
spouse and anyone having the following
relationship to either: parent, spouse,
son, daughter, sibling, stepparent,
stepson, stepdaughter, stepbrother,
stepsister, half-brother, half-sister,
uncle, aunt, nephew, niece,
grandparent, grandson, granddaughter,
and the spouses of the foregoing and
anyone whose association or
relationship with the director or
employee is the equivalent of the
foregoing.
Financial interest means an interest in
an activity, transaction, property, or
relationship with a person or an entity
that involves receiving or providing
something of monetary value or other
present or deferred compensation.
Financially obligated with means
having a joint legally enforceable
obligation with, being financially
obligated on behalf of (contingently or
otherwise), having an enforceable legal
obligation secured by property owned
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by another, or owning property that
secures an enforceable legal obligation
of another.
Material, when applied to a financial
interest or transaction or series of
transactions, means that the interest or
transaction or series of transactions is of
such magnitude that a reasonable
person with knowledge of the relevant
facts would question the ability of the
person who has the interest or is party
to such transaction(s) to perform the
person’s official duties objectively and
impartially and in the best interest of
the institution and its statutory purpose.
Mineral interest means any interest in
minerals, oil, or gas, including, but not
limited to, any right derived directly or
indirectly from a mineral, oil, or gas
lease, deed, or royalty conveyance.
OFI means other financing
institutions that have established an
access relationship with a Farm Credit
bank or an agricultural credit bank
under section 1.7(b)(1)(B) of the Act.
Officer means the chief executive
officer, president, chief operating
officer, vice president, corporate
secretary, treasurer, general counsel,
chief financial officer, and chief credit
officer of each System institution, and
any person not so designated who holds
a similar position of authority.
Ordinary course of business, when
applied to a transaction, means:
(1) A transaction that is usual and
customary between or among persons
who are in business together; or
(2) A transaction with a person who
is in the business of offering the goods
or services that are the subject of the
transaction on terms that are not
preferential. Preferential means that the
transaction is not on the same terms as
those prevailing at the same time for
comparable transactions for other
persons who are not directors,
employees, or agents of a System
institution.
Person means individual or entity.
Relative means any member of the
family as defined in this section.
Service corporation means each
service corporation chartered under the
Act.
Signed, has the same meaning as set
forth in § 620.1 of this chapter.
Standards of Conduct Official means
the official designated under § 612.2170.
Supervised institution is a term which
only applies within the context of a
System bank or an employee of a
System bank and refers to each
association supervised by that bank.
Supervising institution is a term that
only applies within the context of an
association or an employee of an
association and refers to the bank that
supervises that association.
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System institution and institution
mean any bank, association, or service
corporation, chartered under the Act in
the Farm Credit System, including the
Farm Credit Banks, banks for
cooperatives, agricultural credit banks,
Federal land bank associations,
agricultural credit associations, Federal
land credit associations, production
credit associations, and the Federal
Farm Credit Banks Funding
Corporation.
Unincorporated business entities
(UBE) has the same meaning as set forth
in § 611.1151 of this chapter.
§ 612.2135
Responsibilities and conduct.
(a) Directors and employees of all
System institutions must maintain high
standards of industry, honesty, integrity,
impartiality, and conduct in order to
ensure the proper performance of
System business and continued public
confidence in the System and each of its
institutions. The avoidance of
misconduct and conflicts of interest is
indispensable to the maintenance of
these standards.
(b) To achieve these high standards of
conduct, directors and employees must
observe, to the best of their abilities, the
letter and intent of all applicable local,
state, and Federal laws and regulations
and policy statements, instructions,
procedures, and guidance of the Farm
Credit Administration. System
institutions must exercise diligence and
good judgment in carrying out their
duties, obligations, and responsibilities.
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§ 612.2136
Conflicts of interest.
(a) Each director, employee, and agent
of a System institution, and consultants
who provide expert or professional
services to the System institution, must:
(1) Take measures to avoid conflicts of
interest;
(2) Disclose conflicts of interest in any
matters, activities or transactions
pending at the System institution, or in
the case of consultants, experts or
professionals, disclose conflicts of
interest in the matter, activity, or
transaction for which they are providing
services, including financial or other
personal or official interests that may
present a conflict of interest or the
appearance thereof, to the Standards of
Conduct Official; and
(b) If a person subject to paragraph (a)
of this section has a conflict of interest
in a matter, transaction or activity
subject to official action, or before the
board of directors, then the person must:
(1) Disclose to the official or the board
all material non-privileged information
relevant to the consideration of the
matter, activity or transaction,
including:
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(i) The existence, nature, and extent of
the person’s interests; and
(ii) The facts known to the person as
to the matter, activity or transaction
under consideration;
(2) Refrain from participating in the
official action or board discussion of the
matter, activity or transaction; and
(3) Not vote on the matter or
transaction.
(c) The System institution must
establish policies and procedures to
enforce this section which may include
procedures by which the Standards of
Conduct Official may waive the recusal
requirement upon his or her written
determination that a conflict of interest
does not exist or would not interfere
with the person’s ability to perform
impartially and in the best interest of
the System institution.
§ 612.2140
Director reporting.
(a) Annually, as of the institution’s
fiscal year end, and at such other times
as may be required to comply with
paragraph (c) of this section, each
director must file a written and signed
statement with the Standards of
Conduct Official that fully reports:
(1) The names of any immediate
family members as defined in § 620.1(e)
of this chapter, or affiliated
organizations, as defined in § 620.1(a) of
this chapter, who had transactions with
the institution at any time during the
year;
(2) Any matter required to be
disclosed by § 620.6(f) of this chapter;
and
(3) Any additional information the
institution may require to make the
disclosures required by part 620 of this
chapter.
(b) Each director must, at such
intervals as the institution’s board
determines is necessary to effectively
enforce this regulation and the
institution’s standards of conduct policy
and Code of Ethics adopted pursuant to
§ 612.2165, file a written and signed
statement with the Standards of
Conduct Official that contains those
disclosures required by the regulations
and such policy. At a minimum, these
disclosures must include:
(1) All material financial interests
with directors, employees, agents or
borrowers of the employing, supervised,
and supervising institution;
(2) The name of any relative or any
person residing in the director’s
household, any business partner, or any
entity controlled by the director or such
persons (alone or in concert) if the
director knows or has reason to know
that such individual or entity transacts
business with the institution or any
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institution supervised by the director’s
institution; and
(3) The name and the nature of the
business of any entity in which the
director has a material financial interest
or on whose board the director sits if the
director knows or has reason to know
that such entity transacts business with:
(i) The director’s institution or any
institution supervised by the director’s
institution; or
(ii) A borrower of the director’s
institution or any institution supervised
by the director’s institution.
(c) Any director who becomes or
plans to become involved in any
relationship, transaction, or activity that
may violate the institutions’ Code of
Ethics or is required to be reported
under this section or could constitute a
conflict of interest, must promptly
report in writing such involvement or
plan to become involved to the
Standards of Conduct Official for a
determination of whether the
relationship, transaction, or activity is,
in fact, a conflict of interest.
(d) Unless a disclosure as a director
candidate under part 620 of this chapter
has been made within the preceding 180
calendar days, a newly elected or
appointed director must report matters
required to be reported in paragraphs
(a), (b), and (c) of this section to the
Standards of Conduct Official within 30
calendar days after the election or
appointment and thereafter must
comply with the requirements of this
section.
§ 612.2145
Directors—prohibited conduct.
(a) Prohibited conduct. Except as
specifically provided under paragraph
(b) of this section, a director of a System
institution must not:
(1) Participate, directly or indirectly,
in deliberations on, or the determination
of, any matter affecting, directly or
indirectly, the financial interest of the
director, any relative of the director, any
person residing in the director’s
household, any business partner of the
director, or any entity controlled by the
director or such persons (alone or in
concert);
(2) Divulge or make use of any fact,
information, or document not generally
available to the public that is acquired
by virtue of serving on the board of a
System institution;
(3) Use the director’s position to
obtain or attempt to obtain special
advantage or favoritism for the director,
any relative of the director, any person
residing in the director’s household, any
business partner of the director, any
entity controlled by the director or such
persons (alone or in concert), any other
System institution, or any person
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transacting business with the
institution, including borrowers and
loan applicants;
(4) Use the director’s position or
information acquired in connection
with the director’s position to solicit or
obtain, directly or indirectly, any gift,
fee, or other present or deferred
compensation or for any other personal
benefit on behalf of the director, any
relative of the director, any person
residing in the director’s household, any
business partner of the director, any
entity controlled by the director or such
persons (alone or in concert), any other
System institution, or any person
transacting business with the
institution, including borrowers and
loan applicants;
(5) Accept or solicit, directly or
indirectly, any gift, fee, or other present
or deferred compensation that is offered
or could reasonably be viewed as being
offered to influence official action or to
obtain information that the director has
access to by reason of serving on the
board of a System institution;
(6) Knowingly acquire, directly or
indirectly, any interest in any real or
personal property, including mineral
interests, that was owned or acquired by
the employing, supervising, or any
supervised institution as a result of
foreclosure or similar action;
(7) Directly or indirectly borrow from,
lend to, or become financially obligated
with or on behalf of, a director,
employee, or agent of the employing,
supervising or supervised institution or
a borrower, or loan applicant of the
employing institution; or
(8) Violate an institution’s policies
and procedures governing standards of
conduct or Code of Ethics.
(b) Exceptions to prohibited conduct.
(1) A director may participate in
deliberations and determinations of
matters prohibited under paragraph
(a)(1) of this section only if the matter
is one of general applicability affecting
all shareholders/borrowers in a
nondiscriminatory way, as determined
by the Standards of Conduct Official.
(2) A director may divulge or make
use of any fact, information, or
document prohibited under paragraph
(a)(2) of this section, only if in the
performance of the director’s official
duties.
(3) A director may acquire an interest
in any real or personal property
prohibited under paragraph (a)(6) of this
section only if the director did not
participate in the deliberations or
decision to foreclose, or take similar
action, or to dispose of the property or
in establishing the terms of the sale; and
(i) The director acquired the property
through inheritance; or
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(ii) The System institution did not
own the property or interest at any time
during the 12-month period before the
director’s acquisition of the property; or
(iii) The director acquired the
property through public auction with
open competitive bidding and the
Standards of Conduct Official
determined in writing, before the
director acquired the property, that the
director does not have an advantage
over other bidders as a result of the
director’s position and that no other
conflict of interest or appearance thereof
exists.
(4) A director may enter into a lending
transaction prohibited under paragraph
(a)(7) of this section only if:
(i) The transaction is with a relative
or any person residing in the director’s
household;
(ii) The transaction is undertaken in
an official capacity in connection with
the institution’s discounting, lending or
participation relationships with OFIs
and other lenders; or
(iii) The Standards of Conduct
Official, on a case-by-case basis,
determines and documents, pursuant to
a board adopted policy and in the
manner outlined herein, that the
potential for conflict is insignificant.
The Standards of Conduct Official’s
determination must:
(A) Be in writing;
(B) Adequately demonstrate that the
transaction is in the ordinary course of
business or is not material in amount or
value;
(C) Adequately demonstrate that the
director did not participate in the
determination of any matter affecting
the financial interests of the other party
to the transaction except those matters
affecting all shareholders/borrowers in a
nondiscriminatory way;
(D) Be made before the director enters
into the transaction, or at the time the
director is appointed or elected; and
(E) Be renewed annually, as
applicable.
§ 612.2150
Employee reporting.
(a) Annually, as of the institution’s
fiscal yearend, and at such other times
as may be required to comply with
paragraph (c) of this section, each senior
officer as defined in § 619.9310 of this
chapter must file a written and signed
statement with the Standards of
Conduct Official that fully reports:
(1) The names of any immediate
family members, as defined in § 620.1(e)
of this chapter, or affiliated
organizations, as defined in § 620.1(a) of
this chapter, who had transactions with
the institution at any time during the
year;
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(2) Any matter required to be
disclosed by § 620.6(f) of this chapter;
and
(3) Any additional information the
institution may require to make the
disclosures required by part 620 of this
chapter.
(b) Each employee must, at such
intervals as the institution’s board
determines is necessary to effectively
enforce this regulation and the
institution’s standards of conduct policy
and Code of Ethics adopted pursuant to
§ 612.2165, file a written and signed
statement with the Standards of
Conduct Official that contains those
disclosures required by the regulation
and such policy. At a minimum, these
disclosures must include:
(1) All material financial interests
with directors, employees, agents or
borrowers of the employing, supervised,
and supervising institutions;
(2) The name of any relative or any
person residing in the employee’s
household, any business partner, or any
entity controlled by the employee or
such persons (alone or in concert) if the
employee knows or has reason to know
that such individual or entity transacts
business with the employing institution,
or any institution supervised by the
employing institution; and
(3) The name and the nature of the
business of any entity in which the
employee has a material financial
interest or on whose board the employee
sits if the employee knows or has reason
to know that such entity transacts
business with:
(i) The employing institution or any
institution supervised by the employing
institution; or
(ii) A borrower of the employing
institution or any institution supervised
by the employing institution.
(c) Any employee who becomes or
plans to become involved in any
relationship, transaction, or activity that
is required to be reported under this
section or could constitute a conflict of
interest must promptly report in writing
such involvement to the Standards of
Conduct Official for a determination of
whether the relationship, transaction, or
activity is, in fact, a conflict of interest.
(d) A newly hired employee must
report matters required to be reported in
paragraphs (a), (b), and (c) of this
section to the Standards of Conduct
Official five (5) business days after
starting employment and thereafter
must comply with the requirements of
this part.
§ 612.2155
conduct.
Employees—prohibited
(a) Prohibited conduct. Except as
specifically provided under paragraph
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(b) of this section, an employee of a
System institution must not:
(1) Participate, directly or indirectly,
in deliberations on, or the determination
of, any matter affecting, directly or
indirectly, the financial interest of the
employee, any relative of the employee,
any person residing in the employee’s
household, any business partner of the
employee, or any entity controlled by
the employee or such persons (alone or
in concert);
(2) Divulge or make use of any fact,
information, or document not generally
available to the public that is acquired
by virtue of being an employee of a
System institution;
(3) Use the employee’s position to
obtain or attempt to obtain special
advantage or favoritism for the
employee, any relative of the employee,
any person residing in the employee’s
household, any business partner of the
employee, any entity controlled by the
employee or such persons (alone or in
concert), any other System institution,
or any person transacting business with
the institution, including borrowers and
loan applicants;
(4) Serve as an officer or director of an
entity other than a System institution
that transacts business with a System
institution in the district or of any
commercial bank, savings and loan, or
other non-System financial institution.
For the purposes of this paragraph,
‘‘transacts business’’ does not include
loans by a System institution to a
family-owned entity, service on the
board of directors of the Federal
Agricultural Mortgage Corporation, or
transactions with nonprofit entities or
entities in which the System institution
has an ownership interest;
(5) Use the employee’s position or
information acquired in connection
with the employee’s position to solicit
or obtain, directly or indirectly, any gift,
fee, or other present or deferred
compensation or for any other personal
benefit on behalf of the employee, any
relative of the employee, any person
residing in the employee’s household,
any business partner of the employee,
any entity controlled by the employee or
such persons (alone or in concert), any
other System institution, or any person
transacting business with the
institution, including borrowers and
loan applicants;
(6) Accept or solicit, directly or
indirectly, any gift, fee, or other present
or deferred compensation that is offered
or could reasonably be viewed as being
offered to influence official action or to
obtain information that the employee
has access to by reason of employment
with a System institution;
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(7) Knowingly acquire, directly or
indirectly, any interest in any real or
personal property, including mineral
interests, that was owned or acquired by
the employing, supervising, or any
supervised institution as a result of
foreclosure or similar action;
(8) Directly or indirectly borrow from,
lend to, or become financially obligated
with or on behalf of, a director,
employee, or agent of the employing,
supervising, or supervised institution or
a borrower or loan applicant of the
employing institution;
(9) Act as a real estate agent or broker;
(10) Act as an agent or broker in
connection with the sale and placement
of insurance; or
(11) Violate an institution’s policies
and procedures governing standards of
conduct or Code of Ethics.
(b) Exceptions to prohibited conduct.
(1) An employee may participate in
deliberations and determinations of
matters prohibited under paragraph
(a)(1) of this section only if the matter
is one of general applicability affecting
all shareholders/borrowers in a
nondiscriminatory way, as determined
by the Standards of Conduct Official.
(2) An employee may divulge or make
use of a fact, information, or document
prohibited under paragraph (a)(2) of this
section only if in the performance of
official duties.
(3) Notwithstanding the prohibitions
in paragraph (a)(4) of this section, an
employee may serve as an officer or
director of an employee credit union.
With the prior approval of the board of
the employing institution, an employee
of a Farm Credit Bank or association
may serve as a director of a cooperative
that borrows from an agricultural credit
bank. Prior to approving an employee’s
request, the board must determine
whether the employee’s proposed
service as a director is likely to cause
the employee to violate any regulations
in this part or the institution’s policies,
e.g., the requirements relating to
devotion of time to official duties.
(4) An employee may acquire an
interest in real or personal property
prohibited under paragraph (a)(7) of this
section only if the employee did not
participate in the deliberations or
decision to foreclose on the property or
to take action, or to dispose of the
property or in establishing the terms of
the sale; and
(i) The employee acquired the
property through inheritance; or
(ii) The System institution did not
own the property or interest at any time
during the 12-month period before the
employee’s acquisition of the property.
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(5) An employee may enter into a
lending transaction prohibited under
paragraph (a)(8) of this section only if:
(i) The transaction is with a relative
or any person residing in the employee’s
household;
(ii) The transaction is undertaken in
an official capacity in connection with
the institution’s discounting, lending, or
participation relationships with OFIs
and other lenders; or
(iii) The Standards of Conduct Official
on a case-by-case basis, determines and
documents, pursuant to a board adopted
policy under § 612.2165 and in the
manner outlined herein, that the
potential for conflict is insignificant.
The Standards of Conduct Official’s
determination must:
(A) Be in writing;
(B) Adequately demonstrate that the
transaction is in the ordinary course of
business or is not material in value or
amount;
(C) Adequately demonstrate that the
employee did not participate in the
determination of any matter affecting
the financial interests of the other party
to the transaction except those matters
affecting all shareholders/borrowers in a
nondiscriminatory way;
(D) Be made before the transaction in
question is entered into; and
(E) Be renewed annually, as
applicable.
(6) Paragraph (a)(9) of this section
does not apply to transactions involving
the purchase or sale of real estate
intended for the use of the employee, a
member of the employee’s family, or a
person residing in the employee’s
household.
(7) Paragraph (a)(10) of this section
does not apply to the sale or placement
of insurance authorized by section 4.29
of the Act.
§ 612.2157
Joint employees.
(a) An employee of a Farm Credit
bank may serve as an employee of an
association in its district only if:
(1) The employee is not an officer of
the Farm Credit bank and will not serve
as an officer of the association; or
(2) Before such service begins, the
Farm Credit bank’s Standards of
Conduct Official consents in writing to
such service, the Farm Credit bank
board of directors agrees that the
interest of both System institutions
outweighs the potential for conflicts of
interest or conflicts related to devotion
of time to official duties, the Farm
Credit bank delivers written notice to
the Farm Credit Administration, and the
Farm Credit Administration does not
object to such service within ten (10)
calendar days of receiving the notice.
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(b) Each institution must
appropriately reflect the expense of joint
employees in its financial statements.
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§ 612.2160
Institution responsibilities.
Each institution must:
(a) Ensure compliance with this part
by its directors, employees, and agents
and at a minimum:
(1) Provide support as necessary to
the Standards of Conduct program
including assigning appropriate
resources and staffing to the Standards
of Conduct Official;
(2) Act promptly to preserve the
integrity of and public confidence in the
institution in any matter involving a
conflict of interest or the appearance of
a conflict of interest, whether or not
specifically addressed by this subpart or
the policies and procedures adopted
pursuant to § 612.2165; and
(3) Notify the Farm Credit
Administration immediately of known
or suspected material standards of
conduct violations as described in
§ 612.2170(b)(7).
(b) Take appropriate measures to
ensure that all directors and employees
are informed of the requirements of this
regulation and policies and procedures
adopted pursuant to § 612.2165.
(c) Maintain all standards of conduct
policies and procedures, reports,
investigations, determinations, and
evidence of compliance with this part
for a minimum of six (6) years.
(d) Remain informed of applicable
industry approved best practices for
standards of conduct.
(e) Ensure that directors and
employees annually certify in writing
that they will adhere to the institution’s
standards of conduct policy and Code of
Ethics.
(f) Provide its agents a copy of the
institution’s standards of conduct policy
and Code of Ethics;
(1) Adequately document which of its
agents are subject to industry or
professional ethics standards; and
(2) Require each agent that is not
subject to industry or professional ethics
standards to certify that he or she will
adhere to the provisions of the
institution’s Code of Ethics applicable to
agents.
(g) Ensure that compliance with the
standards of conduct program is a
component of the institution’s risk
assessment process subject to periodic
audit by a person or entity independent
of the program.
(h) Develop, implement and maintain
an effective method of internal controls
over the reporting, disclosure and other
requirements of this part. The method of
internal controls, at a minimum, must
comply with the requirements of
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applicable Farm Credit Administration
regulations, including § 618.8430 of this
chapter and include controls for:
(1) The confidentiality of information
reported to and maintained by the
Standards of Conduct Official; and
(2) The audit of the standards of
conduct program for compliance by a
person or entity independent of the
program.
§ 612.2165 Code of Ethics, policies, and
procedures.
(a) Each institution’s board of
directors must adopt:
(1) Policies and procedures governing
standards of conduct for directors,
employees, and agents; and
(2) A code of Ethics that applies to
directors and employees and that
includes a provision for the ethical
conduct of agents to ensure the
avoidance of conflicts of interest in the
performance of their duties. The Code of
Ethics must include specific guidelines
on what is acceptable and unacceptable
conduct. The Code of Ethics must be
signed by directors and employees.
Agents must be presented with the
institution’s Code of Ethics, and agents
not subject to industry or professional
ethics standards must sign the
institution’s Code of Ethics provisions
applicable to agents. The institution’s
Code of Ethics must:
(i) Promote honest and ethical
conduct, including the ethical handling
of actual or apparent conflicts of
interest;
(ii) Promote integrity and compliance
with applicable laws, rules and
regulations governing standards of
conduct;
(iii) Inform directors and employees
that they will be held accountable for
adhering to the institution’s Code of
Ethics, or in the case of agents, to
industry or professional ethics
standards or, in the absence thereof, to
the System institution’s Code of Ethics
provisions applicable to agents;
(iv) Prohibit conduct involving
dishonesty, fraud, or deceit and
discourage the commitment of any act
that reflects adversely on the reputation,
integrity, or competency of the System
institution or the System;
(v) Prohibit conduct involving misuse
of office; and
(vi) Provide for the prompt reporting
to the Standards of Conduct Official any
person or persons in violation of the
institution’s Code of Ethics and of any
activity that may require further
investigation and reporting under
§ 612.2301;
(3) Policies and procedures related to
UBEs that ensure the System
institution’s directors, employees, and
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agents and the UBE members, partners,
employees and agents comply with their
employing institution’s standards of
conduct and avoid conflicts of interest
in carrying out their duties with respect
to the UBE.
(b) Board policies and procedures
adopted pursuant to paragraph (a) of
this section must reflect due
consideration of the potential adverse
impact of activities permitted under the
policies and procedures and must at a
minimum:
(1) Establish requirements and
prohibitions as are necessary to promote
public confidence in the institution and
the System, preserve the integrity and
independence of the supervisory
process, and prevent the improper use
of official property, position, or
information. In developing such
requirements and prohibitions, the
institution must address such issues as
the hiring of relatives, political activity,
devotion of time to duty, use of
institution resources, the exchange of
gifts and favors among directors and
employees of the employing,
supervising, and supervised institution,
and the circumstances under which gifts
may be accepted by directors and
employees from outside sources, in light
of the foregoing objectives;
(2) Outline authorities and
responsibilities of the Standards of
Conduct Official, including:
(i) The authority and responsibility to
review for compliance with this subpart
all loans before the supervisory bank’s
approval under §§ 614.4460 and
614.4470, respectively; and
(ii) A process to allow the Standards
of Conduct Official to report matters to
the board without fear of reprisal;
(3) Establish criteria for business
relationships and transactions not
specifically prohibited by this part
between employees or directors and
borrowers, loan applicants, directors, or
employees of the employing,
supervised, or supervising institutions,
or persons transacting business with
such institutions, including OFIs or
other lenders having an access or
participation relationship;
(4) Establish criteria under which
employees may accept outside
employment or compensation;
(5) Establish conditions under which
employees may receive loans from
System institutions;
(6) Establish conditions under which
employees may acquire an interest in
real or personal property that served as
collateral for a loan from a System
institution;
(7) Establish conditions under which
employees may purchase any real or
personal property of a System
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institution acquired by such institution
for its operations. System institutions
must use open competitive bidding
whenever they sell surplus property
above a stated value (as established by
the board) to their employees;
(8) Provide for a reasonable period of
time for directors and employees to
terminate transactions, relationships, or
activities that are subject to prohibitions
that arise at the time of adoption or
amendment of the policies;
(9) Require new directors and new
employees involved in transactions,
relationships, and activities prohibited
by these regulations or internal policies
to terminate such transactions within
the same time period established for
existing directors or employees
pursuant to paragraph (b)(8) of this
section, beginning with the
commencement of the director’s term
for new directors, and commencement
of official duties for new employees, or
such shorter time period as the
institution may establish;
(10) Establish procedures providing
for a director’s, employee’s, or agent’s
recusal from official action on any
matter in which the director, employee,
or agent is prohibited from participating
under these regulations or the
institution’s policies;
(11) Establish documentation
requirements demonstrating compliance
with standards of conduct decisions and
board policy;
(12) Establish reporting requirements,
consistent with this part, to enable the
institution to comply with § 620.6 of
this chapter, monitor conflicts of
interest, and monitor recusal
compliance;
(13) Establish appeal procedures
available to any employee to whom any
required approval has been denied;
(14) Prohibit directors and employees
from purchasing or retiring any
preferred stock of the institution in
advance of the release of material nonpublic information concerning the
institution to other stockholders;
(15) Establish when directors and
employees may purchase and retire
their preferred stock in the institution;
(16) Require annual training and other
appropriate measures to ensure that all
directors and employees are educated
on best practices for ethical behavior
and standards of conduct and perform
their duties and responsibilities in an
objective and impartial manner; and
(17) Require that the institution report
to the Farm Credit Administration
exceptions authorized by the board
pursuant to paragraph (c) of this section.
(c) Board policies and procedures
adopted pursuant to paragraphs (a) and
(b) of this section may provide for:
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(1) The board to consider a case-bycase exception to conflicts of interest
requirements (§ 612.2136), director and
employee reporting requirements
(§§ 612.2140 and 612.2150), the 5percent threshold on controlled entity
(§ 612.2130), joint employee
prohibitions (§ 612.2157), employee
prohibitions on serving as an officer or
director of a non-System financial
institution (§ 612.2155(a)(4)), and
director and employee prohibitions on
sharing information (§§ 612.2145(a)(2)
and 612.2155(a)(2), respectively). An
exception may be authorized only upon
board approval after the board considers
the written recommendation of the
Standards of Conduct Official. The
recommendation must be adequately
supported by the Standards of Conduct
Official’s written determination that in
that particular matter or transaction
application of the prohibition subject to
the exception is not necessary to avoid
a conflict of interest, to avoid the
appearance of a conflict of interest or to
ensure the confidence in the
impartiality and objectivity of the
director, employee, or System
institution. The board must provide for
periodic review of the criteria to
determine whether the exception
continues to be appropriate. If the board
approves an exception, it may impose
appropriate conditions, such as
requiring a written disqualification or
additional public disclosure.
(2) Exceptions to reporting
requirements under §§ 612.2140 and
612.2150 and exceptions to the
requirements under §§ 612.2145(b)(4)
and 612.2155(b)(6) that the Standards of
Conduct Official review a lending
transaction before it is entered into.
Broad based exceptions in policies may
be authorized only if the potential for
conflict of interest in that category of
interests or transactions is insignificant.
The potential for conflict of interest may
only be considered insignificant if:
(i) The board determines, under its
policies and procedures, that the type of
interest or transaction is so immaterial
in amount or value that no reasonable
person with knowledge of all the facts
could conclude that the interest or
transaction would influence a director’s
or employee’s ability to act impartially
and in the best interests of the System
institution. For this exception,
transactions otherwise prohibited under
§§ 612.2145 and 612.2155 do not require
the prior approval of the Standards of
Conduct Official or reporting under
§§ 612.2140 and 612.2150; or
(ii) The board determines, under its
policies and procedures that the types of
interests or transactions covered by the
exception or reporting requirement are
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in the ordinary course of business. For
this exception, transactions otherwise
prohibited under §§ 612.2145 and
612.2155 do not require the prior
approval of the Standards of Conduct
Official but must be reported under
§§ 612.2140 and 612.2150, and must be
reviewed by the Standards of Conduct
Official at least annually; and
(iii) The board must consider the
written recommendation of the
Standards of Conduct Official in
developing these policy exceptions. The
recommendation must be adequately
supported by the Standards of Conduct
Official’s written determination that the
amount of value in the transaction or
the particular type of interest or
transaction, does not require application
of the reporting requirement or
prohibition subject to the exception and
is not necessary to avoid a conflict of
interest, to avoid the appearance of a
conflict of interest or to ensure the
confidence in the impartiality and
objectivity of the director, employee, or
System institution.
(d) An institution’s directors and
employees, including the Standards of
Conduct Official, must not engage in
any act or practice to evade the
prohibitions and other requirements of
this part.
(e) The Farm Credit Administration
may take appropriate action against any
institution, director or employee who or
that has entered into any transaction for
the purpose of evading the requirements
of this part.
(f) Notwithstanding the exceptions
that may be authorized and approved
under this subpart, the Farm Credit
Administration may find that a
particular financial interest or
transaction, relationship, or activity
constitutes a conflict of interest or the
appearance of a conflict of interest.
§ 612.2170
Standards of Conduct Official.
(a) Each institution’s board of
directors must:
(1) Designate an officer of the
institution as its Standards of Conduct
Official; and
(2) Authorize other employees of the
institution or outside counsel or
consultants to assist the Standards of
Conduct Official as needed, and
dedicate resources as needed, to ensure
the effective operations of the
institution’s standards of conduct
program for compliance with institution
policies and the Farm Credit
Administration’s standards of conduct
regulations.
(b) The Standards of Conduct Official
must:
(1) Advise directors, director
candidates, employees, and potential
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new employees concerning the
provisions of this part;
(2) Receive, review, and maintain
reports required by this part;
(3) Make such determinations as are
required by this part;
(4) Maintain records of
determinations as are required by this
part;
(5) Make appropriate investigations,
as directed by the institution’s board;
(6) Report to the board no less than
annually on the effectiveness of the
institution’s standards of conduct policy
and its implementation;
(7) Report promptly to the
institution’s board and the Office of
General Counsel, Farm Credit
Administration, all cases where:
(i) A preliminary investigation
indicates that a Federal criminal statute
pursuant to subpart B of this part may
have been violated;
(ii) An investigation results in the
resignation or discharge of an employee
or the resignation or potential removal
of a director; or
(iii) A known or suspected criminal or
standards of conduct violation by a
director, employee or agent may have an
adverse impact on continued public
confidence in the System or any of its
institutions.
(8) Investigate or cause to be
investigated all cases involving:
(i) Possible violations of criminal
statutes by a director, employee or
agent;
(ii) Possible violations of §§ 612.2136,
612.2145 and 612.2155, and applicable
policies and procedures approved under
§ 612.2165;
(iii) Complaints received against the
directors, employees, and agents of such
institution; and
(iv) Possible violations of other
provisions of this part or when the
activities or suspected activities of a
director, employee or agent are of a
sensitive nature and could affect
continued public confidence in the
institution or System.
(c) A Farm Credit bank may provide
assistance to an affiliated association’s
board of directors and Standards of
Conduct Official in complying with this
part.
(d) A System institution may use an
outside counsel or consultant to assist
in complying with this part. However,
the Standards of Conduct Official must
oversee the outside counsel or
consultant and remains accountable to
the board.
(e) The Standards of Conduct Official
must coordinate with the board and
management in administering annual
training to ensure that directors and
employees remain informed of the
VerDate Mar<15>2010
17:59 Feb 19, 2014
Jkt 232001
institution’s current standards of
conduct policy and Code of Ethics.
§ 612.2180
agents.
Standards of conduct for
(a) Agents of System institutions must
maintain high standards of honesty,
integrity, and impartiality in order to
ensure the proper performance of
System business and continued public
confidence in the System and its
institutions. The avoidance of
misconduct and conflicts of interest is
indispensable to the maintenance of
these standards.
(b) System institutions must utilize
safe and sound business practices in the
engagement, utilization, and retention of
agents. These practices must provide for
the selection of qualified and reputable
agents. Agents representing a System
institution in contacts with third parties
or who provide consultant or
professional services such as legal,
accounting and appraisal, must review
and acknowledge receipt of the
institution’s Code of Ethics. Agents
must certify to the System institution
that the agent will adhere to the agent’s
professional or industry ethics
standards, or to the institution’s Code of
Ethics provisions applicable to agents.
Employing System institutions are
responsible for the actions of their
agents, and must take appropriate
investigative and corrective action in
the case of a breach of fiduciary duties
by the agent or failure of the agent to
carry out its duties.
(c) System institutions must exercise
special diligence and control, through
good business practices, to avoid or
control situations that have inherent
potential for sensitivity, either real or
perceived. These areas include the
employment of agents who are related to
directors or employees of System
institutions; the solicitation and
acceptance of gifts, contributions, or
special considerations by agents; and
the use of System and borrower
information obtained in the course of
the agent’s association with System
institutions.
(d) An agent may not knowingly
acquire, directly or indirectly, except
through inheritance, any interest in real
or personal property, including a
mineral interest, that was owned by the
employing institution or any supervised
or supervising institution as a result of
foreclosure or similar action during the
agent’s employment. This prohibition
applies for one (1) year after the transfer
of the property out of the System
institution or after the termination of the
agent relationship, whichever occurs
first.
PO 00000
Frm 00019
Fmt 4702
Sfmt 4702
§ 612.2190 Purchase of System
obligations.
(a) Employees and directors of System
institutions must not purchase any
obligation of a System institution,
including any joint, consolidated, or
Systemwide obligation, unless such
obligation is:
(1) Part of an offering available to the
general public; and
(2) Purchased through a dealer or
dealer bank affiliated with a member of
the selling group designated by the
Federal Farm Credit Banks Funding
Corporation or purchased in the
secondary market.
(b) A director or employee of the
Federal Farm Credit Banks Funding
Corporation must not purchase or
otherwise acquire, directly or indirectly,
except by inheritance, any obligation of
a System institution, including any
joint, consolidated, or Systemwide
obligation.
§ 612.2260 and 612.2270
[Reserved]
Dated: February 7, 2014.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2014–03098 Filed 2–19–14; 8:45 am]
BILLING CODE 6705–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2014–0092; Directorate
Identifier 2014–CE–002–AD]
RIN 2120–AA64
Airworthiness Directives; GROBWERKE Airplanes
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
We propose to adopt a new
airworthiness directive (AD) for certain
GROB-WERKE Models G115EG and
G120A airplanes. This proposed AD
results from mandatory continuing
airworthiness information (MCAI)
originated by an aviation authority of
another country to identify and correct
an unsafe condition on an aviation
product. The MCAI describes the unsafe
condition as cracks in the left hand
elevator flange. We are issuing this
proposed AD to require actions to
address the unsafe condition on these
products.
DATES: We must receive comments on
this proposed AD by April 7, 2014.
SUMMARY:
E:\FR\FM\20FEP1.SGM
20FEP1
Agencies
[Federal Register Volume 79, Number 34 (Thursday, February 20, 2014)]
[Proposed Rules]
[Pages 9649-9661]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03098]
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Part 612
RIN 3052-AC44
Standards of Conduct and Referral of Known or Suspected Criminal
Violations; Standards of Conduct
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we, or our) proposes to
amend its regulations governing standards of conduct of directors,
employees, and agents of Farm Credit System (System) institutions,
excluding the Federal Agricultural Mortgage Corporation. The amendments
would clarify and strengthen reporting requirements and prohibitions,
require institutions to establish a Code of Ethics, and enhance the
role of the Standards of Conduct Official.
DATES: You may send comments on or before May 21, 2014.
ADDRESSES: We offer a variety of methods for you to submit your
comments. For accuracy and efficiency reasons, commenters are
encouraged to submit comments by email or through the FCA's Web site.
As facsimiles (fax) are difficult for us to process and achieve
compliance with section 508 of the Rehabilitation Act, we are no longer
accepting comments submitted by fax. Regardless of the method you use,
please do not submit your comment multiple times via different methods.
You may submit comments by any of the following methods:
Email: Send us an email at reg-comm@fca.gov.
FCA Web site: https://www.fca.gov. Select ``Public
Commenters,'' then ``Public Comments'' and follow the directions for
``Submitting a Comment.''
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Barry F. Mardock, Deputy Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, Virginia 22102-5090.
You may review copies of comments we receive at our office in
McLean, Virginia, or from our Web site at https://www.fca.gov. Once you
are in the Web site, select ``Public Commenters,'' then ``Public
Comments'' and follow the directions for ``Reading Submitted Public
Comments.'' We will show your comments as submitted but, for technical
reasons, we may omit items such as logos and special characters.
Identifying information that you provide, such as phone numbers and
addresses, will be publicly available. However, we will attempt to
remove email addresses to help reduce Internet spam.
FOR FURTHER INFORMATION CONTACT:
Jacqueline R. Melvin, Policy Analyst, Office of Regulatory Policy, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703)
883-4056,
or
Mary Alice Donner, Senior Counsel, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)
883-4056.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this proposed rule are to:
Clarify and strengthen the regulations in part 612,
subpart A, regarding standards of conduct;
Modify definitions;
Clarify reporting requirements and prohibitions on the
purchase of System institution acquired property and lending
transactions;
Strengthen responsibility and accountability requirements
for System institution Standards of Conduct Officials, boards of
directors (or board), employees, and agents; and
Require each System institution to adopt a Code of Ethics.
The FCA has not made significant changes to its standards of
conduct regulations since 1994, and we have determined that it is
appropriate to strengthen and modernize the rule. The proposed rule
would add new provisions, clarify and augment some of the current
provisions and provide additional flexibility for others. The proposed
rule is organized differently from the current rule. Sections on
director and employee reporting and prohibited conduct are repositioned
to improve the logical flow of the rule. The proposed rule adds a new
Sec. 612.2136 on conflicts of interest, a new Sec. 612.2165(a) on
Code of Ethics, a new Sec. 612.2165(c) on allowing exceptions to
certain rules if no conflict of interest exists, and new requirements
in Sec. 612.2180 addressing standards of conduct for agents. It also
adds new standards of conduct responsibilities to System institutions
(proposed Sec. 612.2160) and to the Standards of Conduct Official
(proposed Sec. 612.2170). We solicit comments on our proposed
amendments.
II. Section-by-Section Analysis
A. Definitions [Sec. 612.2130]
The proposed rule would have some new and some modified
definitions:
Code of Ethics. The proposed rule would define ``Code of Ethics''
as a written set of standards, rules, values, and guidance that an
institution uses to ensure the ethical conduct of those who sign it,
and that reflects professionalism and discourages misconduct so the
best interests of the institution are advanced.
Controlled entity and entity controlled by. The proposed rule would
continue to provide that a controlled entity includes an interest in an
entity in which the individual, directly or indirectly or acting
through or in concert with one or more persons, owns 5 percent or more
of the equity of the entity; owns, controls, or has the power to vote 5
percent or more of any class of voting securities of the entity; or has
the power to exercise a controlling influence over the management of
the entity. The FCA is aware that in other contexts the definition of
``controlled entity'' or ``entity controlled by'' may mean having an
ownership interest with a greater threshold than 5 percent; however,
the purpose of this rule is to ensure that institution directors and
employees are completely objective in their decision-making, and are
not in any way influenced by personal interests. The FCA believes that
a
[[Page 9650]]
reasonable person could conclude that a director or employee could be
influenced to act favorably toward an entity in which he or she had an
economic interest of 5 percent or more. Therefore, directors and
employees should report these interests and should abstain from
decision-making with regard to them. So, for the purpose of this rule
only, a ``controlled entity'' or ``entity controlled by'' is defined as
an entity in which the director or employee has an interest of 5
percent or more, alone or in concert with others, directly or
indirectly.
Employee. The proposed rule would clarify the definition of
``employee'' to include non-salaried employees such as hourly wage
earners.
Entity. The proposed rule would add unincorporated business
entities to the definition of ``entity''.
Family. The proposed rule would add to the current definition of
``family'' associations or relationships that are in the nature of a
family relationship. This is intended to modernize the definition of
family to include non-traditional relationships, and adoptions and
other relationships where an adult who is not related to a child acts
as a parent to a child living in the home. Each System institution is
encouraged to provide more explanation and discussion of the regulatory
definition in its standards of conduct policies and procedures.
Material. The proposed rule would not change the definition of
``material.'' However, each System institution must set specific
parameters on what constitutes a material financial interest or
transaction. The value of a material financial interest or transaction
may change depending on the circumstances and, to some extent, the
geographic location of the institution involved. The institution's
determination of materiality would be subject to FCA examination.
The institution's policies and procedures may include de minimis
values below which a financial interest is determined by the board not
to be material. The de minimis amount is necessarily System
institution-specific, and must be appropriate to the institution's
size, location and risk tolerance. A de minimis amount is an amount or
value representing an interest that is so insignificant that no
reasonable person could conclude that it would influence a director or
employee's ability to act impartially and in the best interests of the
System institution. The institution would need to adequately support
the values established in its determination of de minimis or not
material, and this determination would be subject to FCA examination.
Officer. We propose to replace ``secretary'' with corporate
secretary.
Ordinary course of business. We propose to remove ``two''
concerning transactions between persons and add ``agents'' to those for
whom preferential treatment should be avoided.
Signed. We would add a definition of ``signed'' to have the same
meaning as set forth in Sec. 620.1 of the chapter, to provide for
greater uniformity in our regulations and to clarify electronic
signatures are acceptable.
Unincorporated business entities. We would add a definition of
``unincorporated business entities'' to have the same meaning as set
forth in Sec. 611.1151 of the chapter.
B. Director and Employee Responsibilities and Conduct--Generally
[Proposed Sec. 612.2135]
The section heading would be replaced with ``responsibilities and
conduct'' but otherwise this section is not substantively changed. The
words ``and guidance'' are added to paragraph (b) to make clear that in
addition to regulations, policy statements, instructions and
procedures, directors and employees must observe guidance of the FCA,
to the best of their abilities.
C. Conflicts of Interest [Proposed Sec. 612.2136]
The proposed rule would add a new Sec. 612.2136 on conflicts of
interest. This section is added to require directors, employees, and
agents to take affirmative action to report conflicts of which they are
aware. It is intended to compel them to take ownership of and invest in
their ethical responsibilities. Paragraph (a) would specifically
require directors, employees, and agents to disclose any conflicts of
interests they may have in any matters, activities or transactions
pending at the System institution to the Standards of Conduct Official.
It would require immediate reporting of conflicts of interests and
would supplement employee's and director's existing annual and periodic
reporting requirements. Paragraph (b) would require recusal from any
board action on, discussion of, or any other official action on or
discussion of, those matters. For example, if a director or employee
were to purchase farm equipment such as a combine harvester from a
known borrower, the purchase should be reported and reviewed by the
Standards of Conduct Official for conflicts. If the borrower has a
matter or transaction pending at the institution, the director or
employee would be recused from that matter. Note that if the purchase
were financed it would be a lending transaction covered by Sec. Sec.
612.2145 and 612.2155. Working together with other provisions of the
rule, this section is intended to bolster the directors', employees',
and agents' loyalty to the System institution and to reinforce personal
responsibility and accountability in avoiding conflicts and acting
ethically.
The requirements of disclosure and recusal in this section apply
not only to directors, employees, and agents, but also those
consultants, professionals or experts who are hired to give advice on a
matter, transaction or activity but may not necessarily meet our
definition of ``agent''. If the consultant, professional or expert has
an interest that may compromise his or her complete impartiality in a
matter, transaction or activity for which his or her expertise is
sought, paragraph (a) requires that he or she disclose that interest
and paragraph (b) requires that he or she refrain from further
discussion of System business with respect to that matter, transaction
or activity.
System institutions must develop policies and procedures to
implement this section. Such policies and procedures could include
procedures for waiver of the recusal requirement if the Standards of
Conduct Official determines in writing that the conflict would not
interfere with the person's ability to perform impartially and in the
best interest of the System institution. In the absence of such waiver
procedures, recusal is required.
D. Director Reporting [Current Sec. 612.2145 Is Proposed Sec.
612.2140]
We would revise Sec. 612.2140(b)(1) to require that each director
report all ``material'' financial interests with other directors,
employees, agents or borrowers of the employing, supervised, and
supervising institution. We believe this section is necessary to help
directors and Standards of Conduct Officials identify and avoid
potential conflicts of interests. Because the proposed rule would
require directors to report only material financial interests we
believe the requirement will not be unduly burdensome or intrusive.
As discussed in the section-by-section analysis above, each System
institution must develop policies and procedures that provide
parameters for that which constitutes a ``material'' financial
interest, and may develop policies and procedures that set forth a
certain de minimis value that would not be considered material for
reporting requirements. Reporting of material financial interests is
intended to assist the Standards of Conduct Official in
[[Page 9651]]
identifying and resolving conflict situations and to help a director
identify areas of prohibited conduct. A material financial interest
does not necessarily mean that a conflict of interest exists or that
the interest would unduly influence the director in his or her
position.
Like the current rule, the proposed rule would require directors to
report the name of any relative or person residing in the director's
household, any business partner, or any entity controlled by the
director or such persons (alone or in concert) if the director knows or
has reason to know that such individual or entity transacts business
with the institution or any institution supervised by the director's
institution. This rule does not require a director to solicit
information from these persons or entities to determine whether they
had or have transactions with the institution. However, the FCA
presumes that a director would know or have reason to know whether or
not a relative or other persons residing in the director's household
had or has transactions with the institution.
E. Directors--Prohibited Conduct [Current Sec. 612.2140 Is Proposed
Sec. 612.2145]
In our current rule, director prohibited conduct and the related
limited exceptions are included in the same discussion. In proposed
Sec. 612.2145(a), we set forth the basic rules for prohibited conduct.
In proposed Sec. 612.2145(b), we set forth the specific limitations
and exceptions to the prohibitions. We believe this change is necessary
to remove any possible ambiguity from the meaning of the prohibitions.
Most of these changes are straightforward, but proposed Sec.
612.2145(a)(6) and (b)(3) regarding acquired property and proposed
Sec. 612.2145(a)(7) and (b)(4) regarding lending transactions require
special discussion.
The proposed rule would clarify the circumstances under which
directors may and may not purchase property that a System institution
has owned or acquired by foreclosure or similar action. These proposed
changes are not substantive; they are clarifications of the rule.
Proposed Sec. 612.2145(a)(6) would provide that, among other things, a
director may not knowingly acquire, directly or indirectly, property
that was owned or acquired by the employing, supervising or supervised
institution as a result of foreclosure or similar action. Proposed
Sec. 612.2145(b)(3) would set forth an exception to the acquired
property prohibition in proposed Sec. 612.2145(a)(6). The exception
would apply only if the director did not participate in the
deliberations or decision to foreclose, or to take similar action, or
to dispose of the property or in establishing the terms of the sale,
and (1) the director acquired the property through inheritance, or (2)
the System institution did not own the property or an interest in the
property at any time during the 12-month period before the director's
acquisition of the property, or (3) the director acquired the property
through public auction with open competitive bidding and the Standards
of Conduct Official determined, before the director acquired the
property, that the director does not have an advantage over other
bidders as a result of the director's position and that no other
conflict of interest or the appearance thereof exists.
By open competitive bidding, we mean bidding that is both
competitive, allowing involvement of all interested parties, and that
is open and unsealed. Open competitive bidding affords all interested
parties an opportunity to counter-bid. The advantage to open bidding is
that it discourages unethical behavior or favoritism. A public auction
can be accomplished on-line as long as there is an opportunity for all
who may be interested to bid.
The proposed language does not reflect a substantive change from
the intent of this original regulatory provision regarding acquired
property. However, we believe that because of the scope of
misunderstanding and misapplication of the original provision, the
revision is necessary.
Proposed Sec. 612.2145(a)(7) would provide that a director must
not directly or indirectly borrow from, lend to, or become financially
obligated with or on behalf of a director, employee, or agent of the
employing, supervising or supervised institution or a borrower or loan
applicant of the employing institution. This section addresses lending
and borrowing relationships. It prohibits a director from entering into
a lending or borrowing transaction with those who may have a financial
relationship with the System institution. Lending and borrowing
relationships include providing guarantees or stand-by letters of
credit and similar forms of financial obligation.
The FCA recognizes that there are many situations in which a
director may enter into lending transactions or business relationships
that involve financing with other directors, employees, agents,
borrowers or loan applicants in the ordinary course of business.
Therefore, to keep the provision from being unduly restrictive,
proposed Sec. 612.2145(b)(4) would set forth an exception to the
proposed Sec. 612.2145(a)(7) prohibition. The exception would apply
if: (1) The transaction is with a relative or any person residing in
the director's household; or (2) the transaction is undertaken in an
official capacity in connection with the institution's discounting,
lending or participation relationships with OFIs and other lenders; or
(3) the Standards of Conduct Official determines, as authorized under
board policy and in the manner outlined in the rule, that the potential
for a conflict of interest is insignificant. The Standards of Conduct
Official's determination must be in writing; document that the
transaction is in the ordinary course of business or is not material in
value or amount; document that the director did not participate in the
determination of any matter affecting the financial interests of the
other party to the transaction except those matters affecting all
shareholders/borrowers in a nondiscriminatory way; and most
importantly, the Standards of Conduct Official's determination be made
before the director enters into the transaction. The Standards of
Conduct Official must renew this determination annually, as applicable.
For example, if a director and a borrower contemplate an ongoing
business relationship by which the director purchases grain from a
borrower on credit on a regular basis, the Standards of Conduct
Official would have to review this relationship for conflicts. Once
reviewed, to the extent this is an ongoing relationship in the ordinary
course of business, the Standards of Conduct Official would not have to
review each and every transaction, but would renew on an annual basis
his or her determination that the ongoing relationship remains in the
ordinary course of business and does not create a conflict.
The Standards of Conduct Official cannot ratify prohibited conduct
after the fact. If the transaction has been entered into without a pre-
existing Standards of Conduct Official determination, then the FCA
could consider the director to have violated this provision of the
regulation.
As discussed, each System institution must set specific parameters
on what constitutes a material financial interest or transaction and
also what is in the ordinary course of business in the local
environment. Whether or not to establish a de minimis threshold for
review would be left to the discretion of each System institution
board; however, as discussed above, if the institution does establish a
de minimis value, it must do so under policies and procedures subject
to FCA examination. The institution's board must not
[[Page 9652]]
establish the de minimis value to be so high or so ambiguous as to
circumvent the intent of this rule.
F. Employee Reporting [Current Sec. 612.2155 Is Proposed Sec.
612.2150]
This provision would require employees to report all ``material''
financial interests with directors, employees, agents or borrowers of
the employing, supervised, and supervising institution. This change can
be found in proposed Sec. 612.2150(b)(1) and is parallel to the change
for directors in proposed Sec. 612.2140(b)(1).
G. Employees--Prohibited Conduct [Current Sec. 612.2150 Is Proposed
Sec. 612.2155]
This provision has been changed from the current Sec. 612.2150 and
the revisions are parallel to the changes for director prohibited
conduct, where applicable.
H. Joint Employees [Proposed Sec. 612.2157]
This section, like the current rule, prohibits an officer of a Farm
Credit Bank (FCB) or agricultural credit bank (ACB) from
contemporaneously working as an employee at an association in its
district. Also, this provision prohibits a non-officer employee of a
FCB or ACB from serving as an officer of an association in its
district. The FCA recognizes that occasionally the System may benefit
from having a FCB or an ACB officer serve at an association. Therefore,
this provision is modified from the original to allow joint employee
relationships with the written approval of the Standards of Conduct
Official if the bank board of directors agrees that the interests of
both System institutions outweighs the potential for conflicts of
interest or conflicts related to devotion of time to official duties.
The bank must provide written notice to the FCA before the joint
relationship begins, and the FCA may object within 10 calendar days of
receiving the bank's notice.
I. Institution Responsibilities [Proposed Sec. 612.2160]
The proposed rule would update this section to require new
responsibilities and accountability of System institutions in
overseeing the standards of conduct program.
Proposed Sec. 612.2160(a)(1) would require the institution to
dedicate appropriate resources to support the standards of conduct
program. The Standards of Conduct Official has many duties and
responsibilities, and depending on the size of the institution it may
not be possible for one person to satisfactorily manage all of these
responsibilities. Each System institution should dedicate personnel and
resources as necessary to ensure that the standards of conduct program
is carried out thoroughly and in compliance with this rule.
Proposed Sec. 612.2160(a)(3) would require the institution to
notify the FCA immediately of any known or suspected material standards
of conduct violations. This notification can come directly from the
board of directors, or from the Standards of Conduct Official as
separately required in proposed Sec. 612.2170(b)(7). The requirement
is added here to make clear that the institution itself is accountable
for notifying the FCA of known or suspected standards of conduct
violations.
Proposed Sec. 612.2160(e) would require the institution to ensure
that directors and employees certify annually that they will adhere to
the institution's standards of conduct policy and Code of Ethics.
System institutions would be required under Sec. 612.2160(f) to have
documentation that agents (1) are subject to applicable industry or
professional ethics standards, or (2) have certified to adhere to the
provisions of the System institution's Code of Ethics applicable to
agents. The certifications could be performed in various ways including
electronic signatures.
Proposed Sec. 612.2160(g) would require that System institutions
make compliance with the standards of conduct program a component of
the risk assessment process subject to periodic audit, as established
by the audit committee, by a person or entity independent of the
standards of conduct program. We would expect an institution to audit
the standards of conduct program at least once every 3 to 4 years
consistent with its risk assessment and audit planning process. The
scope and depth of the audit would be determined and documented by the
institution.
Proposed Sec. 612.2160(h) would require institutions to establish
an effective method of internal controls over the reporting,
disclosing, and other requirements of this part, including controls for
the confidentiality of information reported to and maintained by the
Standards of Conduct Official. It would require institutions to
establish an effective method of internal controls over the audit of
the standards of conduct program.
J. Code of Ethics, Policies and Procedures [Proposed Sec. 612.2165]
Many of the provisions in proposed Sec. 612.2165 would be the same
as the provisions in current Sec. 612.2165. However, each institution
should have a strong sense of its role in the System's mission and
should have a culture of corporate and personal responsibility to
further that mission. Therefore, in addition to adopting internal
standards of conduct policies and procedures, proposed Sec.
612.2165(a) would require each System institution to adopt a Code of
Ethics that applies to directors and employees and that includes a
provision for the ethical conduct of agents. Each institution would be
required to provide a copy of its Code of Ethics to directors,
employees, and agents. Directors and employees would be required to
sign the institution's Code of Ethics. Agents not subject to industry
or professional ethics standards would be required to certify that they
will adhere to the institution's Code of Ethics provision applicable to
agents.
The proposed rule sets forth minimum specific guidelines that each
System institution's Code of Ethics would be required to meet. The
institution's Code of Ethics must promote honest and ethical conduct
including the ethical handling of actual or apparent conflicts of
interest; promote integrity and compliance with laws and regulations;
prohibit dishonesty, fraud or deceit and discourage any conduct or act
that would adversely reflect on the reputation, integrity or competency
of the System; prohibit misuse of office and provide for the prompt
reporting of any person or persons who violates the institution's Code
of Ethics or engages in any activity that may require further
investigation under Sec. 612.2301, subpart B of the part, to the
Standards of Conduct Official.
Proposed Sec. 612.2165(a)(3) would require each institution's
board to adopt policies and procedures concerning the use of
unincorporated business entities (UBEs) that, at a minimum, ensure that
all transactions between the UBE and System institution directors,
employees, and agents are conducted at arm's length. These policies and
procedures must ensure that System institution directors, employees,
and agents comply with their employing institution standards of conduct
policies and procedures and this rule in their interactions with the
UBE. For example, System institution directors, employees, and agents
cannot purchase acquired property from a UBE except in compliance with
this rule and their institution's standards of conduct policies and
procedures.
The FCA believes that each System institution must review and
update its standards of conduct policies and
[[Page 9653]]
procedures, as necessary, to strengthen them. The FCA expects each
System institution to modernize and augment its existing standards of
conduct policies and procedures to ensure the highest standards of
honesty, ethics, integrity, impartiality and conduct. In doing this,
each System institution should establish reasonable criteria for
business relationships and transactions relevant to its business,
geographic location, and customer base. The standards outlined in this
rule serve as a minimum bar against which each System institution
should build and develop stronger internal standards of conduct
policies and procedures.
Proposed Sec. 612.2165(b)(2) would require System institutions to
outline authorities and responsibilities of the Standards of Conduct
Official. Included in this requirement would be the authority and
responsibility to review for compliance with this subpart all loans
considered for approval by the supervisory bank under Sec. Sec.
614.4460 and 614.4470, respectively. System institution loans to
directors and employees and loans to FCA employees and others subject
to Sec. Sec. 614.4460 and 614.4470 present unique conflict of interest
issues. The System institutions should ensure that credit decisions
with respect to these loans are made without favoritism or special
terms. These loans, which include insider loans, warrant a higher level
of scrutiny for possible conflict or undue influence than non-insider
loans.
Proposed Sec. 612.2165(b)(14) would clarify the circumstances
under which an institution's policies and procedures must prohibit the
purchase and retirement of the institution's preferred stock. This
section does not place a restriction on the issuance or retirement of
borrower stock associated with a director or employee loan transaction.
Proposed Sec. 612.2165(b)(16) would require the board in its
policies and procedures to provide for annual training on standards of
conduct. Training presents an opportunity to continually educate
directors and employees on standards of conduct issues and the
importance of ethical behavior.
Proposed Sec. 612.2165(b)(17) would require the institution to
report to the FCA exceptions authorized by the institution board under
Sec. 612.2165(c).
The FCA recognizes that some of the provisions of the rule may
prohibit activity where no actual or apparent conflict of interest
exists. Therefore, proposed Sec. 612.2165(c)(1) would allow each
System institution to adopt policies and procedures by which the System
institution board of directors may grant a written exception to certain
standards of conduct rules under this subpart. The FCA proposes that
rules for which an exception may be granted on a case-by-case basis are
a reporting requirement, an employee or director prohibition on
disclosure of information not generally available to the public, an
employee prohibition on serving as an officer of a non-System entity in
the district or of a non-System financial institution, a restriction on
an employee serving jointly at a bank and association as discussed in
proposed Sec. 612.2157, and the 5-percent threshold for defining a
controlled entity. For example, under proposed Sec. 612.2165(c)(1) a
board could allow an exception to the prohibition with respect to an
individual director's interest in a ``controlled entity'' where that
director indirectly owns more than 5 percent of the equity and the
Standards of Conduct Official determines based on the facts and
circumstances that there is no potential for conflict of interest. As
another example, this provision would allow the board to approve an
exception to the prohibition on an employee serving as an officer or
director of a non-System entity that transacts business with the System
institution in its district (proposed Sec. 612.2155(a)(4)), if the
Standards of Conduct Official determines that there is no conflict of
interest.
The exceptions under proposed Sec. 612.2165(c)(1) would have to be
approved on a case-by-case basis by the institution's board, based on a
recommendation of the Standards of Conduct Official. The Standards of
Conduct Official's recommendation would need to be strongly supported
by a written determination that the prohibition is not necessary to
avoid a conflict or appearance of a conflict or to ensure impartiality,
objectivity and public confidence in the System institution. The
determination would have to be documented in the institution's files
and renewed at least annually. The institution board would impose
appropriate conditions, as the circumstances may dictate. In addition,
the board would provide for periodic review of the criteria to
determine whether the board continues to support the Standards of
Conduct Official's recommendation. The exceptions approved would be
subject to FCA examination, and to its determination of whether the
prohibition of the activity is necessary to avoid a conflict or
appearance of a conflict or to ensure impartiality, objectivity and
public confidence in the System institution.
The FCA specifically requests comment on whether the provisions
proposed are appropriate for board waiver and whether other provisions
should be considered. There are some transactions so susceptible to
conflicts that the FCA would not consider permitting a waiver of the
rule prohibiting them. The rules prohibiting directors, employees, and
agents from acquiring property could not be waived. The rules
prohibiting an employee from acting as a real estate agent or broker
could not be waived, and the rule prohibiting an employee from acting
as an agent or broker in connection with the sale and placement of
insurance could not be waived. Finally the requirement to comply with
the institution's standards of conduct policies and Code of Ethics
could not be waived. As previously stated, there may be other rules for
which an institution board may appropriately consider granting a
waiver, and the FCA specifically requests comment on the waiver
provisions of this proposal and what those rules may be.
Proposed paragraph (c)(2) of this section would allow the
institution board to consider a standing exception to director and
employee reporting requirements under proposed Sec. Sec. 612.2140 and
612.2150, respectively. As an example, policies and procedures under
proposed Sec. 612.2165(c)(2) could allow an exception to the
requirement that a director report the name and nature of a business or
any entity on whose board the director sits, if the entity is a
nonprofit organization such as a Chamber of Commerce, or a place of
worship, and the Standards of Conduct Official determines that the
potential for conflict is insignificant with respect to that category
of entity.
Proposed paragraph (c)(2) would also permit the board to establish
policies and procedures that provide for a standing exception to the
restrictions in proposed Sec. Sec. 612.2145(b)(4) and 612.2155(b)(6)
on lending transactions, if the potential for conflict is insignificant
because the transaction is not material, or it is in the ordinary
course of business. An institution may identify certain lending
transactions that fall under a certain dollar value and are de minimis
or immaterial. Those transactions falling below such identified amounts
would not have to be reported to or reviewed by the Standards of
Conduct Official. In addition, an institution may identify certain
types of transactions that are in the ordinary course of business.
Directors and employees could enter into those ordinary course of
business transactions without the prior review of the Standards of
Conduct Official. However, where the ordinary course of
[[Page 9654]]
business transaction exceeds the de minimis or immaterial threshold set
by the institution, the directors and employees must report such
transactions, by including them in regular reports to the Standards of
Conduct Official, and the Standards of Conduct Official must review
them. Putting the exceptions of proposed Sec. 612.2165(c)(2) together,
a transaction that is in the ordinary course of business and that also
is de minimis or falls below the immaterial amount would require
neither director or employee reporting nor Standards of Conduct
Official review.
For example, the System institution may find that certain goods and
services that are offered to the public in the ordinary course of
business at a fixed price, such as diesel fuel, or equipment repairs,
do not raise conflict of interest concerns, even if purchased from a
System borrower with credit. Institution policies and procedures could
provide that these transactions would not have to be reported or
approved unless they reached a certain dollar amount or value
threshold. By contrast, transactions involving price negotiation, such
as purchasing a tractor or other heavy farm equipment, could raise
issues of impartiality or favoritism and should be subject to more
scrutiny.
In addition to transactions covered in the institution's policies
and procedures under proposed Sec. 612.2165(c)(2), proposed Sec. Sec.
612.2145 and 612.2155 retain the existing flexibility for an
institution's Standards of Conduct Official to review a transaction
before it is entered into and make a case-by-case determination that
there is no conflict. The exceptions in proposed Sec. 612.2165(c)(2)
are designed to be applied to all directors and employees and as such,
must be set on a conservative basis. However, a particular lending
transaction that does not fall within the institutions' Sec.
612.2165(c)(2) exceptions may still be a transaction that the Standards
of Conduct Official determines has little potential for conflict when
applying the rules under Sec. Sec. 612.2145 and 612.2155. Proposed
Sec. 612.2165(f) reminds each System institution that the FCA may
determine that a transaction or activity constitutes a conflict of
interest notwithstanding the System institution's board of director
finding to the contrary. Section 612.2165(d) and (e) are included to
prevent misuse of the requirements under this section to evade conflict
of interest rules and situations. Finally, institution policies and
procedures should provide for periodic review by the System institution
board.
K. Standards of Conduct Official [Proposed Sec. 612.2170]
We would revise Sec. 612.2170(a) to require that there must be an
internal employee who also serves as the institution's Standards of
Conduct Official and who would be accountable to the institution's
board for all standards of conduct matters. The FCA believes that an
in-house Standards of Conduct Official is in the best position to
advise the board because they are in-tune with the day-to-day
operations of the institution. In addition, in order to foster a
culture of highest integrity and ethical conduct, it is important to
have a Standards of Conduct Official who has a constant presence at,
relationship with, and respect of, the employees of the institution.
The proposed rule would require the institution's board of directors to
provide for other employees to assist the Standards of Conduct Official
as needed to ensure the effective operations of the institution's
standards of conduct program.
Proposed Sec. 612.2170(b) would enhance and clarify the
responsibility and accountability of the Standards of Conduct Official.
The Standards of Conduct Official must receive, actively review, and
maintain the reports required by the rule. Proposed Sec.
612.2170(b)(6) would require the Standards of Conduct Official to
report to the board no less than annually on the effectiveness of the
institution's standards of conduct policy and its implementation. This
report should include an evaluation of the extent to which safeguards
are in place to avoid conflicts of interest and standards of conduct
policy violations and should present the opportunity to make
improvements to the standards of conduct program.
The Standards of Conduct Official must also present any violations
of the standards of conduct policy to the board for appropriate action.
Section 612.2170(b)(7) would requires the Standards of Conduct Official
to report to the institution's board and to the FCA all suspected
criminal and, in addition, any standards of conduct violations that may
have an adverse impact on continued public confidence in the System or
any of its institutions.
Proposed Sec. 612.2170(c) would provide that a Farm Credit bank
may provide assistance to an affiliated association's board of
directors and Standards of Conduct Official in complying with this
part. Proposed Sec. 612.2170(d) would provide that an institution may
use an outside counsel or consultant to assist the institution in
meeting standards of conduct requirements. However, the institution's
in-house Standards of Conduct Official would be responsible for
overseeing the outside counsel or consultant.
Proposed Sec. 612.2170(e) would provide that the Standards of
Conduct Official must coordinate appropriate training with the
institution's board on an annual basis.
L. Standards of Conduct for Agents [Current Sec. 612.2260 Is Proposed
Sec. 612.2180]
It is important for System institutions to hold their agents to the
same high ethical standards held by their directors and employees. The
proposed rule would require that institutions document that agents
representing System institutions in contacts with third parties or who
provide professional or consultant services such as legal, accounting,
and appraisal, are subject to industry or professional ethics standards
and that the institution provide each agent a copy of the institution's
standards of conduct policy and Code of Ethics. The proposed rule would
further require that an agent who is not subject to industry or
professional ethics standards must certify to the System institution
that the agent will adhere to the provisions of the institution's Code
of Ethics applicable to agents. Agents play an important role in System
institutions and this rule would help achieve high ethical standards at
every level throughout the System.
To avoid the appearance of conflicts in the disposition or purchase
of institution-owned or institution-acquired real or personal property,
we propose that agents must agree to prohibitions similar to those that
apply to employees. The proposed rule would prohibit agents from
acquiring any interest in real or personal property if it was owned or
acquired by the employing institution or any supervised or supervising
institution as a result of foreclosure or similar action at any time
during the agent's employment. The prohibition would apply for as long
as the property is owned or acquired by the System institution, and for
12 months after the property is transferred out of the System
institution or after the agency relationship is terminated, whichever
occurs first.
M. Purchase of System Obligations [Current Sec. 612.2270 Is Proposed
Sec. 612.2190]
We revised this section to clarify that directors and employees may
not purchase any obligation of a System institution except as
specifically stated.
[[Page 9655]]
III. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule
would not have a significant economic impact on a substantial number of
small entities. Each of the banks in the Farm Credit System, considered
together with its affiliated associations, has assets and annual income
in excess of the amounts that would qualify them as small entities.
Therefore, Farm Credit System institutions are not ``small entities''
as defined in the Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 612
Agriculture, Banks, Banking, Conflict of interests, Crime,
Investigations, Rural areas.
For the reasons stated in the preamble, part 612 of chapter VI,
title 12 of the Code of Federal Regulations is proposed to be amended
as follows:
PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED
CRIMINAL VIOLATIONS
0
1. The authority citation for part 612 continues to read as follows:
Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12
U.S.C. 2243, 2252, 2254).
0
2. Subpart A, consisting of Sec. Sec. 612.2130 through 612.2270, is
revised to read as follows:
Subpart A--Standards of Conduct
Sec.
612.2130 Definitions.
612.2135 Responsibilities and conduct.
612.2136 Conflicts of interest.
612.2140 Director reporting.
612.2145 Directors--prohibited conduct.
612.2150 Employee reporting.
612.2155 Employees--prohibited conduct.
612.2157 Joint employees.
612.2160 Institution responsibilities.
612.2165 Code of ethics, policies, and procedures.
612.2170 Standards of Conduct Official.
612.2180 Standards of Conduct for agents.
612.2190 Purchase of System obligations.
612.2260 [Reserved]
612.2270 [Reserved]
Subpart A--Standards of Conduct
Sec. 612.2130 Definitions.
For purposes of this part, the following terms are defined:
Agent means any person, other than a director or employee, who
currently represents a System institution in contacts with third
parties or who currently provides professional services to a System
institution, such as legal, accounting, appraisal, and other similar
services.
Code of Ethics means a written set of standards, rules, values, and
guidance that is used to ensure the ethical conduct of those who sign
it, and that reflects professionalism and discourages misconduct so
that the best interests of the institution are advanced.
Conflicts of interest or the appearance thereof exists when a
person has a financial interest in a transaction, relationship, or
activity that actually affects or has the appearance of affecting the
person's ability to perform official duties and responsibilities in a
totally impartial manner and in the best interest of the employing
institution when viewed from the perspective of a reasonable person
with knowledge of the relevant facts.
Controlled entity and entity controlled by, for the purposes of
this rule only, means an interest in an entity in which the individual,
directly or indirectly, or acting through or in concert with one or
more persons:
(1) Owns 5 percent or more of the equity;
(2) Owns, controls, or has the power to vote 5 percent or more of
any class of voting securities; or
(3) Has the power to exercise a controlling influence over the
management of policies of such entity.
Employee means any salaried officer or part-time, full-time,
temporary salaried employee or any non-salaried employee who receives a
wage.
Entity means a corporation, company, association, firm, joint
venture, partnership (general or limited), unincorporated business
entity, society, joint stock company, trust (business or otherwise),
fund or other organization or institution.
Family means an individual and spouse and anyone having the
following relationship to either: parent, spouse, son, daughter,
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister,
half-brother, half-sister, uncle, aunt, nephew, niece, grandparent,
grandson, granddaughter, and the spouses of the foregoing and anyone
whose association or relationship with the director or employee is the
equivalent of the foregoing.
Financial interest means an interest in an activity, transaction,
property, or relationship with a person or an entity that involves
receiving or providing something of monetary value or other present or
deferred compensation.
Financially obligated with means having a joint legally enforceable
obligation with, being financially obligated on behalf of (contingently
or otherwise), having an enforceable legal obligation secured by
property owned by another, or owning property that secures an
enforceable legal obligation of another.
Material, when applied to a financial interest or transaction or
series of transactions, means that the interest or transaction or
series of transactions is of such magnitude that a reasonable person
with knowledge of the relevant facts would question the ability of the
person who has the interest or is party to such transaction(s) to
perform the person's official duties objectively and impartially and in
the best interest of the institution and its statutory purpose.
Mineral interest means any interest in minerals, oil, or gas,
including, but not limited to, any right derived directly or indirectly
from a mineral, oil, or gas lease, deed, or royalty conveyance.
OFI means other financing institutions that have established an
access relationship with a Farm Credit bank or an agricultural credit
bank under section 1.7(b)(1)(B) of the Act.
Officer means the chief executive officer, president, chief
operating officer, vice president, corporate secretary, treasurer,
general counsel, chief financial officer, and chief credit officer of
each System institution, and any person not so designated who holds a
similar position of authority.
Ordinary course of business, when applied to a transaction, means:
(1) A transaction that is usual and customary between or among
persons who are in business together; or
(2) A transaction with a person who is in the business of offering
the goods or services that are the subject of the transaction on terms
that are not preferential. Preferential means that the transaction is
not on the same terms as those prevailing at the same time for
comparable transactions for other persons who are not directors,
employees, or agents of a System institution.
Person means individual or entity.
Relative means any member of the family as defined in this section.
Service corporation means each service corporation chartered under
the Act.
Signed, has the same meaning as set forth in Sec. 620.1 of this
chapter.
Standards of Conduct Official means the official designated under
Sec. 612.2170.
Supervised institution is a term which only applies within the
context of a System bank or an employee of a System bank and refers to
each association supervised by that bank.
Supervising institution is a term that only applies within the
context of an association or an employee of an association and refers
to the bank that supervises that association.
[[Page 9656]]
System institution and institution mean any bank, association, or
service corporation, chartered under the Act in the Farm Credit System,
including the Farm Credit Banks, banks for cooperatives, agricultural
credit banks, Federal land bank associations, agricultural credit
associations, Federal land credit associations, production credit
associations, and the Federal Farm Credit Banks Funding Corporation.
Unincorporated business entities (UBE) has the same meaning as set
forth in Sec. 611.1151 of this chapter.
Sec. 612.2135 Responsibilities and conduct.
(a) Directors and employees of all System institutions must
maintain high standards of industry, honesty, integrity, impartiality,
and conduct in order to ensure the proper performance of System
business and continued public confidence in the System and each of its
institutions. The avoidance of misconduct and conflicts of interest is
indispensable to the maintenance of these standards.
(b) To achieve these high standards of conduct, directors and
employees must observe, to the best of their abilities, the letter and
intent of all applicable local, state, and Federal laws and regulations
and policy statements, instructions, procedures, and guidance of the
Farm Credit Administration. System institutions must exercise diligence
and good judgment in carrying out their duties, obligations, and
responsibilities.
Sec. 612.2136 Conflicts of interest.
(a) Each director, employee, and agent of a System institution, and
consultants who provide expert or professional services to the System
institution, must:
(1) Take measures to avoid conflicts of interest;
(2) Disclose conflicts of interest in any matters, activities or
transactions pending at the System institution, or in the case of
consultants, experts or professionals, disclose conflicts of interest
in the matter, activity, or transaction for which they are providing
services, including financial or other personal or official interests
that may present a conflict of interest or the appearance thereof, to
the Standards of Conduct Official; and
(b) If a person subject to paragraph (a) of this section has a
conflict of interest in a matter, transaction or activity subject to
official action, or before the board of directors, then the person
must:
(1) Disclose to the official or the board all material non-
privileged information relevant to the consideration of the matter,
activity or transaction, including:
(i) The existence, nature, and extent of the person's interests;
and
(ii) The facts known to the person as to the matter, activity or
transaction under consideration;
(2) Refrain from participating in the official action or board
discussion of the matter, activity or transaction; and
(3) Not vote on the matter or transaction.
(c) The System institution must establish policies and procedures
to enforce this section which may include procedures by which the
Standards of Conduct Official may waive the recusal requirement upon
his or her written determination that a conflict of interest does not
exist or would not interfere with the person's ability to perform
impartially and in the best interest of the System institution.
Sec. 612.2140 Director reporting.
(a) Annually, as of the institution's fiscal year end, and at such
other times as may be required to comply with paragraph (c) of this
section, each director must file a written and signed statement with
the Standards of Conduct Official that fully reports:
(1) The names of any immediate family members as defined in Sec.
620.1(e) of this chapter, or affiliated organizations, as defined in
Sec. 620.1(a) of this chapter, who had transactions with the
institution at any time during the year;
(2) Any matter required to be disclosed by Sec. 620.6(f) of this
chapter; and
(3) Any additional information the institution may require to make
the disclosures required by part 620 of this chapter.
(b) Each director must, at such intervals as the institution's
board determines is necessary to effectively enforce this regulation
and the institution's standards of conduct policy and Code of Ethics
adopted pursuant to Sec. 612.2165, file a written and signed statement
with the Standards of Conduct Official that contains those disclosures
required by the regulations and such policy. At a minimum, these
disclosures must include:
(1) All material financial interests with directors, employees,
agents or borrowers of the employing, supervised, and supervising
institution;
(2) The name of any relative or any person residing in the
director's household, any business partner, or any entity controlled by
the director or such persons (alone or in concert) if the director
knows or has reason to know that such individual or entity transacts
business with the institution or any institution supervised by the
director's institution; and
(3) The name and the nature of the business of any entity in which
the director has a material financial interest or on whose board the
director sits if the director knows or has reason to know that such
entity transacts business with:
(i) The director's institution or any institution supervised by the
director's institution; or
(ii) A borrower of the director's institution or any institution
supervised by the director's institution.
(c) Any director who becomes or plans to become involved in any
relationship, transaction, or activity that may violate the
institutions' Code of Ethics or is required to be reported under this
section or could constitute a conflict of interest, must promptly
report in writing such involvement or plan to become involved to the
Standards of Conduct Official for a determination of whether the
relationship, transaction, or activity is, in fact, a conflict of
interest.
(d) Unless a disclosure as a director candidate under part 620 of
this chapter has been made within the preceding 180 calendar days, a
newly elected or appointed director must report matters required to be
reported in paragraphs (a), (b), and (c) of this section to the
Standards of Conduct Official within 30 calendar days after the
election or appointment and thereafter must comply with the
requirements of this section.
Sec. 612.2145 Directors--prohibited conduct.
(a) Prohibited conduct. Except as specifically provided under
paragraph (b) of this section, a director of a System institution must
not:
(1) Participate, directly or indirectly, in deliberations on, or
the determination of, any matter affecting, directly or indirectly, the
financial interest of the director, any relative of the director, any
person residing in the director's household, any business partner of
the director, or any entity controlled by the director or such persons
(alone or in concert);
(2) Divulge or make use of any fact, information, or document not
generally available to the public that is acquired by virtue of serving
on the board of a System institution;
(3) Use the director's position to obtain or attempt to obtain
special advantage or favoritism for the director, any relative of the
director, any person residing in the director's household, any business
partner of the director, any entity controlled by the director or such
persons (alone or in concert), any other System institution, or any
person
[[Page 9657]]
transacting business with the institution, including borrowers and loan
applicants;
(4) Use the director's position or information acquired in
connection with the director's position to solicit or obtain, directly
or indirectly, any gift, fee, or other present or deferred compensation
or for any other personal benefit on behalf of the director, any
relative of the director, any person residing in the director's
household, any business partner of the director, any entity controlled
by the director or such persons (alone or in concert), any other System
institution, or any person transacting business with the institution,
including borrowers and loan applicants;
(5) Accept or solicit, directly or indirectly, any gift, fee, or
other present or deferred compensation that is offered or could
reasonably be viewed as being offered to influence official action or
to obtain information that the director has access to by reason of
serving on the board of a System institution;
(6) Knowingly acquire, directly or indirectly, any interest in any
real or personal property, including mineral interests, that was owned
or acquired by the employing, supervising, or any supervised
institution as a result of foreclosure or similar action;
(7) Directly or indirectly borrow from, lend to, or become
financially obligated with or on behalf of, a director, employee, or
agent of the employing, supervising or supervised institution or a
borrower, or loan applicant of the employing institution; or
(8) Violate an institution's policies and procedures governing
standards of conduct or Code of Ethics.
(b) Exceptions to prohibited conduct. (1) A director may
participate in deliberations and determinations of matters prohibited
under paragraph (a)(1) of this section only if the matter is one of
general applicability affecting all shareholders/borrowers in a
nondiscriminatory way, as determined by the Standards of Conduct
Official.
(2) A director may divulge or make use of any fact, information, or
document prohibited under paragraph (a)(2) of this section, only if in
the performance of the director's official duties.
(3) A director may acquire an interest in any real or personal
property prohibited under paragraph (a)(6) of this section only if the
director did not participate in the deliberations or decision to
foreclose, or take similar action, or to dispose of the property or in
establishing the terms of the sale; and
(i) The director acquired the property through inheritance; or
(ii) The System institution did not own the property or interest at
any time during the 12-month period before the director's acquisition
of the property; or
(iii) The director acquired the property through public auction
with open competitive bidding and the Standards of Conduct Official
determined in writing, before the director acquired the property, that
the director does not have an advantage over other bidders as a result
of the director's position and that no other conflict of interest or
appearance thereof exists.
(4) A director may enter into a lending transaction prohibited
under paragraph (a)(7) of this section only if:
(i) The transaction is with a relative or any person residing in
the director's household;
(ii) The transaction is undertaken in an official capacity in
connection with the institution's discounting, lending or participation
relationships with OFIs and other lenders; or
(iii) The Standards of Conduct Official, on a case-by-case basis,
determines and documents, pursuant to a board adopted policy and in the
manner outlined herein, that the potential for conflict is
insignificant. The Standards of Conduct Official's determination must:
(A) Be in writing;
(B) Adequately demonstrate that the transaction is in the ordinary
course of business or is not material in amount or value;
(C) Adequately demonstrate that the director did not participate in
the determination of any matter affecting the financial interests of
the other party to the transaction except those matters affecting all
shareholders/borrowers in a nondiscriminatory way;
(D) Be made before the director enters into the transaction, or at
the time the director is appointed or elected; and
(E) Be renewed annually, as applicable.
Sec. 612.2150 Employee reporting.
(a) Annually, as of the institution's fiscal yearend, and at such
other times as may be required to comply with paragraph (c) of this
section, each senior officer as defined in Sec. 619.9310 of this
chapter must file a written and signed statement with the Standards of
Conduct Official that fully reports:
(1) The names of any immediate family members, as defined in Sec.
620.1(e) of this chapter, or affiliated organizations, as defined in
Sec. 620.1(a) of this chapter, who had transactions with the
institution at any time during the year;
(2) Any matter required to be disclosed by Sec. 620.6(f) of this
chapter; and
(3) Any additional information the institution may require to make
the disclosures required by part 620 of this chapter.
(b) Each employee must, at such intervals as the institution's
board determines is necessary to effectively enforce this regulation
and the institution's standards of conduct policy and Code of Ethics
adopted pursuant to Sec. 612.2165, file a written and signed statement
with the Standards of Conduct Official that contains those disclosures
required by the regulation and such policy. At a minimum, these
disclosures must include:
(1) All material financial interests with directors, employees,
agents or borrowers of the employing, supervised, and supervising
institutions;
(2) The name of any relative or any person residing in the
employee's household, any business partner, or any entity controlled by
the employee or such persons (alone or in concert) if the employee
knows or has reason to know that such individual or entity transacts
business with the employing institution, or any institution supervised
by the employing institution; and
(3) The name and the nature of the business of any entity in which
the employee has a material financial interest or on whose board the
employee sits if the employee knows or has reason to know that such
entity transacts business with:
(i) The employing institution or any institution supervised by the
employing institution; or
(ii) A borrower of the employing institution or any institution
supervised by the employing institution.
(c) Any employee who becomes or plans to become involved in any
relationship, transaction, or activity that is required to be reported
under this section or could constitute a conflict of interest must
promptly report in writing such involvement to the Standards of Conduct
Official for a determination of whether the relationship, transaction,
or activity is, in fact, a conflict of interest.
(d) A newly hired employee must report matters required to be
reported in paragraphs (a), (b), and (c) of this section to the
Standards of Conduct Official five (5) business days after starting
employment and thereafter must comply with the requirements of this
part.
Sec. 612.2155 Employees--prohibited conduct.
(a) Prohibited conduct. Except as specifically provided under
paragraph
[[Page 9658]]
(b) of this section, an employee of a System institution must not:
(1) Participate, directly or indirectly, in deliberations on, or
the determination of, any matter affecting, directly or indirectly, the
financial interest of the employee, any relative of the employee, any
person residing in the employee's household, any business partner of
the employee, or any entity controlled by the employee or such persons
(alone or in concert);
(2) Divulge or make use of any fact, information, or document not
generally available to the public that is acquired by virtue of being
an employee of a System institution;
(3) Use the employee's position to obtain or attempt to obtain
special advantage or favoritism for the employee, any relative of the
employee, any person residing in the employee's household, any business
partner of the employee, any entity controlled by the employee or such
persons (alone or in concert), any other System institution, or any
person transacting business with the institution, including borrowers
and loan applicants;
(4) Serve as an officer or director of an entity other than a
System institution that transacts business with a System institution in
the district or of any commercial bank, savings and loan, or other non-
System financial institution. For the purposes of this paragraph,
``transacts business'' does not include loans by a System institution
to a family-owned entity, service on the board of directors of the
Federal Agricultural Mortgage Corporation, or transactions with
nonprofit entities or entities in which the System institution has an
ownership interest;
(5) Use the employee's position or information acquired in
connection with the employee's position to solicit or obtain, directly
or indirectly, any gift, fee, or other present or deferred compensation
or for any other personal benefit on behalf of the employee, any
relative of the employee, any person residing in the employee's
household, any business partner of the employee, any entity controlled
by the employee or such persons (alone or in concert), any other System
institution, or any person transacting business with the institution,
including borrowers and loan applicants;
(6) Accept or solicit, directly or indirectly, any gift, fee, or
other present or deferred compensation that is offered or could
reasonably be viewed as being offered to influence official action or
to obtain information that the employee has access to by reason of
employment with a System institution;
(7) Knowingly acquire, directly or indirectly, any interest in any
real or personal property, including mineral interests, that was owned
or acquired by the employing, supervising, or any supervised
institution as a result of foreclosure or similar action;
(8) Directly or indirectly borrow from, lend to, or become
financially obligated with or on behalf of, a director, employee, or
agent of the employing, supervising, or supervised institution or a
borrower or loan applicant of the employing institution;
(9) Act as a real estate agent or broker;
(10) Act as an agent or broker in connection with the sale and
placement of insurance; or
(11) Violate an institution's policies and procedures governing
standards of conduct or Code of Ethics.
(b) Exceptions to prohibited conduct. (1) An employee may
participate in deliberations and determinations of matters prohibited
under paragraph (a)(1) of this section only if the matter is one of
general applicability affecting all shareholders/borrowers in a
nondiscriminatory way, as determined by the Standards of Conduct
Official.
(2) An employee may divulge or make use of a fact, information, or
document prohibited under paragraph (a)(2) of this section only if in
the performance of official duties.
(3) Notwithstanding the prohibitions in paragraph (a)(4) of this
section, an employee may serve as an officer or director of an employee
credit union. With the prior approval of the board of the employing
institution, an employee of a Farm Credit Bank or association may serve
as a director of a cooperative that borrows from an agricultural credit
bank. Prior to approving an employee's request, the board must
determine whether the employee's proposed service as a director is
likely to cause the employee to violate any regulations in this part or
the institution's policies, e.g., the requirements relating to devotion
of time to official duties.
(4) An employee may acquire an interest in real or personal
property prohibited under paragraph (a)(7) of this section only if the
employee did not participate in the deliberations or decision to
foreclose on the property or to take action, or to dispose of the
property or in establishing the terms of the sale; and
(i) The employee acquired the property through inheritance; or
(ii) The System institution did not own the property or interest at
any time during the 12-month period before the employee's acquisition
of the property.
(5) An employee may enter into a lending transaction prohibited
under paragraph (a)(8) of this section only if:
(i) The transaction is with a relative or any person residing in
the employee's household;
(ii) The transaction is undertaken in an official capacity in
connection with the institution's discounting, lending, or
participation relationships with OFIs and other lenders; or
(iii) The Standards of Conduct Official on a case-by-case basis,
determines and documents, pursuant to a board adopted policy under
Sec. 612.2165 and in the manner outlined herein, that the potential
for conflict is insignificant. The Standards of Conduct Official's
determination must:
(A) Be in writing;
(B) Adequately demonstrate that the transaction is in the ordinary
course of business or is not material in value or amount;
(C) Adequately demonstrate that the employee did not participate in
the determination of any matter affecting the financial interests of
the other party to the transaction except those matters affecting all
shareholders/borrowers in a nondiscriminatory way;
(D) Be made before the transaction in question is entered into; and
(E) Be renewed annually, as applicable.
(6) Paragraph (a)(9) of this section does not apply to transactions
involving the purchase or sale of real estate intended for the use of
the employee, a member of the employee's family, or a person residing
in the employee's household.
(7) Paragraph (a)(10) of this section does not apply to the sale or
placement of insurance authorized by section 4.29 of the Act.
Sec. 612.2157 Joint employees.
(a) An employee of a Farm Credit bank may serve as an employee of
an association in its district only if:
(1) The employee is not an officer of the Farm Credit bank and will
not serve as an officer of the association; or
(2) Before such service begins, the Farm Credit bank's Standards of
Conduct Official consents in writing to such service, the Farm Credit
bank board of directors agrees that the interest of both System
institutions outweighs the potential for conflicts of interest or
conflicts related to devotion of time to official duties, the Farm
Credit bank delivers written notice to the Farm Credit Administration,
and the Farm Credit Administration does not object to such service
within ten (10) calendar days of receiving the notice.
[[Page 9659]]
(b) Each institution must appropriately reflect the expense of
joint employees in its financial statements.
Sec. 612.2160 Institution responsibilities.
Each institution must:
(a) Ensure compliance with this part by its directors, employees,
and agents and at a minimum:
(1) Provide support as necessary to the Standards of Conduct
program including assigning appropriate resources and staffing to the
Standards of Conduct Official;
(2) Act promptly to preserve the integrity of and public confidence
in the institution in any matter involving a conflict of interest or
the appearance of a conflict of interest, whether or not specifically
addressed by this subpart or the policies and procedures adopted
pursuant to Sec. 612.2165; and
(3) Notify the Farm Credit Administration immediately of known or
suspected material standards of conduct violations as described in
Sec. 612.2170(b)(7).
(b) Take appropriate measures to ensure that all directors and
employees are informed of the requirements of this regulation and
policies and procedures adopted pursuant to Sec. 612.2165.
(c) Maintain all standards of conduct policies and procedures,
reports, investigations, determinations, and evidence of compliance
with this part for a minimum of six (6) years.
(d) Remain informed of applicable industry approved best practices
for standards of conduct.
(e) Ensure that directors and employees annually certify in writing
that they will adhere to the institution's standards of conduct policy
and Code of Ethics.
(f) Provide its agents a copy of the institution's standards of
conduct policy and Code of Ethics;
(1) Adequately document which of its agents are subject to industry
or professional ethics standards; and
(2) Require each agent that is not subject to industry or
professional ethics standards to certify that he or she will adhere to
the provisions of the institution's Code of Ethics applicable to
agents.
(g) Ensure that compliance with the standards of conduct program is
a component of the institution's risk assessment process subject to
periodic audit by a person or entity independent of the program.
(h) Develop, implement and maintain an effective method of internal
controls over the reporting, disclosure and other requirements of this
part. The method of internal controls, at a minimum, must comply with
the requirements of applicable Farm Credit Administration regulations,
including Sec. 618.8430 of this chapter and include controls for:
(1) The confidentiality of information reported to and maintained
by the Standards of Conduct Official; and
(2) The audit of the standards of conduct program for compliance by
a person or entity independent of the program.
Sec. 612.2165 Code of Ethics, policies, and procedures.
(a) Each institution's board of directors must adopt:
(1) Policies and procedures governing standards of conduct for
directors, employees, and agents; and
(2) A code of Ethics that applies to directors and employees and
that includes a provision for the ethical conduct of agents to ensure
the avoidance of conflicts of interest in the performance of their
duties. The Code of Ethics must include specific guidelines on what is
acceptable and unacceptable conduct. The Code of Ethics must be signed
by directors and employees. Agents must be presented with the
institution's Code of Ethics, and agents not subject to industry or
professional ethics standards must sign the institution's Code of
Ethics provisions applicable to agents. The institution's Code of
Ethics must:
(i) Promote honest and ethical conduct, including the ethical
handling of actual or apparent conflicts of interest;
(ii) Promote integrity and compliance with applicable laws, rules
and regulations governing standards of conduct;
(iii) Inform directors and employees that they will be held
accountable for adhering to the institution's Code of Ethics, or in the
case of agents, to industry or professional ethics standards or, in the
absence thereof, to the System institution's Code of Ethics provisions
applicable to agents;
(iv) Prohibit conduct involving dishonesty, fraud, or deceit and
discourage the commitment of any act that reflects adversely on the
reputation, integrity, or competency of the System institution or the
System;
(v) Prohibit conduct involving misuse of office; and
(vi) Provide for the prompt reporting to the Standards of Conduct
Official any person or persons in violation of the institution's Code
of Ethics and of any activity that may require further investigation
and reporting under Sec. 612.2301;
(3) Policies and procedures related to UBEs that ensure the System
institution's directors, employees, and agents and the UBE members,
partners, employees and agents comply with their employing
institution's standards of conduct and avoid conflicts of interest in
carrying out their duties with respect to the UBE.
(b) Board policies and procedures adopted pursuant to paragraph (a)
of this section must reflect due consideration of the potential adverse
impact of activities permitted under the policies and procedures and
must at a minimum:
(1) Establish requirements and prohibitions as are necessary to
promote public confidence in the institution and the System, preserve
the integrity and independence of the supervisory process, and prevent
the improper use of official property, position, or information. In
developing such requirements and prohibitions, the institution must
address such issues as the hiring of relatives, political activity,
devotion of time to duty, use of institution resources, the exchange of
gifts and favors among directors and employees of the employing,
supervising, and supervised institution, and the circumstances under
which gifts may be accepted by directors and employees from outside
sources, in light of the foregoing objectives;
(2) Outline authorities and responsibilities of the Standards of
Conduct Official, including:
(i) The authority and responsibility to review for compliance with
this subpart all loans before the supervisory bank's approval under
Sec. Sec. 614.4460 and 614.4470, respectively; and
(ii) A process to allow the Standards of Conduct Official to report
matters to the board without fear of reprisal;
(3) Establish criteria for business relationships and transactions
not specifically prohibited by this part between employees or directors
and borrowers, loan applicants, directors, or employees of the
employing, supervised, or supervising institutions, or persons
transacting business with such institutions, including OFIs or other
lenders having an access or participation relationship;
(4) Establish criteria under which employees may accept outside
employment or compensation;
(5) Establish conditions under which employees may receive loans
from System institutions;
(6) Establish conditions under which employees may acquire an
interest in real or personal property that served as collateral for a
loan from a System institution;
(7) Establish conditions under which employees may purchase any
real or personal property of a System
[[Page 9660]]
institution acquired by such institution for its operations. System
institutions must use open competitive bidding whenever they sell
surplus property above a stated value (as established by the board) to
their employees;
(8) Provide for a reasonable period of time for directors and
employees to terminate transactions, relationships, or activities that
are subject to prohibitions that arise at the time of adoption or
amendment of the policies;
(9) Require new directors and new employees involved in
transactions, relationships, and activities prohibited by these
regulations or internal policies to terminate such transactions within
the same time period established for existing directors or employees
pursuant to paragraph (b)(8) of this section, beginning with the
commencement of the director's term for new directors, and commencement
of official duties for new employees, or such shorter time period as
the institution may establish;
(10) Establish procedures providing for a director's, employee's,
or agent's recusal from official action on any matter in which the
director, employee, or agent is prohibited from participating under
these regulations or the institution's policies;
(11) Establish documentation requirements demonstrating compliance
with standards of conduct decisions and board policy;
(12) Establish reporting requirements, consistent with this part,
to enable the institution to comply with Sec. 620.6 of this chapter,
monitor conflicts of interest, and monitor recusal compliance;
(13) Establish appeal procedures available to any employee to whom
any required approval has been denied;
(14) Prohibit directors and employees from purchasing or retiring
any preferred stock of the institution in advance of the release of
material non-public information concerning the institution to other
stockholders;
(15) Establish when directors and employees may purchase and retire
their preferred stock in the institution;
(16) Require annual training and other appropriate measures to
ensure that all directors and employees are educated on best practices
for ethical behavior and standards of conduct and perform their duties
and responsibilities in an objective and impartial manner; and
(17) Require that the institution report to the Farm Credit
Administration exceptions authorized by the board pursuant to paragraph
(c) of this section.
(c) Board policies and procedures adopted pursuant to paragraphs
(a) and (b) of this section may provide for:
(1) The board to consider a case-by-case exception to conflicts of
interest requirements (Sec. 612.2136), director and employee reporting
requirements (Sec. Sec. 612.2140 and 612.2150), the 5-percent
threshold on controlled entity (Sec. 612.2130), joint employee
prohibitions (Sec. 612.2157), employee prohibitions on serving as an
officer or director of a non-System financial institution (Sec.
612.2155(a)(4)), and director and employee prohibitions on sharing
information (Sec. Sec. 612.2145(a)(2) and 612.2155(a)(2),
respectively). An exception may be authorized only upon board approval
after the board considers the written recommendation of the Standards
of Conduct Official. The recommendation must be adequately supported by
the Standards of Conduct Official's written determination that in that
particular matter or transaction application of the prohibition subject
to the exception is not necessary to avoid a conflict of interest, to
avoid the appearance of a conflict of interest or to ensure the
confidence in the impartiality and objectivity of the director,
employee, or System institution. The board must provide for periodic
review of the criteria to determine whether the exception continues to
be appropriate. If the board approves an exception, it may impose
appropriate conditions, such as requiring a written disqualification or
additional public disclosure.
(2) Exceptions to reporting requirements under Sec. Sec. 612.2140
and 612.2150 and exceptions to the requirements under Sec. Sec.
612.2145(b)(4) and 612.2155(b)(6) that the Standards of Conduct
Official review a lending transaction before it is entered into. Broad
based exceptions in policies may be authorized only if the potential
for conflict of interest in that category of interests or transactions
is insignificant. The potential for conflict of interest may only be
considered insignificant if:
(i) The board determines, under its policies and procedures, that
the type of interest or transaction is so immaterial in amount or value
that no reasonable person with knowledge of all the facts could
conclude that the interest or transaction would influence a director's
or employee's ability to act impartially and in the best interests of
the System institution. For this exception, transactions otherwise
prohibited under Sec. Sec. 612.2145 and 612.2155 do not require the
prior approval of the Standards of Conduct Official or reporting under
Sec. Sec. 612.2140 and 612.2150; or
(ii) The board determines, under its policies and procedures that
the types of interests or transactions covered by the exception or
reporting requirement are in the ordinary course of business. For this
exception, transactions otherwise prohibited under Sec. Sec. 612.2145
and 612.2155 do not require the prior approval of the Standards of
Conduct Official but must be reported under Sec. Sec. 612.2140 and
612.2150, and must be reviewed by the Standards of Conduct Official at
least annually; and
(iii) The board must consider the written recommendation of the
Standards of Conduct Official in developing these policy exceptions.
The recommendation must be adequately supported by the Standards of
Conduct Official's written determination that the amount of value in
the transaction or the particular type of interest or transaction, does
not require application of the reporting requirement or prohibition
subject to the exception and is not necessary to avoid a conflict of
interest, to avoid the appearance of a conflict of interest or to
ensure the confidence in the impartiality and objectivity of the
director, employee, or System institution.
(d) An institution's directors and employees, including the
Standards of Conduct Official, must not engage in any act or practice
to evade the prohibitions and other requirements of this part.
(e) The Farm Credit Administration may take appropriate action
against any institution, director or employee who or that has entered
into any transaction for the purpose of evading the requirements of
this part.
(f) Notwithstanding the exceptions that may be authorized and
approved under this subpart, the Farm Credit Administration may find
that a particular financial interest or transaction, relationship, or
activity constitutes a conflict of interest or the appearance of a
conflict of interest.
Sec. 612.2170 Standards of Conduct Official.
(a) Each institution's board of directors must:
(1) Designate an officer of the institution as its Standards of
Conduct Official; and
(2) Authorize other employees of the institution or outside counsel
or consultants to assist the Standards of Conduct Official as needed,
and dedicate resources as needed, to ensure the effective operations of
the institution's standards of conduct program for compliance with
institution policies and the Farm Credit Administration's standards of
conduct regulations.
(b) The Standards of Conduct Official must:
(1) Advise directors, director candidates, employees, and potential
[[Page 9661]]
new employees concerning the provisions of this part;
(2) Receive, review, and maintain reports required by this part;
(3) Make such determinations as are required by this part;
(4) Maintain records of determinations as are required by this
part;
(5) Make appropriate investigations, as directed by the
institution's board;
(6) Report to the board no less than annually on the effectiveness
of the institution's standards of conduct policy and its
implementation;
(7) Report promptly to the institution's board and the Office of
General Counsel, Farm Credit Administration, all cases where:
(i) A preliminary investigation indicates that a Federal criminal
statute pursuant to subpart B of this part may have been violated;
(ii) An investigation results in the resignation or discharge of an
employee or the resignation or potential removal of a director; or
(iii) A known or suspected criminal or standards of conduct
violation by a director, employee or agent may have an adverse impact
on continued public confidence in the System or any of its
institutions.
(8) Investigate or cause to be investigated all cases involving:
(i) Possible violations of criminal statutes by a director,
employee or agent;
(ii) Possible violations of Sec. Sec. 612.2136, 612.2145 and
612.2155, and applicable policies and procedures approved under Sec.
612.2165;
(iii) Complaints received against the directors, employees, and
agents of such institution; and
(iv) Possible violations of other provisions of this part or when
the activities or suspected activities of a director, employee or agent
are of a sensitive nature and could affect continued public confidence
in the institution or System.
(c) A Farm Credit bank may provide assistance to an affiliated
association's board of directors and Standards of Conduct Official in
complying with this part.
(d) A System institution may use an outside counsel or consultant
to assist in complying with this part. However, the Standards of
Conduct Official must oversee the outside counsel or consultant and
remains accountable to the board.
(e) The Standards of Conduct Official must coordinate with the
board and management in administering annual training to ensure that
directors and employees remain informed of the institution's current
standards of conduct policy and Code of Ethics.
Sec. 612.2180 Standards of conduct for agents.
(a) Agents of System institutions must maintain high standards of
honesty, integrity, and impartiality in order to ensure the proper
performance of System business and continued public confidence in the
System and its institutions. The avoidance of misconduct and conflicts
of interest is indispensable to the maintenance of these standards.
(b) System institutions must utilize safe and sound business
practices in the engagement, utilization, and retention of agents.
These practices must provide for the selection of qualified and
reputable agents. Agents representing a System institution in contacts
with third parties or who provide consultant or professional services
such as legal, accounting and appraisal, must review and acknowledge
receipt of the institution's Code of Ethics. Agents must certify to the
System institution that the agent will adhere to the agent's
professional or industry ethics standards, or to the institution's Code
of Ethics provisions applicable to agents. Employing System
institutions are responsible for the actions of their agents, and must
take appropriate investigative and corrective action in the case of a
breach of fiduciary duties by the agent or failure of the agent to
carry out its duties.
(c) System institutions must exercise special diligence and
control, through good business practices, to avoid or control
situations that have inherent potential for sensitivity, either real or
perceived. These areas include the employment of agents who are related
to directors or employees of System institutions; the solicitation and
acceptance of gifts, contributions, or special considerations by
agents; and the use of System and borrower information obtained in the
course of the agent's association with System institutions.
(d) An agent may not knowingly acquire, directly or indirectly,
except through inheritance, any interest in real or personal property,
including a mineral interest, that was owned by the employing
institution or any supervised or supervising institution as a result of
foreclosure or similar action during the agent's employment. This
prohibition applies for one (1) year after the transfer of the property
out of the System institution or after the termination of the agent
relationship, whichever occurs first.
Sec. 612.2190 Purchase of System obligations.
(a) Employees and directors of System institutions must not
purchase any obligation of a System institution, including any joint,
consolidated, or Systemwide obligation, unless such obligation is:
(1) Part of an offering available to the general public; and
(2) Purchased through a dealer or dealer bank affiliated with a
member of the selling group designated by the Federal Farm Credit Banks
Funding Corporation or purchased in the secondary market.
(b) A director or employee of the Federal Farm Credit Banks Funding
Corporation must not purchase or otherwise acquire, directly or
indirectly, except by inheritance, any obligation of a System
institution, including any joint, consolidated, or Systemwide
obligation.
Sec. 612.2260 and 612.2270 [Reserved]
Dated: February 7, 2014.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2014-03098 Filed 2-19-14; 8:45 am]
BILLING CODE 6705-01-P