Personnel Administration

FARM CREDIT ADMINISTRATION

12 CFR Part 612

RIN 3052-AB47

Personnel Administration

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit

Administration Board (Board), adopts final amendments to the

regulations relating to standards of conduct for directors and

employees of Farm Credit System (FCS or System) institutions, excluding

the Federal Agricultural Mortgage Corporation. This action results from

a reassessment of the regulations in light of the amendments to the

Farm Credit Act of 1971 (1971 Act) made by the Agricultural Credit Act

of 1987 (1987 Act) and the findings of a review required by section 514

of the Farm Credit Banks and Associations Safety and Soundness Act of

1992 (1992 Act). The final rule updates the regulations to reflect

statutory changes and the change in focus of the FCA's regulatory

oversight of personnel matters. In addition, the final rule enhances

and clarifies the regulations to ensure that they fulfill the purposes

of section 514 of the 1992 Act relative to the reporting of financial

information and potential conflicts of interest.

EFFECTIVE DATE: The regulations shall become effective upon the

expiration of 30 days after publication during which either or both

houses of Congress are in session or December 31, 1994, whichever is

later. Notice of the effective date will be published in the Federal

Register.

FOR FURTHER INFORMATION CONTACT:

John J. Hays, Policy Analyst, Policy Development and Planning Division,

Office of Examination, Farm Credit Administration, McLean, VA 22102-

5090, (703) 883-4498, TDD (703) 883-4444,

or

Dorothy J. Acosta, Assistant General Counsel, Regulatory Operations

Division, Office of General Counsel, Farm Credit Administration,

McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: On August 19, 1993, the FCA proposed

amendments to its regulations relating to standards of conduct for

directors and employees of System institutions. See 58 FR 44139. The

final regulations retain much of the content of the existing and

proposed regulations, but strengthen and clarify them, expanding some

of the provisions and relaxing others.

The final regulations also address the concerns and suggestions

received on the proposed regulations during the comment period, which

expired on September 30, 1993. The FCA received seven comment letters

on the proposed regulations during the comment period. Three letters

were submitted by System banks, three by System associations, and one

by the Farm Credit Council (FCC) on behalf of its member banks and the

Federal Farm Credit Banks Funding Corporation. These comments and the

FCA responses are summarized below.

In addition to comments received during the comment period, three

letters were received concerning the proposed amendments that have also

been considered by the FCA Board. Two comment letters pertaining to the

proposed standards-of-conduct regulations were received pursuant to the

FCA's request for comments on regulatory burden, published in the

Federal Register on June 23, 1993. See 58 FR 34003. These comments

related to reporting requirements and are similar to the comments

received during the comment period for the proposed regulations. They

are summarized and addressed in the Board's response to comments

relating to reporting that were received during the comment period for

the proposed regulations. One letter was received from an association

as a followup to a meeting held in Dallas, Texas, between FCA's Board

and senior management and directors and officers of FCS associations.

The association expressed a concern regarding the ability to attract

and retain qualified directors if they are prohibited from purchasing

acquired property as proposed. The FCA received numerous comments on

this prohibition and the Board's response appears later in the

preamble.

General Comments

Two comments were received concerning the effective date of the

amendments. The FCC urged the FCA to allow sufficient lead time between

publication of the final regulations and the effective date to permit

boards of directors the opportunity to consider carefully the many

policy judgments that are left to their discretion by the regulations.

Another comment recommended an effective date no earlier than January

1, 1995, suggesting that existing regulations and policies would

continue to provide adequate direction and control in the interim.

The Board agrees that there should be sufficient lead time to

revise policies, especially in view of changes made in the final

regulations in response to comments. Although the final regulations are

substantially changed from the proposed regulations in response to the

comments, the Board believes that with the delayed effective date the

public will have ample opportunity to further review the regulations

and bring any observations to the Board's attention prior to the

effective date of the regulations. As always, the Board will consider

requests for further clarification of or amendments to the regulations

prior to or after their effective date. Consequently, the Board adopts

final regulations with a delayed effective date not earlier than

December 31, 1994.

One commenter stated that the proposed regulations would result in

a regulatory burden and that while some improvement in clarity and

flexibility is offered, the benefits do not appear commensurate with

the time and cost of implementing the changes. The commenter also

stated that conflicts of interest have not been improperly or

inadequately handled and that there is no reason to believe the

proposed changes will provide any significant improvement in avoiding,

handling, or reporting conflict-of-interest situations where an

institution has been complying with the present regulations. According

to the commenter, the proposed regulations would require substantial

effort to revamp policies and procedures.

The FCA Board has not undertaken this revision of the standards-of-

conduct regulations because of improper or inadequate handling or

reporting of conflicts of interest. Rather, as noted earlier, the

revision is intended to update the regulations to reflect statutory

changes and a change in the focus of the FCA's regulatory oversight of

personnel matters, as well as to respond to section 514 of the 1992

Act. While the FCA recognizes that the revamping of policies and

procedures requires substantial effort, the final regulations attempt

to minimize any burden by providing a delayed effective date. Also, the

FCA has adjusted the proposed regulations in response to comments where

it was possible to achieve its objectives by less burdensome means. The

final regulations place more responsibility on the institutions and

their officers and directors for identifying possible sources of

conflict and developing adequate controls, but also offer more

flexibility for developing procedures that effectively address

significant conflicts without imposing burdensome requirements that are

ineffective in preventing conflicts of interest. While this will

initially require more work, the FCA believes that it is a more

effective approach to conflicts of interest and that it more

appropriately reflects the focus of the responsibility for preventing

conflicts of interest and the role of the FCA as regulator.

Another commenter supported four of the primary FCA policy

objectives, namely: (1) Enhancing each association's accountability for

sound standards-of-conduct programs; (2) maintaining high standards of

conduct to ensure the proper performance of System business; (3)

holding directors and employees to the same standard where the

potential for conflict is the same; and (4) establishing that the

internal corporate matters of devotion of time to official duties,

political activity, nepotism, exchange of gifts, and improper use of

official property are best left to each institution's board of

directors to oversee through the implementation of a standards-of-

conduct policy. However, the commenter disagreed with the proposed

strict prohibition of a director purchasing property acquired by the

institution through foreclosure. The Board's response to this comment

is addressed in detail later in the preamble.

Section-by-Section Analysis of Comments Received

The following narrative summarizes the comments received on the

various sections of the regulations during the comment period, in

response to the Regulatory Burden Notice, and as a followup to the

Dallas meeting, and provides the Board's response to those comments.

Section 612.2130--Definitions

While no comments were received regarding the proposed changes to

this section, the FCC provided comments on the definitions in the

existing regulations for ``controlled entity'' and ``officer'' and

requested the FCA to define the terms ``financially obligated'' and

``business proprietor'' to clarify how the prohibitions in proposed

Secs. 612.2140(g) and 612.2150(h) are intended to interface.

The FCC recommended changing the definition of ``controlled

entity'' to one similar to that used in the attribution rules of the

lending limit regulations. See 12 CFR 614.4358(a)(3). Specifically,

this would increase the 5-percent threshold for control in existing

regulations to a 50-percent threshold. The FCC believes that 5-percent

ownership is a very stringent and perhaps unrealistic test of control,

and that the term ``controlling influence,'' without a higher threshold

is perhaps too vague to be meaningful.

The Board does not believe that the definition of control in the

lending limit regulations is an appropriate definition for standards-

of-conduct regulations. The purpose of the definition of control in the

lending limit regulations is to identify when borrowers are so related

that they should be regarded as a single credit risk. The purpose of

the definition of control in the standards-of- conduct regulations is

to identify when an interest is so significant that if an individual

were to act on a matter concerning the related party, there would be an

appearance of a conflict of interest. Consequently, the FCA believes

that the control threshold for standards of conduct should be much

lower than the control threshold for the purposes of lending limits.

Control thresholds used in regulations directed at conflicts of

interest are typically much lower. For example, the Securities and

Exchange Commission requires disclosure of certain transactions with

the institution of individuals owning 5 percent or more of a class of

the institution's stock. The Comptroller of the Currency, the Federal

Deposit Insurance Corporation, and the Office of Thrift Supervision

have similar requirements for institutions they regulate that are

public companies required to register under the Securities Exchange Act

of 1934. The Comptroller imposes similar disclosure requirements on all

national banks when they sell their securities, whether or not they are

public companies. The phrase ``exercises a controlling influence'' is

intended as a catch-all to capture those situations in which a person

does not meet the objective control tests, but for some other reason

has the power to control the management of the entity's policies. This

term is a common component of control definitions and has long been a

component of the part 612 definition of control without causing a

particular problem. The definition is used to determine when a director

or officer must recuse him or herself and in the reporting provisions,

both of which are direct responsibilities of directors and employees.

Such persons are likely to know when they are in a position to control

management of the entity's policies, and, if in doubt, should err on

the side of recusal and reporting. For the reasons stated above, no

change has been made to the definition of ``controlled entity.''

The FCC suggested that the position of chief executive officer be

added to the definition of ``officer'' since a number of System

institutions have both a president and a chief executive officer, or a

chief executive officer rather than a president. The Board adopts this

suggestion and also adds specific references to chief operating

officers, chief financial officers, and chief credit officers.

On a related issue, the FCC questioned whether an association's

contracting with its supervising bank for a Standards of Conduct

Officer would violate the joint employee provisions of Sec. 612.2157.

To clarify that it would not, unless the person otherwise satisfies the

definition in Sec. 612.2130(m), the term ``Standards of Conduct

Officer'' is changed to the ``Standards of Conduct Official'' in the

final regulations.

The FCC recommended that the term ``financially obligated'' be

defined, and that prohibited ``financially obligated'' transactions be

more clearly distinguished from business relationships that are

permissible.

The final regulations define ``financially obligated with'' to mean

having a joint legally enforceable obligation with, being financially

obligated on behalf of (contingently or otherwise), having an

enforceable legal obligation secured by a property owned by another, or

owning property that secures an enforceable legal obligation of

another. The Board's revision to Secs. 612.2140(g) and 612.2150(h)

responds to the request to distinguish permissible business

relationships from prohibited ``financially obligated with''

relationships and is discussed below under those sections.

As a result of this revision, the term ``business proprietor'' is

no longer used in the regulations and its definition has been deleted.

In addition, to avoid any possible confusion relative to reporting

requirements, the definition for the term ``business relationship'' or

``transacts business'' has been deleted in the final rule.

The definition of ``ordinary course of business'' in the final

regulations has been added as described in the discussion of

Sec. 612.2140.

The definition of ``family'' has been clarified to spell out more

specifically those persons included under the phrase ``and each person

having such relationships by marriage.''

Section 612.2135--Director and Employee Responsibilities and Conduct--

Generally

No comments were received on this section and it is adopted as

proposed.

Section 612.2140--Directors--Prohibited Conduct

The Board proposed to adopt some of the specific prohibitions

applicable to employees and specifically requested comments on whether

these prohibitions would operate too restrictively on directors. A

number of comments were received. The majority of commenters opposed

the proposed prohibition in paragraph (f) of this section concerning a

director's purchasing property owned by the director's institution or

an institution it supervises or is supervised by during the preceding

12 months when such property was acquired through foreclosure or

similar action. The FCC asserted that a strict prohibition would make

it more difficult to attract or retain qualified directors and

suggested that such purchases be permitted on an institution-by-

institution basis depending on whether the institution has adequate

controls in place to ensure that directors do not receive an advantage

or favoritism over other prospective purchasers. Other commenters

suggested that there are less restrictive alternatives available to

avoid real or apparent conflicts of interest and ensure continued

public confidence in the System. One alternative offered was a general

prohibition on acquired property purchases by directors except by

public auction or open competitive bidding. The commenters also

disagreed that the potential for conflicts of interest is as great for

directors as it is for employees.

After additional consideration of the issues in light of the public

comments, the Board has concluded that a total prohibition of director

purchases of acquired property may be overly restrictive. Directors of

Farm Credit Banks, associations, and certain directors of agricultural

credit banks, except outside directors, are required to be farmers,

ranchers, or producers or harvesters of aquatic products, and as such

may want to acquire additional land that becomes available in their

communities. Restrictions on their ability to acquire land that becomes

available for sale from the institution while they are serving as

director could be a serious disincentive for a successful individual to

serve as a director. On the other hand, the potential for conflict is

especially serious where there is strong motivation for acquiring

property owned by the institution. Therefore, it is important that

there be adequate controls in place to ensure that the director's

impartiality is not impaired and that the director does not use his or

her position to gain some advantage in acquiring property. The final

regulations do not prohibit such acquisitions, but require that the

property be purchased at public auctions or in open competitive

bidding. In addition, to avoid the appearance of conflict, it is

important that a director interested in acquiring such property not

participate in deliberations or decisions concerning foreclosure or

disposition of that property. Therefore, the final regulations prohibit

a director from acquiring such property, even through public auction or

competitive bidding, if he or she has participated in the decision to

foreclose or dispose of the property or in establishing the terms of

the sale.

The FCC recommended that there be an additional exception in

paragraph (g) of this section under which an otherwise prohibited

transaction would be permissible if approved by the Standards of

Conduct Official. Paragraph (g) of the proposed regulations prohibited

lending transactions between directors and other directors, employees

or borrowers, but excepts loans between family members, loans made in

an official capacity, and transactions in the ordinary course of

business, as defined. The commenter recommended that the suggested

approval be based upon a determination that the transaction does not

present any significant risk of impairing the director's (or

employee's) ability to perform his or her duties with impartiality and

in compliance with regulations.

After considering the comment and the likelihood that the

institutions themselves are in the best position to know what is in the

ordinary course of business in the local business environment, the

Board concluded that the suggestion had merit as a substitution for the

ordinary course of business exception. However, the Board believes that

there should be a regulatory standard against which such determinations

can be evaluated that will provide a measure of uniformity among FCS

institutions. The Board concluded that some relief from the prohibition

is appropriate when the transaction is so insignificant in amount as

not to create the appearance of a conflict in the eyes of a reasonable

person or is an ordinary course of business transaction that is not on

preferential terms.

Therefore, in the final regulations the proposed ordinary course of

business exception has been replaced by a provision that essentially

allows the Standards of Conduct Officer to grant a waiver where: (1)

The amount of the transaction is so immaterial that it would not cause

a reasonable person with knowledge of the relevant facts to question

the impartiality or objectivity of the director in performing his or

her official duties; or (2) where the transaction is in the ordinary

course of business; provided the director recuses him or herself from

any matter affecting the financial interest of the other party to the

transaction. ``Ordinary course of business'' is defined to mean 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 or a transaction between two persons who are in

business together that is incident to the business they conduct

together. A ``preferential'' transaction is one that is not on the same

terms as those available for comparable transactions with other persons

who are not officers and directors of System institutions. The Standard

of Conduct Official's determination that either of the circumstances

warranting an exception exists must be documented and is subject to the

recordkeeping requirements, unless the transaction falls within any

materiality thresholds for various types of transactions or specific

ordinary course of business guidelines established by the Board's

standards-of-conduct policy. While not applicable, the Uniform

Standards of Ethical Conduct for Executive Branch Employees may be

useful as a resource in determining such policy guidelines.

The Board believes that this change responds to the FCC's concern

that a deferral of payment may be construed as a loan and the concern

that the exclusion in the proposed regulation may fail to reach

transactions between an elected director (or employee) who is a

borrower and an institution's outside director.

The FCC recommended that the FCA explain its rationale for

prohibiting employees from being financially obligated with directors,

other employees, and borrowers, but having no similar prohibition for

directors.

The FCA believes there is a greater potential for conflict for

employees in having these types of relationships with borrowers because

employees are in a position to have a more direct influence on the

institution's dealings with the borrower. Also, since directors (except

outside directors) are statutorily required to be borrower/

stockholders, such a restriction could constitute an inappropriate

restraint on the ability of directors to pursue their primary

occupation. However, in light of the greater flexibility granted in the

final regulation to define an exception to the prohibition on lending

transactions, the Board believes that the institution can make

appropriate distinctions in its policies to reflect the greater

potential for conflict among employees and the impact of the

prohibition on the ability of the director to pursue his or her primary

occupation. Therefore, the final regulations make the prohibition for

directors congruent with the employee prohibition by including

``financially obligated with'' transactions within the scope of the

prohibition. See Sec. 612.2150 for discussion of the comments on this

prohibition for employees. In addition, the final regulation expands

the family loan transaction exception to include any person residing in

the director's household and relies on recusal to prevent conflicts of

interest. Accordingly, the recusal provision in Sec. 612.2140(a) is

expanded to include any person residing in the director's household and

to include a specific reference to business partners.

Section 612.2145--Director Reporting

The FCC believes the requirement to disclose the name of any

relative or entity controlled by a relative that transacts business

with the institution or an institution supervised by the institution is

overly broad. The FCC suggested that the definition of ``relative,''

for purposes of disclosure under Secs. 612.2145(b)(1) and

612.2155(b)(1), be limited to immediate family members as defined in

part 620 of this chapter. Section 620.1(e) of this chapter defines

``immediate family member'' to mean spouse, parents, siblings,

children, mothers- and fathers-in-law, brothers- and sisters-in-law,

and sons- and daughters-in-law. In addition, the FCC commented that it

is extremely difficult for a director to disclose a list of borrowers

with whom the director or the director's entity transacts business,

since if the director is not involved in the day-to-day operations of

the business, he or she will have little or no knowledge of the people

who conduct business with the director's entity. Also, a director may

not know that the individual or entity is a borrower. The FCC assumed

that this was not the intention of Sec. 612.2145 and that the

requirement to disclose ``to the best of his or her knowledge after

reasonable inquiry'' was designed to address this problem. However, the

FCC recommended that the requirement of ``reasonable inquiry'' be

deleted, noting that it is difficult to know what reasonable inquiry is

in any particular case. The FCC also suggested that directors be

required to disclose only those business relationships with borrowers

that are other than ordinary course of business relationships,

unusually large transactions, ongoing contractual relationships, or

transactions with nonstandard terms and conditions, or terms other than

those arrived at through arm's-length negotiations. The FCC argued that

any appearance of conflict would be eliminated by the knowledge that

neither the director nor the borrower received special terms. The FCC

also recommended that each institution be allowed the opportunity to

define transactions other than in the ordinary course of business

within the above parameters. The FCC also commented that it is

difficult to understand how a director's position can be compromised by

the mere fact that a borrower does business with the director or an

entity owned by the director.

Some of the FCC's comments appear to reflect a misunderstanding of

the requirements of both proposed and existing regulations. Neither the

proposed regulations nor existing regulations require the reporting of

transactions with borrowers. The proposed regulations merely require

the disclosure of the name of any relative or any entity in which the

director has a financial interest if the relative or entity transacts

business with borrowers. Transacting business with borrowers is the

standard that narrows the class of persons or entities a director must

report. An institution could, for instance, require instead the

reporting of the names of all entities in which a director or employee

has a financial interest, irrespective of whether such entities

transact business with borrowers. Such a requirement would require more

reporting, but might be easier for the individuals required to report.

The regulatory requirement is a minimum requirement. The FCA encourages

boards to require sufficient reporting to permit adequate monitoring of

potential conflicts.

After considering the comments on the reporting requirements, the

final regulations have been modified in several ways in response to

revisions to the prohibited conduct sections and in an effort to ease

any unnecessary burden the proposed regulations might have entailed.

The final regulations permit the institution greater flexibility to

determine the applicability of the prohibition on lending transactions

among directors, employees, and borrowers and relies more heavily on

recusal as a means of resolving conflicts of interest than the existing

regulations or the proposed regulations. Since the FCA believes that

the reporting requirements should provide the institution sufficient

information for the institution to determine when recusal rather than

prohibition is appropriate, an effort has been made to make the

reporting requirements parallel the recusal provisions.

The final regulations do not narrow the definition of ``relative''

as suggested. To do so would narrow the scope of the exception from the

lending and borrowing prohibition and the reach of the recusal

provision. The suggested narrowing would have deleted ``aunts, uncles,

nephews, nieces, and grandchildren,'' and these relationships are often

close enough that it would be unreasonable to restrict borrowing and

lending between family members when such family members are borrowers.

Similarly, these relationships are often close enough that it is not

unreasonable to require recusal from matters affecting their interests.

However, the standard for reporting the names of relatives in the final

regulations is whether the individual ``knows or has reason to know''

that a relative or entity transacts business with the institution or a

supervised institution or a borrower of such institutions. The ``knows

or has reason to know'' standard is adopted to address concerns that

``to the best of his or her knowledge after reasonable inquiry''

imposes a duty to inquire, the reasonableness of which could lead to

disputes. The ``knows or has reason to know'' standard is a common

legal standard that is used to ensure that a person's assertion about

the state of his or her knowledge can be challenged in circumstances in

which any reasonable person would be deemed to have knowledge. The

``actual knowledge'' standard suggested by the FCC is not adopted

because it does not allow any basis for the FCA to question a

director's assertion regarding his or her subjective state of mind even

in the most obvious circumstances.

The reporting requirements supporting the disclosure requirements

of part 620 of this chapter have been more narrowly focused in the

final regulations on information needed by the institution to make

appropriate disclosures under part 620 of this chapter, and more

clearly specify the information required to be reported. In addition,

the final regulations also permit greater flexibility in determining

the frequency of reporting for matters required to be reported, other

than matters that are required to be reported for part 620 of this

chapter.

The FCC also recommended that the reporting requirement for a

director or employee who becomes or plans to become involved in any

relationship, transaction, or activity that is required to be reported

or could constitute a conflict of interest be expanded to require the

Standards of Conduct Official to determine whether such involvement is,

in fact, a conflict of interest. The Board has adopted the FCC's

suggestion in the final regulations and has also added a requirement

that the determination specify what controls, such as recusal, are

necessary to ensure that the appearance of conflict is minimized.

A commenter noted that the proposed requirement that all new

directors report all matters listed in the director reporting section

within 1 month after election or appointment perpetuates the present

reporting redundancy involving a director candidate's disclosure. In

response to this concern, the final regulations require reporting only

if no disclosure was made as a director candidate under part 620 of

this chapter within the preceding 180 days, as this would be considered

sufficient disclosure.

Section 612.2150--Employees--Prohibited Conduct

Comments were received from the FCC regarding the prohibition

against employees borrowing from, lending to, or becoming financially

obligated with or on behalf of a director, employee, or agent of the

employing, supervising, or a supervised institution or a borrower or

loan applicant of the employing institution. The FCA also considered

the appropriateness of the FCC's comments on the parallel director

prohibition for the employee prohibition. The FCC recommended that

there be an additional exception under which an otherwise prohibited

transaction would be permissible if approved by the Standards of

Conduct Official after a determination that the transaction does not

present any significant risk of impairing the director's or employee's

ability to perform his or her duties with impartiality and in

compliance with the regulations.

The FCA concluded that the same modification that was made to

Sec. 612.2140(g) should be made to the employee prohibition. See

discussion above.

Both banks that commented objected to the relaxation of the

prohibition in Sec. 612.2150(j) against employees acting as real estate

agents or brokers because of a strong potential for creating conflicts

of interest, especially for staff appraisers. In addition, one

commenter observed that such a relaxation would be inconsistent with

the functional independence required by FCA appraisal regulations.

Another commenter asserted that the phrase ``for the employee's own

account'' is unclear and suggested substituting ``intended for the

employee's own or immediate family use.''

In view of the commenters' concerns and assurance that the

prohibition is not a particularly burdensome requirement for staff

appraisers, the FCA has decided not to adopt the appraiser exception at

this time. In addition, the final regulations substitute ``intended for

the use of the employee, a member of the employee's family, or a person

residing in the employee's household'' for ``for the employee's own

account,'' to clarify that the latter term was not intended to permit

an employee to act as an agent or broker for commercial purposes.

Section 612.2155--Employee Reporting

The FCC commented that the scope and frequency of reports required

by Sec. 612.2155 are unwarranted, unduly burdensome, and unduly costly

below the senior officer level. The FCC recommended that the FCA

distinguish between senior officers and other employees in the

reporting requirements. The FCC stated that, in its judgment, reports

by non-senior officers when hired and biennially thereafter are fully

adequate, especially since employees are required to report covered

activities as they occur in the interim. They also recommended that the

FCA remove the specific reporting requirements and require institutions

to establish reporting procedures to ensure that relationships and

activities subject to the regulations are properly disclosed and acted

upon.

The FCC commented on proposed paragraph (b)(1) of this section,

which requires employees to file an annual statement disclosing the

name of any relative or entity controlled by relatives that transact

business with the institution or any institution supervised by the

institution. The concern raised was that the disclosure is to be based

not only on actual knowledge, but also upon reasonable inquiry. This

was considered to be unreasonably broad in view of the definition of

``relative,'' because many such relatives may be virtual strangers to

the employee in question and it is difficult to know what reasonable

inquiry is in any particular case. The FCC also suggested that

``relative'' for purposes of disclosure be limited to immediate family

members, as defined in Sec. 620.1(e) of this chapter.

The same modifications that were made to the director reporting

sections have been made to the employee reporting sections in the final

regulations. Part 620 reporting requirements are focused on matters not

already within the institution's knowledge and specifically restricted

to employees who are subject to disclosure requirements, namely senior

officers, as defined in part 620 of this chapter. The final regulations

allow the institution to determine employee reporting frequency for

matters not required for part 620 disclosures, but the institution must

establish reporting requirements sufficient to permit the effective

enforcement of the regulations and the standards-of-conduct policy.

This will allow institutions to exclude certain individuals or classes

of individuals from the reporting requirement based on the functions

the employee performs. For instance, positions where there is a

substantial degree of supervision and a low level of responsibility may

make the reporting requirement unnecessary.

The FCC commented that it appears Sec. 612.2150(d) prohibits an

employee from serving as a director of an entity that transacts

business with the employing or supervised institution, while

Sec. 612.2155(b)(2) requires an employee to report the name and nature

of any entity in which the employee has a financial interest or on

whose board the employee sits, if the entity transacts business with

the employing institution. The final regulations delete the reference

to entities on whose board the employee serves in the reporting

requirement.

In response to an FCC recommendation on director reporting

requirements, Sec. 612.2155 is expanded to require the Standards of

Conduct Official to determine whether any reported transaction or

activity is, in fact, a conflict of interest and what controls are

necessary to ensure that there is no appearance of a conflict of

interest.

A commenter noted that for new employee reporting requirements it

is unclear whether 1 month refers to the time an employment offer is

extended and accepted or 1 month after the employee commences work. The

final regulations have been revised to make it clear that a newly hired

employee must report the required matters within 30 days after

accepting an offer for employment. However, under the final

regulations, the institution may establish a reasonable period for such

new employees to terminate such transactions, activities, or

relationships not to exceed the period provided for existing employees

to terminate conduct prohibited under the institution's policies.

The FCA believes that these changes, together with the greater

flexibility in defining exceptions to prohibited lending and borrowing

relationships, will enable institutions to fashion standards-of-conduct

programs that are more focused on areas in which the potential for

conflict is most significant without imposing ineffective, burdensome,

and costly reporting requirements.

Although enhancing the disclosure of financial information and

reporting of conflicts of interest was the purpose of section 514 of

the 1992 Act, the experience of the FCA in implementing Uniform

Standards of Ethical Conduct for Executive Branch Employees is that

training employees to recognize situations that present conflicts of

interest is also an effective use of resources to prevent conflicts of

interest. The FCA strongly encourages each System institution to

conduct effective periodic training programs to ensure that employees

are informed of the requirements of the regulations and the

institution's policies and are sensitive to circumstances that give the

appearance of a conflict of interest. Although the FCA believes that

the responsibility to avoid actual or apparent conflicts of interest

rests primarily with the individual director or employee, the

institution has a responsibility to develop policies and procedures

that monitor compliance with the regulation and avoid the appearance of

conflict. Providing guidance and training concerning appropriate and

inappropriate behavior is an effective way of achieving that end.

Section 612.2157--Joint Employees

The FCC questioned the advisability of having the supervising

bank's Standards of Conduct Officer contract with an association in the

district to comply with these requirements on behalf of the association

and be accountable to the association's board. The FCC stated that it

is not clear whether this arrangement is possible since the Standards

of Conduct Officer is an officer of the bank as defined in

Sec. 612.2130(m).

The Standards of Conduct Officer does not come within the

definition of ``officer'' in Sec. 612.2130(m), unless the individual

designated to perform the duties of the Standards of Conduct Officer

satisfies the definition because of other duties. Therefore, for

clarity, the position is referred to in the final regulations as the

``Standards of Conduct Official'' rather than ``Standard of Conduct

Officer,'' but in no way is this action intended to diminish the

importance of the position. In addition, the final regulations do not

require an association to contract with the bank's Standards of Conduct

Official. An association may contract with the bank for these services

to be performed by an individual whom the bank has designated as the

bank's Standards of Conduct Official. The final regulations also

include reference to an agricultural credit bank in addition to a Farm

Credit Bank to provide for the situation in which an association is

supervised by such a bank.

Section 612.2160--Institution Responsibilities

No comments were received on this new section and it is adopted as

proposed.

Section 612.2165--Policies and Procedures

The FCC suggested that the regulations require an institution to

provide a reasonable period of time for new directors and new employees

to terminate transactions, relationships, and activities that are

prohibited by the regulations and the institution's standards-of-

conduct policies. The Board agrees with this suggestion and adds a new

paragraph (b)(9) requiring a System institution to provide a reasonable

period of time for new directors and new employees to terminate

transactions, relationships, and activities that are prohibited. The

purpose of this revision is to clarify that a new director or employee

involved in a prohibited transaction prior to election or hiring is not

prohibited from accepting the position. However, such persons are

required to terminate any transactions subject to prohibitions within

such time period as established by institution policy, beginning with

the commencement of official duties, except that such period may not

exceed the period established for existing directors and employees to

terminate transactions, relationships, or activities prohibited by the

institution's policies.

Section 612.2170--Standards of Conduct Official

In addition to changing ``Officer'' to ``Official,'' as discussed

above, the final regulations add a requirement that records be

maintained for all determinations made by the Standards of Conduct

Official and for resolution of each case reported pursuant to this

part. Also, the office within the FCA designated to receive reports

under part 612 is changed to the Office of General Counsel, which also

receives reports relative to part 617 of this chapter.

Section 612.2180--Enforcement

No comments were received on the proposed amendments and these

actions are adopted as proposed.

Sections 612.2190 Through 612.2250

The sections regarding devotion of time to official duties,

political activity, nepotism, gifts or favors, and improper use of

official property are removed as proposed and the topics are required

to be addressed in the institution's policy established pursuant to

Sec. 612.2165. No comments were received regarding the removal of these

sections.

Section 612.2260--Standards of Conduct for Agents

No comments were received regarding this section and it is adopted

as proposed.

Section 612.2270--Prohibited Purchase of System Obligations

One commenter questioned the prohibition in existing regulations on

bank presidents' purchasing obligations of the Farm Credit banks and

the proposed extension of this prohibition to all employees who may

participate in any manner in funding activities of their institution.

The Board concurs that the potential for conflict in a director's or

employee's purchase of System obligations that are available for

purchase by the general public through members of the selling group or

in the secondary market is small. Therefore, the final regulations

permit such purchases under the conditions listed in Sec. 612.2270.

List of Subjects in 12 CFR Part 612

Agriculture, Banks, banking, Conflicts of interest, Rural areas.

For the reasons stated in the preamble, part 612 of chapter VI,

title 12 of the Code of Federal Regulations is revised to read as

follows:

PART 612--STANDARDS OF CONDUCT

Sec.

612.2130 Definitions.

612.2135 Director and employee responsibilities and conduct--

generally.

612.2140 Directors--prohibited conduct.

612.2145 Director reporting.

612.2150 Employees--prohibited conduct.

612.2155 Employee reporting.

612.2157 Joint employees.

612.2160 Institution responsibilities.

612.2165 Policies and procedures.

612.2170 Standards of Conduct Official.

612.2260 Standards of conduct for agents.

612.2270 Purchase of System obligations.

Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12

U.S.C. 2243, 2252, 2254).

Sec. 612.2130 Definitions.

For purposes of this part, the following terms are defined:

(a) Agent means any person, other than a director or employee, who

represents a System institution in contacts with third parties or who

provides professional services to a System institution, such as legal,

accounting, appraisal, and other similar services.

(b) A conflict 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.

(c) Controlled entity and entity controlled by mean 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.

(d) Director means a member of a board of directors.

(e) Employee means any salaried officer or part-time, full-time, or

temporary salaried employee.

(f) Entity means a corporation, company, association, firm, joint

venture, partnership (general or limited), society, joint stock

company, trust (business or otherwise), fund, or other organization or

institution, except System institutions.

(g) Family means an individual and spouse and anyone having the

following relationship to either: parents, 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.

(h) 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.

(i) 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.

(j) 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 his or her official duties objectively and impartially and in

the best interest of the institution and its statutory purpose.

(k) 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.

(l) 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.

(m) Officer means the chief executive officer, president, chief

operating officer, vice president, 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.

(n) Ordinary course of business, when applied to a transaction,

means: (1) A transaction that is usual and customary between two

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 or

employees of a System institution.

(o) Person means individual or entity.

(p) Relative means any member of the family as defined in paragraph

(g) of this section.

(q) Service organization means each service organization authorized

by section 4.25 of the Act, and each unincorporated service

organization formed by one or more System institutions.

(r) Standards of Conduct Official means the official designated

under Sec. 612.2170 of these regulations.

(s) 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.

(t) 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.

(u) System institution and institution mean any bank, association,

or service organization 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, the

Federal Farm Credit Banks Funding Corporation, and service

organizations.

Sec. 612.2135 Director and employee responsibilities and conduct--

generally.

(a) Directors and employees of all System institutions shall

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 shall 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, and procedures of the Farm Credit

Administration and System institutions and shall exercise diligence and

good judgment in carrying out their duties, obligations, and

responsibilities.

Sec. 612.2140 Directors--prohibited conduct.

A director of a System institution shall not:

(a) 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), except those matters of general applicability

that affect all shareholders/borrowers in a nondiscriminatory way,

e.g., a determination of interest rates.

(b) Divulge or make use of, except in the performance of official

duties, 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.

(c) 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 transacting business with the institution, including borrowers

and loan applicants.

(d) 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.

(e) Accept, 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.

(f) Knowingly acquire, directly or indirectly, except by

inheritance or through public auction or open competitive bidding

available to the general public, any interest in any real or personal

property, including mineral interests, that was owned by the employing,

supervising, or any supervised institution within the preceding 12

months and that had been acquired by any such institution as a result

of foreclosure or similar action; provided, however, a director shall

not acquire any such interest in real or personal property if he or she

participated in the deliberations or decision to foreclose or to

dispose of the property or in establishing the terms of the sale.

(g) 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 a supervised institution or a

borrower or loan applicant of the employing institution, unless:

(1) The transaction is with a relative or any person residing in

the director's household;

(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, pursuant to

policies and procedures adopted by the board, that the potential for

conflict is insignificant because the transaction is in the ordinary

course of business or is not material in amount and the director does

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.

(h) Violate an institution's policies and procedures governing

standards of conduct.

Sec. 612.2145 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 shall file a written and signed statement with

the Standards of Conduct Official that fully discloses:

(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. 620.5(k) 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 shall, at such intervals as the institution's

board shall determine is necessary to effectively enforce this

regulation and the institution's standards-of-conduct policy 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 requirements

shall include:

(1) The name of any relative or any person residing in the

director's household, 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

(2) 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 is required to be reported

under this section or could constitute a conflict of interest shall

promptly report such involvement in writing 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 days, a newly

elected or appointed director shall report matters required to be

reported in paragraphs (a), (b), and (c) of this section to the

Standards of Conduct Official within 30 days after the election or

appointment and thereafter shall comply with the requirements of this

section.

Sec. 612.2150 Employees--prohibited conduct.

An employee of a System institution shall not:

(a) 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), except those matters of general applicability

that affect all shareholders/borrowers in a nondiscriminating way, e.g.

a determination of interest rates.

(b) Divulge or make use of, except in the performance of official

duties, any fact, information, or document not generally available to

the public that is acquired by virtue of employment with a System

institution.

(c) 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.

(d) Serve as an officer or director of an entity that transacts

business with a System institution in the district or of any commercial

bank, savings and loan, or other non-System financial institution,

except employee credit unions. 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. 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 a bank for

cooperatives. Prior to approving an employee request, the board shall

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.

(e) Use the employee's position or information acquired in

connection with the employee's position to solicit or obtain any gift,

fee, or other present or deferred compensation or for any other

personal benefit 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.

(f) Accept, 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

the employee has access to by reason of employment with a System

institution.

(g) Knowingly acquire, directly or indirectly, except by

inheritance, any interest in any real or personal property, including

mineral interests, that was owned by the employing, supervising, or any

supervised institution within the preceding 12 months and that had been

acquired by any such institution as a result of foreclosure or similar

action.

(h) 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 a supervised institution or a

borrower or loan applicant of the employing institution, unless: (1)

The transaction is with a relative or any person residing in the

employee's household;

(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, pursuant to

policies and procedures adopted by the board, that the potential for

conflict is insignificant because the transaction is in the ordinary

course of business or is not material in amount and the employee does

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.

(i) Violate an institution's policies and procedures governing

standards of conduct.

(j) Act as a real estate agent or broker; provided that this

paragraph shall 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.

(k) Act as an agent or broker in connection with the sale and

placement of insurance; provided that this paragraph shall not apply to

the sale or placement of insurance authorized by section 4.29 of the

Act.

Sec. 612.2155 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. 620.1(o) of this

chapter, shall file a written and signed statement with the Standards

of Conduct Official that fully discloses:

(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. 620.5(k) 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 shall, at such intervals as the Board shall

determine necessary to effectively enforce this regulation and the

institution's standards-of-conduct policy 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 requirements shall

include: (1) 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

(2) 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 shall

promptly report such involvement in writing 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 shall report matters required to be

reported in paragraphs (a), (b), and (c) of this section to the

Standards of Conduct Official within 30 days after accepting an offer

for employment and thereafter shall comply with the requirements of

this section.

Sec. 612.2157 Joint employees.

No officer of a Farm Credit Bank or an agricultural credit bank may

serve as an employee of an association in its district and no employee

of a Farm Credit Bank or an agricultural credit bank may serve as an

officer of an association in its district. Farm Credit Bank or

agricultural credit bank employees other than officers may serve as

employees other than officers of an association in its district

provided each institution appropriately reflects the expense of such

employees in its financial statements.

Sec. 612.2160 Institution responsibilities.

Each institution shall: (a) Ensure compliance with this part by its

directors and employees and act promptly to preserve the integrity of

and public confidence in the institution in any matter involving a

conflict of interest, whether or not specifically addressed by this

part or the policies and procedures adopted pursuant to Sec. 612.2165;

(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) Adopt and implement policies and procedures that will preserve

the integrity of and public confidence in the institution and the

System pursuant to Sec. 612.2165;

(d) Designate a Standards of Conduct Official pursuant to

Sec. 612.2170; and

(e) Maintain all standards-of-conduct policies and procedures,

reports, investigations, determinations, and evidence of compliance

with this part for a minimum of 6 years.

Sec. 612.2165 Policies and procedures.

(a) Each institution's board of directors shall issue, consistent

with this part, policies and procedures governing standards of conduct

for directors and employees.

(b) Board policies and procedures issued pursuant to paragraph (a)

of this section shall reflect due consideration of the potential

adverse impact of any activities permitted under the policies and shall

at a minimum: (1) Establish such 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 shall address such issues as the hiring of relatives,

political activity, devotion of time to duty, 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;

(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 was mortgaged to a System

institution at any time within the preceding 12 months;

(7) Establish conditions under which employees may purchase any

real or personal property of a System institution acquired by such

institution for its operations;

(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 at the time of

election or hiring 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 official duties, or such shorter

time period as the institution may establish.

(10) Establish procedures providing for a director's or employee's

recusal from official action on any matter in which he or she 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. 620.5 of this chapter,

monitor conflicts of interest, and monitor recusal compliance; and

(13) Establish appeal procedures available to any employee to whom

any required approval has been denied.

Sec. 612.2170 Standards of Conduct Official.

(a) Each institution's board shall designate a Standards of Conduct

Official who shall: (1) Advise directors, director candidates, and

employees concerning the provisions of this part;

(2) Receive reports required by this part;

(3) Make such determinations as are required by this part;

(4) Maintain records of actions taken to resolve and/or make

determinations upon each case reported relative to provisions of this

part;

(5) Make appropriate investigations, as directed by the

institution's board; and

(6) Report promptly, pursuant to part 617 of this chapter, 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 may have been violated;

(ii) An investigation results in the removal of a director or

discharge of an employee; or

(iii) A violation may have an adverse impact on continued public

confidence in the System or any of its institutions.

(b) The Standards of Conduct Official shall investigate or cause to

be investigated all cases involving: (1) Possible violations of

criminal statutes;

(2) Possible violations of Secs. 612.2140 and 612.2150, and

applicable policies and procedures approved under Sec. 612.2165;

(3) Complaints received against the directors and employees of such

institution; and

(4) Possible violations of other provisions of this part or when

the activities or suspected activities are of a sensitive nature and

could affect continued public confidence in the Farm Credit System.

(c) An association board may comply with this section by

contracting with the Farm Credit Bank or agricultural credit bank in

its district to provide a Standards of Conduct Official.

Sec. 612.2260 Standards of conduct for agents.

(a) Agents of System institutions shall 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 all its institutions. The avoidance of misconduct and

conflicts of interest is indispensable to the maintenance of these

standards.

(b) System institutions shall utilize safe and sound business

practices in the engagement, utilization, and retention of agents.

These practices shall provide for the selection of qualified and

reputable agents. Employing System institutions shall be responsible

for the administration of relationships with their agents, and shall

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 other agent duties as required by contract, FCA regulations,

or law.

(c) System institutions shall be responsible for exercising

corresponding 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 the

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.

Sec. 612.2270 Purchase of System obligations.

(a) Employees and directors of System institutions, other than the

Federal Farm Credit Banks Funding Corporation, may only purchase joint,

consolidated, or Systemwide obligations that are:

(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) No director or employee of the Federal Farm Credit Banks

Funding Corporation may purchase or otherwise acquire, directly or

indirectly, except by inheritance, any joint, consolidated, or

Systemwide obligation.

Dated: May 5, 1994.

Nan P. Mitchem,

Acting Secretary, Farm Credit Administration Board.

[FR Doc. 94-11496 Filed 5-12-94; 8:45 am]

BILLING CODE 6705-01-P