Federal Agricultural Mortgage Corporation; Conflicts of Interest

FARM CREDIT ADMINISTRATION

12 CFR Part 650

RIN 3052-AB49

Federal Agricultural Mortgage Corporation; Conflicts of Interest

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

Administration Board, adopts a new regulation relating to reporting and

disclosure of conflicts of interest by directors, officers, and

employees of the Federal Agricultural Mortgage Corporation

(Corporation). The regulation is adopted in response to section 514 of

the Farm Credit Banks and Associations Safety and Soundness Act of

1992. Section 514 directs the FCA to ensure that its regulations

require the disclosure of financial information and the reporting of

potential conflicts of interest by directors, officers, and employees

of all Farm Credit System (System) institutions and that such

requirements are adequate to fulfill the purposes of the section.

The regulation requires the Corporation to adopt a conflict-of-

interest policy that defines the types of relationships, transactions,

or activities that might reasonably be expected to give rise to a

potential conflict of interest. The regulation also requires the

reporting of sufficient information about financial interests,

transactions, relationships, and activities to inform the Corporation

about potential conflicts of interest. The regulation further requires

disclosure to shareholders, investors, and potential investors of any

unresolved conflicts of interest involving its directors, officers, and

employees identified by the Corporation under the policy. Such

disclosure is in addition to disclosures already required under the

Federal securities laws.

EFFECTIVE DATE: The regulation shall become effective 180 days after

publication in the Federal Register or on such later date as may be

necessary to comply with the statutory requirement for a delayed

effective date of 30 days after Federal Register publication during

which either or both Houses of Congress are in session. Notice of the

effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Suzanne J. McCrory, Director, Office

of Secondary Market Oversight, Farm Credit Administration, McLean, VA

22102-5090 (703) 883-4280, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: On October 14, 1993, the FCA published for

comment conflict-of-interest regulations (58 FR 53161) for the

Corporation. The regulations were proposed in response to section 514

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

1992, Pub. L. 102-552, 106 Stat. 4102 (1992 Act). The 1992 Act directed

the FCA to review its current regulations regarding the disclosure of

financial information and the reporting of potential conflicts of

interest by the directors, officers, and employees of System

institutions to determine whether the regulations: (1) Are adequate to

fulfill the purpose of section 514 and other purposes determined by the

FCA to be necessary or appropriate, consistent with the Farm Credit Act

of 1971, as amended (1971 Act); (2) require the disclosure of financial

information and reporting of potential conflicts of interest by the

directors, officers, and employees of all System institutions; and (3)

require such disclosure of all of the appropriate directors, officers,

or employees of System institutions. The 1992 Act further directed the

FCA to amend its current financial disclosure and conflict-of-interest

regulations to carry out the purpose of section 514, which is to ensure

that FCA regulations require the disclosure of financial information

and the reporting of potential conflicts of interest to provide

sufficient information for: (1) Stockholders to make informed decisions

regarding the operation of the institutions; (2) investors and

potential investors to make informed investment decisions; and (3) the

FCA to examine and regulate all System institutions effectively and

efficiently.

The comment period closed on November 15, 1993. Comments were

received from the Corporation and from The Farm Credit Council (FCC), a

trade association for the banks and associations of the System. The

Farm Credit Bank of Baltimore submitted a letter endorsing the comments

of the FCC.

The Corporation supported the regulatory approach to conflicts of

interest, but made a number of substantive and clarifying comments.

Most notably, the Corporation asserted that the definition of

``employee'' is broader than necessary to effectuate the stated purpose

of the 1992 Act and will result in irrelevant or immaterial reporting

by receptionists, secretaries, bookkeepers, clerks, and other employees

without regard to their functions or duties at the Corporation. The

Corporation noted that its existing policies also define ``employee''

broadly, but reporting requirements are tailored to screen out

reporting by employees who are not in a position to influence activity

with respect to their financial interests.

The Corporation suggested that the term ``employee'' be replaced

with the term ``key employee,'' defined to mean ``any salaried manager

or supervisor or part-time, full-time, or temporary salaried employee

who is involved in any significant activity related to the processing,

analysis, or guarantee of loan pools or other significant financial

activity or who is engaged in any policy-making, managerial,

supervisory, or professional function for the Corporation.'' This

definition would apply only to employees other than officers and

directors, who are already specifically referenced in the regulation.

The FCA is opposed to removing groups of employees from the

regulation's applicability. Although the proposed regulation broadly

defines potential conflicts of interest to apply to all employees, it

requires the Corporation to define the types of specific transactions,

relationships, and activities that reasonably could be expected to give

rise to potential conflicts of interest and to require reporting of

sufficient information to inform the Corporation of these potential

conflicts of interest. The FCA believes that the regulation gives the

Corporation sufficient latitude to tailor its reporting requirements

based upon the function various employees perform for the Corporation.

The FCA believes that each employee, no matter what his or her

function, should be subject to a requirement to report any matter that

might adversely affect impartiality in the performance of his or her

duties. Accordingly, the FCA declines to replace the term ``employee''

with the term ``key employee'' in the definition of ``potential

conflict of interest.'' However, because officers are separately

defined, the FCA has amended the definition of ``employee'' to exclude

officers.

The Corporation and the FCC requested that the language of the

regulation be amended to clarify that only material conflicts need to

be resolved to avoid disclosure. The FCA confirms that this is the

intended result and adopts minor language changes to the definition of

``resolved'' and to Sec. 650.3 to make this point clearer.

The Corporation requested that the regulation be modified to

provide a defined period of time for the development of the conflict-

of-interest policy by the Corporation and suggested that a reasonable

time period would be 180 days from the effective date of the final

rule, noting that developing such a policy will involve issues that

must be decided by the Corporation's Board (Board).

The FCA recognizes that the policy required by the regulation may

be different from the Corporation's existing policy and that Board

participation in its development is required. Indeed, in requiring the

Corporation to adopt a conflict-of-interest policy, the FCA

contemplated that the Corporation must act through its board of

directors. The FCA views the request as a reasonable one, but believes

that 180 days from the date of publication of the final rule should be

a sufficient period to develop a policy. Consequently, the FCA has

adopted a delayed effective date of 180 days after publication in the

Federal Register or such later date as may be necessary to comply with

the statutory requirement for a delayed effective date of 30 days

during which either or both Houses of Congress are in session. In the

interim, the FCA expects that employees of the Corporation and its

subsidiaries will adhere to high standards of honesty, integrity,

impartiality, loyalty, and care consistent with applicable law and

regulation in furtherance of the Corporation's public purpose. The FCA

further expects that the Corporation will be vigilant in monitoring and

resolving potential conflicts of interest under its existing policy.

The Corporation also suggested adding a requirement to establish

procedures for resolving material conflicts of interest and for

maintaining adequate records of non-material conflicts of interest and

resolutions of material conflicts of interest. The FCA believes that

these requirements are fairly implied from the requirement to disclose

unresolved conflicts of interest and the requirement to retain, for a

period of 6 years, reports and statements on potential conflicts of

interests and documentation of materiality determinations and

resolutions of conflict of interests. However, an express requirement

to develop procedures for resolving material conflicts of interest has

been added as paragraph (e) of Sec. 650.2 of the final regulation and

succeeding paragraphs have been renumbered.

The FCC expressed general agreement with the rationale underlying

the FCA's decision to treat the Corporation differently from System

banks and associations, but expressed reservations about the extent of

delegation granted to the Corporation to define its own conflict-of-

interest policy, especially with regard to standards that may be

established for members of the Board. In particular, the FCC asserted

that the emphasis in the preamble on the fiduciary duties of directors

to all of the shareholders ignores the representative character of the

board of directors.\1\ Although the FCC agrees that traditional

concepts of fiduciary responsibility apply, it asserts that System and

non-System directors are under no obligation to disregard the interests

of the shareholders who elected them, and that to prohibit

participation by System directors or non-System directors in board

deliberations and voting on matters potentially affecting the interests

of System institutions or non-System institutions would be contrary to

congressional intention.

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\1\The Corporation's Board is composed of 15 directors--5

elected by class A shareholders (non-System financial institutions

such as commercial banks and insurance companies), 5 elected by

class B shareholders (System institutions), and 5 appointed by the

President.

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In addition, the FCC asserted that it would be inappropriate for

the Corporation to adopt a policy that prohibits directors from

discussing matters deemed confidential by Corporation management with

anyone other than Board members and employees of the Corporation, as it

would impede directors in the exercise of their independent business

judgment if they were unable to disclose information to their own

advisors. The FCC noted that ``legitimately confidential'' information

would, of course, be disclosed to advisors on a confidential basis. In

addition, the FCC asserted that System directors must be free to

discuss information with a reasonable number of other individuals who

represent System institutions, subject to strict guarantees of

confidentiality.

The principles of statutory construction require that all of a

statute's provisions be interpreted together. As the FCC has noted, the

representative character of the Corporation's Board must be reconciled

with its corporate structure and associated principles of corporate

governance. In the FCA's opinion, such a reconciliation can be achieved

by: (1) Interpreting ``representative'' to be a qualification for

office; and (2) recognizing that directors owe fiduciary duties to the

Corporation and all its shareholders (rather than to the electing class

of shareholders exclusively or primarily). The FCA's interpretation of

``representative'' does not require elected directors to disregard the

perspectives of the electing class. Rather, directors should share

these perspectives with the Board at large so that each director can

act in the best interests of the Corporation and all of its

shareholders.

The FCA believes that the statutory term ``representative'' means

that elected directors must have an official affiliation with a class A

or class B institution in order to serve as a Corporation director. The

FCA views an official affiliation as a substantial and visible

connection such as serving as director, officer, or employee of a class

A or class B institution. This interpretation of ``representative''

stems in part from the vacancy and continuation of membership

provisions of sections 8.2(a)(4) and 8.2(b)(5)of the 1971 Act. Vacancy

of an elected Board seat is filled by the permanent Board ``from among

persons eligible for election to the position for which the vacancy

exists,'' suggesting that some objective eligibility criterion exists

other than being elected by the shareholder class. The continuation

provision has the effect of terminating the term of a director when he

or she ceases to be ``a representative.'' By contrast, were

``representative'' interpreted broadly to mean anyone who is selected

by the institutions to act as a delegate, everybody would be eligible

for election when a vacancy occurred and the automatic termination

provisions would not work. Taken together, these provisions suggest

that elected directors must have an official affiliation that is

visible and substantial so that the presence and termination of this

affiliation can be readily ascertained.

Although the Board is representative in nature, Congress chose a

corporate structure to govern the operations of the Corporation. Common

law corporate principles affirm the fiduciary duty of directors to act

in the best interests of the Corporation and all of its shareholders.

The FCA believes that the representative character of the Board does

nothing to alter this fiduciary duty of directors.\2\ That is,

irrespective of the manner of appointment or election, each director

has a duty to act in the best interests of the Corporation and all of

its shareholders. The legislative history supports this interpretation

by indicating, ``There is to be no distinction between the three

categories of directors in terms of their duties and responsibilities

as directors to the Mortgage Corporation and all stockholders.''\3\

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\2\Some public companies have boards with representative

features analogous though not identical to the Corporation's. For

example, public companies may have seats designated to be elected by

minority shareholders or seats designated to be filled by a union

representative. However, the fiduciary responsibilities of directors

are unchanged by the representational aspects of these boards,

according to an official from the Securities and Exchange Commission

with whom the FCA consulted. Each director owes fiduciary duties to

the Corporation and its shareholders collectively.

\3\Senate Report 100-230, p. 52 (November 20, 1987).

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When ``representative'' is interpreted as a qualification that

directors must satisfy to be elected, directors can discharge their

fiduciary duties in the context of a representative Board. Although

directors may attain Board seats through different processes, each

needs the same opportunity to understand the perspectives of different

shareholders and secondary market participants on an issue to properly

discharge his or her fiduciary duties to the Corporation. With an

official affiliation, elected directors are authoritatively able to

bring the perspectives of the class to the Board's deliberations. When

the elected directors convey such perspectives to the Board at large,

each director gets the information needed to discharge his or her

fiduciary duties to the Corporation and all of its shareholders.

The FCA believes that ``representative'' should not be interpreted

to mean a delegate elected solely to further the viewpoints of the

electing class without regard to the impact on the Corporation and all

its shareholders. Such an interpretation implies that directors need

not consider the interests of any class of Corporation shareholders

lacking authority to elect them--a result inconsistent with corporate

common law principles of a director's fiduciary duties and

congressional intent.

Specifically, the FCA responds to the FCC's comment by noting that

the use of information gained in private consultations with class

members about Corporation matters to inform only a director's personal

judgments but not the Board deliberations would systematically prevent

class A directors from learning the views of class B institutions and

class B directors from learning the views of class A institutions. The

``public directors'' would have neither perspective. This withholding

of information would likely lead to factional voting patterns because

no director would be able to understand and weigh the many and

different views of all shareholders. Because each director is obliged

to act in the best interests of the Corporation and all of its

shareholders, the FCA believes that withholding from Board

deliberations useful perspectives and pertinent information gained from

private consultations could undermine the ability of directors to carry

out their fiduciary duties.

In light of its interpretation of the ``representative'' nature of

the Corporation's Board, the FCA makes the following determinations

about three amendments requested by the FCC related to the

representative character of the Board.

First, the FCC requested that the definition of ``potential

conflict of interest'' be modified to recognize that it is not a

conflict of interest for Corporation directors to consider or act on

matters that affect the financial interests of the class of

shareholders that elected them if the matter is one of general

applicability that affects all the shareholders in that class and does

not have its effect exclusively or disproportionately on the particular

shareholder with which that director is affiliated.

The FCA agrees that ``potential conflict of interest'' should not

be so broadly defined as to make it impermissible for any of the 10

elected directors to participate in matters affecting the financial

interests of the class or the institution with which he or she is

affiliated. To regard participation by an elected director in such

matters as impermissible would render the Board nonfunctional since

such decisions are unavoidable and large blocs of directors would be

disenfranchised on certain general questions being deliberated by the

Board. However, the FCA believes that no change is needed to respond to

the FCC's concerns because the regulation does not disqualify directors

from participating in deliberations affecting the electing class of

institutions.

The FCA believes that matters affecting class institutions as

secondary market participants would not likely constitute potential

conflicts of interests. Therefore, the regulatory definition of

``potential conflict of interest'' does not impute the interests of the

class to the directors elected from that class. However, FCA notes that

any Board action having differential effects on the class as

shareholders may constitute a breach of fiduciary duties by directors.

A director must act in the best interest of the Corporation and all of

its shareholders.

Second, the FCC requested that the regulation be modified to

provide that Corporation directors may discuss with representatives of

the shareholder class that elected them the implications of a proposed

action that has general applicability and that such activity not be

considered a conflict of interest.

The regulation neither permits nor prohibits consultations by

Corporation directors with outside parties. The appropriateness of such

consultations depends on the facts and circumstances at hand. FCA

declines to create a safe harbor for director consultations in order to

avoid sanctioning consultations that might be inconsistent with a

director's fiduciary duties.

While the FCA agrees with the FCC that directors have a duty to

exercise informed independent judgment on Corporation matters, and may

from time to time need to consult knowledgeable advisors, the FCA also

recognizes the right of the Corporation's Board to maintain the

confidentiality of the Corporation's business matters. Consequently,

the consultation of advisors in order to make an independent judgment

must be undertaken with due regard for the Corporation's interest in

maintaining confidentiality. Any advisors consulted by a director on a

confidential matter would be bound by the Board's confidentiality

constraints and could, by virtue of the consultation, become insiders

of the Corporation subject to the prohibitions of the Securities

Exchange Act of 1934 and rules thereunder. The director should make

every effort to ensure that the confidentiality of consultations can

and will be maintained. Fiduciary duty to the Corporation requires the

director to share with the Board any material information in his or her

possession that is germane to Board decisions, regardless of its

source.

Third, the FCC requested that the regulation be modified to

recognize that the Corporation's directors are free to vigorously

advance the interest of the institutions they represent, provided they

make clear that they are not acting in their capacity as Corporation

directors.

The FCA declines to modify its regulation as requested because it

believes that such a modification might sanction actions inconsistent

with a director's fiduciary duties. As the FCC's comment letter noted,

inherent within the organizational framework of the Corporation's Board

is the potential for perceived conflicts of interest. Elected directors

typically have simultaneous responsibilities to the Corporation and to

a competing class A or B institution.

The FCA agrees with the FCC's comment that such directors are not

agents of the Corporation in all their doings and may also owe

fiduciary duties to other institutions. However, the FCA believes a

Corporation director who advances the interests of another institution

must be mindful of his or her fiduciary duties to the Corporation and

its shareholders, including System and non-System shareholders. Where

directors have fiduciary duties to competing institutions, they must

balance these duties to avoid harming either institution. To advance

the interests of one corporation to which a director owes duties in a

manner that injures another corporation to which he also owes fiduciary

duties could heighten shareholder concern about the good faith and fair

dealing of the director. The difficulty of balancing fiduciary duties

to competing institutions has previously led the FCA to prohibit

directors of Farm Credit banks and associations from serving as

directors of competing institutions. While the FCA cannot prohibit such

dual responsibilities, it is reluctant to sanction by regulation those

actions by directors to advance the interests of one institution that

are potentially at the expense of the Corporation's interests.

As in the previous matter, the FCA believes that the

appropriateness of a director's action must be evaluated in light of

the specific circumstances. In some cases, action might be considered

improper; in others it might not. As a result, the FCA declines to

exclude from the definition of ``potential conflict of interest'' those

actions by the Corporation's directors to ``advance vigorously the

interests'' of a competing institution. The effect of declining to make

such a change will be to continue to subject such actions to scrutiny

as potential conflicts of interest.

In addition to its general comments, the FCC made a number of

specific suggestions regarding particular sections of the regulation.

The FCC suggested that the definition of ``potential conflict of

interest'' be changed to parallel the definition of ``conflict of

interest'' in the regulations proposed for System banks and

associations. Specifically, the FCC recommended changing ``might

adversely affect or appear to adversely affect'' to ``actually affects

or appears to affect.''

The change proposed by the FCC would narrow the reportable

conflicts to those that an individual believes would affect or would

appear to affect the individual's impartiality. The FCA believes that

it would be inappropriate to adopt the FCC's suggestion in light of the

fact that the approach taken for Farm Credit banks and associations

differs from the regulatory approach for the Corporation. Specifically,

the FCA has prohibited certain activities for employees and directors

of Farm Credit banks and associations. Because most conflicts are

banned in the regulation, a narrower definition of reportable conflicts

of interest seems appropriate. By contrast, Corporation directors,

officers, and employees are not subject to similar regulatory

prohibitions. In the absence of specific prohibitions, the FCA believes

it important to have reporting requirements that establish the broadest

possible net so that the actual existence of a conflict is determined

by the Corporation rather than the reporting individual. The regulation

allows the Corporation to review all potential conflicts of interest

for materiality before determining that an actual conflict must be

resolved or disclosed. Because the FCA believes the different

regulatory approaches warrant different reporting requirements, the FCA

declines to make the change requested by the FCC.

The FCC asserted that the regulation should be extended to agents

in a manner similar to that currently in effect for agents of System

banks and associations, especially since many of the various aspects of

the Corporation's business are accomplished through agents, and

recommended a definition similar to that used for banks and

associations.

Although responding to the direction of the 1992 Act does not

require that the regulation address conflicts of interest of agents,

the FCA considered this suggestion in light of how the Corporation's

business activities are structured. Since the statute permits the

activities of the Corporation to be carried out through affiliates

chartered under state law, the FCA concluded that the intention of

section 514 could be subverted were the requirements of the regulation

not applied to such affiliates. Accordingly, the final regulation

clarifies that the Corporation policy required by the regulation must

also apply to officers, directors, and employees of any affiliates the

Corporation establishes to carry out its function. The clarification is

accomplished by expanding the definition of ``Corporation'' to include

affiliates established under section 8.3(b)(13) of the 1971 Act.

Similarly, with respect to agents that are not affiliates, the

final regulation would require the Corporation's policy to address

potential conflicts of interest by agents. The FCA recognizes that the

Corporation has less control over agents that are not affiliates. The

FCA believes the regulation is sufficiently flexible to permit the

Corporation to make reasonable distinctions. Definitions of ``agent''

and ``affiliate'' have been added in the final regulation.

The FCC suggested that the same basic due process and other

protections set forth in the recently proposed System bank and

association regulation be incorporated in the final regulation for the

Corporation. The FCC deems this especially important in view of the

fact that the penalties of part C of title V of the 1971 Act are

available to enforce the policy. Specifically, the FCC suggested adding

the following:

(1) A requirement that all directors and employees be informed of

the regulatory and policy requirements;

(2) A requirement that the policy establish various criteria for

business relationships and transactions to provide guidance to

directors and employees;

(3) A requirement that there be a reasonable time during which

directors and employees may terminate prohibited transactions;

(4) A requirement for recusal procedures;

(5) A requirement for a standards-of-conduct officer and

documentation of his or her actions; and

(6) A requirement for appeal procedures.

The FCA has considered each of these suggestions in light of the

different approaches taken in the proposed regulations for the

Corporation and for System banks and associations. Because of the

different approach, the FCA believes that the specific requirements

outlined in the proposed bank and association regulation are

appropriate in some cases but not others. Specifically:

(1) The FCA agrees that all directors and employees should be

informed of the conflict-of-interest requirements and has added

Sec. 650.2(g) to accomplish this.

(2) Because Sec. 650.2(a) already requires the Corporation to

define the types of activities, transactions, and relationships that

could give rise to potential conflicts of interests, criteria for

permissible business relationships and transactions will be

established, at least by exclusion. Consequently, the FCA finds

changing the regulation unnecessary.

(3) The FCA agrees with the FCC that directors, officers, and

employees should have an opportunity to bring themselves into

compliance when the policy changes and has added language to that

effect in Sec. 650.2(g).

(4) In response to a Corporation comment, the FCA added a

requirement that the Corporation's policy establish procedures for

resolving and disclosing material conflicts of interest. The FCA has

not specifically included a requirement that recusal procedures be

established because recusal is just one way in which a conflict of

interest can be resolved.

(5) The FCA finds it unnecessary to require a standards-of-conduct

officer, although the Corporation is free to appoint one, and believes

that documentation requirements are already fairly implied from the

recordkeeping requirement.

(6) The Corporation may opt to establish appeals procedures as part

of its resolution methods. However, the FCA declines to add such a

requirement by regulation because procedures for conflict resolution

are to be specified by the Corporation. The FCA believes that the

appropriateness of appeal procedures can only be evaluated in light of

the policy and procedures, which are yet to be developed. Finally,

since the Corporation's policy must be adopted by the Board, directors

will have an opportunity to address the concerns expressed in the FCC's

letter as they deem appropriate.

At the request of the FCC, the FCA changed ``highest standards'' to

``high standards'' in Sec. 650.4(a)(1) to achieve consistency with the

regulation governing Farm Credit banks and associations. The FCA finds

it unnecessary to define ``director'' as the FCC requested. The FCA

previously eliminated the definition in its proposed rules for Farm

Credit banks and associations, making both regulations consistent.

List of Subjects in 12 CFR Part 650

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

For the reasons stated in the preamble, a new part 650 of chapter

VI, title 12 of the Code of Federal Regulations is added to read as

follows:

PART 650--FEDERAL AGRICULTURAL MORTGAGE CORPORATION

Subpart A--Conflicts of Interest

Sec.

650.1 Definitions.

650.2 Conflict-of-interest policy.

650.3 Implementation of policy.

650.4 Director, officer, employee, and agent responsibilities.

Subpart B--[Reserved]

Authority: Secs. 5.9, 5.17, 8.11 of the Farm Credit Act; 12

U.S.C. 2243, 2252, 2279aa-11; sec. 514 of Pub. L. 102-552, 106 Stat.

4102.

Subpart A--Conflicts of Interest

Sec. 650.1 Definitions.

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

employee of the Corporation) who represents the Corporation in contacts

with third parties or who provides professional services such as legal,

accounting, or appraisal services to the Corporation.

(b) Affiliate means any entity established under authority granted

to the Corporation under section 8.3(b)(13) of the Farm Credit Act of

1971, as amended.

(c) Corporation means the Federal Agricultural Mortgage Corporation

and its affiliates.

(d) Employee means any salaried individual working part-time, full-

time, or temporarily for the Corporation.

(e) 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.

(f) Material, when applied to a potential conflict of interest,

means the conflicting interest is of sufficient magnitude or

significance that a reasonable observer with knowledge of the relevant

facts would question the ability of the person having such interest to

discharge official duties in an objective and impartial manner in

furtherance of the interests and statutory purposes of the Corporation.

(g) Officer means the salaried president, vice presidents,

secretary, treasurer, and general counsel, or other person, however

designated, who holds a position of similar authority in the

Corporation.

(h) Person means individual or entity.

(i) Potential conflict of interest means a director, officer, or

employee of the Corporation has an interest in a transaction,

relationship, or activity that might adversely affect, or appear to

adversely affect, the ability of the director, officer, or employee to

perform his official duties on behalf of the Corporation in an

objective and impartial manner in furtherance of the interest of the

Corporation and its statutory purposes. For the purpose of determining

whether a potential conflict of interest exists, the following

interests shall be imputed to a person subject to this regulation as if

they were that person's own interests:

(1) Interests of that person's spouse;

(2) Interests of that person's minor child;

(3) Interests of that person's general partner;

(4) Interests of an organization or entity that the person serves

as officer, director, trustee, general partner or employee; and

(5) Interests of a person, organization, or entity with which that

person is negotiating for or has an arrangement concerning prospective

employment.

(j) Resolved, when applied to a potential conflict of interest that

the Corporation has determined is material, means that circumstances

have been altered so that a reasonable observer with knowledge of the

relevant facts would conclude that the conflicting interest would not

adversely affect the person's performance of official duties in an

objective and impartial manner in furtherance of the interests and

statutory purposes of the Corporation.

Sec. 650.2 Conflict-of-interest policy.

The Corporation shall establish and administer a conflict-of-

interest policy that will provide reasonable assurance that the

directors, officers, employees, and agents of the Corporation discharge

their official responsibilities in an objective and impartial manner in

furtherance of the interests and statutory purposes of the Corporation.

The policy shall, at a minimum:

(a) Define the types of transactions, relationships, or activities

that could reasonably be expected to give rise to potential conflicts

of interest.

(b) Require each director, officer, and employee to report in

writing, annually, and at such other times as conflicts may arise,

sufficient information about financial interests, transactions,

relationships, and activities to inform the Corporation of potential

conflicts of interest;

(c) Require each director, officer, and employee who had no

transaction, relationship, or activity required to be reported under

paragraph (b) of this section at any time during the year to file a

signed statement to that effect;

(d) Establish guidelines for determining when a potential conflict

is material in accordance with this subpart;

(e) Establish procedures for resolving or disclosing material

conflicts of interest.

(f) Provide internal controls to ensure that reports are filed as

required and that conflicts are resolved or disclosed in accordance

with this subpart.

(g) Notify directors, officers, and employees of the conflict-of-

interest policy and any subsequent changes thereto and allow them a

reasonable period of time to conform to the policy.

Sec. 650.3 Implementation of policy.

(a) The Corporation shall disclose any unresolved material

conflicts of interest involving its directors, officers, and employees

to:

(1) Shareholders through annual reports and proxy statements; and

(2) Investors and potential investors through disclosure documents

supplied to them.

(b) The Corporation shall make available to any shareholder,

investor, or potential investor, upon request, a copy of its policy on

conflicts of interest. The Corporation may charge a nominal fee to

cover the costs of reproduction and handling.

(c) The Corporation shall maintain all reports of all potential

conflicts of interest and documentation of materiality determinations

and resolutions of conflicts of interest for a period of 6 years.

Sec. 650.4 Director, officer, employee, and agent responsibilities.

(a) Each director, officer, employee, and agent of the Corporation

shall:

(1) Conduct the business of the Corporation following high

standards of honesty, integrity, impartiality, loyalty, and care,

consistent with applicable law and regulation in furtherance of the

Corporation's public purpose;

(2) Adhere to the requirements of the conflict-of-interest policy

established by the Corporation and provide any information the

Corporation deems necessary to discharge its responsibilities under

this subpart.

(b) Directors, officers, employees, and agents of the Corporation

shall be subject to the penalties of part C of title V of the Farm

Credit Act of 1971, as amended, for violations of this regulation,

including failure to adhere to the conflict-of-interest policy

established by the Corporation.

Subpart B--[Reserved]

Dated: February 23, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-4536 Filed 2-28-94; 8:45 am]

BILLING CODE 6705-01-P