83 FR 27922 - Standards of Conduct and Referral of Known or Suspected Criminal Violations; Standards of Conduct

FARM CREDIT ADMINISTRATION

Federal Register Volume 83, Issue 116 (June 15, 2018)

The Farm Credit Administration (FCA, we, or our) proposes to amend our regulations governing standards of conduct of directors and employees of Farm Credit System (FCS or System) institutions, excluding the Federal Agricultural Mortgage Corporation. The proposed rule would replace the original proposed rule, and would require every System institution to have or develop a Standards of Conduct Program based on core principles to put into effect ethical values as part of corporate culture.

[Federal Register Volume 83, Number 116 (Friday, June 15, 2018)]
[Proposed Rules]
[Pages 27922-27932]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-12874]


=======================================================================
-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

12 CFR Part 612

RIN 3052-AC44


Standards of Conduct and Referral of Known or Suspected Criminal 
Violations; Standards of Conduct

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Farm Credit Administration (FCA, we, or our) proposes to 
amend our regulations governing standards of conduct of directors and 
employees of Farm Credit System (FCS or System) institutions, excluding 
the Federal Agricultural Mortgage Corporation. The proposed rule would 
replace the original proposed rule, and would require every System 
institution to have or develop a Standards of Conduct Program based on 
core principles to put into effect ethical values as part of corporate 
culture.

DATES: You may send comments on or before September 13, 2018.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by email or through FCA's website. As 
facsimiles (fax) are difficult for us to process and achieve compliance 
with section 508 of the Rehabilitation Act, we are no longer accepting 
comments submitted by fax. Regardless of the method you use, please do 
not submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA Website: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments'' and follow the directions for 
``Submitting a Comment.''

[[Page 27923]]

     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Barry F. Mardock, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, Virginia 22102-5090.

You may review copies of comments we receive at our office in McLean, 
Virginia, or from our website at http://www.fca.gov. Once you are in 
the website, select ``Public Commenters,'' then ``Public Comments'' and 
follow the directions for ``Reading Submitted Public Comments.'' We 
will show your comments as submitted but, for technical reasons, we may 
omit items such as logos and special characters. Identifying 
information that you provide, such as phone numbers and addresses, will 
be publicly available. However, we will attempt to remove email 
addresses to help reduce internet spam.

FOR FURTHER INFORMATION CONTACT: Jacqueline R. Melvin, Senior Policy 
Analyst, Office of Regulatory Policy, (703) 883-4498, TDD (703) 883-
4056, [email protected], or Mary Alice Donner, Senior Counsel, Office of 
General Counsel, (703) 883-4020, TDD (703) 883-4056, [email protected].

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this proposed rule are to:

     Establish principles for ethical conduct and recognize 
each System institution's responsibility for promoting an ethical 
culture;
     Provide each System institution flexibility to develop 
specific guidelines on acceptable practices suitable for its 
business;
     Encourage each System institution to foster core 
ethical values and conduct as part of its corporate culture;
     Require each System institution to develop strategies 
and a system of internal controls to promote institution and 
individual accountability in ethical conduct, including by 
establishing a Standards of Conduct Program and adopting a Code of 
Ethics; and
     Remove prescriptive requirements that do not promote 
these objectives.

II. Background

    Our standards of conduct regulations have not been significantly 
changed since their 1994 publication.\1\ Over the past few years, there 
have been increasing concerns with governance, oversight, management 
practices and standards of conduct in the financial services industry. 
The proposed rule would update FCA's regulations in view of these 
concerns, and would address the ethical culture under which System 
institutions should operate.\2\
---------------------------------------------------------------------------

    \1\ The original proposed regulation was published in the 
Federal Register on February 20, 2014, (79 FR 9649). The objective 
was to build on the existing standards of conduct rules by adding a 
few new provisions, clarifying or augmenting some current 
provisions, and providing additional flexibility for others. After 
receiving comments, FCA determined to use a different approach.
    \2\ ``The Directors Role'' booklet states that sound ethics and 
adherence to standards of conduct, among other things, are essential 
to effective oversight.
---------------------------------------------------------------------------

III. The Importance of Ethical Culture

    Public confidence in the integrity and ethical business practices 
of any financial institution is fundamental to its ongoing viability. 
Unethical or preferential business practices can damage a financial 
institution's reputation and lead to earnings and credit risk. Congress 
granted the Farm Credit System certain attributes that result in 
Government-sponsored enterprise (GSE) status. This status confers on 
System institutions additional responsibility to strive for high 
ethical standards and business practices.

IV. The Proposed Rule

    This rule would establish core principles for ethical conduct. It 
would set forth basic tenets of ethical business practices to compel 
each System institution to foster a culture of loyalty, honesty, 
integrity and accountability. The proposed rule would set forth 
principles by which a System institution must do business. The System 
institution would be responsible for establishing and enforcing 
policies that expand on these principles, and for clearly communicating 
expectations for acceptable behavior to directors and employees. FCA 
believes that the proposed rule would promote ethical conduct. At the 
same time, because it is less prescriptive than the current rule, it 
could reduce regulatory burden.

A. Organization

    The proposed rule would change the organization of the current 
rule. It would consolidate, rename and assign new numbers to some 
sections and remove other sections altogether. The following bullets 
summarize the changes:

     Proposed Sec.  612.2136 would set forth the principles 
that serve as the foundation for the rule. It would substantively 
revise and rename current Sec.  612.2135 ``Director and employee 
responsibilities and conduct--generally''.
     Proposed Sec.  612.2137 ``Elements of a Standards of 
Conduct Program,'' would consolidate current Sec.  612.2160 
``Institution responsibilities'' and current Sec.  612.2165 
``Policies and procedures''.
     Proposed Sec.  612.2138 ``Conflicts of interest, 
reporting of financial interests'' would consolidate current 
``Director reporting'' and current Sec.  612.2155 ``Employee 
reporting''.
     Proposed Sec.  612.2139 ``Prohibited conduct'' would 
consolidate current Sec.  612.2140 ``Directors--prohibited conduct'' 
and Sec.  612.2150 ``Employees--prohibited conduct''. It would also 
include the prohibitions in current Sec.  612.2157 ``Joint 
employees'' and current Sec.  612.2270 ``Purchase of System 
obligations''.
     Proposed Sec.  612.2137 would require that institutions 
develop policies and procedures with respect to agents to avoid 
conflicts of interests and would replace current Sec.  612.2260 
``Standards of conduct for agents''.

B. Definitions [Proposed Sec.  612.2130]

    The proposed rule would define ``Code of Ethics,'' ``resolved'' and 
``Standards of Conduct Program''. We would change the term ``controlled 
entity and entity controlled by'' to ``reportable business entity'' and 
modify the definition of ``employee''. We would omit the definitions of 
``officer'' and ``service corporation'' as redundant with the 
definitions of ``employee'' and ``System institution'', respectively. 
We would omit the definition of ``relative'' as redundant with the 
definition of ``family'' in the current rule and ``immediate family'' 
in Sec.  620.1(e). We would make the definition of System institutions 
more concise. These and other changes and clarifications are discussed 
below.
    Agent. We would modify the definition of ``agent'' to clarify that 
an agent includes someone who currently represents a System institution 
as a fiduciary in contacts with third parties. The proposed rule adds 
the language ``as a fiduciary'' to the definition of agent to explain 
that not all outside parties performing services for the System 
institution require the conflict of interest disclosure required of 
agents. For example, the contractor responsible for maintaining grounds 
would not be an agent. However, those with fiduciary responsibilities, 
such as lawyers, accountants, and those representing the System 
institution in contacts with third parties would be an agent. Each 
System institution should review the risks associated with its use of 
third parties and should expand or elaborate on the definition of 
agent, depending on the System institution's need for conflict 
disclosures in those relationships. Special consideration should be 
given to cyber security issues in third party relationships and 
information technology specialists should be subject

[[Page 27924]]

to especially heightened ethical controls and confidentiality 
requirements.
    Code of Ethics. The proposed rule would define ``Code of Ethics'' 
as a written statement of the principles and values the System 
institution follows to establish a culture of ethical conduct. The Code 
of Ethics directs professionalism and discourages misconduct so that 
the best interests of the institution and the System are advanced.
    Conflict of interest. This definition would explain that a conflict 
can arise whenever a secondary or non-work-related interest might 
unduly influence or materially impact a director's or employee's work-
related decision-making.
    Employee. The proposed rule would define ``employee'' to mean any 
individual, including an officer, who works for the System institution. 
Every individual who works for the System institution, including 
temporary employees and interns, would be part of the ethical corporate 
culture, regardless of length or term of employment. System 
institutions should also consider whether and when third-party 
contractors should be included in the definition of employee or agent.
    Entity. The proposed rule would add ``sole proprietorship'' to the 
definition of ``entity'' in the current rule and make other non-
substantive changes.
    Family. The proposed rule would include ``significant others'' in 
the definition of ``family''. The System institution could elaborate on 
this definition, and consider whether to include cousins or civil union 
partners.
    Material. The definition of ``material'' in the proposed rule is 
not substantively different from the definition in the current rule. 
Each System institution must set its own specific parameters for what 
would constitute a material financial interest or transaction. The 
dollar amount or value of material, in the context of a financial 
interest or transaction, should be determined by the System institution 
board. This should be based on the institution's needs for tracking and 
supervising the potentially conflicting business and financial 
activities of its directors and employees.
    Ordinary course of business. We would clarify that an ordinary 
course of business transaction is one that is usual and customary ``in 
the business in question'', on terms that are not preferential. Each 
System institution must determine what activities and transactions are 
in the ordinary course of business. Generally, a person provides goods 
or services in the ordinary course of business if the transaction is 
usual or customary for the kind of business in which the seller or 
service provider is engaged or with the seller's or service provider's 
own usual or customary practices. So, for example, a borrower sells 
crop inputs (seed, fertilizer, etc.), and a System institution director 
or employee wishes to purchase the crop inputs. A transaction in the 
ordinary course of business would mean that the borrower sells the crop 
inputs at the price and terms common to others in the industry. It 
would mean that the director or employee is typical of an ordinary 
purchaser of crop inputs in the industry. Also, the terms of the 
arrangement should be consistent with the other transactions, if any, 
between this borrower/seller and director or employee/buyer.
    Another example involves services in the ordinary course of 
business, such as accounting, legal or medical. A System institution 
director may need a lawyer. The fact that the best lawyer is a 
borrower, does not preclude the director from engaging that lawyer for 
personal use, assuming no conflict, if the terms of the engagement are 
usual or customary practices in the legal field. The director must pay 
the lawyer at the going rate, the legal services must be of the kind 
the lawyer typically provides in the business, and the relationship 
cannot have any preferential terms or discounts.
    Preferential. The proposed rule would not change the definition of 
``preferential'' but would list it separately from the definition of 
``ordinary course of business''.
    Reportable business entity. The proposed rule would change the term 
``controlled entity and entity controlled by'' and replace it with 
``reportable business entity''. The proposed rule would provide that a 
reportable business entity is an entity in which the reporting 
individual, directly or indirectly or acting through or in concert with 
one or more persons, owns a material percentage of the equity; owns, 
controls, or has the power to vote a material percentage of any class 
of voting securities; or has the power to exercise a material influence 
over management of policies of such entity. We would make this change 
to avoid confusion with the term ``control'' in the corporate context, 
and to allow the System institution discretion to determine how much 
interest represents a conflict. This determination may vary depending 
on whether the entity is private, public, profit, or not for profit. 
The intent of this provision is to require directors and employees to 
identify and report any business interest that is significant enough to 
create a conflict of interest or the appearance of a conflict of 
interest when considered from the perspective of an ordinarily prudent 
and reasonable person.
    Resolved. We would define ``resolved'' to mean an actual or 
apparent conflict of interest that has been addressed with an action 
such as recusal, divestiture, approval or exception, job reassignment, 
employee supervision, employment separation or other action, with the 
result that a reasonable person with knowledge of the relevant facts 
would conclude that the conflicting interest is unlikely to adversely 
affect the person's performance of official duties in an objective and 
fair manner and in furtherance of the interests and statutory purposes 
of the Farm Credit System.
    Standards of Conduct Official. The proposed rule would modify the 
definition of Standards of Conduct Official (or Official). Because of 
the variety of institution sizes and resources, we do not require the 
Standards of Conduct Official to be a senior officer. However, the 
focus of this proposal is on accountability in ethical conduct; 
therefore, the Official must be an employee who is an officer appointed 
under Sec.  612.2137(b), and must have the authority to report directly 
to the System institution board or designated board committee on 
standards of conduct matters. The Official should be an employee who is 
able to exert a positive influence in ethical matters on System 
institution directors and employees. The Official would be independent 
in his duties related to standards of conduct. It may be practical for 
some larger System institutions to appoint more than one Standards of 
Conduct Official.
    Standards of Conduct Program. The proposed rule would define 
``Standards of Conduct Program'' to mean the policies and procedures, 
internal controls, and other actions a System institution must 
implement to put into practice the requirements of this rule. The 
Standards of Conduct Program is the totality of the policies and 
procedures, internal controls, audit, training, and other activities 
that promote ethical behavior.

C. Standards of Conduct--Core Principles [Proposed Sec.  612.2136]

    As mentioned in Section A, we would substantively revise and rename 
current Sec.  612.2135 ``Director and employees responsibilities and 
conduct--generally'' as proposed Sec.  612.2136 ``Standards of 
conduct--core principles.'' Proposed Sec.  612.2136 would establish 
principles that directors and employees must follow in performing

[[Page 27925]]

official duties. We specifically request comment on the effectiveness 
of the proposed principles in reaching the objective of fostering a 
culture of ethical conduct.
    Paragraph (a) would establish core principles. Paragraph (b) would 
set forth certain basic minimum requirements to comply with the 
principles.
    Proposed Sec.  612.2136(a)(1) would set forth the first principle: 
To maintain the highest ethical standards of the financial banking 
industry, including standards of care, honesty, integrity and fairness. 
This principle establishes that these standards, important in the 
financial banking industry, are critical to the conduct expected of a 
GSE. System institution directors and employees should consider ethical 
conduct beyond reproach a component of their job responsibilities.
    System institution directors and employees must avoid self-serving 
practices and hold performance of their duties to the institution above 
personal concerns. They must not use their position for personal 
advantage. Proposed Sec.  612.2136(a)(2) would set forth the principle 
that institution directors and employees must act in the best interest 
of the institution. Proposed Sec.  612.2136(a)(3) would set forth the 
principle to preserve the reputation of the institution and the 
public's confidence in the Farm Credit System. Proposed Sec.  
612.2136(a)(4) would set forth the principle to exercise diligence and 
good business judgment in carrying out duties and responsibilities.
    Proposed Sec.  612.2136(a)(5) would state as a principle the 
responsibility to report, vet and make all reasonable efforts to 
resolve conflicts and the appearance of conflicts in business 
relationships and activities. As a corollary, proposed Sec.  
612.2136(a)(6) would set forth the principle that directors and 
employees must avoid self-dealing and acceptance of gifts or favors 
that may influence or have the appearance of influencing official 
actions or decisions. Proposed rules concerning acceptance of gifts are 
set forth in proposed Sec.  612.2137(d)(6). Proposed Sec.  
612.2136(a)(7) would require directors and employees, if applicable, to 
fulfill fiduciary duties.
    Proposed Sec.  612.2136(b)(1) would require institution directors 
and employees to comply with their System institution's Standards of 
Conduct Program and Code of Ethics. Proposed Sec.  612.2136(b)(2) would 
require institution directors and employees to comply with all 
applicable laws and regulations when carrying out official duties. 
Applicable laws and regulations would include all FCA regulations and 
Federal laws. Proposed Sec.  612.2136(b)(3) would require institution 
directors and employees to participate in annual standards of conduct 
training, and to acknowledge participation with a written 
certification. Section 612.2136(b)(4) would require directors and 
employees to report, under Sec.  612.2137(e), known or suspected 
illegal or unethical activities, and known or suspected violations of 
the institution's rules on standards of conduct and Code of Ethics. 
Reporting would be made to the Standards of Conduct Official or through 
the institution's hotline or other method consistent with the 
institution's procedures for anonymous reporting.

D. Elements of a Standards of Conduct Program [Proposed Sec.  612.2137]

    The proposed rule would consolidate current Sec.  612.2160 
``Institution responsibilities'' with current Sec.  612.2165 ``Policies 
and procedures,'' in proposed Sec.  612.2137 ``Elements of a Standards 
of Conduct Program.'' This section would require each System 
institution to establish a Standards of Conduct Program that 
incorporates the principles established in proposed Sec.  612.2136 and 
provide resources for its implementation. A System institution may 
continue to use its existing Standards of Conduct Program if it 
incorporates the core principles and satisfies the requirements of this 
proposed rule.
    The Standards of Conduct Program would set forth specific 
guidelines on acceptable and unacceptable business practices. Policies 
and procedures should include requirements and prohibitions as 
necessary to promote public confidence in the institution and the 
System, and further the objectives of the principles and this proposed 
rule. Each System institution should enhance these requirements with 
comprehensive rules as necessary to meet System institution goals. Each 
System institution would be required to allocate resources to 
administer the Standards of Conduct Program. This could include hiring 
personnel in addition to the Standards of Conduct Official, if 
necessary, to assist in responsibilities such as reviewing reports, 
providing training, and conducting investigations. It could include use 
of outside counsel, especially if the Standards of Conduct Official is 
not an attorney, and whatever additional resources are necessary to 
implement the Standards of Conduct Program and promote the ethical 
culture of the System institution.
    The System institution board is ultimately responsible for 
implementing the principles and for compliance and oversight of the 
Standards of Conduct Program. Proposed Sec.  612.2137(a) would require 
each institution to establish a Standards of Conduct Program that sets 
forth the core principles in Sec.  612.2136. Proposed Sec.  612.2137(b) 
would require the board of directors to appoint a Standards of Conduct 
Official, defined as an employee, who would be responsible for carrying 
out the duties set forth in proposed Sec.  612.2170. To carry out these 
responsibilities and promote the ethical culture required by the 
proposed rule, the Standards of Conduct Official should have a close 
relationship with the employees of the System institution and be in a 
position of authority and trust. Because the board of directors is 
ultimately responsible for compliance, the Standards of Conduct 
Official must have direct access to the board or designated board 
committee on standards of conduct matters. The Standards of Conduct 
Official would be required to meet periodically with the board or 
designated board committee as proposed in Sec.  612.2170(g).
    Proposed Sec.  612.2137(c) would require each System institution to 
adopt a written Code of Ethics that states the institution's principles 
and values and guides directors and employees in ethical conduct. These 
principles and values must include standards for appropriate 
professional conduct at the workplace and in matters related to 
employment. The Code of Ethics would be a component of the Standards of 
Conduct Program. To demonstrate commitment to its values and to provide 
transparency and accountability in ethical conduct, the proposed rule 
requires each System institution to post its Code of Ethics on the 
System institution's external (public) website.
    Proposed Sec.  612.2137(d) would require each System institution to 
establish policies and procedures to put into operation the Standards 
of Conduct Program and to comply with the provisions of this proposed 
rule.
    Proposed Sec.  612.2137(d)(1) would require each System institution 
to establish policies and procedures for reporting. At a minimum, these 
would include reporting requirements sufficient to identify any 
conflicts of interest, actual or apparent; any business transactions 
with directors, employees, borrowers and agents that are not in the 
ordinary course of business; any gifts; names of family members; and 
reportable business entities (or other related party as determined by 
the System institution).
    As defined in proposed Sec.  612.2130, ordinary course of business 
means a transaction that is usual and customary in the business in 
question, on terms

[[Page 27926]]

that are not preferential. We believe the System institution is in the 
best position to determine that which is an ordinary course of business 
transaction and that which is favorable or preferential in its region. 
Therefore, each System institution should develop policies and 
procedures to identify transactions that are preferential and not in 
the ordinary course of business and report the transactions pursuant to 
Sec.  612.2137(d)(1)(ii).
    Generally, ordinary course of business means business procedures 
and practices consistent with usual customs and practices in that line 
of business. Is the transaction of a type that other similar businesses 
and their customers would engage in as ordinary business? Is the 
transaction, and its terms, common in the specific industry? From an 
industry-wide perspective, is the transaction of the sort commonly 
undertaken? The practices of others in the industry would be helpful in 
making the determination.
    Another consideration is the parties' own past relationship and 
past practice. Is the transaction ordinary in the context of the 
relationship already existing between the parties? A review of the 
parties' prior conduct and practices would be helpful in making this 
determination.
    Certain special situations bear discussion. Transactions between a 
director/employee and that director's/employee's loan officer should be 
specifically addressed, and the general nature of these transactions 
should always be reported because of the high potential for conflict, 
even if the transactions are in the ordinary course of business. System 
institution policies and procedures should require reporting for other 
ordinary course of business transactions that may have a high potential 
for conflict.
    Compliance with proposed Sec.  612.2137(d)(1) would require the 
System institution to develop a method to monitor related-party 
transactions and make sure that directors and employees do not transact 
business on preferential or favorable terms and do not take advantage 
of their employment or position with the Farm Credit System in their 
business affairs. The policies and procedures should include specific 
dollar amounts as appropriate, and other criteria for pre-event versus 
post-event reporting. Reporting should include, at a minimum, financial 
transactions (recurring or one-time), and other relationships or 
arrangements (monetary or non-monetary) between directors, employees, 
agents or borrower/stockholders.
    Proposed Sec.  612.2137(d)(2) would require each System institution 
to establish policies and procedures to address how conflicts of 
interest would be resolved through an action such as recusal, 
divestiture, approval or exception, job reassignment, employee 
supervision, employment separation or other action. To resolve 
conflicts of interest, the director or employee should cooperate with 
the Standards of Conduct Official. Policies and procedures would 
include action taken in the event a conflict cannot be resolved. 
Compliance with proposed Sec.  612.2137 requires that the System 
institution establish a process to report, vet, and resolve conflicts 
of interest effectively. It would be read in tandem with proposed Sec.  
612.2138, which speaks directly to directors and employees and sets 
forth their reporting requirements.
    Agents, consultants and other third parties who represent the 
institution to the public, or upon whom the institution relies for 
professional services, must be bound by the same ethical 
responsibilities to the System institution and its borrower/
shareholders as directors and employees. Proposed Sec.  612.2137(d)(3) 
would require each System institution to establish policies and 
procedures to make sure that agents file conflict of interest 
disclosures, and that agents, consultants and other third-party 
contractors avoid misconduct and conflicts of interests. These third 
parties must be notified that their engagement is conditioned upon 
their agreement to avoid misconduct and conflicts of interest. These 
policies and procedures should include a mechanism to report, vet and 
resolve any conflicts of interest between third parties representing 
the institution and the System institution itself or its directors and 
employees. The System institution should also consider having the agent 
or consultant acknowledge its Code of Ethics, depending on the relative 
importance of the agent or consultant services to the institution. 
Consideration should be given to the sensitivity of the services, for 
example third-party performers of internet technology or cyber security 
services should be subject to a high degree of scrutiny. Consideration 
also should be given to whether the third party is covered by a 
professional code or standard that prescribes ethical conduct.
    The rule provides specific authority to each System institution to 
monitor and enforce its standards of conduct rules and Code of Ethics. 
Violators should be subject to specific and appropriate action, as 
determined by the System institution. Proposed Sec.  612.2137(d)(4) 
would require each System institution to establish policies and 
procedures for the enforcement of its Standards of Conduct Program. 
This would provide the mechanism by which the institution takes action 
against any person who violates the standards of conduct rules, Code of 
Ethics, or these regulations. This section places accountability for 
enforcing the ethical conduct outlined in this proposed rule and 
fundamental to the health and viability of the System institution 
directly with the System institution itself.
    Proposed Sec.  612.2137(d)(5) would require each System institution 
to establish policies and procedures to apply and enforce the 
prohibitions set forth in proposed Sec.  612.2139 and any other 
provision in this subpart A.
    Proposed Sec.  612.2137(d)(6) would require policies and procedures 
to prohibit gifts. These should include a definition of gifts, and 
explanation of prohibited sources. Directors and employees are 
prohibited from accepting gifts or favors that could be viewed as 
offered to influence or give the appearance to influence decision-
making or official action or to obtain information. A System 
institution may determine that certain gifts, for example those valued 
at $25.00 or less, are so low in value (de minimis) that they could not 
be perceived as influencing decision-making or official action. The 
System institution may allow its directors and employees to accept 
gifts of little or no value. However, it may do so only if it has 
policies and procedures in place that set forth controls that are 
consistent with the core principles established in this proposed rule 
and with the requirements of Federal laws including FCA regulations and 
the Federal Bank Bribery Act.\3\ These policies and procedures would 
set forth the maximum value of any individual gift that a director or 
employee may accept, and the maximum value of gifts in the aggregate 
per year that a director or employee may accept. The policies and 
procedures would include reporting requirements for gifts and rules for 
disposing of impermissible gifts.
---------------------------------------------------------------------------

    \3\ See 18 U.S.C. 215 and 18 U.S.C. 20.
---------------------------------------------------------------------------

    Proposed Sec.  612.2137(e) would set forth minimum requirements for 
internal controls for all aspects of the System institution's Standards 
of Conduct Program.
    Proposed Sec.  612.2137(e)(1) would require the System institution 
to maintain all reports generated under subpart A of the Standards of 
Conduct regulations including those required by Sec.  612.2137(d)(1) 
and records on any ethics investigations and

[[Page 27927]]

determinations, for a minimum of 6 years. Proposed Sec.  612.2137(e)(2) 
would require internal controls to preserve the confidentiality of 
reports and other information maintained under the Standards of Conduct 
Program.
    Proposed Sec.  612.2137(e)(3) would require each System institution 
to establish a process for anonymous reporting of suspected standards 
of conduct or Code of Ethics violations. A reporting hotline is most 
effective when both internal parties (directors and employees) and 
external parties (agents, borrowers, shareholders, applicants, and 
others) can report a complaint, misconduct, or tip for corrective 
action without fear of retribution such as termination of employment, 
suspension, or other similar action.
    Proposed Sec.  612.2137(e)(4) requires periodic review of the 
Standards of Conduct Program for consistency with current practices at 
the System institution, financial banking industry best practices, and 
FCA regulations.
    Internal controls to prevent self-dealing and conflict situations 
should be monitored and evaluated with an effective audit program. 
Proposed Sec.  612.2137(e)(5) would require each System institution to 
arrange for periodic internal audits of the Standards of Conduct 
Program. The audit would identify weaknesses, review and measure the 
effectiveness of the Standards of Conduct Program, and prescribe 
necessary corrective actions. The audit would cover the entire System 
institution and include all activities conducted by the System 
institution including through an unincorporated business entity (UBE), 
such as those organized for the express purpose of investing in a Rural 
Business Investment Company pursuant to Sec.  611.1150(b). The audit 
would test for compliance and recommend corrective action as necessary, 
and the results should be reported directly to the institution's board 
or designated board committee. The scope and depth of the audit would 
be determined by the needs of the institution. The System institution 
would document the audit process and results.
    Proposed Sec.  612.2137(f) would require each System institution to 
establish and provide standards of conduct training at least annually. 
This section should be read in tandem with Sec.  612.2170. The 
institution's Standards of Conduct Program and ongoing training would 
encourage directors and employees to obtain counsel from the Standards 
of Conduct Official prior to engaging in transactions that could be 
perceived as preferential or not in the ordinary course of business. 
The Standards of Conduct Official could then provide advice to the 
director or employee on the permissibility of the transaction under the 
institution's Standards of Conduct Program and these proposed rules, or 
prescribe actions that would be necessary before or following the 
transaction to resolve a conflict of interest or the appearance of a 
conflict of interest. Training must include updates, if any, to the 
Standards of Conduct Program and Code of Ethics, and discussion of the 
System institution's procedures for the anonymous reporting of 
violations. It must include education on prohibited conduct, conflicts 
of interest and reporting requirements. Training on fiduciary 
responsibilities would be required, although the System institution may 
elect to have that service performed by outside counsel.

E. Conflicts of Interest, Reporting of Financial Interests [New Sec.  
612.2138]

    It is incumbent upon each System institution to adopt the standards 
of conduct core principles, to make them part of the culture and 
lexicon of every director and employee. In addition, certain 
prescriptive rules directed to employees and directors are necessary to 
realize a baseline ethical standard. The baseline prescriptive 
requirements are set forth in proposed Sec. Sec.  612.2138 and 
612.2139, and each System institution should expand upon these 
prescriptive requirements as appropriate.
    Section 612.2138 of the proposed rule would specifically address 
conflicts of interest and reporting of financial interests. This 
section would require directors and employees to take affirmative 
action to identify, report and resolve conflicts or potential conflicts 
of interest of which they are aware. It is intended to compel each 
director and employee to take ownership of and invest in ethical 
responsibilities.
    Proposed Sec.  612.2138(a) would require each director and employee 
to identify, report and resolve conflicts and potential conflicts. 
Proposed Sec.  612.2138(b) would require that if a director or employee 
has a conflict of interest in a matter, transaction or activity that is 
subject to official action, or that is being considered by the board of 
directors, then that director or employee must disclose relevant non-
privileged information including the existence, nature, and extent of 
his or her interests; refrain from participating in the official action 
or board discussion on the matter, activity or transaction (Sec.  
612.2138(b)(2)); and not vote on or influence the decision-making on 
the matter, transaction or activity (Sec.  612.2138(b)(3)). Working 
together with other provisions of the proposed rule, this section is 
intended to bolster loyalty to the System institution and to reinforce 
personal responsibility and accountability in avoiding conflicts and 
acting ethically.
    Proposed Sec.  612.2138(c) would require a director or employee to 
report conflicts of interest to the Standards of Conduct Official at 
year-end and at such other times as may be required by the institution. 
At a minimum, this section would require reporting of information 
sufficient for a reasonable person to make a conflict of interest 
determination on any business matter to be considered by the System 
institution. Reporting consistent with part 620 is also required.
    Proposed Sec.  612.2138(c)(1) would require directors and employees 
to report any interest that they may have in any business matter before 
the System institution. This would include any interest in a loan, or 
in an entity making a loan application, or any other direct or indirect 
interest in a matter that pertains to the business of the System 
institution.
    Proposed Sec.  612.2138(c)(2) would require directors and employees 
to report the names of any family member who has transacted or is 
currently transacting business with the System institution. The System 
institution should determine how best to capture reporting of current 
transactions, and should consider whether to require a director or 
employee to report the name of a family member who has engaged in a 
transaction in the past.
    Proposed Sec.  612.2138(c)(3) would require directors and employees 
to report all material financial interests with any director, employee, 
agent, borrower or business affiliate of the System institution, 
supervised institution or supervising institution.
    Proposed Sec.  612.2138(c)(4) would require directors and employees 
to report any matter required to be disclosed by Sec.  620.6 of this 
chapter, in accordance with System institution policies and procedures.
    Proposed Sec.  612.2138(c)(5) would require directors and employees 
to report the names of reportable business entities.
    Proposed Sec.  612.2138(c)(6) would require directors and employees 
to report the names of any person residing in the home if such person 
transacts business with the System institution, or any institution 
supervised by the System institution.
    All the reporting in this section would be based on information the 
reporting

[[Page 27928]]

individual knows or has reason to know.

F. Prohibited Conduct [Proposed Sec.  612.2139]

    As stated in Section A, we would consolidate current Sec.  612.2140 
``Directors--prohibited conduct'' with current Sec.  612.2150 
``Employees--prohibited conduct,'' in proposed Sec.  612.2139 
``Prohibited conduct.'' We would also incorporate current Sec.  
612.2157 ``Joint employees'' and current Sec.  612.2270 ``Purchase of 
System obligations'' requirements in this section. Most of our 
revisions to the prohibited conduct rules are straightforward and 
provide clarification of an intended prohibition. For example, we would 
clarify that lending transactions with a party related to the System 
institution such as a director, employee or a borrower is permitted, 
but only if on terms that are not favorable or preferential. We would 
also add a new provision that would prohibit directors and employees 
from acting inconsistently with the core principles.
    Proposed Sec.  612.2139(a) would set forth the general prohibitions 
and their related exceptions for directors and employees, and proposed 
Sec.  612.2139(b) would set forth additional prohibitions specifically 
for employees with their related exceptions.
    Proposed Sec.  612.2139(a)(1) would prohibit acting inconsistently 
with the core principles in proposed Sec.  612.2136.
    Proposed Sec.  612.2139(a)(2) restates the director and employee 
prohibitions on participation in matters affecting financial interests 
in current Sec. Sec.  612.2140(a) and 612.4150(a), respectively.
    Proposed Sec.  612.2139(a)(3) restates the director and employee 
prohibitions on use of information in current Sec. Sec.  612.2140(b) 
and 612.4150(b), respectively.
    Proposed Sec.  612.2139(a)(4) would prohibit directors and 
employees from soliciting, obtaining or accepting, directly or 
indirectly, any gift, fee or other compensation that could be viewed as 
offered to influence decision-making, or official action or to obtain 
information. The System institution may determine that a gift that has 
an insignificant value would not trigger this prohibition, and may 
develop rules under which directors and employees may accept de minimis 
gifts. However, these System institution rules must be consistent with 
Federal rules and regulations including FCA rules and the Federal Bank 
Bribery Act. De minimis gifts may be accepted only as set forth under 
the institution's properly established policies and procedures (see 
Sec.  612.2137(d)(6)).
    Proposed Sec.  612.2139(a)(5) would provide that, among other 
things, a director or employee may not knowingly purchase or otherwise 
acquire, directly or indirectly, unless through inheritance, any 
interest (including mineral interests) in any real or personal property 
that is currently owned, or within the 12 past months was owned, by the 
System institution, supervising institution or any supervised 
institution as a result of foreclosure, deed in lieu, or similar 
action. Like the current rule, the proposed rule would allow a director 
to purchase such property only through public auction or similar open, 
competitive bidding. By open competitive bidding, we mean bidding that 
is both competitive, allowing involvement of all interested parties, 
and open and unsealed. Open competitive bidding affords all interested 
parties an opportunity to counter-bid. The advantage to open bidding is 
that it discourages unethical behavior or favoritism. A public auction 
can be accomplished on-line only if there is an opportunity for all who 
may be interested in the auction to participate in the bidding process. 
A director may purchase acquired property through open competitive 
bidding only if the director did not participate in the decision to 
foreclose or dispose of the property, including setting the sale terms, 
and did not receive information that could provide an advantage over 
other potential bidders or purchasers of the property.
    The proposed acquired property prohibitions do not reflect a 
substantive change from the current rule. We made revisions because the 
scope of misunderstanding and misapplication of the original provision 
warranted further clarification of the current rule's intent. The 
prohibition would apply to collateral acquired by a System institution, 
including collateral acquired directly or through use of an acquired 
property UBE. This provision of the rule does not change or alter any 
rights a borrower may have under title IV, part C of the Farm Credit 
Act of 1971, as amended, 12 U.S.C. 2199-2202, or FCA regulations 
promulgated thereunder.
    Proposed Sec.  612.2139(a)(6) would provide that a director or 
employee must not directly or indirectly borrow from, lend to, or 
become financially obligated with or on behalf of a director, employee, 
or agent of the System institution, supervising institution, or 
supervised institution or a borrower or loan applicant of the System 
institution. This section prohibits a director or employee from 
entering into a lending or borrowing transaction with those who may 
have a financial relationship with the System institution. Lending and 
borrowing relationships include providing loan guarantees or stand-by 
letters of credit and similar forms of financial obligation.
    FCA recognizes that there are many situations in which a director 
or employee may enter into lending transactions or business 
relationships that involve other directors, employees, agents, 
borrowers, or loan applicants in the ordinary course of business. 
Financing in the ordinary course of business, as discussed earlier, is 
not a prohibited lending transaction. Each System institution should 
develop policies and procedures governing ordinary course of business 
transactions that include rules for reporting.
    The proposed rule requires every System institution to develop 
policies and procedures for directors and employees to identify, vet, 
and resolve any lending transactions with prohibited sources that are 
on preferential terms. Evidence of a director or employee engaging in a 
preferential business arrangement with a borrower or other party 
related to the System institution would be a safety and soundness 
concern and might be evidence of non-compliance.
    Proposed Sec.  612.2139(a)(7) restates the prohibitions in current 
Sec.  612.2270 on purchasing System obligations; and Sec.  
612.2165(b)(14) on purchasing or retiring preferred stock in advance of 
the release of material non-public information.
    Proposed Sec.  612.2139(b)(1) restates the prohibition in current 
Sec.  612.2150(d) on serving as an officer or director of an entity 
other than a System institution, except that the proposed revisions 
would not include the exception in current Sec.  612.2150(d) that 
allows an employee of a Farm Credit Bank or association to serve as a 
director of a cooperative that borrows from a bank for cooperatives. 
This exception has been dropped because of the conflicts that would 
arise as a result of merger activity. Proposed Sec.  612.2139(b)(2) and 
(b)(3) restate the prohibitions in current Sec.  612.2150(j) on acting 
as a real estate agent or broker; and current Sec.  612.2150(k) on 
acting as an agent or broker; respectively. Proposed Sec.  
612.2139(b)(4) restates the prohibition in current Sec.  612.2157 on 
joint employees, but allows an employee of a bank to serve as an 
officer of a supervised association in its district in an extraordinary 
situation if: Both boards authorize the service, the duties and 
compensation at each institution

[[Page 27929]]

are set forth in writing, and reasonable notice prior to the assumption 
of duties is provided to FCA.

G. Standards of Conduct Official [Proposed Sec.  612.2170]

    The proposed rule would enhance the role of the Standards of 
Conduct Official. The System institution board of directors is 
responsible for creating and fostering the institution culture, and for 
development of the Standards of Conduct Program. The institution board 
is also responsible for compliance with the Standards of Conduct 
Program. Proposed Sec.  612.2170(a) would require that the Standards of 
Conduct Official must implement the Standards of Conduct Program. The 
Standards of Conduct Official is the authority to whom directors, 
employees, agents and consultants turn for advice on conflict of 
interest situations. Proposed Sec.  612.2170(b) would require the 
Standards Conduct Official to provide guidance and information to 
directors and employees on conflicts of interest.
    Proposed Sec.  612.2170(c) should be read in tandem with proposed 
Sec.  612.2137(f) and would require the Standards of Conduct Official 
to provide annual and new director and employee training. The training 
would review the institution's standards of conduct rules and the Code 
of Ethics and discuss any updates; review and discuss the anonymous 
reporting hotline or other reporting procedure; prohibited conduct; 
directors' and employees' fiduciary duties (this training could be 
separate from the training of employees who do not have fiduciary 
duties); the importance of identifying conflicts of interests and 
reporting of financial interests; and annual and ongoing reporting 
requirements.
    The proposed rule would require the Standards of Conduct Official 
to report periodically to the board of directors or designated board 
committee on the Standards of Conduct Program and Code of Ethics 
matters. Proposed Sec.  612.2170(d) would require the Standards of 
Conduct Official to help directors and employees identify conflicts of 
interest and report financial interests, in accordance with proposed 
Sec.  612.2138. The Official would make written determinations on 
conflicts of interest and determine how to resolve them including by 
recusal, divestiture, approval or exception, job reassignment, employee 
supervision, employment separation, or other action consistent with the 
institution's Standards of Conduct Program as provided in proposed 
Sec.  612.2170(e). Proposed Sec.  612.2170(f) would require the 
Standards of Conduct Official to document all resolved and unresolved 
material or significant conflicts of interest. The Standards of Conduct 
Official would be required to maintain documentation that explains how 
conflicts are handled.
    Proposed Sec.  612.2170(g) would require the Standards of Conduct 
Official to report to the institution's board of directors or 
designated board committee any instance of non-compliance with the 
System institution's standards of conduct rules or Code of Ethics. It 
would also require periodic reporting on the administration of the 
Standards of Conduct Program. These reports would include a review of 
the Standards of Conduct Program required under proposed Sec.  
612.2137.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
affiliated associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.

List of Subjects in 12 CFR Part 612

    Agriculture, Banks, banking, Conflict of interests, Crime, 
Investigations, Rural areas.

    For the reasons stated in the preamble, part 612 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED 
CRIMINAL VIOLATIONS

0
1. The authority citation for part 612 continues to read as follows:

    Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12 
U.S.C. 2243, 2252, 2254).

0
2. Subpart A, consisting of Sec. Sec.  661.2130 through 612.2270, is 
revised to read as follows:
Subpart A--Standards of Conduct
Sec.
612.2130 Definitions.
612.2135 [Reserved]
612.2136 Standards of conduct--core principles.
612.2137 Elements of a Standards of Conduct Program.
612.2138 Conflicts of interest, reporting of financial interests.
612.2139 Prohibited conduct.
612.2140-612.2165 [Reserved]
612.2170 Standards of Conduct Official.
612.2260-612.2270 [Reserved]

Subpart A--Standards of Conduct


Sec.  612.2130  Definitions.

    For purposes of this section, the following terms are defined:
    Agent means any person, other than a director or employee, who 
currently represents a System institution as a fiduciary in contacts 
with third parties or who currently provides professional services to a 
System institution, such as legal, accounting, appraisal, cyber-
security, internet technology and other similar services.
    Code of Ethics means a written statement of the principles and 
values the System institution follows to establish a culture of ethical 
conduct for directors and employees.
    Conflicts of interest means a set of circumstances that creates a 
risk that actions or judgments regarding a primary interest will be 
unduly influenced by a secondary interest. A conflict of interest (or 
the appearance of a conflict of interest) may exist when a person has a 
financial interest in a transaction, relationship, or activity that 
could materially impact that person's ability to perform official 
duties and responsibilities in a totally impartial manner and in the 
best interest of the institution, when viewed from the perspective of a 
reasonable person with knowledge of the relevant facts.
    Employee means any individual, including an officer, working part-
time, full-time, or on a temporary basis for the System institution.
    Entity means a corporation, company, association, firm, joint 
venture, partnership, sole proprietorship, trust or other organization 
whether or not incorporated.
    Family means spouse or significant other and anyone having the 
following relationship to either: Parent, spouse, son, daughter, 
sibling, stepparent, stepson, stepdaughter, stepbrother, stepsister, 
half-brother, half-sister, uncle, aunt, nephew, niece, grandparent, 
grandson, granddaughter, and the spouses of the foregoing.
    Financial interest means an interest in an activity, transaction, 
property, or relationship with a person that involves receiving or 
providing something of monetary value or other present or deferred 
compensation.
    Financially obligated with means having a legally enforceable joint 
obligation with, being financially obligated on behalf of (contingently 
or otherwise), having an enforceable legal obligation secured by 
property owned by another person, or owning property

[[Page 27930]]

that secures an enforceable legal obligation of another.
    Material, when applied to a financial interest or transaction 
(including a series of transactions viewed in the aggregate), means 
that the interest or transaction is of sufficient magnitude that a 
reasonable person with knowledge of the relevant facts would question 
the ability of the person who has the interest or is party to such 
transaction(s) to perform the person's official duties objectively and 
impartially and in the best interest of the institution and its 
statutory purpose.
    Mineral interest means any interest in minerals, oil or gas, 
including but not limited to, any right derived directly or indirectly 
from a mineral, oil, or gas lease, deed or royalty conveyance.
    Ordinary course of business, when applied to a transaction, means:
    (1) A transaction that is usual and customary in the business in 
question on terms that are not preferential; 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.
    Person means individual or entity.
    Preferential means that the transaction is not on the same terms as 
those prevailing at the same time for comparable transactions for other 
persons who are not directors, employees or agents of a System 
institution.
    Reportable business entity means an entity in which the reporting 
individual, directly or indirectly, or acting through or in concert 
with one or more persons:
    (1) Owns a material percentage of the equity;
    (2) Owns, controls, or has the power to vote a material percentage 
of any class of voting securities; or
    (3) Has the power to exercise a material influence over the 
management of policies of such entity.
    Resolved means an actual or apparent conflict of interest that has 
been addressed with an action such as recusal, divestiture, approval or 
exception, job reassignment, employee supervision, employment 
separation or other action, with the result that a reasonable person 
with knowledge of the relevant facts would conclude that the 
conflicting interest is unlikely to adversely affect the person's 
performance of official duties in an objective and impartial manner and 
in furtherance of the interests and statutory purposes of the Farm 
Credit System.
    Standards of Conduct Official means a System institution employee 
who is appointed as an officer under Sec.  612.2137(b), and who reports 
directly to the board of directors or designated board committee on 
Standards of Conduct and Code of Ethics matters.
    Standards of Conduct Program means the policies and procedures, 
internal controls and other actions a System institution must implement 
to put into practice the requirements of this rule and the System 
institution's Code of Ethics.
    Supervised institution is a term that only applies within the 
context of a System bank or employee of a System bank and refers to 
each association supervised by that System bank.
    Supervising institution is a term that only applies within the 
context of an association or employee of an association and refers to 
the System bank that supervises that association.
    System institution and institution means any Farm Credit System 
bank, association, or service corporation chartered under section 4.25 
of the Act, and the Federal Farm Credit Banks Funding Corporation. It 
does not include the Federal Agricultural Mortgage Corporation.


Sec.  612.2135   [Reserved]


Sec.  612.2136  Standards of conduct--core principles.

    (a) If you are a System institution director or employee, you must:
    (1) Maintain the highest ethical standards of the financial banking 
industry, including standards of care, honesty, integrity, and 
fairness.
    (2) Act in the best interest of the institution.
    (3) Preserve the reputation of the institution and the public's 
confidence in the Farm Credit System.
    (4) Exercise diligence and good business judgment in carrying out 
official duties and responsibilities.
    (5) Report, vet, and work with the Standards of Conduct Official to 
resolve conflicts of interest and the appearance of conflicts of 
interest in System business relationships and activities.
    (6) Avoid self-dealing and acceptance of gifts or favors that may 
be deemed as offered, or have the appearance of being offered, to 
influence official actions or decisions.
    (7) Fulfill your fiduciary duties, as applicable.
    (b) To comply with core principles, all System institution 
directors and employees must:
    (1) Comply with the institution's standards of conduct and Code of 
Ethics.
    (2) Comply with all applicable laws and regulations.
    (3) Certify, in writing, participation in the institution's annual 
standards of conduct training.
    (4) Timely report to the Standards of Conduct Official or through 
the institution's reporting procedures under Sec.  612.2137(e)(3) known 
or suspected:
    (i) Illegal or unethical activities; and
    (ii) Violations of the institution's standards of conduct and Code 
of Ethics.


Sec.  612.2137  Elements of a Standards of Conduct Program.

    The System institution board is ultimately responsible for the 
implementation and oversight of, and compliance with, the Standards of 
Conduct Program. Each System institution board of directors must:
    (a) Establish a Standards of Conduct Program that sets forth the 
core principles in Sec.  612.2136 and provide adequate resources for 
its implementation.
    (b) Appoint a Standards of Conduct Official. Provide the Standards 
of Conduct Official:
    (1) Authority to carry out responsibilities set forth in this 
subpart A; and
    (2) Direct access to the System institution board of directors or 
designated board committee on standards of conduct matters.
    (c) Adopt a written Code of Ethics that establishes the System 
institution's values and expectations for the ethical conduct of 
directors and employees. Include standards for appropriate professional 
conduct at the workplace and in matters related to employment. Post the 
Code of Ethics on the institution's external website with access for 
the public.
    (d) Establish policies and procedures to:
    (1) Institute requirements for directors and employees to comply 
with the Standards of Conduct Program, including at a minimum, annual 
and interim reporting of:
    (i) Actual or apparent conflicts of interest;
    (ii) Transactions not in the ordinary course of business;
    (iii) Names of family members;
    (iv) Reportable business entities; and
    (v) Gifts under paragraph (d)(6) of this section.
    (2) Address how conflicts will be resolved, and provide action(s) 
to be taken when a conflict cannot be resolved to the satisfaction of 
the System institution;
    (3) Address third-party relationships. Include policies and 
procedures to:
    (i) Require agents to disclose conflicts of interest and act in a 
manner consistent with the ethical standards of the System institution; 
and
    (ii) Notify agents, consultants and other third parties who 
represent the

[[Page 27931]]

institution, or who provide expert or professional services to the 
System institution that their engagement is conditioned upon their 
agreement to avoid misconduct and conflicts of interest;
    (4) Enforce and monitor the System institution's Standards of 
Conduct Program. Take appropriate action against any director or 
employee who violates the standards of conduct rules, Code of Ethics or 
the regulations under this subpart A;
    (5) Apply and enforce the prohibited conduct rules set forth in 
Sec.  612.2139 and any other Farm Credit Administration rules in this 
subpart A; and
    (6) Set forth rules prohibiting gifts. If the System institution 
allows directors and employees to accept de minimis gifts, establish a 
de minimis threshold dollar amount per gift and an aggregate amount per 
year consistent with applicable laws. Establish rules for disposing of 
impermissible gifts.
    (e) Provide for Standards of Conduct Program internal controls to 
include at a minimum, a process to:
    (1) Maintain conflicts of interest and other reports required under 
this subpart A, including paragraph (d)(1) of this section, along with 
any investigations, determinations and supporting documentation, for a 
minimum of 6 years.
    (2) Protect against unauthorized disclosure of confidential 
information maintained by the institution, pursuant to this subpart A.
    (3) Report anonymously known or suspected violations of the 
institution's Standards of Conduct Program and Code of Ethics, through 
a hotline or other reporting procedure.
    (4) Periodically review the Standards of Conduct Program to ensure 
continued adequacy and consistency with changes in institution 
practices, financial banking industry best practices and Farm Credit 
Administration regulations.
    (5) Perform internal audits of the Standards of Conduct Program to:
    (i) Review the effectiveness of advancing the core principles,
    (ii) Identify weaknesses;
    (iii) Recommend and report necessary corrective actions directly to 
the institution's board or designated board committee; and
    (iv) Cover the entire Standards of Conduct Program across the 
System institution and include all activities conducted through a 
System institution unincorporated business entity (UBE), including UBEs 
organized for the express purpose of investing in a Rural Business 
Investment Company pursuant to Sec.  611.1150(b) of this chapter. The 
System institution must determine and document the scope and depth of 
the audit.
    (f) Establish periodic standards of conduct training required under 
Sec.  612.2170(c) at least annually.


Sec.  612.2138  Conflicts of interest, reporting of financial 
interests.

    (a) If you are a director or employee of a System institution you 
must, to the best of your knowledge and belief:
    (1) Identify conflicts of interest and potential conflicts of 
interest;
    (2) Report conflicts of interest and potential conflicts of 
interest in any matters, transactions or activities pending at the 
System institution to the Standards of Conduct Official; and
    (3) Cooperate with and provide information requested by the 
Standards of Conduct Official to resolve conflicts of interest and 
potential conflicts of interest.
    (b) If you are a director or employee of a System institution and 
you have a conflict of interest in a matter, transaction or activity 
subject to official action, or before the board of directors then you 
must, to the best of your knowledge:
    (1) Disclose relevant information including:
    (i) The existence, nature, and extent of your interest; and
    (ii) The facts known to you as to the matter, transaction or 
activity under consideration;
    (2) Refrain from participating in the official action or board 
discussion of the matter, transaction or activity; and
    (3) Not vote on, or influence the vote on, the matter, transaction 
or activity.
    (c) If you are a director or employee, at least annually and at 
such other times as may be required by your institution policies and 
procedures, you must report to the Standards of Conduct Official, in 
sufficient detail for a reasonable person to make a conflict of 
interest determination, the following information to the best of your 
knowledge or belief:
    (1) Any interest you have in any business matter to be considered 
by the System institution;
    (2) The names of your family members who have transacted or are 
currently transacting, business with the System institution;
    (3) All material financial interests with any director, employee, 
agent, borrower or business affiliate of your System institution, or 
supervised or supervising institution;
    (4) Any matter you are required to disclose under Sec.  620.6(f) of 
this chapter;
    (5) The names of entities that are reportable business entities to 
you; and
    (6) The name of any person residing in your home if, you know or 
have reason to know, such person transacts business with your System 
institution, or any institution supervised by the System institution.


Sec.  612.2139  Prohibited conduct.

    (a) If you are a System institution director or employee you must 
not:
    (1) Act inconsistently with the core principles. You must follow 
the core principles set forth in Sec.  612.2136.
    (2) Use your position for personal gain or advantage. Do not 
participate in deliberations on, or the determination of, any matter 
affecting your financial interest. Matters affecting your financial 
interest include financial interests of a family member, a person 
residing in your home, or a reportable business entity. You may 
participate in matters of general applicability affecting shareholders/
borrowers of a particular class in a nondiscriminatory way.
    (3) Divulge confidential information. Do not make use of any fact, 
information or document not generally available to the public that you 
acquired by virtue of your position. You may use confidential 
information in the performance of your official duties.
    (4) Accept gifts. Do not solicit, obtain, or accept, directly or 
indirectly, any gift, fee or other compensation that could be viewed as 
offered to influence your decision-making, or official action, or to 
obtain information.
    (5) Purchase property owned by the institution. Do not knowingly 
purchase or otherwise acquire, directly or indirectly except through 
inheritance, any interest (including mineral interests) in any real or 
personal property that currently is owned, or within the past 12 months 
was owned, by your employing or supervising institution, or any 
supervised institution as a result of foreclosure, deed in lieu, or 
similar action. Exceptions: As a director, in addition to the 
inheritance exception, you may purchase such property if you:
    (i) Purchase the property through public auction or similar open, 
competitive bidding process;
    (ii) Did not participate in the decision to foreclose or dispose of 
the property, including setting the sale terms; and
    (iii) Have not received information as a result of your position 
that could give you an advantage over other potential bidders or 
purchasers of the property.
    (6) Enter into loan transactions with prohibited sources. Do not 
directly or indirectly borrow from, lend to, or become financially 
obligated with or on behalf of a director, employee, or agent of your 
employing or supervising

[[Page 27932]]

institution, supervised institution, or a borrower or loan applicant of 
the employing institution. Exceptions: You may enter into transactions 
with family members and transactions in the ordinary course of business 
as determined and documented by the written policies and procedures of 
your institution.
    (7) Purchase System obligations.
    (i) Do not purchase any obligation of a System institution, 
including any joint, consolidated or System-wide obligation, unless 
such obligation is part of an offering available to the public; and 
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.
    (ii) Do not purchase or retire any stock in advance of the release 
of material non-public information concerning the institution to other 
stockholders;
    (iii) If you are a director or employee of the Federal Farm Credit 
Banks Funding Corporation, do not purchase or otherwise acquire, 
directly or indirectly, except by inheritance, any obligation or equity 
of a System institution, including any joint, consolidated or System-
wide obligations, unless it is a common cooperative equity as defined 
in Sec.  628.2 of this chapter.
    (b) In addition to the prohibitions under paragraph (a) of this 
section, if you are a System institution employee you must not:
    (1) Serve as a director or employee of certain entities. Do not 
serve as a director or employee of an entity that transacts business 
with your institution, another System institution in the district, or 
of any commercial bank, savings and loan or other non-System financial 
institution. For the purpose of this paragraph, ``transacts business'' 
does not include System institution loans to a reportable business 
entity; service on the board of directors of the Federal Agricultural 
Mortgage Corporation; or transactions with non-profit entities; or 
entities in which the System institution has an ownership interest. 
Exceptions: You may serve as a director or employee of an employee 
credit union, and you may serve as an employee of another System 
institution as permitted under paragraph (b)(4) of this section.
    (2) Act as a real estate agent or broker. Do not act as a real 
estate agent or broker, unless you are buying or selling real estate 
for your own use or for a family member or a person living in your 
home.
    (3) Act as an insurance agent or broker. Do not act as an insurance 
agent or broker for the sale and placement of insurance, unless 
authorized by section 4.29 of the Act.
    (4) Serve as a joint employee.
    (i) If you are currently employed as an officer with a System bank, 
you cannot serve as an employee of a supervised association.
    (ii) If you are currently employed with a bank, but not as an 
officer, you may be an officer of a supervised association only if:
    (A) Both boards authorize such service in an extraordinary 
situation;
    (B) The duties and compensation at each institution is delineated 
in the board's approval; and
    (C) Reasonable prior notice is provided to the Farm Credit 
Administration.
    (iii) You may be both a non-officer employee at a System bank and a 
supervised association, if employee expenses are appropriately 
reflected in each institution's financial statements.


Sec. Sec.  612.2140-612.2165   [Reserved]


Sec.  612.2170  Standards of Conduct Official.

    The Standards of Conduct Official must:
    (a) Implement and enforce the institution's Standards of Conduct 
Program.
    (b) Provide guidance and information to directors and employees on 
conflicts of interest.
    (c) Administer periodic, but at a minimum, annual standards of 
conduct training to directors and employees that includes:
    (1) Procedures for the review of and recommendation for any 
revisions to the institution's standards of conduct rules and Code of 
Ethics;
    (2) Procedures for reporting anonymously known or suspected 
violations of standards of conduct, Code of Ethics and unethical 
conduct;
    (3) Rules for prohibited conduct;
    (4) Fiduciary duties;
    (5) Conflicts of interest and apparent conflicts of interest;
    (6) Reporting requirements; and
    (7) New director training within 60 calendar days before the 
beginning of the director's election or term; and new employee training 
within 5 business days of the beginning of employment.
    (d) Help all directors and employees identify conflicts of interest 
and report financial interests in accordance with Sec.  612.2138.
    (e) Make written determinations on how conflicts of interest will 
be resolved consistent with your institution's Standards of Conduct 
Program.
    (f) Document resolved and unresolved conflicts of interest that are 
material or significant. Maintain documentation that explains how 
conflicts are being handled.
    (g) Report to your institution's board of directors or designated 
board committee:
    (1) Instances of standards of conduct or Code of Ethics non-
compliance, promptly upon completion of any investigation or 
determination; and
    (2) Administration of the Standards of Conduct Program, 
periodically as determined by the written policies and procedures of 
your institution.


Sec. Sec.  612.2260-612.2270   [Reserved]

    Dated: June 12, 2018.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2018-12874 Filed 6-14-18; 8:45 am]
 BILLING CODE 6705-01-P