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Federal Register / Vol. 86, No. 174 / Monday, September 13, 2021 / Rules and Regulations threshold. However, as mentioned previously, our intent in this rulemaking is to provide performance criteria using a principles-based approach. The final definition provides flexibility based on each institutions definition and support for what it considers material without setting specific percentages or dollar amounts.
As we explained in the proposed rule preamble, we avoid using specific measurements to allow a System institution discretion to determine what constitutes a conflict of interest.
Commenters also asked that we use the definition of affiliated organization in 620.1a.11 However, the reporting requirements of the Standards of Conduct regulations have a purpose that is more expansive than that used for making annual disclosures to shareholders and requires consideration of more than affiliated organizations as that term is defined in part 620. The Standards of Conduct use of reportable business entity serves to put the System institution on notice that a director or employee with an interest in a business entity that is significant enough that the interest may give rise to a conflict, or an appearance of a conflict, with that directors or employees responsibilities to the System institution under certain circumstances requires reporting to the institution.
The final rule modifies the proposed definition of reportable business entity by adding to the third and last listed item, the phrase . . . from his or her status as a partner, director, officer, or majority shareholder in the entity.
This addition comes from 12 CFR 620.1
and is made in response to comments asking us to reconcile the term with that of affiliated organization in part 620.
We also point out that if a System institution is concerned about picking up all 620.1a affiliated organizations in its standards of conduct disclosures, it can provide, through its own policies and procedures, that all 620.1a affiliated organizations be treated as reportable business entities when making conflicts of interest reports.

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1k. Resolved We proposed adding a new term resolved. One commenter remarked on this proposal, asking that we remove the term since not all conflicts are resolved. The commenter instead suggested leaving it to each institution 11 The term affiliated organization is defined in 12 CFR 620.1 as Any organization, other than a Farm Credit organization, of which a director, senior officer or nominee for director of the reporting institution is a partner, director, officer, or majority shareholder. The term as defined only applies to 12 CFR part 620.

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to identify how conflicts are addressed.
This term is being finalized as proposed as we believe it is important that there be a common understanding and application of the term. We agree that each institution should identify how conflicts are to be addressed and allow the institution that opportunity in its policies and procedures. The rule requires the institution to address the process by which real and apparent conflicts will be resolved and explain actions to be taken when a conflict cannot be resolved to the satisfaction of the institution in its policies and procedures as part of its standards of conduct program.
1l. Standards of Conduct Official or SOCO
Changes proposed to the definition of a Standards of Conduct Official SOCO
would have required the SOCO to be an employee of the System institution and have the authority to report to the institution board of directors or designated board committee on standards of conduct matters. The Council, one FC bank, and 37
individuals from several associations commented upon this proposal. The Council and several other commenters specifically disagreed with limiting the SOCO to an employee of the institution while supporting the SOCO having direct access to the institutions board of directors. The Council asked that if the proposed limitation is finalized, FCA
make clear the SOCOs employment reporting relationship is within the organizational structure, not a direct supervisory relationship with the board.
One commenter suggested defining the SOCO as either an employee or agent of the institution with direct access to the institutions board of directors.
FCB of Texas and some other commenters strongly disagreed with limiting the SOCO to employees of an institution explaining there is validity in using someone from the outside, especially for smaller associations. One commenter stated it saw the benefit of limiting the position to employees and another saw value in multiple SOCOs.
Both said there should be flexibility to outsource. Other commenters expressed strong belief in allowing each institution to decide who should serve as the SOCO. These same commenters explained the value of outside sources for the SOCO, stating there is greater confidentiality and file protection.
In response to commenters, the final rule incorporates commenter suggestions but in a manner that preserves the policy objectives behind the proposed rule. Some of the suggested changes are reflected in the
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definition of SOCO and others are captured in the rule sections on SOC
program elements and the SOCO duties and responsibilities, both discussed later in this preamble. In the definition section of the final rule, and in response to comments, the SOCO is defined as a person appointed by the institutions board of directors to administer and report on the standards of conduct program, as well as investigate allegations of misconduct. We clarify in this preamble that the Standards of Conduct Official must be in a position to be independent and impartial in order to discharge his or her duties but does not have to be an employee. We also agree with comments that the institution is in the best position to know its needs and resources, including the person who would best satisfy the SOCO role in light of those needs and the program in place, whether such person is employed by the institution or is an outside resource.
1m. Standards of Conduct Program As proposed, the Standards of Conduct Program would be defined to mean the policies and procedures, internal controls, and other actions a System institution must put into practice to meet the requirements of this rule. Only the FCB of Texas commented on this term, suggesting that the definition include specific guidelines and comprehensive rules. The definition explains that the Standards of Conduct Program includes the policies and procedures, internal controls, audit, training, and other activities that promote ethical behavior. Therefore, we are not making the suggested change, preferring to keep the principals-based approach of the rule. Further, as was explained in the proposed rule, we reiterate that the Standards of Conduct Program is the totality of the policies, procedures, internal controls, audit, training, and other activities used to promote ethical behavior at a System institution.
2. Standards of ConductCore Principles. 612.2135
We proposed substantially revising current rule 612.2135 to set forth the core principles we believe are essential to fostering an ethical culture within the System. We also proposed certain basic minimum requirements for compliance as well as requiring cooperation between employees, directors, and the SOCO. We received 23 comment letters on this section, including one from the Council and two FC banks. Most of these same commenters asked us to retain the existing rule instead of what was proposed, stating the proposed
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