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Federal Register / Vol. 86, No. 174 / Monday, September 13, 2021 / Rules and Regulations
4a. Disclosing Conflicts of Interest.
612.2145a As proposed, directors and employees would be required 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. We also proposed that a director or employee with a conflict in a matter subject to official action refrain from participating in the official action i.e., recusal. FCB
of Texas and one other commenter remarked that provisions on cooperating was redundant with requirements to report conflicts and suggested consolidating them within paragraph a, leaving recusal issues in paragraph b. One commenter expressed appreciation for adding rule text on recusals, calling it an improvement over the existing regulation.
The final rule consolidates into paragraph a the proposed paragraphs discussing identification and reporting conflicts of interest. To further group the responsibilities into paragraph a, the proposed contents of paragraph b are consolidated and renumbered as a1. As suggested by a commenter, language on recusals is now in new paragraph a1. In the process of consolidating these provisions, some language was revised for readability and to remove redundancy. Also, a new paragraph a2 is added as a conforming change with retaining existing language regarding reporting illegal or unethical behavior, which is further discussed in this preamble at III.B.6-d. The contents of paragraph a2 resemble the core principles in 612.2135b3.

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i Scope of Transactions Disclosed CoBank and several others asked that the requirement to report any matter be limited to transactions outside the ordinary course of business. The commenters also asked to limit entity reporting to material business transactions with the System.
Commenters explained that normal business interactions should not trigger a report as operating as a cooperative, many System directors are farmers and conduct farm business in the same communities as their institutions borrowers. The final rule replaces the proposed language on reporting any matter, transactions or activities pending at the System institution with language explaining that identification, disclosure and reporting on conflicts means any interest or circumstance that does or could constitute a conflict
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or potential conflict. The final rule has a related requirement for directors and employees to disclose actual conflicts with a matter, transaction or activity subject to official action by the institution. We think that it is more important to both disclose the conflict of interest and refrain from participating in any action or board discussion of the matter rather than prescribe what must be in the disclosure. As was proposed, the final rule at 612.2145a1 requires directors and employees to refrain from participating in official actions at the institution that are related to the matter disclosed. In keeping with the principals-based approach, we have not finalized the proposed language detailing what the disclosure must contain. Additionally, System institutions should understand that identifying conflicts uses a reasonable persons perspective in a manner that gives full consideration to the cooperative structure of the System, and institutions may build their SOC
program policies and procedures accordingly.
ii Identifying Conflicts of Interest As proposed, directors and employees would identify, report, and cooperate with the SOCO to resolve conflicts of interest. Commenters asked that a director or employee not be required to identify conflicts of interest when functionally it is the SOCO who has the obligation to determine whether there is a conflict. We view the process of reporting conflicts of interest as a collaborative one between the director or employee making the report and the SOCO. We have made clarifying changes to better reflect that process.
We have revised the wording in final rule 612.2145a to provide that the director or employee must identify, disclose, and report any interest or circumstance that does or could be a conflict of interest. The rule at 612.2170b1 lists helping institution personnel identify conflicts as a SOCO
responsibility. Next, the rule at 612.2145a requires directors and employees to cooperate with the SOCO
in identifying if a conflict is material or not. The rule elaborates in 612.2145b that this includes providing enough information to the SOCO for a reasonable person to make a materiality determination. Elsewhere we explain that the SOCO will use the institutions SOC program policies and procedures to determine materiality.
Further guidance on any interest or circumstance that might give rise to a conflict of interest must be provided in the System institutions policies and
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procedures as discussed earlier in III.B.3-c of this preamble.
The Council and a few other commenters specifically asked that directors be excused from detailed reporting as they are no longer involved in loan approvals. We decline the request. Directors of System institutions have ultimate responsibility for all that occurs at the institution and are directly involved in hiring the CEO. Directors also play a role in credit decisions when setting institution lending policies and through service on the institutions credit review committee.
4b. Reporting Conflicts of Interest.
612.2145b As proposed, annual reporting of interests in business matters, names of family members, material financial interests, reportable business entities, and persons residing in the home would be required. The Council and most associations or persons and entities affiliated with associations objected to the language on reporting the names of family and reportable business entities, stating it is too broad and inconsistent with 12 CFR 620.6e and f. The Council and 20 other commenters recommended keeping existing regulations in this area and explaining how these reports interact with the part 620 annual reporting requirements on conflicts of interest for directors and senior officers. CoBank and a few other commenters likewise objected to reporting requirements on entities, asking to limit it to those with current year transactions. Eleven of these also asked that the provision be reconciled with how affiliated organizations are reported in part 620.
The reporting requirements of 612.2145b were revised in response to comments received. Some changes were made to general areas of 612.2145, but most were specific to certain subject matters and we discuss those in the subsections below.
Additionally, existing language from current 612.2145b and 612.2155b was inadvertently omitted from the proposed rule. The final rule restores:
The language requiring directors and employees to file conflicts of interest reports with the SOCO that contain the disclosures required by this section and the institutions SOC
program policies and procedures;
The current provisions of 612.2145b2 and 612.2155b2
regarding the scope of reporting for reportable business entities; and The current provisions of 612.2145b1 and 612.2155b1
regarding the scope of reporting for family.

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