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Federal Register / Vol. 86, No. 174 / Monday, September 13, 2021 / Rules and Regulations both direct and indirect effect on financial interests. The final rule also retains a sentence from the existing rule that was inadvertently omitted in the proposed rule. That sentence prohibits directors and employees from using their positions to obtain special advantages for themselves, their families and their reportable business entities.

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5b. Accepting Prohibited Gifts.
612.2150a3
The proposed language on gifts 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 decisionmaking, or official action or to obtain information. The final rule makes minor changes to reconcile the provision with the final language on the elements of a SOC program, located in 612.2137, discussing an institutions role in setting SOC program policies and procedures for gifts, including limiting the blanket gift prohibition to gifts offered because a person serves as a director or employee of a System institution.
5c. Acquired Property.
612.2150a4
We proposed keeping the current prohibitions against directors and employees knowingly purchasing or otherwise acquiring any interest in real or personal property owned by his or her System institution within the past 12 months. FCB of Texas asked for an exception to the 12-month provision when a third party purchases the property from the institution and then sells it by competitive bid within 1 year.
The Council and CoBank asked if the provision applied to inventory property held by a UBE, as was mentioned in the proposed rule preamble but not regulatory text. Many commenters offered the general observation that items were put in the proposed preamble that should be contained in rule text. In some instances, we have agreed with commenter requests and in others we have not.
We stated in the preamble to the proposed rule that the prohibition on acquired property would apply to collateral acquired by a System institution, including collateral acquired directly or through an acquired property UBE. As requested by commenters, the final rule text specifically references property held or sold by a UBE or a 4.25
service corporation. In one of our preamble explanations for this section, we said that the acquired property prohibition does not affect a directors right of first refusal to inventory property under 12 U.S.C. 2219a.

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Commenters asked that this be included in the rule text and the final rule adds that exception. As finalized, this paragraph sets forth all the exceptions on acquiring institution property in subparagraph form: i By inheritance, ii through the right of first refusal, and iii when property is sold by public auction. We caution that although we do not directly include agents in the acquired property prohibition, System institutions should be aware of agent conflicts and not allow an agent to purchase acquired property if he or she has non-public information e.g., property type, location, condition of such property that would give him or her an unfair advantage over other interested parties.
One commenter questioned why employees were included in the prohibition. The current rule does not exempt employees from this prohibition and we did not propose to change that.
Unlike directors, institution employees are heavily involved in the acquisition and sale of acquired properties and thus present real possibility for actual conflicts of interest. To minimize the potential for misconduct and the burden of institutions augmenting their internal controls and monitoring systems, we believe that it is in the best interest of the System to keep employees covered by the prohibition.
5d. Transactions With Prohibited Sources. 612.2150a5
We proposed keeping the current limitations on directors and employees entering into lending relationships with individuals who may have a financial relationship with a System institution, with certain exceptions. The FCB of Texas and one other commenter expressed concern that the proposed rule does not keep the existing exception for transactions with any person residing in the directors or employees household. The final rule retains the existing exemption for family and given the final rule also changes the definition of family to now include persons residing in the household, we believe the final rule addresses this comment. These same two commenters questioned the absence of the existing exception for non-material transactions.
These comments are directed at the current provision allowing the SOCO to determine an otherwise prohibited transaction as permissible because it does not involve a material amount of money and the director or employee does not participate in the other partys business with the institution. We did not propose to keep this exemption based on other changes to the subpart and are not otherwise persuaded by the
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comments to now do so. We point out that the final rule retains the prohibited transaction exception for ordinary course of business transactions.
However, the extent to which these transactions will be allowed is for each institution to address as part of the SOC
program policies and procedures.
The final rule makes minor changes to improve the readability of the provision, including breaking the main sentence into two. This action separates the language prohibiting financial transactions with the institution from those with a borrower of the institution.
No change in the meaning is intended by this. Also, as mentioned earlier, the exceptions to this prohibition are set forth in subparagraph form. In making this modification, we identified that an existing exception to the prohibition on financial transactions was inadvertently omitted. The final rule restores the exception for official transactions connected with the institutions relationships with Other Financing Institutions.
5e. System Obligations.
612.2150a6
We proposed keeping the current limitations on directors and employees purchasing System obligations. The Council, CoBank, and one other commenter asked that the prohibition exclude those obligations held in a mutual fund or other account where an individual investor is not involved in selecting the securities comprising the mutual fund. The commenters do not elaborate on if the mutual funds would be publicly available or private funds.
We understand the concern surrounding mutual funds. At this time, we are not making the requested change.
Because of the complicated nature of this request, we will review this issue and possibly include it in another rule making action. We remind the commenters that the rule does not prevent most System directors and employees 16 from purchasing those System obligations that are part of a public offering when bought from members of the Funding Corporation selling group 17 or in the secondary market.
16 This exception in the rule does not extend to directors and employees of the Funding Corporation.
17 The Funding Corporation works with a selling group of approximately 30 investment and dealer banks that provide distribution, trading and underwriting capabilities for Farm Credit debt securities.

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