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Federal Register / Vol. 86, No. 174 / Monday, September 13, 2021 / Rules and Regulations
cousins a director or employee has reason to know is conducting business with the System.
The final meaning of family has been revised from what was proposed to incorporate most of the comments received. First, reference to significant others has been replaced with a reference to civil union partners.
Second, cousins have not been added to the definition. Next, highly specific relationships are replaced with more gender-neutral terms and accompanying language that those terms apply whether the relationship arises from biological, adoptive, martial, or other legal means.
This action also brings the definition closer to that of immediate family used in 12 CFR part 620 as requested by some commenters. Finally, persons residing in the household or who are legal/financial dependents, regardless of familial relationships, have been added as requested. This change makes the definition similar to the existing Farmer Mac guidance found at 651.22a and harmonizes it with other areas of the law.

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1g. Material No substantive changes to this definition were proposed. However, the FCB of Texas asked that the current definition be retained without change.
The commenter then suggested that if the intent was to expand the definition to include personal interests that the rule clearly state that, adding that a parallel change should be made to the definition of conflict of interest. The term is finalized as proposed. We have not made the suggested changes to the definition as we do not believe they are necessary.
In the preamble to the proposed rule, we discussed that something that is material in one context or geographic area may not be material in a different context or geographical area. We also discussed our expectation that each System institution would develop its own guidelines on that which is material, possibly including a dollar threshold for what would not be material. We continue to believe the System institution board should be accountable for, and involved in approving, these guidelines as required in 612.2137.
1h. Ordinary Course of Business Changes proposed to the definition of ordinary course of business would separate out the existing definition for preferential and define ordinary course of business as:
A transaction that is usual and customary in the business in question on terms that are not preferential, or
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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.
The FCB of Texas and seven others commented on the proposed change to the meaning of ordinary course of business. FCB of Texas asked that we keep the current definition because the proposed changes are confusing and too subjective for consistent application.
The other six commenters asked that we keep the current term since the proposed changes go beyond what is ordinary, potentially causing common business negotiations to be reported to the Standards of Conduct Official SOCO. One commenter asked that we leave the existing term alone, stating it does not need to be changed. Another commenter observed that there is little meaningful difference between the first and second paragraphs of the proposed definition.
This term is being finalized as proposed. We do not find the proposed definition confusing or subjective. The current definition applies to transactions that are usual and customary, as does our proposed definition. The current definition also applies to transactions with a person who is in the business of offering the goods or services that are the subject of the transaction, as does our proposed definition. Additionally, we do not agree with the commenters concerns regarding the first and second paragraphs. The first paragraph applies to a transaction that is usual and customary in a business but is not necessarily with a person in that business. The second applies to a transaction with a person in the business that is the subject of the transaction. In either case, the rule does not allow a director or employee to trade on their position within the System institution to get a special deal or preferential treatment for goods and services.
1i. Preferential In the proposed rule, the definition of preferential currently contained within the definition for ordinary course of business would be a separate term. Only the FCB of Texas commented on the proposed change, suggesting we include a reference to the institutions policies and procedures in the regulatory definition of preferential.
This term is being finalized as proposed.
Although we decline the suggestion to add a reference to institution policies and procedures because we believe the addition would be overly prescriptive, a
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System institution can include a discussion of preferential in its SOC
program policies and procedures for business transactions.
1j. Reportable Business Entity We proposed changing the term controlled entity to reportable business entity, defining it as an entity in which a person owns, controls, or has power to vote a material percentage of the equity. The intent behind this proposed change was to avoid confusion with the term control in the corporate context, and to allow the System institution discretion to determine when an interest in a business entity may present a conflict and therefore should be reported to the institution.
The Council, two FC banks and 15
other commenters remarked on this proposal. The Council, CoBank and one other commenter stated the revisions to this definition do not align clearly with how affiliated organizations is used in 12 CFR part 620. The Council pointed out that the part 620 disclosures for some directors and senior officers are taken directly from standards of conduct reports and it is difficult to understand how the two sets of regulations will work together with the new term reportable entity only used in one of the rules. The Council asked for the two rules to be reconciled or that FCA
otherwise state if the proposed change in part 612 means a separate process for part 620 disclosures is now expected.
FCB of Texas said the proposed definition is an improvement over controlled entity but disagrees with replacing the 5% ownership threshold with the less specific material percentage language. The FCB of Texas also remarked that it was unreasonable to ask an institutions board to set a dollar threshold for materiality in different situations, instead suggesting we keep the specific ownership threshold but raise it 25%. The same commenter also suggested changing language on the power to exercise material influence to controlling influence. In the alternative, the commenter recommended replacing the definition entirely with that used to define affiliated organization in 620.1. CoBank supported removing the 5% ownership language. Fourteen commenters stated support for the term reportable business entity but would like it used with the existing definition of controlling entity because it reflects numerical ownership of an entity, which does not always mean control of that entity.
We appreciate that it would be easier to comply with this provision if we simply used a bright line percentage
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