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Federal Register / Vol. 86, No. 174 / Monday, September 13, 2021 / Rules and Regulations specific parameters for what would constitute a material financial interest and what activities and transactions would present real or potential conflicts, including those in the ordinary course of business.14 Some commenters were concerned that we did not clearly set forth this expectation in the rule. In response to comments, we are revising the final rule at 612.2137d to clearly require that every System institution have policies and procedures to help directors and employees identify interests and circumstances that could lead to a conflict of interest, including identifying transactions posing real or apparent conflicts of interest, explaining what would constitute a material financial interest, and establishing how transactions occurring in the ordinary course of business are identified. The board must give due consideration to the potential adverse impact of any activities identified as not presenting conflicts. We decline the request to give the SOCO specific authority to exclude non-material transactions. The authority and requirement to define what constitutes a material transaction lies with the board of directors. The SOCO
implements these policies as required under 612.2170.
FCB of Texas asked that we move all reporting details to the proposed disclosure section. We believe the final rule achieves this by consolidating all reporting requirements in 612.2145, which correspond with the policy requirements in 612.2137d. However, discussion of reporting content and how reports are made is still a part of 612.2137 as each institutions board of director must address these issues in their SOC program policies and procedures.

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ii Identifying Reportable Business Entities and Family Proposed 612.2137d1iii and iv would require System institutions to establish policies and procedures for disclosing conflicts arising from family and business entities. We received several comments on this proposal and address them in III.B.4 of this preamble discussion of provisions on the reporting of conflicts.
iii Standards of Conduct Policies and Procedures for Resolving Conflicts of Interest. 612.2137d3
We proposed that an institutions policies and procedures address how reported conflicts of interest will be resolved. We received no substantive comments on this area, but there were 14 83

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related comments asking us to clarify the role of the SOCO in the resolution process. We finalize the rule in this area substantially as proposed but make some changes to improve readability and clarity. We also add language clarifying that the policies and procedures must explain the process for how conflicts will be resolved and the role of the SOCO in resolving conflicts.
This clarification is made in response to comments on the issue and is in keeping with our principals-based approach to the rule.
iv Standards of Conduct Policies and Procedures for Agents and Other ThirdParties. 612.2137d4
As proposed, System institutions would establish policies and procedures to address third-party relationships, including disclosing known conflicts.
Several commenters questioned the ability to get agents to cooperate in reporting the required information and whether all System personnel know all the institutions agents. Some specifically suggested keeping the current requirements of 612.2260
saying it is clear and understandable.
The Council asked how the phrase third-party relationships differed from the proposed definition of agent.
The Council, CoBank and several others suggested that those parties not covered as agents be handled by the institutions vendor management policies. The Council and nineteen other commenters also asked that service providers covered by professional conduct and ethics standards be exempted from compliance with an institutions standards of conduct or be treated as satisfying those requirements if in compliance with their own professional and ethical standards.
CoBank and some others asked that existing agent contracts be grandfathered in to avoid costly renegotiations. A few commenters asked that we allow institutions to follow reasonable policies on agents. Four commenters remarked on preamble language discussing conditioning an agents appointment on the misconduct rules, stating that is an overreach and inconsistent with rule text. Another comment stated vendors cannot be expected to know the institutions SOC
program and asked us to remove the requirement. Still others asked that we add a knowledge element to the reporting requirement for agents. One commenter pointed out that most agents do not have direct knowledge of the institutions borrowers so would be unable to accurately report any potential conflicts of interest. Seventeen commenters said the requirement was
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unnecessary as contract language to engage an agent already has behavior clauses.
In response to comments asking to keep the current rules on agents in 12
CFR 612.2260, the final rule does not implement the proposed removal of that section. However, the existing provision is renumbered as 612.2180. A full discussion of this retained section is contained later in this preamble at III.B.7. In connection with making this requested change, the final rule replaces proposed language with language requiring an institutions board of directors to adopt conflict of interest polices for third party relationships including agents. And, following the comments regarding use of contracts, the final rule requires each board to apply ethical safeguards in contracts with third parties, including agents. The final rule also implements commenter suggestions by adding a knowledge requirement of conflicts disclosed by agents and other third-parties. At a minimum, board policies address its expectations for agents and other thirdparty service providers to disclose known conflicts to the institution. By definition, an agent is someone who has the power to act for the institution either by contract or apparent authority;
therefore, it is important that agents and other third-parties maintain the same high ethical standards as directors and employees. We consider not finalizing the proposed third-party reporting provision, along with keeping existing rule text on conflict of interest reporting by agents, as satisfying all other comments asking for changes to that requirement.
Some commenters objected to the suggestion in the proposed rule preamble that a System institution should require agents to acknowledge a System institutions Code of Ethics by signing it. This is not a requirement in the rule, although a System institution could consider imposing this requirement on their own in future agency relationships.
v Policies and Procedures on Gifts.
612.2137d5
As proposed, System institutions would be required to establish policies and procedures prohibiting gifts but could have rules in place to allow directors and employees to accept de minimis gifts. The Council and three others asked that a gift exception be made for transactions that would not otherwise be reported, such as giveaways of token items, explaining the de minimis language is unclear on this point. AgFirst FCB and seventeen other commenters asked the gift exceptions
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