June 18, 2014
Mr. Barry F. Mardock
Office of Regulatory Policy
Farm Credit Administration
1501 Farm Credit Drive
McLean, VA 22102-5090
Dear Mr. Mardock:
Thank you for the opportunity to comment on FCA's recent proposed rule regarding Standards of Conduct. Standards of Conduct is important to the integrity of the Farm Credit System and should be carefully considered. The FCA’s proposed rule, however, does far more harm than good and should be withdrawn or substantially revised.
The Board of Directors of Farm Credit Services Southwest has reviewed the proposed regulations and finds that the proposed disclosure requirements in the Conflicts of Interest section are both unrealistic and contain severe unintended consequences. The rule requires immediate reporting of transactions to the Standard of Conduct Officer for review. To assure accurate reporting, the proposed regulations will require each institution to track all commerce between Directors and borrowers. In many cases the Directors do not know they are doing business with a borrower. Directors are not involved in the direct approval process on individual loans and they do not set individual loan terms and conditions between the Association and its borrower/owners. It is our view that the proposed rule is not only overreaching and well beyond what other financial institution regulators require but the unintended consequences are counterproductive to strengthening the system as a whole.
Specifically, local food producers and food hubs by definition trade with other local persons. This proposed regulation includes Director paper work and immediate disclosure so burdensome that it will discourage or eliminate local food producers from being involved with the governance of the institution by serving as Directors.
In addition, this proposed rule could encourage current effective Board members to resign over the added individual paperwork and disclosure burden even though transactions are market value and no wrong doing exists.
A few examples:
A local Director and hay producer sells several tons of hay to a local dairy through the normal course of business. The proposed rule requires immediate reporting of this transaction and review by the Standard of Conduct Official even though the Director does not know that the dairy borrows from the Association. Effectively, this requires the Director to have an ongoing system to track all borrowers of the Association just to avoid a violation of the proposed reporting rule.
A local Director owns a 10% interest in a local equipment dealership which is over the 5% ownership rule in the proposed regulation. This proposed rule requires that each equipment sale be immediately reported to the Standards of Conduct Official if that transaction involves another borrower. The equipment dealership does not know who is a borrower and who is not a borrower. This will likely cause the local Director to choose between being a Director of the Farm Credit Institution and attempting to have the dealer cooperate with the Association on reporting as defined in the proposed rule.
As an alternative, we encourage FCA to take strong enforcement action if they identify any intentional wrongdoing. FCA has this authority.
It is our view that what the Agency terms as “strengthening” Standards of Conduct regulations actually ends up weakening the governance of the Farm Credit System it is dedicated to protect by eliminating many exceptionally qualified Director candidates.
We request and encourage the Farm Credit Administration to withdraw or seriously modify the rule as proposed.
Board of Directors
Farm Credit Services Southwest, ACA
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