Interpretation, Exemptions and Waiver Guidance Concerning 18 U.S.C. 208 (Acts Affecting a Personal Financial Interest)
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Part II
Office of Government Ethics
_______________________________________________________________________
5 CFR Part 2640
Interpretation, Exemptions and Waiver Guidance Concerning Acts
Affecting a Personal Financial Interest; Proposed Rule
Proposed Rules
OFFICE OF GOVERNMENT ETHICS
5 CFR Part 2640
RIN 3209-AA09
Interpretation, Exemptions and Waiver Guidance Concerning 18
U.S.C. 208 (Acts Affecting a Personal Financial Interest)
AGENCY: Office of Government Ethics (OGE).
ACTION: Proposed rule.
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SUMMARY: The Office of Government Ethics is issuing a proposed
regulation describing circumstances under which the prohibitions
contained in 18 U.S.C. 208(a) would be waived. Section 208(a) prohibits
employees of the executive branch from participating in an official
capacity in particular matters in which they, or certain persons or
entities with whom they have specified relationships, have a financial
interest. Section 208(b) of title 18 permits waivers of these
prohibitions in certain cases. Section 208(b)(1) permits agencies to
exempt employees on a case-by-case basis from the disqualification
provisions of section 208(a). Similarly, section 208(b)(3) permits
agencies to waive, in certain cases, the disqualification requirement
that would apply to special Government employees serving on a Federal
advisory committee. Finally, under section 208(b)(2), the Office of
Government Ethics has the authority to promulgate executive branchwide
regulations describing financial interests that are too remote or
inconsequential to warrant disqualification pursuant to section 208(a).
This proposed regulation describes those financial interests. It also
proposes to provide guidance to agencies on the factors to consider
when issuing individual waivers under section 208(b)(1) or (b)(3).
DATES: Comments by agencies and the public are invited and are due by
November 13, 1995.
rests that are too remote or
inconsequential to warrant disqualification pursuant to section 208(a).
This proposed regulation describes those financial interests. It also
proposes to provide guidance to agencies on the factors to consider
when issuing individual waivers under section 208(b)(1) or (b)(3).
DATES: Comments by agencies and the public are invited and are due by
November 13, 1995.
ADDRESSES: Office of Government Ethics, suite 500, 1201 New York
Avenue, NW., Washington, DC 20005-3917. Attention: Ms. Glynn.
FOR FURTHER INFORMATION CONTACT: Marilyn Glynn, Office of Government
Ethics, telephone 202-523-5757, FAX 202-523-6325.
SUPPLEMENTARY INFORMATION: Section 208 of title 18 of the United States
Code was enacted in 1962 as part of a general revision of the criminal
statutes dealing with bribery, graft, and conflicts of interest. It was
the successor to 18 U.S.C. 434, a statute enacted in the Civil War era,
which prohibited a Government employee from transacting business for
the Government with any business entity in which the employee held a
financial interest. Since it became effective in 1963, 18 U.S.C. 208(a)
has prohibited an employee of the executive branch from participating
in an official capacity in any particular matter in which, to his
knowledge, he or other specified persons or organizations, has a
financial interest. As originally enacted, section 208(b) provided for
certain exceptions to the disqualification mandated by section 208(a).
Under 18 U.S.C. 208(b)(1), in individual cases a determination could be
made by the official responsible for the employee's appointment that
the employee could act in matters in which he or other specified
individuals or entities had a financial interest because the interest
was not so substantial as to be deemed likely to affect the integrity
of the employee's services to the Government. Under 18 U.S.C
S.C. 208(b)(1), in individual cases a determination could be
made by the official responsible for the employee's appointment that
the employee could act in matters in which he or other specified
individuals or entities had a financial interest because the interest
was not so substantial as to be deemed likely to affect the integrity
of the employee's services to the Government. Under 18 U.S.C.
208(b)(2), each agency had the authority to determine, by regulation,
that certain financial interests were too remote or too inconsequential
to affect the integrity of the services of that agency's employees.
These regulatory ``waivers'' permitted all employees of the particular
agency to act in Government matters in which their only financial
interest was one of the type specified in the regulation.
The Ethics Reform Act of 1989 (Pub. L. No. 101-94), as amended,
(``the Act''), amended 18 U.S.C. 208 to eliminate the authority of
individual agencies to adopt agencywide exemptions from the
applicability of section 208(a). Instead, section 208(d)(2) directs the
Office of Government Ethics, after consultation with the Attorney
General, to adopt uniform regulations exempting financial interests
from the applicability of section 208(a) for all or a portion of the
executive branch if OGE determines that such interests are either too
remote or too inconsequential to affect an employee's services to the
Government. The Office of Government Ethics has consulted with the
Office of Personnel Management and the Department of Justice, and
pursuant to section 201(c) of Executive Order 12674, as modified by
E.O. 12731, has obtained the concurrence of the Justice Department.
The Office of Government Ethics is separately publishing in the
Federal Register an interim regulation, effective upon publication,
establishing a single exemption under 18 U.S.C. 208(b)(2) for
disqualifying financial interests that arise from Federal Government
salary and benefits or from Social Security or veterans' benefits
.O. 12731, has obtained the concurrence of the Justice Department.
The Office of Government Ethics is separately publishing in the
Federal Register an interim regulation, effective upon publication,
establishing a single exemption under 18 U.S.C. 208(b)(2) for
disqualifying financial interests that arise from Federal Government
salary and benefits or from Social Security or veterans' benefits. That
exemption is being issued for codification on interim basis at
Sec. 2640.101 of 5 CFR. However, when this proposed overall section 208
regulation is ultimately issued as a final regulation, the exemption
for certain Federal Government employment-related financial interests
will be moved and placed with the miscellaneous exemptions described in
Sec. 2640.203. Therefore, the exemption being established in the
separate interim regulation is also being republished as part of this
proposed regulation for eventual codification at 5 CFR 2640.203(d).
Section 2640.101 of this proposed regulation sets forth a general
discussion of the purpose of the overall regulation.
Although individual agencies no longer have the authority to issue
agency-specific general exemptions, previously issued agency regulatory
``waivers'' continue to apply until this proposed regulation is adopted
as a final rule and becomes effective. When effective, this rule will
supersede all agency regulatory waivers issued under 18 U.S.C.
208(b)(2) as in effect prior to November 30, 1989. See 5 CFR
2635.402(d)(2). As proposed, this regulation would protect employees
who acted in reliance on such ``waivers'' issued by agencies prior to
the effective date of the final regulation. Employees who acted in
reliance on such an agency regulatory waiver in effect prior to the
effective date of the final version of this regulation would be deemed
to have acted in accordance with applicable authority
5.402(d)(2). As proposed, this regulation would protect employees
who acted in reliance on such ``waivers'' issued by agencies prior to
the effective date of the final regulation. Employees who acted in
reliance on such an agency regulatory waiver in effect prior to the
effective date of the final version of this regulation would be deemed
to have acted in accordance with applicable authority.
This proposed regulation describes those holdings or relationships
that give rise to financial interests that OGE has determined are
either too remote or too inconsequential in value to be likely to
affect an employee's consideration of any particular matter. Employees
who have these disqualifying financial interests would be permitted, to
the extent described in the regulation, to participate in matters
affecting such interests notwithstanding the general prohibition in
section 208(a).
Section 208, as amended, still authorizes agencies to issue
individual waivers to employees on a case-by-case basis under section
208(b)(1). The determinations required by section 208 for issuance of
an individual waiver are unchanged from previous statutory
requirements. Section 208(b)(1) provides that an individual waiver may
be issued if the official responsible for the officer's or employee's
appointment determines that the interest in the matter ``is not so
substantial as to be deemed likely to affect the integrity of the
services which the Government may expect from such officer or
employee.'' This proposed regulation provides guidance to agencies in
making such determinations by listing factors
l waiver may
be issued if the official responsible for the officer's or employee's
appointment determines that the interest in the matter ``is not so
substantial as to be deemed likely to affect the integrity of the
services which the Government may expect from such officer or
employee.'' This proposed regulation provides guidance to agencies in
making such determinations by listing factors
agencies should consider before granting a waiver.
In addition, section 208, as amended, gives agencies specific
authority concerning disqualifying financial interests held by special
Government employees serving on, or being considered for appointment
to, advisory committees within the meaning of the Federal Advisory
Committee Act, 5 U.S.C. app. After reviewing the financial disclosure
statement required by the Ethics in Government Act of 1978 to be filed
by such an individual, the official responsible for the employee's
appointment can ``waive'' the individual's disqualifying financial
interest by certifying that the need for the individual's services on
the advisory committee outweighs the potential for a conflict of
interest created by the financial interest involved. This proposed
regulation would describe the factors an agency is to consider in
determining whether a waiver should be granted under section 208(b)(3).
Since section 208 became effective in 1963, agency ethics officials
have often used the term ``waiver'' to describe exceptions to the
prohibition authorized under either section 208(b)(1) or (b)(2). This
proposed rule uses the term ``exemption'' to describe regulatory
exceptions authorized by OGE under section 208(b)(2), and ``waiver'' to
describe individual exceptions granted under section 208 (b)(1) or
208 became effective in 1963, agency ethics officials
have often used the term ``waiver'' to describe exceptions to the
prohibition authorized under either section 208(b)(1) or (b)(2). This
proposed rule uses the term ``exemption'' to describe regulatory
exceptions authorized by OGE under section 208(b)(2), and ``waiver'' to
describe individual exceptions granted under section 208 (b)(1) or
(b)(3). The Office of Government Ethics believes the term ``exemption''
more accurately describes the fact that section 208(b)(2) permits OGE
to ``exempt'' certain financial interests from the prohibition in
section 208(a).
I. Scope of 18 U.S.C. 208(a)
Section 208(a) prohibits an officer or employee of the executive
branch, or an officer or employee of an independent agency of the
United States, or a Federal Reserve bank director, officer or employee,
or an officer or employee of the District of Columbia, including a
special Government employee, from participating personally and
substantially in an official capacity
through decision, approval, disapproval, recommendation, the
rendering of advice, investigation, or otherwise, in a judicial or
other proceeding, application, request for a ruling or other
determination, contract, claim, controversy, charge, accusation,
arrest, or other particular matter, in which to his knowledge, he,
his spouse, minor child, general partner, organization in which he
is serving as officer, director, trustee, general partner or
employee, or any person or organization with whom he is negotiating
or has any arrangement concerning prospective employment, has a
financial interest * * *.
, claim, controversy, charge, accusation,
arrest, or other particular matter, in which to his knowledge, he,
his spouse, minor child, general partner, organization in which he
is serving as officer, director, trustee, general partner or
employee, or any person or organization with whom he is negotiating
or has any arrangement concerning prospective employment, has a
financial interest * * *.
18 U.S.C. 208(a).
An employee has a financial interest in a particular matter ``when
there is a real possibility that he might gain or lose as a result of
developments in or resolution of the matter.'' 83 OGE 1, at 2 (Jan. 7,
1983), published in the Informal Advisory Letters and Memoranda and
Formal Opinions of the United States Office of Government Ethics 1979-
1988 (OGE Advisory Publication), pp. 859, 861. The statute does not
require that the amount of gain or loss be of any particular size, or
likelihood. ``All that is required is that there be a real, as opposed
to a speculative, possibility of benefit or detriment.'' Id. Section
208(a) has long been interpreted as applying where the matter will have
a ``direct and predictable effect'' on the employee's financial
interest or on the financial interests of other persons or entities
specified in the statute. See, e.g., 2 Opinions of the Office of the
Legal Counsel 151, 155 (June 29, 1978). In this regulation, the
financial interests of the employee and of the other individuals and
entities specified in section 208 would be referred to as the
employee's ``disqualifying financial interests.''
The meaning of the term ``financial interest'' is sometimes
misunderstood. As used in section 208, the term ``financial interest''
refers to the possibility of financial gain or loss as a result of
action on a matter. For example, if an employee is owed money by a
person who is a party to an agency matter, the loan itself is not a
``financial interest'' within the meaning of section 208
s.''
The meaning of the term ``financial interest'' is sometimes
misunderstood. As used in section 208, the term ``financial interest''
refers to the possibility of financial gain or loss as a result of
action on a matter. For example, if an employee is owed money by a
person who is a party to an agency matter, the loan itself is not a
``financial interest'' within the meaning of section 208. Instead, the
employee's financial interest in the matter arises from the possibility
that the matter may have an effect on the debtor's ability or
willingness to honor his obligation to pay the debt owed to the
employee. The loan would be a disqualifying financial interest under
section 208 only if the agency matter would have a direct and
predictable effect on the debtor's ability or willingness to repay the
loan.
Similarly, an employee may have a savings account in a financial
institution which conducts business at the employee's agency. While the
employee ordinarily would be viewed as having a ``financial interest''
in the deposits in his savings account, the employee's involvement in
agency matters affecting the financial institution would not
necessarily affect his financial interest in the savings account. In
fact, in most such cases, the employee would not have a disqualifying
financial interest within the meaning of section 208 because the agency
matter in which the employee would participate would not result in any
gain or loss to his savings account. He would be disqualified from
acting in matters affecting the financial institution only if the
matter would have a direct and predictable effect on his financial
interest in his savings account. Even in the unusual case where the
matter would have a direct and predictable effect on the employee's
savings account, a portion or all of many such accounts may be insured
by the Federal Deposit Insurance Corporation or other similar
governmental entity
the financial institution only if the
matter would have a direct and predictable effect on his financial
interest in his savings account. Even in the unusual case where the
matter would have a direct and predictable effect on the employee's
savings account, a portion or all of many such accounts may be insured
by the Federal Deposit Insurance Corporation or other similar
governmental entity. In such cases, the employee's financial interest
may not be the amount of the account itself, but the amount of interest
paid on the account, or the amount above the level covered by the
insurance. Where the matters in which the employee would act would have
a direct and predictable effect on the bank's ability to maintain and
pay interest on an account or to preserve the amount in the account
above the insurance limit, the employee's participation in these
matters should be examined by the appointing official on an individual
basis.
In summary, because the meaning of the term ``financial interest''
under section 208 is not identical to its commonplace or conventional
meaning, this proposed regulation does not contain exemptions for
certain interests that may be commonly thought of as ``financial
interests,'' but that are not affected by most Government matters so as
to require disqualification under section 208. This would include, for
example, deposits in bank accounts and interests arising from most
insurance policies.
There may be situations in which there is some potential for an
employee's financial holding to be affected by the outcome of a matter,
but the employee would not have a disqualifying interest under section
208(a). For example, if an employee is a contingent beneficiary in a
will executed by a still living relative, the employee's interest in
the assets to be distributed under the will is merely speculative since
he may never inherit them. For purposes of section 208(a), the employee
would not be disqualified from participating in matters affecting those
assets
qualifying interest under section
208(a). For example, if an employee is a contingent beneficiary in a
will executed by a still living relative, the employee's interest in
the assets to be distributed under the will is merely speculative since
he may never inherit them. For purposes of section 208(a), the employee
would not be disqualified from participating in matters affecting those
assets.
Another limitation on the scope of section 208(a) concerns the
range of interests it covers. To be within the scope of the statute,
the affected interest must be that of the employee, his spouse, his
minor children, a general partner of the employee, an organization in
which the employee serves as officer, director, trustee, general
partner or employee, or an organization with which the employee is
negotiating or has any arrangement concerning
prospective employment. Thus, section 208(a) prohibits an employee from
acting in a particular matter that will have a direct and predictable
effect on the financial interests of a company by which he is employed
in his off-duty hours. On the other hand, section 208(a) does not
necessarily bar an employee from acting in a matter affecting his
spouse's employer. Because the financial interests of a spouse's
employer are not specified as disqualifying financial interests under
the statute, an employee is not disqualified from acting in matters
affecting a spouse's employer unless the matter would have a direct and
predictable effect on the spouse's financial interest. For example,
where the spouse is a salaried employee, does not have an ownership
interest in the employer, and the matter will not affect her continued
employment or her benefits, the agency matter ordinarily would not have
a direct and predictable effect on her financial interest. See, e.g.,
OGE Informal Advisory Letter 84x6 (May 1, 1984), OGE Advisory
Publication, p. 465
inancial interest. For example,
where the spouse is a salaried employee, does not have an ownership
interest in the employer, and the matter will not affect her continued
employment or her benefits, the agency matter ordinarily would not have
a direct and predictable effect on her financial interest. See, e.g.,
OGE Informal Advisory Letter 84x6 (May 1, 1984), OGE Advisory
Publication, p. 465. Under such circumstances, the employee would not
be disqualified under section 208(a) from participating in the
particular matter.
This does not mean, however, that an employee who concludes that a
matter will significantly affect the financial interest of a person or
entity with whom he has a close business or personal relationship
should act on the matter because the financial interest is not within
the scope of section 208(a). Even though section 208(a) is not
applicable by its terms to a specific situation, administrative
regulations might prohibit participation in particular circumstances.
The Standards of Ethical Conduct for Employees of the Executive Branch
contain procedures an employee should follow in cases where his
impartiality might be questioned if he were to participate in a
Government matter affecting financial interests that do not fall within
the scope of section 208(a). See 5 CFR 2635.501 et seq. For example,
under Sec. 2635.502, an employee must consider whether his impartiality
would be questioned if he were to participate in a particular matter
involving specific parties in which his spouse's employer is a party,
or represents a party.
It is important to note that section 208(a) applies only in cases
where the employee knows that he, or any other person or entity
specified in section 208, has a financial interest that will be
affected. For example, an employee who is a general partner in a
partnership is prohibited from acting in an official capacity in
matters that would affect the financial interests of his general
partners
is important to note that section 208(a) applies only in cases
where the employee knows that he, or any other person or entity
specified in section 208, has a financial interest that will be
affected. For example, an employee who is a general partner in a
partnership is prohibited from acting in an official capacity in
matters that would affect the financial interests of his general
partners. If one of his general partners owns stock in a corporation
that would be affected by an agency matter in which the employee would
participate, the employee would be barred from participating only if he
knows that his general partner owns stock in the corporation. Employees
who are general partners should be alert to the fact that they will
have actual knowledge of their partners' assets if they have reviewed
copies of partners' financial statements or similar documents.
Section 208 prohibits employees from participating in a ``judicial
or other proceeding, application, request for a ruling or other
determination, contract, claim, controversy, charge, accusation,
arrest,'' or certain other ``particular matters.'' The term
``particular matter'' is discussed in the regulation at proposed
Sec. 2640.103(a)(1). In general, a particular matter is one that is
focused upon the interests of specific persons, or a discrete and
identifiable class of persons. It may include rulemaking, legislation,
or policymaking that is narrowly focused on the interests of a discrete
and identifiable class of persons. It does not extend to broad policy
options or considerations directed toward the interests of a large and
diverse group of persons. Because the meaning of the term ``particular
matter'' is often difficult to apply in specific situations, the
proposed regulation contains a number of examples based on the opinions
of the Office of Legal Counsel at the Department of Justice
ble class of persons. It does not extend to broad policy
options or considerations directed toward the interests of a large and
diverse group of persons. Because the meaning of the term ``particular
matter'' is often difficult to apply in specific situations, the
proposed regulation contains a number of examples based on the opinions
of the Office of Legal Counsel at the Department of Justice. In
general, these opinions indicate that certain governmental matters
having broad application to a large number of persons are not
sufficiently focused on the interests of identifiable persons or
classes of persons to be considered ``particular matters.'' However,
such broad policy matters may later become particular matters when they
are implemented in a way that the interests of specific persons or
groups of persons are distinctly affected.
Some of the exemption provisions in this proposed regulation would
apply to so-called ``particular matters involving specific parties'';
others would apply to ``particular matters of general applicability not
involving specific parties.'' The distinction between these two
categories of ``particular matters'' is derived from concepts used in
other criminal conflict of interest statutes, such as 18 U.S.C. 207.
However, to avoid any misunderstanding about the meaning of the terms,
the proposed regulation defines ``particular matter involving specific
parties'' by restating a portion of the definition of that term as it
is used in 5 CFR 2637.201(c)(1) for purposes of 18 U.S.C. 207.\1\ A
``particular matter involving specific parties'' is one that typically
involves a specific transaction affecting the legal rights of parties
such as a contract, grant, or case in litigation. For purposes of this
regulation, ``particular matters of general applicability not involving
specific parties'' are those types of particular matters not
encompassed by the description at 5 CFR 2637.201(c)(1)
rticular matter involving specific parties'' is one that typically
involves a specific transaction affecting the legal rights of parties
such as a contract, grant, or case in litigation. For purposes of this
regulation, ``particular matters of general applicability not involving
specific parties'' are those types of particular matters not
encompassed by the description at 5 CFR 2637.201(c)(1). Examples of
such matters are rulemaking and the formulation of policy directed to
the interests of a discrete and identifiable class of persons. The
regulation generally contains more expansive exemptions for
participation in ``matters of general applicability not involving
specific parties'' because it is less likely that an employee's
integrity would be compromised by concern for his own financial
interests when participating in these broader matters.
\1\Section 207 was amended in part by the Ethics Reform Act of
1989, Pub. L. 101-194, and Pub. L. 101-280. The Office of Government
Ethics expects to publish regulations interpreting section 207, as
amended. The new regulations are expected to contain a similar
definition of the term ``particular matter involving specific
parties.''
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Before an employee decides that section 208 might prevent him from
participating in a certain governmental matter, he should determine
whether the matter is a ``particular matter'' or a ``particular matter
involving specific parties.'' Once he decides that the matter is a
``particular matter'' or a ``particular matter involving specific
parties,'' he should then decide whether the matter will have a direct
and predictable effect on his financial interest.
Finally, it is important to note that the requirements of section
208, as well as the exemptions in this proposed regulation, apply not
only to regular Government employees, but also to special Government
employees as defined in 18 U.S.C. 202(a)
r matter involving specific
parties,'' he should then decide whether the matter will have a direct
and predictable effect on his financial interest.
Finally, it is important to note that the requirements of section
208, as well as the exemptions in this proposed regulation, apply not
only to regular Government employees, but also to special Government
employees as defined in 18 U.S.C. 202(a). The proposed regulation also
contains an exemption at Sec. 2640.203(g) applicable solely to special
Government employees serving on advisory committees. In addition,
waivers issued pursuant to 18 U.S.C. 208(b)(3) for members of Federal
advisory committees specifically impact special Government employees,
many of whom serve on Federal advisory committees. And, of course, the
waiver authority of section 208(b)(1) may be used in individual cases
where there is a conflict between the financial interests of a special
Government employee and his official responsibilities.
II. Exemptions from the Prohibition of Section 208(a)
This proposed regulation contains three categories of exemptions
from the prohibitions of 18 U.S.C. 208(a). First, the regulation
contains proposed exemptions relating to interests arising out of the
ownership of mutual funds, common trust funds, unit investment trusts,
and employee benefit plans. Second, the regulation contains proposed
exemptions arising out of the ownership of interests in securities.
Finally, it contains several miscellaneous provisions which would
establish exemptions that would apply only in specific situations or
only to employees of certain agencies. It is expected that agencies may
ask for additional exemptions applicable only to employees or groups of
employees at those agencies, as they become aware of the need for them
of the ownership of interests in securities.
Finally, it contains several miscellaneous provisions which would
establish exemptions that would apply only in specific situations or
only to employees of certain agencies. It is expected that agencies may
ask for additional exemptions applicable only to employees or groups of
employees at those agencies, as they become aware of the need for them.
For the most part, the exemptions proposed in this regulation would
apply to interests that are common to a large number of employees and
that are relatively simple to identify, such as those arising from the
ownership of mutual funds and securities. In general, the regulation as
proposed does not contain exemptions for other potentially
disqualifying financial interests which are not normally disqualifying
for most employees, such as the interest of a policyholder of a life
insurance policy. In most cases, it is unlikely that the typical
Federal employee would be required to act in a matter which would
affect an insurance company's ability to fulfill its obligation to pay
a benefit upon the death of the insured or which would affect the cash
value of the policy. Except in the case of interests arising from the
purchase of insurance from a mutual insurance company where employees
have more a direct interest in the operations of the company itself,
interests such as this are not usually disqualifying financial
interests under section 208. Those unusual cases where section 208
would bar an employee from acting in a particular matter are best
handled on a case-by-case basis in accordance with the procedures for
granting an individual waiver under section 208(b)(1) or (b)(3).
Additionally, there may be certain financial interests that create
a problem under section 208 only for employees of a particular agency
because of that agency's mission, but that are remote or
inconsequential enough that an exemption under section 208(b)(2) would
be appropriate. For example, the regulation at proposed
Sec
for
granting an individual waiver under section 208(b)(1) or (b)(3).
Additionally, there may be certain financial interests that create
a problem under section 208 only for employees of a particular agency
because of that agency's mission, but that are remote or
inconsequential enough that an exemption under section 208(b)(2) would
be appropriate. For example, the regulation at proposed
Sec. 2640.203(h) has an exemption that applies solely to the Directors
of Federal Reserve banks. Although this regulation is an executive
branchwide rule, OGE will consider including other exemptions which may
have applicability only to employees of a particular agency if an
exemption would be significant for a large number of the agency's
employees and agency resources that would be utilized in issuing
individual waivers under section 208(b)(1) would be better used
elsewhere in implementing the agency's ethics program. For example, the
proposed exemptions for short-term Government securities at
Sec. 2640.202(d) and commercial discount and incentive programs at
Sec. 2640.203(e) primarily benefit employees at a limited number of
agencies. However, these agencies have a sufficient number of employees
that can take advantage of the exemptions that it would be appropriate
to include specific exemptions here. The Office of Government Ethics
specifically requests suggestions for any such exemptions that should
be established and asks that agencies making such suggestions provide
proposed ``exemption'' language to facilitate consideration of the
recommendations.
The definitions of some of the terms used in the exemptions
proposed in this regulation may appear to be inconsistent with similar
or related terms used in other regulations issued by OGE
ests suggestions for any such exemptions that should
be established and asks that agencies making such suggestions provide
proposed ``exemption'' language to facilitate consideration of the
recommendations.
The definitions of some of the terms used in the exemptions
proposed in this regulation may appear to be inconsistent with similar
or related terms used in other regulations issued by OGE. In
particular, the definitions of diversified mutual fund, common trust
fund, unit investment trust, and employee benefit plan are not parallel
to the definition of an excepted investment fund (EIF) as that term is
used in connection with reporting assets on a financial disclosure form
and which is defined in 5 CFR 2634.310(c)(2). For the reasons described
in section A below, OGE has determined that it is impractical to adopt
the definition of ``excepted investment fund'' for use in defining
similar terms in this regulation.
Finally, the Office of Government Ethics has attempted to devise
exemptions that can be understood and easily applied by the individual
Government employees who have conflicting financial interests. The
Office of Government Ethics believes that, to the extent possible
consistent with the requirements of section 208, the exemptions in this
proposed regulation should not be so complex and technical that a
typical Government employee would need the advice and assistance of an
agency ethics official to determine how to apply the regulation in his
particular case. Because one of the purposes of these regulatory
exemptions is to lessen the burden on agency ethics officials who may
be issuing numerous individual waivers under section 208(b)(1) or
ation should not be so complex and technical that a
typical Government employee would need the advice and assistance of an
agency ethics official to determine how to apply the regulation in his
particular case. Because one of the purposes of these regulatory
exemptions is to lessen the burden on agency ethics officials who may
be issuing numerous individual waivers under section 208(b)(1) or
(b)(3), OGE has tried to simplify the language of each proposed
exemption. However, because section 208 is a criminal statute with
significant penalties, the language of each exemption also must
carefully delineate the scope of the exemption.
A. Exemptions for Mutual Funds, Common Trust Funds, Unit Investment
Trusts, and Employee Benefit Plans
1. Diversified Mutual Funds, Common Trust Funds, and Unit Investment
Trusts
For purposes of section 208, an employee who has an interest in a
pooled fund such as a mutual fund, a common trust fund, or unit
investment trust is deemed to have a financial interest in a matter
that would affect the assets held by the fund or trust. In most cases,
the holdings of such funds are diversified, with only a limited portion
of the fund's assets placed in the securities of any single issuer.
Moreover, a fund typically holds securities of issuers who are engaged
in a variety of businesses or industries. Usually an employee's
interest in any one fund is only a small portion of the fund's total
assets. For these reasons, it is generally unlikely that an employee's
official actions with regard to any one of the holdings of the fund in
which he holds shares will have any consequential effect on the
employee's financial interest. Accordingly, proposed Sec. 2640.201(a)
would permit an employee to participate in any particular matter
affecting the holdings of a diversified mutual fund, diversified common
trust fund, or diversified unit investment trust in which the employee,
or any other person specified in section 208, has a direct or
beneficial ownership interest
equential effect on the
employee's financial interest. Accordingly, proposed Sec. 2640.201(a)
would permit an employee to participate in any particular matter
affecting the holdings of a diversified mutual fund, diversified common
trust fund, or diversified unit investment trust in which the employee,
or any other person specified in section 208, has a direct or
beneficial ownership interest. The term ``direct or beneficial
ownership'' means that the employee's interest can arise either through
his direct ownership of a share in the fund or trust, or as the
beneficiary of a trust or an estate that holds such shares.
To ensure that the foregoing assumptions are satisfied, however,
the proposed exemption described in Sec. 2640.201(a) would apply only
to the holdings of trusts or funds which meet the following criteria.
First, if the fund is a mutual fund, it must be a diversified mutual
fund that meets the requirements of section 5(b)(1) of the Investment
Company Act of 1940, 15 U.S.C. 80a-5(b)(1), for a ``diversified
company.'' Section 80a-5 specifies that, for at least 75% of its
assets, a diversified company may not invest more than 5% of its assets
in any one issuer nor hold more than 10% of the
outstanding voting securities of any issuer. Additionally, the proposed
rule's definition of the term ``diversified'' at Sec. 2640.102(b)
requires that the fund not have a stated policy of concentrating its
investments in any industry, business, single country (other than the
United States), or bonds of a single State. This would ensure, for
example, that an employee of the Food and Drug Administration (FDA)
would not be given an automatic waiver for investments in a mutual fund
which limits its holdings to drug company stocks. Of course, an
appropriate FDA official could grant an individual waiver under 18
U.S.C
industry, business, single country (other than the
United States), or bonds of a single State. This would ensure, for
example, that an employee of the Food and Drug Administration (FDA)
would not be given an automatic waiver for investments in a mutual fund
which limits its holdings to drug company stocks. Of course, an
appropriate FDA official could grant an individual waiver under 18
U.S.C. 208(b)(1) or (b)(3) to an employee in a particular case if the
agency determined that the employee's interest in a mutual fund
specializing in the pharmaceutical industry was not so substantial that
it would affect the integrity of his services.
The Office of Government Ethics decided to define ``diversified
mutual fund'' by reference to the definition of ``diversified company''
contained in 15 U.S.C. 80a-5 to provide employees a simple way of
determining whether the mutual funds they own are, in fact,
``diversified.'' Regulations issued by the Securities and Exchange
Commission (SEC) governing the administration of mutual funds
specifically require that each mutual fund prospectus contain a
statement concerning the fund's investment objectives, including
whether the fund is deemed to be diversified for purposes of securities
law. In most cases, this requirement will be met by a statement that
the fund or the company is a diversified management investment company.
By locating this statement in the fund's prospectus, an employee can
easily determine whether the fund is considered ``diversified'' under
this section 208 regulation. Alternatively, if the employee cannot find
the relevant statement or the prospectus is unavailable, the employee
can simply call the fund's manager or the broker through whom he
purchased the fund and ask if the fund is a diversified company
is statement in the fund's prospectus, an employee can
easily determine whether the fund is considered ``diversified'' under
this section 208 regulation. Alternatively, if the employee cannot find
the relevant statement or the prospectus is unavailable, the employee
can simply call the fund's manager or the broker through whom he
purchased the fund and ask if the fund is a diversified company.
The Office of Government Ethics considered using other standards to
define the term ``diversified'', such as adopting the standard for
``excepted investment funds'' as that term is used in 5 CFR 2634.310(c)
for purposes of financial disclosure. ``Excepted investment funds''
cannot have more than 5% of the value of the fund's portfolio invested
in any one issuer and more than 20% in any particular economic or
geographic sector. However, use of standards such as this would require
employees to examine the fund's assets and perform lengthy mathematical
calculations to determine whether the particular fund was diversified.
Moreover, because mutual fund assets continuously change, it would be
burdensome to determine whether the fund was diversified at all times
after the initial calculations were made. Using a numerical standard
such as the 5%/20% formula described above arguably would require an
employee to recalculate the ratio of assets in the fund's portfolio
prior to participating in particular matters that occur on a continuing
basis.
In informal discussions concerning the draft regulation, some
agency ethics officials recommended that OGE define the term
``diversified'' only in relation to whether investments are
concentrated in a particular sector, and not whether the fund's assets
are invested in any particular number of issuers
s portfolio
prior to participating in particular matters that occur on a continuing
basis.
In informal discussions concerning the draft regulation, some
agency ethics officials recommended that OGE define the term
``diversified'' only in relation to whether investments are
concentrated in a particular sector, and not whether the fund's assets
are invested in any particular number of issuers. Another ethics
official suggested that the term ``mutual fund'' should not be defined
by referencing regulations issued by the Securities and Exchange
Commission because the regulations are extremely technical and most
employees could not really be sure whether their investment is a
``mutual fund'' or a ``diversified company'' as defined by the SEC. The
thrust of these recommendations was that an employee who failed to
determine whether his investment met the statutory definitions would be
misled into violating section 208 by acting in matters affecting
interests in an investment that appeared to be a mutual fund, but was
in fact some other type of pooled investment vehicle that was not
technically a ``mutual fund'' as defined in SEC regulations. Leaving
the relevant terms undefined presumably would absolve employees of the
responsibility of determining whether their investments were actually
diversified mutual funds and would thus avoid inadvertent violations.
The Office of Government Ethics shares these concerns, but does not
agree that employees would be better served by dropping the requirement
for ``diversification'' or by leaving the terms ``diversified'' and
``mutual fund'' undefined. First, OGE believes it is essential that the
exemption proposed for mutual funds apply to funds that are diversified
as to the number of holdings in the fund, as well as the sectors in
which the holdings are invested
t does not
agree that employees would be better served by dropping the requirement
for ``diversification'' or by leaving the terms ``diversified'' and
``mutual fund'' undefined. First, OGE believes it is essential that the
exemption proposed for mutual funds apply to funds that are diversified
as to the number of holdings in the fund, as well as the sectors in
which the holdings are invested. Because OGE has the authority to
promulgate exemptions only for financial interests that are too
``remote or inconsequential'' to affect an employee's services to the
Government, it would be difficult to conclude that interests arising
from a fund containing only a few holdings would be remote or
inconsequential enough to warrant a total exemption under section
208(b)(2).
Moreover, employees would also be at risk of violating section 208
if the terms ``mutual fund'' and ``diversified'' were not defined in
the regulation. With the increasing variety of complex financial
instruments that are available to investors, employees certainly could
become confused about whether their particular pooled investments are
diversified mutual funds. The experience of OGE in reviewing public
financial disclosure forms indicates that private limited partnerships
invested in securities are sometimes mistaken for mutual funds even
though the partnership has a limited number of investors and holdings,
and even though the holdings may not be diversified as to either
numbers or sector. It would be unfair to employees not to clarify that
interests such as these private partnerships would not be considered
mutual funds for purposes of the exemption as proposed.
On balance, OGE decided that proposing to define the term
``diversified mutual fund'' by reference to 15 U.S.C
nvestors and holdings,
and even though the holdings may not be diversified as to either
numbers or sector. It would be unfair to employees not to clarify that
interests such as these private partnerships would not be considered
mutual funds for purposes of the exemption as proposed.
On balance, OGE decided that proposing to define the term
``diversified mutual fund'' by reference to 15 U.S.C. 80a-5 would be
the most convenient method for determining whether the investment
vehicle is a fund and is diversified, since a quick perusal of the
fund's prospectus, or a call to the fund's manager, will indicate
whether the fund is a diversified management investment company.
Employees must be expected to have some responsibility for determining
whether their investments meet the criteria for application of the
exemption provisions. Employees also deserve to receive guidance that
is reasonably specific enough to give them adequate notice of what
investments meet the criteria for an exemption.
Similarly, by examining the prospectus or calling the fund's
manager, an employee can determine whether the fund has a stated policy
of concentrating its investments in any industry, business, or country,
or to bonds issued by a single State. For example, some funds clearly
limit their investments to biotechnology stocks, energy stocks,
precious metals and minerals, agricultural products, telecommunications
stocks, or municipal bonds issued by a single State. Securities and
Exchange Commission regulations require mutual fund sponsors to
describe limitations of this type in the fund's prospectus.
Additionally, limitations on the type of assets held by a mutual fund
are often reflected in the name of the fund itself, e.g. Vanguard
Specialized Portfolios: Health Care or Fidelity Spartan New York High
Yield. These types of funds
are commonly referred to as ``sector'' funds.\2\
ission regulations require mutual fund sponsors to
describe limitations of this type in the fund's prospectus.
Additionally, limitations on the type of assets held by a mutual fund
are often reflected in the name of the fund itself, e.g. Vanguard
Specialized Portfolios: Health Care or Fidelity Spartan New York High
Yield. These types of funds
are commonly referred to as ``sector'' funds.\2\
\2\Although a sector fund is not considered a ``diversified
mutual fund'' for purposes of the exemption described at
Sec. 2640.201(a), a mutual fund (including a nondiversified mutual
fund) is a ``publicly traded security'' for purposes of the de
minimis exemptions described in Sec. 2640.202. Accordingly, the
proposed regulation would permit an employee to participate in
certain matters affecting financial interests arising from the
ownership of a de minims amount of nondiversified mutual funds.
Also, proposed Sec. 2640.201(b) would exempt interests arising from
assets in a sector mutual fund which are not invested in the sector
in which the fund concentrates.
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The Office of Government Ethics decided not to consider funds
invested in broad geographical regions as ``sector'' funds. While funds
limited to a single State or a single country (other than the United
States) would be excluded from the definition of ``diversified'' under
this proposed rule, OGE concluded that it is unnecessary to also
exclude, for example, funds limited to investments in Europe or the
Pacific region. The Office of Government Ethics specifically requests
comments on whether such funds should be considered ``diversified.''
Because the term ``mutual fund'' at proposed Sec. 2640.102(l)
includes ``registered money market funds,'' money market mutual funds
would also have to be diversified in accordance with the standards
described at Sec. 2640.102(b)(1) for the exemption proposed at
Sec. 2640.201(a) to be applicable
Ethics specifically requests
comments on whether such funds should be considered ``diversified.''
Because the term ``mutual fund'' at proposed Sec. 2640.102(l)
includes ``registered money market funds,'' money market mutual funds
would also have to be diversified in accordance with the standards
described at Sec. 2640.102(b)(1) for the exemption proposed at
Sec. 2640.201(a) to be applicable. Registered money market funds may be
offered by a mutual fund company or may be marketed through a bank. In
either case, however, as with other mutual funds, the prospectus
describing the fund will contain the information an employee needs to
determine whether the fund is diversified. For purposes of this
regulation, money market instruments are not considered a single
industry or business, and therefore, money market mutual funds are not
considered investments concentrating in a single business or industry.
By contrast, however, funds which have a policy of investing only in
bank stock, or in savings and loan institutions, or in financial
services are clearly limited to a single business or industry and are
not considered ``diversified'' for purposes of this proposed
regulation.
Money market deposit accounts (as opposed to money market mutual
funds) offered by banks are not included in the proposed definition of
the term ``mutual fund'' as it is used in this regulation. Accordingly,
the exemption for diversified mutual funds at Sec. 2640.201(a) as
proposed would not be applicable to bank money market deposit accounts.
The inapplicability of the proposed exemption to money market deposit
accounts is not a problem, however, because in most cases, an interest
in such an account is not a disqualifying financial interest under
section 208. Unlike a money market mutual fund, a bank money market
account is a type of individual deposit account funded by the bank's
investments
o bank money market deposit accounts.
The inapplicability of the proposed exemption to money market deposit
accounts is not a problem, however, because in most cases, an interest
in such an account is not a disqualifying financial interest under
section 208. Unlike a money market mutual fund, a bank money market
account is a type of individual deposit account funded by the bank's
investments. Just as in the case of a regular bank savings account, it
is unlikely that an employee would have a disqualifying financial
interest because of his account. First, an employee would rarely have
knowledge of the bank's underlying investments. However, even in those
unusual cases where the employee did have knowledge of those
investments, it would be unlikely that a Government matter involving
one of the investments would have a direct and predictable effect on
the employee's ``financial interest'' in his deposit account.
On the other hand, employees whose official responsibilities
require them to participate in matters affecting banks where they have
money market or other deposit accounts may have to consider whether the
Government matters in which they might participate would have a direct
and predictable effect on the bank's ability to maintain, and pay the
appropriate interest on, the accounts. In such cases, of course, the
employee may have a disqualifying financial interest in whether the
bank can continue to pay interest on his deposit account, rather than a
disqualifying financial interest in the bank's investments.
In summary, to make a definitive determination whether a particular
mutual fund is ``diversified'' for purposes of this proposed
regulation, an employee simply has to find whether the prospectus
states that the fund is a diversified management company, and whether
it has a policy of concentrating its investments in a particular
industry, business, single country (other than the United States) or in
bonds issued by a single State
mination whether a particular
mutual fund is ``diversified'' for purposes of this proposed
regulation, an employee simply has to find whether the prospectus
states that the fund is a diversified management company, and whether
it has a policy of concentrating its investments in a particular
industry, business, single country (other than the United States) or in
bonds issued by a single State. Because the SEC requires that this
information be contained in the prospectus, employees may properly rely
on the accuracy of the information. If the prospectus has the specified
information, an employee is not required to make any independent
determination concerning the fund's diversification. If the employee
cannot find the relevant statement in his prospectus or does not have a
prospectus, he may call the fund's manager or the broker who sells the
fund and ask whether the fund is a ``diversified company.''\3\
\3\Although this proposed regulation would reference several
definitions contained in statutes and regulations within the purview
of the Securities and Exchange Commission, the Office of the
Comptroller of the Currency, the Internal Revenue Service, and the
Department of Labor, those agencies do not have any role in
interpreting the provisions of this regulation. Inquiries concerning
the meaning of terms used in those statutes and regulations, and the
way those terms are used in this regulation, should be directed to
OGE.
---------------------------------------------------------------------------
e Currency, the Internal Revenue Service, and the
Department of Labor, those agencies do not have any role in
interpreting the provisions of this regulation. Inquiries concerning
the meaning of terms used in those statutes and regulations, and the
way those terms are used in this regulation, should be directed to
OGE.
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The regulation, at Sec. 2640.201(a), also contains a proposed
exemption for participating in matters affecting the underlying assets
of a diversified unit investment trust. A unit investment trust is
``diversified'' if it meets the definition of a ``regulated investment
company'' at 26 U.S.C. 851(a)(1)(A). The standard set forth in section
851 requires that, for 50% of its assets, no more than 5% of the
trust's assets may be invested in any one issuer and the trust may hold
no more than 10% of any one issuer's outstanding voting securities.
Additionally, no more than 25% of the trust's total assets may be
invested in any one issuer, or in two or more issuers that the trust
controls and which are engaged in the same or similar trades or
businesses. An employee need not make an independent determination
whether the unit investment trust in which he has invested meets these
criteria. Instead, the employee should consult the prospectus
describing the trust or the trust's sponsor to determine whether the
trust is a ``regulated investment company.'' If it is so described, it
satisfies this regulation's diversification requirements, provided the
trust does not have a stated policy of concentrating its investments in
any industry, business, or single country (other than the United
States), or to bonds issued by a single State.\4\
scribing the trust or the trust's sponsor to determine whether the
trust is a ``regulated investment company.'' If it is so described, it
satisfies this regulation's diversification requirements, provided the
trust does not have a stated policy of concentrating its investments in
any industry, business, or single country (other than the United
States), or to bonds issued by a single State.\4\
\4\A unit investment trust (or a mutual fund) comprised of bonds
issued by a single State would not meet the diversification
requirements of this regulation. However, the lack of an exemption
would not be a problem for most Federal employees since they
typically would not have a disqualifying financial interest arising
from ownership of State bonds. Except in unusual cases, the official
matters in which an employee would participate would not affect the
bond's rating or the State's ability or willingness to honor its
obligation to pay interest on the bond.
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The assets of a common trust fund will be ``diversified'' for
purposes of this proposed regulation if the common trust fund meets the
rules for ``diversification'' established by the Office of the
Comptroller of the Currency at 12 CFR 9.18. These rules provide that no
more than 10% of a fund's assets may represent one investor's interest,
and that no more than 10% of the fund's assets may be
The assets of a common trust fund will be ``diversified'' for
purposes of this proposed regulation if the common trust fund meets the
rules for ``diversification'' established by the Office of the
Comptroller of the Currency at 12 CFR 9.18. These rules provide that no
more than 10% of a fund's assets may represent one investor's interest,
and that no more than 10% of the fund's assets may be
invested in any one issuer. This diversification standard applies
explicitly to common trust funds maintained by national banks. It also
applies to funds maintained under State law by State banks which are
required by 26 U.S.C. 584(a) to adhere to rules established by the
Office of the Comptroller of the Currency, including the rules for
diversification of common trust funds. An employee may presume that any
State bank maintaining a common trust fund adheres to these
requirements. Of course, as with mutual funds and unit investment
trusts, the bank maintaining the fund cannot have a policy of
concentrating its investments in an industry, business, or country, or
in bonds issued by a single State.
2. Sector Mutual Funds
Section 2640.201(b) would contain a provision permitting an
employee to participate in any particular matter affecting the holdings
of a sector mutual fund, provided the affected holding is not invested
in the sector in which the fund concentrates. This provision would
address the problem that might be encountered, for example, by an
employee of the Federal Reserve who owns shares in a sector mutual fund
that concentrates in biotechnology stocks, but which also has bank
stocks in its portfolio. The proposed exemption would permit the
Federal Reserve employee to participate in matters affecting banks
whose stock is in the fund's portfolio without obtaining an individual
waiver under section 208(b)(1)
d, for example, by an
employee of the Federal Reserve who owns shares in a sector mutual fund
that concentrates in biotechnology stocks, but which also has bank
stocks in its portfolio. The proposed exemption would permit the
Federal Reserve employee to participate in matters affecting banks
whose stock is in the fund's portfolio without obtaining an individual
waiver under section 208(b)(1).
The proposed regulation does not contain an exemption for holdings
in a geographic sector mutual fund where an individual holding creates
a section 208 conflict for an employee, but the sector as a whole does
not create a conflict. This might occur, for example, when a Food and
Drug Administration employee purchases a mutual fund which concentrates
its investments in German businesses and the employee is involved in
reviewing an application for a drug approval submitted by a German
pharmaceutical company whose stock is a holding of the mutual fund. The
Office of Government Ethics requests specific suggestions for language
for an exemption that would be applicable in this situation.
3. Employee Benefit Plans
Proposed 5 CFR 2640.201(c)(1) (i), (ii) and (iii) would permit an
employee to act in any particular matter affecting the holdings of the
Federal Government's Thrift Savings Plan, a pension plan established or
maintained by a State or local government, or other diversified
employee benefit plan in which the employee participates. By
participating in the plan, the employee has a financial interest in a
matter that affects one or more assets held by the plan. The exemption
would also apply in situations where any other person specified in
section 208 participates in the plan.
In the case of State or local government pension plans, OGE's
experience has been that the plans typically are comprised of a large
number of varied assets managed by an independent agency or board.
Therefore, the proposed exemption at Sec
ne or more assets held by the plan. The exemption
would also apply in situations where any other person specified in
section 208 participates in the plan.
In the case of State or local government pension plans, OGE's
experience has been that the plans typically are comprised of a large
number of varied assets managed by an independent agency or board.
Therefore, the proposed exemption at Sec. 2640.201(c)(1) would apply to
an employee's disqualifying interest in the holdings of any State or
local government pension.
For all other types of employee benefit plans, the exemption would
apply only if the plan is (i) diversified; (ii) the plan's investments
are administered by an independent trustee; (iii) the employee (or
other person specified in section 208) does not participate in the
selection of the investments except to direct that contributions be
divided among several different types of investments (such as stocks,
bonds or mutual funds) available to plan participants; and (iv) the
plan is not a profit-sharing or stock bonus plan. Although this
proposed provision would apply to all types of employee benefit plans
as described in Sec. 2640.102(d), for all practical purposes most of
the plans covered by the provision are some form of employee savings or
retirement plan that provides deferred income, typically after the
employee has retired. Most often employees view these plans as
pensions.
Most pensions (and similar employee benefit plans covered by this
rule) are one of two types: A defined benefit plan or a defined
contribution plan. A defined benefit plan is one that is designed to
provide participants with a defined or specified benefit upon
retirement, such as an annual income that is a specific percentage of
the compensation received by the participant during a certain period of
his employment. By contrast, a defined contribution plan is one that
establishes an individual account for each participant
ontribution plan. A defined benefit plan is one that is designed to
provide participants with a defined or specified benefit upon
retirement, such as an annual income that is a specific percentage of
the compensation received by the participant during a certain period of
his employment. By contrast, a defined contribution plan is one that
establishes an individual account for each participant. In the case of
a defined contribution plan, the retirement benefit received by the
employee is based upon the contributions to and any income generated by
the account, and can vary depending upon the gains, losses, and
expenses that are attributable to the account. Benefits to which a
participant is entitled under a defined benefit plan may be insured by
the Pension Benefit Guaranty Corporation (PBGC) or by private insurance
contracts or annuities.
In most cases, an employee will not have a section 208 interest in
the holdings of a defined benefit plan because payment of the specified
benefit is ensured whether or not the plan holdings generate income
sufficient to fund the benefit. Therefore, under most circumstances an
employee would not need a waiver under section 208 (b)(1) or (b)(3) or
an exemption under section 208(b)(2) to act in matters affecting the
underlying assets of a defined benefit plan. In some cases, the
employee may have a financial interest in the sponsor of the plan who
has promised to pay the benefit upon retirement. Except as provided in
Sec. 2640.201(c)(2) as proposed, authority to act in matters affecting
the sponsor of such a plan must be handled on an individual basis in
accordance with the provisions of 18 U.S.C. 208(b)(1). As a practical
matter, however, most governmental matters in which an employee would
participate are unlikely to have a direct and predictable effect on the
plan sponsor's ability or willingness to pay an employee's pension
benefits
authority to act in matters affecting
the sponsor of such a plan must be handled on an individual basis in
accordance with the provisions of 18 U.S.C. 208(b)(1). As a practical
matter, however, most governmental matters in which an employee would
participate are unlikely to have a direct and predictable effect on the
plan sponsor's ability or willingness to pay an employee's pension
benefits. Accordingly, most employees will not have a disqualifying
financial interest in either the holdings or the sponsor of a defined
benefit plan.
On the other hand, employees would ordinarily have a financial
interest in the holdings of a defined contribution plan since those
holdings are the assets which will generate the employee's retirement
or other income. Therefore, in the absence of an exemption or waiver,
an employee cannot act in particular matters that would have a direct
and predictable effect on those holdings. The proposed exemption at
Sec. 2640.201(c)(1) would permit an employee to act in particular
matters affecting the holdings of an employee benefit plan only if the
plan meets the criteria described below.
First, the plan must be administered by an independent trustee
which is defined in Sec. 2640.102(g) as either a trustee independent of
the plan's sponsor and participants, or a registered investment
adviser. Second, the proposed rule would not permit the employee to
select his own investments. However, the prohibition on participation
in selecting plan investments would not bar an employee from directing
the division of employer or employee contributions among a variety of
types of investments or among a group of specific investment vehicles
chosen by the plan trustee or manager. For example, a pension plan may
offer participants the opportunity to choose between a bond fund, a
common stock
e prohibition on participation
in selecting plan investments would not bar an employee from directing
the division of employer or employee contributions among a variety of
types of investments or among a group of specific investment vehicles
chosen by the plan trustee or manager. For example, a pension plan may
offer participants the opportunity to choose between a bond fund, a
common stock
fund, or a government securities fund. Participants may choose to
divide their investments among the various funds.
Additionally, as with mutual funds, common trust funds, and unit
investment trusts, this regulation as proposed would require that the
assets of the plan must be diversified. Unlike mutual funds, common
trust funds, and unit investment trusts, however, there is no
independent statutory or regulatory diversification requirement for
employee benefit plans except that plan sponsors and managers have a
fiduciary responsibility to diversify plan assets to reduce risk to the
investors. See 29 U.S.C. 1104(a)(1)(C). Because there is no specific
numerical standard for diversification that this proposed regulation
could easily reference to assist employees in determining whether an
individual plan is diversified, OGE had to consider whether it wanted
to create a diversification standard similar to others referenced in
the regulation. Alternatively, OGE considered whether to adopt the same
diversification standard used by employees to determine whether they
must report the underlying assets of certain funds or trusts on the
public financial disclosure statement (SF 278), i.e. no more than 5% of
a plan's assets can be invested in any one issuer and no more than 20%
of the plan's assets can be invested in any one business, industry, or
economic or geographic sector
dopt the same
diversification standard used by employees to determine whether they
must report the underlying assets of certain funds or trusts on the
public financial disclosure statement (SF 278), i.e. no more than 5% of
a plan's assets can be invested in any one issuer and no more than 20%
of the plan's assets can be invested in any one business, industry, or
economic or geographic sector.
The problem with adopting any one of these diversification
standards is that before an employee could decide whether the exemption
would be applicable, he would be required to obtain a copy of the
plan's portfolio and scrutinize it to determine how the plan's assets
are invested, including what proportion of assets are invested in
particular issuers and particular industries or sectors. The Office of
Government Ethics believes that in many cases it is unrealistic to
assume that employees can easily obtain an inventory of pension
holdings and make accurate calculations about the percentage of
holdings in various issuers and industries. The problem is especially
exacerbated by the fact that the assets of many employee benefit plan
portfolios are continually changing and it would be difficult to
establish with any certainty the relative proportion of the plan's
assets from day to day. This problem is not so significant for purposes
of determining whether an employee benefit plan is an excepted
investment fund (EIF) for purposes of financial disclosure because
financial disclosure rules only require employees to determine whether
the plan is diversified on the day the report is filed. Where section
208 is implicated, however, employees may be participating over a
period of time in Government matters and presumably the plan would have
to be diversified at all times when the employee would participate in
the matter affecting the plan's assets
ecause
financial disclosure rules only require employees to determine whether
the plan is diversified on the day the report is filed. Where section
208 is implicated, however, employees may be participating over a
period of time in Government matters and presumably the plan would have
to be diversified at all times when the employee would participate in
the matter affecting the plan's assets. If OGE created a numerical
diversification standard for employee benefit plans in this regulation,
it would be nearly impossible for employees to know from day to day
whether the plan continued to be ``diversified,'' and OGE's goal of
issuing clear and easy-to-use exemptions would be severely undermined.
On the other hand, OGE is unwilling to permit an automatic
exemption to apply to any employee benefit plan, whether or not it is
diversified. Without a requirement for some type of diversification,
employees would be free to act in matters affecting the holdings of a
plan which could contain any amount of a single asset, thus increasing
the possibility that the employee might significantly gain or lose as a
result of the Government matter in which he would participate. This
outcome would subvert the statute's clear intent to exempt only
interests that are remote or inconsequential.
Because the majority of employee benefit plans are widely
diversified in any case, OGE's concern may be somewhat theoretical.
Nevertheless, OGE has decided to propose a requirement that, for the
exemption to apply, employee benefit plans must be diversified, i.e.
the plan trustee or manager must have a written policy of varying plan
investments.
This diversification standard would simply require an employee to
determine whether the plan trustee or manager has articulated a policy
of diversifying plan assets. The diversification policy might
ordinarily be stated in materials describing the benefit plan
employee benefit plans must be diversified, i.e.
the plan trustee or manager must have a written policy of varying plan
investments.
This diversification standard would simply require an employee to
determine whether the plan trustee or manager has articulated a policy
of diversifying plan assets. The diversification policy might
ordinarily be stated in materials describing the benefit plan. For
example, brochures describing the TIAA-CREF retirement plan for
employees of educational and research institutions specifically state
that the CREF Stock Account is a ``broadly diversified portfolio of
U.S. stocks,'' and that the CREF Social Choice Account is ``diversified
among stocks, bonds * * *.'' In the absence of such a statement, the
employee could obtain a written statement from the plan manager or
trustee indicating that he has a policy of diversification. In most
cases, the manager or trustee will attempt to diversify plan
investments in accordance with his or her fiduciary responsibilities
under 29 U.S.C. 1104(a)(1)(C).
In addition, the proposed regulation would require that the plan
not have a stated policy of concentrating its holdings in any business,
industry, single country other than the United States, or bonds of a
State within the United States. The provision does not require an
employee to perform any mathematical calculation to determine whether a
particular percentage of the plan's assets are invested in any industry
or sector, but simply to ascertain whether the plan has a policy of
making such investments.
Finally, the regulation at proposed Sec. 2640.201(c)(1)(iii)(B)
states that the plan may not be a profit-sharing or stock bonus plan.
This limitation would ensure that the exemption would not allow an
employee to participate in matters affecting the corporate sponsor of a
plan. However, because profit-sharing plans which are tax-deferred
under 26 U.S.C
s a policy of
making such investments.
Finally, the regulation at proposed Sec. 2640.201(c)(1)(iii)(B)
states that the plan may not be a profit-sharing or stock bonus plan.
This limitation would ensure that the exemption would not allow an
employee to participate in matters affecting the corporate sponsor of a
plan. However, because profit-sharing plans which are tax-deferred
under 26 U.S.C. 401(k) have become a common form of employee benefit,
401(k) plans would be excluded from the term ``profit-sharing plan''
for purposes of this regulation.
Section 2640.201(c)(2) as proposed contains a provision which would
permit an employee to act in particular matters of general
applicability affecting the sponsor of a State or municipal pension
plan in which the employee, his spouse or minor child, or general
partner, participates. As used in this regulation, the term ``pension''
means a plan, fund or program established or maintained by a State or
municipality to provide retirement income for its employees or which
results in a deferral of income by employees for periods extending to
termination of covered employment or beyond.
As used in the regulation, the term ``sponsor'' means the State or
municipality that established or maintains the plan, not any individual
State or municipal agency, board, or panel that may administer the plan
on behalf of the State or municipality. Of course, the restrictions of
section 208 apply only when the particular matter in which the employee
would act has a direct and predictable effect on his financial
interest. In the vast majority of cases involving defined benefit
plans, it would be unlikely that any particular matter would affect a
government's ability or willingness to pay the employee's pension.
However, in the event that the employee would be required to act in
such a matter, this provision would allow an employee to act only in a
particular matter not involving specific parties, such as a rulemaking
vast majority of cases involving defined benefit
plans, it would be unlikely that any particular matter would affect a
government's ability or willingness to pay the employee's pension.
However, in the event that the employee would be required to act in
such a matter, this provision would allow an employee to act only in a
particular matter not involving specific parties, such as a rulemaking.
If the matter in which the employee would participate affects the
State or
municipal agency, board or panel which administers the plan on the
State or local government's behalf, the employee would not be able to
participate in the matter without first receiving an individual waiver
in accordance with the terms of 18 U.S.C. 208(b)(1).
B. Exemptions for Interests in Securities
Because many Federal employees own shares of stock and other types
of securities, the proposed regulation contains a number of provisions
that describe exemptions for matters affecting financial interests
arising out of ownership of securities. Some of the exemptions would
apply when the employee owns the security directly; others would apply
only when the security is owned by other persons specified in section
208, such as an organization in which the employee serves as officer or
director. In addition, some of the exemptions would apply to
participation in all types of particular matters, including those
involving specific parties. Other exemptions would apply only to
participation in particular matters of general applicability. In
general, the type and extent of exemption depends on the type of matter
involved, the amount of the employee's financial interest, and the
likelihood that the employee's action will affect the entity issuing
the securities.
As defined in the proposed regulation at Sec. 2640.102(r), the term
``security'' has a somewhat expansive meaning including stock, bonds,
mutual funds, long-term Federal Government securities, limited
partnership interests, and municipal securities
ed, the amount of the employee's financial interest, and the
likelihood that the employee's action will affect the entity issuing
the securities.
As defined in the proposed regulation at Sec. 2640.102(r), the term
``security'' has a somewhat expansive meaning including stock, bonds,
mutual funds, long-term Federal Government securities, limited
partnership interests, and municipal securities. However, for many of
the exemptions to be applicable, the securities must be ``publicly
traded securities'' as defined in the regulation at proposed
Sec. 2640.102(p). This means that in addition to being the type of
security described in Sec. 2640.102(r), the securities would have to be
registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 781) and listed on a
national exchange or traded through NASDAQ, or be registered under the
Investment Company Act of 1940 (15 U.S.C. 80a-8), or be a corporate
bond issued by an entity whose stock meets the definition of a
``publicly traded security.'' In general, this requirement ensures that
the securities which are the subject of an exemption are widely
disseminated. In the case of corporate bonds, the definition of
``publicly traded security'' will ensure that many bonds which are not
traded on a national exchange (but are instead sold over-the-counter)
will still be covered by the exemption.
Although most of the securities owned by employees clearly will be
``publicly traded'' within the meaning of the definition, there may be
some cases where the employee is not absolutely certain whether a
security is ``publicly traded'' within the meaning of this regulation.
In such cases, employees should discuss the matter with a broker or
simply call the issuer.
An interest in stock can create a section 208 disqualifying
financial interest in a number of ways. First, ownership of shares of
stock in an entity normally represents an ownership interest in the
entity itself
certain whether a
security is ``publicly traded'' within the meaning of this regulation.
In such cases, employees should discuss the matter with a broker or
simply call the issuer.
An interest in stock can create a section 208 disqualifying
financial interest in a number of ways. First, ownership of shares of
stock in an entity normally represents an ownership interest in the
entity itself. Therefore, Government matters that affect the financial
interest of the entity have a concomitant effect on the financial
interest of the person who owns stock in the entity. For purposes of
section 208, the effect of the matter on the entity need not be
reflected in a change in the price of the entity's stock. Section 208
is implicated if the matter affects the entity's financial interest in
any measurable way, such as when a contract for computer maintenance
services is awarded to a large corporation that develops, manufactures
and maintains computers. Even if the contract amount is not significant
enough to result in an increase in the value of the company's stock,
the mere award of the contract has affected the company's finances, and
an employee who owns stock in the company has a disqualifying financial
interest in the award of the contract to the company. Of course, in
some cases a Government matter may be so significant that the price of
the company's stock rises or falls to reflect the financial market's
reaction to the matter. In such cases, an employee who owns stock in
the company would even more clearly have a disqualifying financial
interest in the matter.
Corporate bonds and certain municipal and Government bonds are
included in the definition of ``security'' for purposes of the proposed
regulation. Of course, a bond is also a form of debt owed by the entity
issuing the bond
market's
reaction to the matter. In such cases, an employee who owns stock in
the company would even more clearly have a disqualifying financial
interest in the matter.
Corporate bonds and certain municipal and Government bonds are
included in the definition of ``security'' for purposes of the proposed
regulation. Of course, a bond is also a form of debt owed by the entity
issuing the bond. Ordinarily, ownership of a corporate or municipal
bond does not create a disqualifying financial interest unless the
Government matter in which the employee participates would have a
direct and predictable effect on the market value of the bond or the
entity's ability to repay the debt. The proposed rule contains
exemptions that would apply in cases where the bond's value or the
issuing entity's ability to pay would be affected.
The term ``municipal security'' is defined in the proposed
regulation at Sec. 2640.102(k) to include only the direct obligations
of, or obligations guaranteed as to principal or interest by, a
municipal entity. Thus, certain industrial development bonds which are
issued under municipal aegis, but which actually represent the
obligations of a private organization, would not be deemed municipal
securities for purposes of this regulation. Since the corporations
which issue industrial development bonds are varied, including both
public and nonpublic companies, a blanket waiver to cover interests in
securities offered by such organizations is inappropriate.
The term ``long-term Federal Government security'' is defined in
the proposed regulation at Sec. 2640.102(j) to mean bonds or notes with
a maturity of one year or more issued by the United States Treasury
pursuant to 31 U.S.C. chapter 31
are varied, including both
public and nonpublic companies, a blanket waiver to cover interests in
securities offered by such organizations is inappropriate.
The term ``long-term Federal Government security'' is defined in
the proposed regulation at Sec. 2640.102(j) to mean bonds or notes with
a maturity of one year or more issued by the United States Treasury
pursuant to 31 U.S.C. chapter 31. Because the value of these long-term
securities can fluctuate widely, OGE has determined that it would be
appropriate to exempt financial interests arising from the ownership of
these Government securities to the same extent that financial interests
arising from other securities are exempted. On the other hand, the
value of short-term Federal Government securities (with maturities of
less than one year) cannot be substantially affected by the actions of
employees who participate in matters involving those securities.
Therefore, the regulation would contain a separate exemption at
Sec. 2640.202(d) for interests arising from the ownership of short-term
Federal Government securities. Of course, as a practical matter only
employees involved in setting and implementing monetary policy or other
similar governmental matters are likely to be participating in matters
affecting financial interests in Government securities in any event.
The term ``Federal Government security'' does not include a
security issued by any Federal entity other than the U.S. Treasury
pursuant to 31 U.S.C. chapter 31. Accordingly, interests arising from
the ownership of securities issued by the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA),
and other similar Government agencies and Government-sponsored entities
are not automatically exempt from the requirements of section 208. Of
course, in appropriate cases disqualifying financial interests arising
from the ownership of Federal agency securities may be waived on an
individual basis pursuant to 18 U.S.C. 208(b)(1).
ation (GNMA), the Federal National Mortgage Association (FNMA),
and other similar Government agencies and Government-sponsored entities
are not automatically exempt from the requirements of section 208. Of
course, in appropriate cases disqualifying financial interests arising
from the ownership of Federal agency securities may be waived on an
individual basis pursuant to 18 U.S.C. 208(b)(1).
Even though interests in diversified mutual funds, and certain
interests in sector mutual funds would be totally exempted under
Sec. 2640.201 as proposed, the term ``mutual fund'' is included in the
definition of ``security'' for the purpose of the de minimis
exemptions. This means that nondiversified mutual funds would be exempt
to the same extent, and under the same circumstances, that stocks,
bonds and other ``securities'' are exempt. Thus, an interest in $5,000
worth of a biotechnology sector mutual fund would be exempt even though
an employee would be participating in a particular matter involving a
company whose stock was owned by the mutual fund. Similarly, proposed
Sec. 2640.202(c) would permit an employee to participate in a
particular matter of general applicability even if he owned $25,000
worth of a sector mutual fund, one of whose holdings was a company
affected by the matter in which the employee would participate. For
purposes of the de minimis provisions, the value of an employee's
interest in a mutual fund would be the value of his interest in the
fund as a whole, not the pro rata value of any underlying holding of
the fund.
1. De Minimis Exemptions
The first exemption pertaining to ownership of securities at
Sec
holdings was a company
affected by the matter in which the employee would participate. For
purposes of the de minimis provisions, the value of an employee's
interest in a mutual fund would be the value of his interest in the
fund as a whole, not the pro rata value of any underlying holding of
the fund.
1. De Minimis Exemptions
The first exemption pertaining to ownership of securities at
Sec. 2640.202(a) as proposed would permit an employee to participate in
any particular matter involving specific parties where the employee's
financial interest arises from the direct or beneficial ownership by
the employee, his spouse or minor child of publicly traded securities,
long-term Federal Government securities, or municipal securities valued
at no more than $5,000 where the entity issuing the security is a party
to the matter. The term ``direct or beneficial ownership'' means that
the employee's interest can arise either through his direct ownership
of the securities, or as the beneficiary of a trust or an estate. The
value of securities owned by the employee, his spouse, and his minor
children must be aggregated to determine whether the exemption
applies.\5\ Thus, for example, if an employee owns stock in each of
several companies which are parties to the particular matter, the
provision at proposed Sec. 2640.202(a) would not exempt him from the
prohibition of section 208 unless the aggregate value of the stock he
owns in all parties is no more than $5,000.
\5\Some of the exemptions in proposed Sec. 2640.202 apply to the
interests of the employee, the employee's spouse and minor children,
and the employee's general partner. Others apply to interests
arising from the holdings of a general partner, or someone whom the
employee serves as officer, director, trustee or employee. Still
others apply to the interests of any one listed in section 208.
---------------------------------------------------------------------------
ts of the employee, the employee's spouse and minor children,
and the employee's general partner. Others apply to interests
arising from the holdings of a general partner, or someone whom the
employee serves as officer, director, trustee or employee. Still
others apply to the interests of any one listed in section 208.
---------------------------------------------------------------------------
The Office of Government Ethics considered proposing to set the de
minimis standard at no more than $1,000 because that is the minimum
value for assets that must be reported on an employee's public
financial disclosure statement (SF 278). Setting the de minimis level
at $1,000 would have permitted agency ethics officials who review
financial disclosure reports to counsel employees that section
208(b)(2) exempts all interests in securities they own whose values
fall below the threshold for reporting on the SF 278 statement.
However, the actual financial interest one might have in a matter
because of the ownership of stock worth no more than $1,000 would have
been a significantly lower amount than OGE believes can be considered
``inconsequential'' within the meaning of section 208(b)(2) and would
have clearly limited the exemption's usefulness. After final adoption
of this rule (with any modifications), OGE will periodically review
this and other specific dollar thresholds as well as other aspects of
this regulation.
Where an employee has an interest in a security issued by an entity
which is not a party to the particular matter involving specific
parties, but which is nonetheless affected by the matter, the employee
may act in the matter if the value of the security does not exceed
$25,000. See proposed Sec. 2640.202(b). This might occur, for example,
when one automobile manufacturer sues the Government to enjoin
enforcement of a new regulation that will require all manufacturers to
incur additional production expenses
lving specific
parties, but which is nonetheless affected by the matter, the employee
may act in the matter if the value of the security does not exceed
$25,000. See proposed Sec. 2640.202(b). This might occur, for example,
when one automobile manufacturer sues the Government to enjoin
enforcement of a new regulation that will require all manufacturers to
incur additional production expenses. A Government attorney involved in
the litigation who owns stock in another auto manufacturer not a party
to the litigation may continue to act in the case pursuant to this
exemption if the value of his stock does not exceed $25,000. Of course,
this proposed exemption would be relevant only in cases where section
208 was applicable to the matter at issue, i.e. the matter would have a
direct and predictable effect on the employee's financial interest
arising from the security.
Proposed Sec. 2640.202(b) would not permit an employee to act in a
particular matter if the aggregate value of affected securities owned
by the employee, his spouse and minor children exceeds $25,000. For
purposes of determining whether the $25,000 limitation is met, the
value of securities exempted under Sec. 2640.202(a) would have to be
included. For example, if an employee owns $5,000 of stock in an
automobile manufacturer which is a party to a case in litigation in
which the employee is involved, and he also owns $22,000 of stock in
another automobile manufacturer affected by, but not a party to the
litigation, he may not rely on the exemptions at Secs. 2640.202(a) and
ties exempted under Sec. 2640.202(a) would have to be
included. For example, if an employee owns $5,000 of stock in an
automobile manufacturer which is a party to a case in litigation in
which the employee is involved, and he also owns $22,000 of stock in
another automobile manufacturer affected by, but not a party to the
litigation, he may not rely on the exemptions at Secs. 2640.202(a) and
(b), as proposed, to participate in the matter. Because the aggregate
market value of his holdings in the securities of all affected entities
exceeds $25,000, he would have to disqualify himself from the matter,
or divest at least $2,000 worth of securities in affected party or non-
party entities, or seek an individual waiver under section 208(b)(1)
prior to participating in the matter. The purpose of the aggregation
requirement is to ensure that the application of more than one
exemption to a single matter does not violate the statutory criterion
that exemptions be issued only for interests that have been determined
to be remote or inconsequential.
The proposed regulation at Sec. 2640.202(c) would permit an
employee to participate in any particular matter of general
applicability not involving specific parties, where the employee's
disqualifying financial interest arises from the ownership of publicly
traded, long-term Federal Government, or municipal securities issued by
one or more entities, if the value of the employee's holdings
(including the aggregate holdings of his spouse and minor children) in
any one affected entity does not exceed $25,000, and his holdings in
all affected entities does not exceed $50,000. This proposed exemption
would not permit the employee to participate in particular matters
having specific parties whether or not the issuer of the securities is
a party. This exemption, as well as the exemption proposed at
Sec
gate holdings of his spouse and minor children) in
any one affected entity does not exceed $25,000, and his holdings in
all affected entities does not exceed $50,000. This proposed exemption
would not permit the employee to participate in particular matters
having specific parties whether or not the issuer of the securities is
a party. This exemption, as well as the exemption proposed at
Sec. 2640.202(b) for cases where the issuer of the security is not a
party to the matter, would allow an employee to participate in matters
where his financial interest was relatively insubstantial, and where it
is not likely that the interest would be affected in a manner
disproportionate to other affected entities.
Finally, it should be understood that the amounts set forth in the
de minimis provisions in proposed Sec. 2640.202 do not establish a
threshold over which waivers may not be granted on an individual basis
under section 208(b)(1). Therefore, an appointing official may decide
in an individual case to grant a waiver to permit an employee to
participate in particular matters involving parties in cases where an
employee owns more than $5,000 worth of stock in an affected party.
Similarly,
an appointing official may grant waivers in cases where an employee
would participate in matters of general applicability or in matters
where he owns stock in affected entities which are not parties, even
where the amount of the employee's holdings exceeds the amounts set
forth in Sec. 2640.202(b) and (c) as proposed. The criteria an agency
should consider in granting such waivers are described in
Secs. 2640.301 and 2640.302 of this proposed regulation.
2. Short-term Federal Government Securities
Proposed Sec. 2640.202(d) would permit an employee to act in any
particular matter affecting a financial interest arising from the
ownership of ``short-term Federal Government securities'' by the
employee, or any other person specified in section 208
r in granting such waivers are described in
Secs. 2640.301 and 2640.302 of this proposed regulation.
2. Short-term Federal Government Securities
Proposed Sec. 2640.202(d) would permit an employee to act in any
particular matter affecting a financial interest arising from the
ownership of ``short-term Federal Government securities'' by the
employee, or any other person specified in section 208. The term
``short-term Federal Government security'' is defined in proposed
Sec. 2640.102(t) to mean a bill issued by the United States Treasury
pursuant to 31 U.S.C. chapter 31, with a maturity of less than one
year. This provision, for example, would permit employees of the
Federal Reserve to act in matters that would affect changes in the
interest rates paid on Treasury bills. The Office of Government Ethics
believes that the exemption for short-term Federal Government
securities is warranted because changes in the interest rates paid on
Treasury bills occur in relatively small increments, and do not
significantly enhance the value of these bills because of their short
maturities.
3. Interests of Tax-Exempt Organizations
Unless he is personally involved in an organization's investment
decisions, an employee often would not have knowledge of the investment
interests of organizations in which he is an officer, director,
trustee, or employee. However, because section 208 bars him from acting
in matters in which these organizations have a financial interest,
section 208 will be implicated if an employee acts in a particular
matter which he knows will affect the holdings of an organization he
serves as officer, director, trustee, or employee.
The concern about a conflict of interest in such cases is
diminished, however, if the organization is nonprofit and tax-exempt
under section 501(c)(3) of the Internal Revenue Code, and the employee
has no involvement in making investment decisions for the organization
cular
matter which he knows will affect the holdings of an organization he
serves as officer, director, trustee, or employee.
The concern about a conflict of interest in such cases is
diminished, however, if the organization is nonprofit and tax-exempt
under section 501(c)(3) of the Internal Revenue Code, and the employee
has no involvement in making investment decisions for the organization.
Examples of such organizations include child or animal welfare
organizations, community service groups, and health or medical research
organizations. Section 2640.202(e) of this proposed regulation contains
a provision that would permit an employee to participate in any type of
particular matter affecting an entity which issues publicly traded,
municipal, or long-term Federal Government securities in which a tax-
exempt organization invests, if the employee serves the 501(c)(3)
organization as an unpaid officer, director, or trustee, or as an
employee. The exemption would apply only if the employee plays no role
in making investment decisions for the organization other than
participating in the decision to invest in several different categories
of investments, the organization's holdings in the entity are limited,
and the organization is not related to the entity except as an
investor, or through a routine commercial transaction. This proposed
exemption is limited in scope and only allows an employee to
participate in a matter which affects the tax-exempt organization's
investments. It would not permit the employee to participate in matters
that directly affect the tax-exempt organization, or matters that would
also affect the employee's own financial interests.
4. Interests of General Partners
Section 208(a) prohibits an employee from acting in any particular
matter that would affect the financial interests of his general
partner
tax-exempt organization's
investments. It would not permit the employee to participate in matters
that directly affect the tax-exempt organization, or matters that would
also affect the employee's own financial interests.
4. Interests of General Partners
Section 208(a) prohibits an employee from acting in any particular
matter that would affect the financial interests of his general
partner. Of course, in many cases, an employee will not have knowledge
of his partner's financial interests, so that section 208 will not
limit the employee's ability to act in Government matters in which his
partner has an interest.
On the other hand, where the employee does have knowledge of his
partner's interests, it might often be inappropriate for the employee
to act in a matter which would affect those interests. However, where
the general partner's interest is derived solely from the ownership of
publicly traded, long-term Federal Government, or municipal securities,
proposed Sec. 2640.202(f)(1) would permit an employee to act in any
particular matter affecting the issuer of the securities, if the value
of the securities does not exceed $200,000 and ownership of the
securities is not related to the partnership between the employee and
his general partner.
Proposed Sec. 2640.202(f)(2) contains a provision that would permit
an employee to act in all matters where the disqualifying interest
would arise from any interest of an employee's general partner, but
only if the employee's relationship to his general partner is that of a
limited partner in a large partnership, i.e. one with at least 100
limited partners. OGE believes that, in most such cases, an employee
would not have enough of a personal relationship with his general
partner that his judgment on official matters affecting his partner
would be impaired, or would be perceived to be impaired, by the public
yee's relationship to his general partner is that of a
limited partner in a large partnership, i.e. one with at least 100
limited partners. OGE believes that, in most such cases, an employee
would not have enough of a personal relationship with his general
partner that his judgment on official matters affecting his partner
would be impaired, or would be perceived to be impaired, by the public.
In cases where an employee is a limited partner in a partnership with
fewer than 100 limited partners, he would have to receive an individual
waiver under section 208(b)(1) before he could participate in
particular matters in which he knows his general partner has a
financial interest.
C. Miscellaneous Exemptions
1. Hiring Decisions
Employees throughout Government are expected to participate in
routine personnel matters that involve current employees of an entity
in which they may have a financial interest, but the Government
personnel matters are unlikely to have any significant effect on their
financial interests. In most such cases, it would be difficult to
conclude that the employee has a disqualifying financial interest
within the meaning of section 208 in the hiring of an employee. In
certain exceptional cases, however, an employee's participation in a
hiring decision might affect his financial interests. For example, an
employee may be called upon to participate in a decision to hire a new
employee currently working for a company in which he owns stock. In the
case of some highly paid executives, the executive's departure may
cause the company to incur gains or losses, thereby creating a
disqualifying financial interest. An exemption under section 208(b)(2)
would permit the employee to carry out his duties without raising any
serious conflict of interest concerns
to hire a new
employee currently working for a company in which he owns stock. In the
case of some highly paid executives, the executive's departure may
cause the company to incur gains or losses, thereby creating a
disqualifying financial interest. An exemption under section 208(b)(2)
would permit the employee to carry out his duties without raising any
serious conflict of interest concerns.
Section 2640.203(a) as proposed would permit an employee who owns
publicly traded securities issued by a corporation, or who has a vested
interest in a pension plan sponsored by a corporation which issues
publicly traded securities, to participate in Government hiring
decisions involving an applicant currently employed by the corporation.
This exemption would allow an employee to continue participation in
routine hiring procedures even when the matter might nominally affect
his interest in the corporation. The exemption would also apply in
cases where any other person specified in section 208 owns publicly
traded securities issued by the corporation or participates in a
pension plan sponsored by the corporation.
2. Employees on Leave from Institutions of Higher Education
Proposed Sec. 2640.203(b) would permit an employee who is on a
leave of absence from an institution of higher education (defined as an
educational institution described in 20 U.S.C. 1141(a)) to participate
in matters of general applicability which would affect the financial
interest of the institution. Because of the tenure system, an employee
who comes from an academic setting to work in the Federal Government
often takes a leave of absence from his academic position rather than
terminate the position entirely
efined as an
educational institution described in 20 U.S.C. 1141(a)) to participate
in matters of general applicability which would affect the financial
interest of the institution. Because of the tenure system, an employee
who comes from an academic setting to work in the Federal Government
often takes a leave of absence from his academic position rather than
terminate the position entirely. Under these circumstances, in cases
where the employee's involvement in a Government matter would affect
the educational institutional only as part of a larger class of
similarly affected institutions, the likelihood of a conflict of
interest is sufficiently remote that an exemption permitting the
employee to act is warranted.
The proposed exemption would permit the employee to act only in
matters affecting the institution from which he is on leave, not his
own direct financial interests. For example, an employee could
participate in developing a research plan that is expected to result in
a grant announcement soliciting proposals from researchers to study a
particular medical procedure even if he knows that the university from
which he is on leave may submit a proposal. On the other hand, the
employee could not participate under this exemption in a Government
decision to increase the current funding levels of a certain type of
research conducted by a group of colleges and universities, including
the school from which he is on leave, if his university salary when he
returns will be paid from an affected research grant.
3. Multi-campus Institutions of Higher Education
18 U.S.C. 208 prohibits an employee, including a special Government
employee, from acting in a Government matter which would have a direct
and predictable effect on the financial interest of his employer. In
the case of some employees, particularly special Government employees,
the non-Federal employer may be a multi-campus State institution of
higher education
stitutions of Higher Education
18 U.S.C. 208 prohibits an employee, including a special Government
employee, from acting in a Government matter which would have a direct
and predictable effect on the financial interest of his employer. In
the case of some employees, particularly special Government employees,
the non-Federal employer may be a multi-campus State institution of
higher education. Even though the employee may be employed by only one
campus of the institution, his employer is the entire institution and
he is therefore barred from acting in official matters which affect any
of the institution's campuses.
To lessen the hardship that would result from the application of
section 208 in many cases involving multi-campus institutions of higher
education and to alleviate the need for numerous individual waivers,
the exemption at proposed Sec. 2640.203(c) would permit an employee to
act in matters affecting one campus of a state multi-campus institution
of higher education if the employee is employed in a position with no
multi-campus responsibilities at a different campus of the same
institution. Where an employee is employed on one campus of an
institution, he is not likely to be involved with matters occurring on
other campuses, and therefore his interests in those matters are
sufficiently remote that a blanket waiver would be appropriate. The
exemption would allow an employee to participate in matters affecting
other campuses of the institution only if his responsibilities are
confined to the one campus where he is employed; a person whose
responsibilities cross more than one campus would not be able to
participate in any particular matter involving any campus of the
institution without first receiving an individual waiver under 18
U.S.C. 208(b)(1).
4. Employees Whose Official Duties Affect the Financial Interests of
Government Employees
Section 2640.203(d) as proposed would restate the exemptive
provision contained in interim rule Sec
ilities cross more than one campus would not be able to
participate in any particular matter involving any campus of the
institution without first receiving an individual waiver under 18
U.S.C. 208(b)(1).
4. Employees Whose Official Duties Affect the Financial Interests of
Government Employees
Section 2640.203(d) as proposed would restate the exemptive
provision contained in interim rule Sec. 2640.101 of 5 CFR, which is
being separately published in the Federal Register by OGE, that applies
to interests that arise from employment in the executive branch of the
Federal Government. With two exceptions, the provision exempts all
disqualifying financial interests in Government salary and benefits,
and in Social Security and veterans' benefits. The exemption does not
permit an employee to make (1) determinations that individually or
specially affect his own financial interest in Government salary and
benefits, or (2) determinations, requests, or recommendations that
individually or specially relate to, or affect the Government
employment-related financial interests of any other person specified in
section 208, such as the employee's spouse, minor child, or general
partner. Furthermore, a note following the section explains that the
exemption does not permit an employee to take any action in violation
of any other statutory or regulatory requirement.
5. Participation in Discount and Incentive Programs
The proposed exemption at Sec. 2640.203(e) concerns benefits earned
in discount, incentive and other similar programs. These benefits might
include, for example, frequent flier mileage, upgraded seating on
airplanes, free tickets for additional airplane flights, and discounted
rates for rental cars and hotel rooms. Typically these programs are
established by commercial entities to generate loyalty to a particular
company. Often participants in the programs earn benefits based on the
amount of the company's services they utilize during a specified
period
quent flier mileage, upgraded seating on
airplanes, free tickets for additional airplane flights, and discounted
rates for rental cars and hotel rooms. Typically these programs are
established by commercial entities to generate loyalty to a particular
company. Often participants in the programs earn benefits based on the
amount of the company's services they utilize during a specified
period. Employees may participate in such programs in a personal
capacity, and usually participation would raise no concerns under
section 208. However, in unusual cases, the benefits may create a
financial interest of the employee in certain types of matters.
Employees who act in Government matters which affect an entity's
ability or inclination to honor its commitment to provide benefits may
have a disqualifying financial interest in those matters. The exemption
proposed at Sec. 2640.203(e) would permit an employee who participates
in such a significant way in matters affecting one of these entities to
participate in these agency matters even if he, or any other person
specified in section 208, participates in the benefit program. In the
case of frequent flier programs, for example, this might include
employees of the Federal Aviation Administration, or the Pension
Benefit Guaranty Corporation, or the Antitrust Division of the
Department of Justice.
6. Mutual Insurance Companies
An employee's interest as a policyholder of life, health,
automobile, house and other types of insurance does not often create a
section 208 disqualifying financial interest because there are not many
Government matters in which an employee could participate that would
affect an insurance company's ability or inclination to continue the
benefits to which the employee is entitled under the policy. In the
unusual case where an employee were assigned to participate in such a
significant matter, the employee should first obtain an individual
waiver under section 208(b)(1)
e there are not many
Government matters in which an employee could participate that would
affect an insurance company's ability or inclination to continue the
benefits to which the employee is entitled under the policy. In the
unusual case where an employee were assigned to participate in such a
significant matter, the employee should first obtain an individual
waiver under section 208(b)(1).
In the case of mutual insurance companies, however, employees may
have interests in the company other than those involving the
continuation of benefits. Mutual insurance company policyholders may
have an interest in the overall financial health of the
mutual insurance company because the amount of the policyholders'
premiums are based upon the profitability of the company. In such
cases, the policyholder would have a disqualifying financial interest
in any particular matter that would affect the company's profitability
or general financial health. The proposed exemption at Sec. 2640.203(f)
would permit an employee to participate in any particular matter,
including a matter involving parties, that would affect the financial
interest of the employee, or any other individual specified in section
208, as a mutual insurance policyholder.
The exemption would not apply, however, if the matter would affect
the company's ability to comply with its obligation to pay claims under
the policy or to pay the employee the cash value of the policy. The
exemption would, for example, allow an employee to participate in
Government matters where his mutual insurance company insures a party
to the matter as long as the matter was not so significant that it
would impair the company's ability to satisfy its obligation to pay
claims under the policy or to pay the employee the cash value of the
policy. The exemption also would not apply when an entity specified in
section 208 (e.g
ow an employee to participate in
Government matters where his mutual insurance company insures a party
to the matter as long as the matter was not so significant that it
would impair the company's ability to satisfy its obligation to pay
claims under the policy or to pay the employee the cash value of the
policy. The exemption also would not apply when an entity specified in
section 208 (e.g. a corporation that the employee serves as officer or
director) rather than the employee himself or other individual
specified in section 208 is a policyholder. OGE decided not to extend
the exemption to this situation because of concern whether the
financial interest of a corporation or other large entity as a
policyholder might be considerably greater than one which could be
considered ``inconsequential'' under the statute.
7. Special Government Employees Serving on Advisory Committees
Federal agencies often utilize the services of outside experts by
forming advisory committees under the Federal Advisory Committee Act, 5
U.S.C. app. These committees are organized specifically to obtain the
advice and recommendations of persons with expertise in a particular
field. Therefore, many of the persons serving on an advisory committee
will likely be employed or have some type of business relationship with
private sector organizations that may be affected by the matter under
review by the committee. Many advisory committee members are appointed
as special Government employees and are therefore subject to the
requirements of section 208.\6\
a particular
field. Therefore, many of the persons serving on an advisory committee
will likely be employed or have some type of business relationship with
private sector organizations that may be affected by the matter under
review by the committee. Many advisory committee members are appointed
as special Government employees and are therefore subject to the
requirements of section 208.\6\
\6\In some cases, a person may be serving on an advisory
committee in a representative capacity on behalf of a non-
governmental organization, group or industry. Section 208 does not
apply to committee members serving in a representative capacity
because they are not considered special Government employees.
Accordingly, a representative does not need a waiver or exemption as
described in this proposed regulation in order to participate in
committee matters. See generally OGE Informal Advisory Letter 82x22
(July 9, 1982), OGE Advisory Publication, p. 325.
---------------------------------------------------------------------------
When 18 U.S.C. 208 was amended in 1989, a new waiver authority was
added concerning the interests of persons serving on advisory
committees. This new authority, at section 208(b)(3), permits an agency
to waive, on an individual basis, any disqualifying financial interest
of a special Government employee (SGE) serving on an advisory committee
if the need for the employee's services outweighs the potential for a
conflict of interest. Nevertheless, agencies which utilize the services
of a large number of special Government employees on advisory
committees still have to prepare innumerable waivers, largely on a
routine basis, for the disqualifying interests of these employees. To
eliminate the need for some of these individual waivers, the proposed
regulation at Sec
vices outweighs the potential for a
conflict of interest. Nevertheless, agencies which utilize the services
of a large number of special Government employees on advisory
committees still have to prepare innumerable waivers, largely on a
routine basis, for the disqualifying interests of these employees. To
eliminate the need for some of these individual waivers, the proposed
regulation at Sec. 2640.203(g) would exempt the employment interests of
special Government employees serving on advisory committees, permitting
them to participate in any particular matter of general applicability
not involving specific parties. The provision would specifically permit
a covered employee to act in a particular matter affecting a financial
interest created because of his employment status. This would include,
for example, the interests of an SGE's principal employer in a
regulatory matter applicable to all similarly situated entities. The
exemption would not apply, however, if the matter would have a special
or distinct effect on the person other than as part of a class.
The Office of Government Ethics believes that this special
exemption for members of advisory committees can be justified because
the public's interest in the integrity of advisory committee
proceedings is protected by the nature of the proceedings themselves.
The Federal Advisory Committee Act requires that advisory committee
meetings be open to the public, except in unusual circumstances.
Moreover, the membership of advisory committees must be balanced so
that a variety of viewpoints will be represented. Both of these
requirements will ensure that the public is aware of a committee
member's ties to persons who may be affected by the committee's
deliberations. Finally, the findings of an advisory committee are not
binding on an agency, but merely constitute recommendations that can be
adopted or rejected by the agency.
Limitations on the use of the exemption would further ensure the
integrity of the advisory committee process
sure that the public is aware of a committee
member's ties to persons who may be affected by the committee's
deliberations. Finally, the findings of an advisory committee are not
binding on an agency, but merely constitute recommendations that can be
adopted or rejected by the agency.
Limitations on the use of the exemption would further ensure the
integrity of the advisory committee process. First, the exemption would
apply only to matters of general applicability which would not have a
special and distinct effect on the affected person. Thus, the exemption
would not permit a special Government employee to act in a matter in
which the affected person was a party, or the competitor of a party.
Second, the exemption would apply only to the financial interests which
arise from the special Government employee's non-Federal employment,
such as the employee's salary or the overall financial well-being of
the entity or person who employs the special Government employee. It
would not apply to the employee's stockholding interest in his
employer, although such an interest could be exempt under
Sec. 2640.202(c) of this proposed regulation or under Sec. 2640.201(c)
if stock is part of an employee benefit plan as defined in the proposed
exemption. Moreover, a disqualifying financial interest arising from
the ownership of stock by the special Government employee could be
waived on an individual basis under section 208(b)(1) or (b)(3).
8. Directors of Federal Reserve Banks
Although the other conflict of interest prohibitions in title 18 do
not apply to the Directors of the twelve Federal Reserve Banks
throughout the United States, the Directors are subject to the
requirements of section 208. Each of the twelve banks has nine
Directors, three of whom represent the interests of that Bank's
stockholding member banks, and six of whom represent the interests of
the public, with due consideration to the interests of commerce,
industry, services, labor and consumers
twelve Federal Reserve Banks
throughout the United States, the Directors are subject to the
requirements of section 208. Each of the twelve banks has nine
Directors, three of whom represent the interests of that Bank's
stockholding member banks, and six of whom represent the interests of
the public, with due consideration to the interests of commerce,
industry, services, labor and consumers. Because of their ties to the
financial services industry and their communities, it is likely that at
least some of the Directors will have financial conflicts with their
duties. The proposed regulation at Sec. 2640.203(h) would exempt the
Directors from the application of section 208 for two primary
activities: the role of Directors in establishing the interest rate to
be charged on loans made by Reserve Banks, and the role the Directors
may play in extending credit to healthy financial institutions or to
financial institutions in hazardous
condition. The exemptions, which were first issued by the Federal
Reserve in 1978 and which are currently set forth in 12 CFR 264a.5, are
necessary to resolve any possible conflict between the Directors'
statutorily mandated representational function and the performance of
their official duties.
In general, proposed Sec. 2640.203(h) would permit a Federal
Reserve Director to act in matters involving (1) the establishment of
rates to be charged member banks for advances and discounts; (2)
approval or ratification of extensions of credit, advances or discounts
to depository institutions that are not in a hazardous financial
condition; (3) approval or ratification of extensions of credit,
advances or discounts to depository institutions that are in a
hazardous condition as determined by the President of the Bank in
accordance with 12 CFR 264a.3, but only when certain conditions are
met; and (4) consideration of monetary policy matters, regulations,
statutes, or other similar matters of broad applicability
ancial
condition; (3) approval or ratification of extensions of credit,
advances or discounts to depository institutions that are in a
hazardous condition as determined by the President of the Bank in
accordance with 12 CFR 264a.3, but only when certain conditions are
met; and (4) consideration of monetary policy matters, regulations,
statutes, or other similar matters of broad applicability. As described
above, these exemptions would simply continue existing regulatory
exemptions for Reserve Bank Directors.
9. Medical Products and Devices
Section 2640.203(i) would contain an exemption for special
Government employees who serve on advisory committees considering the
approval or classification of medical products or devices. Often these
special Government employees are employed by hospitals or other medical
facilities that purchase these products or devices for use by their
patients. Similarly, the special Government employees may prescribe the
product or device for their own patients. In some cases, the employees
may have a disqualifying financial interest in the matters under
consideration by the committee because their employers' profits from
providing these products or devices to patients by billing more than
the cost of the item. In other cases, it is possible that a special
Government employee with private patients could affect his own
financial interest by, for example, deciding not to reclassify a drug
to permit it to be sold over the counter, thereby resulting in a loss
of patients who would otherwise have to seek a prescription from him.
The Office of Government Ethics believes that the types of
financial interests described in the proposed exemption are
inconsequential enough that special Government employees who serve on
these types of advisory committees can be expected to act impartially.
Of course, the exemption would apply only when the financial interest
is of the type described in the regulation
rescription from him.
The Office of Government Ethics believes that the types of
financial interests described in the proposed exemption are
inconsequential enough that special Government employees who serve on
these types of advisory committees can be expected to act impartially.
Of course, the exemption would apply only when the financial interest
is of the type described in the regulation. Other types of financial
interests, such as those arising from the ownership of stock in the
manufacturer of the product or device, or employment by the
manufacturer would not be not covered by this exemption. Such interests
may be covered by other exemptions (such as proposed Sec. 2640.202(a))
or an employee may obtain an individual waiver under section 208(b)(1)
or (b)(3).
D. Prohibited Financial Interests
The provision at Sec. 2640.204 of this proposed regulation would
make clear that none of the exemptions apply to financial interests
held or acquired in violation of a statute or agency supplemental
regulation issued under 5 CFR 2635.105, or that are otherwise
prohibited under 5 CFR 2635.403(b). This provision would prevent an
employee who knowingly acquires a prohibited financial interest and who
also participates in an agency matter affecting that interest, from
asserting that the exemption provisions described in this rule preclude
the Government from pursuing appropriate sanctions against him.
E. Employee Responsibility
, or that are otherwise
prohibited under 5 CFR 2635.403(b). This provision would prevent an
employee who knowingly acquires a prohibited financial interest and who
also participates in an agency matter affecting that interest, from
asserting that the exemption provisions described in this rule preclude
the Government from pursuing appropriate sanctions against him.
E. Employee Responsibility
Section 2640.205 as proposed states that each employee assigned to
a matter which may affect a financial interest within the scope of
section 208(a) is responsible for determining, prior to taking action,
whether an exemption permits him to participate in the matter. If an
employee is unsure whether an exemption is applicable in a particular
situation, he should consult with the agency ethics official prior to
taking action. As proposed, this regulation would be interpreted
strictly, so that an employee who has a financial interest in a matter
could not act in the matter in reliance on any provision in the
regulation unless the interest were specifically exempted by the
regulation. Alternatively, an employee may seek an individual waiver
under 18 U.S.C. 208(b)(1) or (b)(3).
F. Existing Agency Exemptions
This proposed rule at Sec. 2640.206 contains a provision designed
to resolve questions concerning reliance on waivers issued by agency
regulation prior to November 30, 1989, the effective date of the 1989
Ethics Reform Act revisions to 18 U.S.C. 208. The provision would make
clear that an employee who, prior to the effective date of this
regulation, participated in a matter in which he had a financial
interest acted in accordance with applicable regulations if he acted in
reliance on a regulatory waiver issued by his employing agency under 18
U.S.C. 208(b)(2) as in effect prior to November 30, 1989.
III. Waivers Issued Pursuant to 18 U.S.C. 208(b)(1)
would make
clear that an employee who, prior to the effective date of this
regulation, participated in a matter in which he had a financial
interest acted in accordance with applicable regulations if he acted in
reliance on a regulatory waiver issued by his employing agency under 18
U.S.C. 208(b)(2) as in effect prior to November 30, 1989.
III. Waivers Issued Pursuant to 18 U.S.C. 208(b)(1)
In some situations an employee may have a disqualifying financial
interest which would not be exempted from the requirements of section
208(a) by this proposed regulation as being too remote or
inconsequential. For example, some disqualifying financial interests
are simply too difficult to define precisely enough in a regulation,
while in other cases OGE is unable to describe with enough
particularity the matters in which the exemptions would apply. In
circumstances such as these, an agency may determine pursuant to
section 208(b)(1) that an individual waiver should be granted to the
employee. The determination required in these cases is that the
employee's disqualifying interest in the matter is not so substantial
as to be deemed likely to affect the integrity of the services which
the Government expects from the employee. In short, the agency must
determine whether the employee's interest in the matter is not so
significant that the employee can be relied upon to act or appear to
act impartially in the matter. While final determinations in these
matters rest with the agencies, this proposed regulation at
Sec. 2640.301 would establish uniform procedural requirements for such
waivers and would provide guidance to agencies in making the
determinations necessary for the granting of waivers.
An agency granting a waiver pursuant to section 208(b)(1) should
observe a number of procedural requirements
er. While final determinations in these
matters rest with the agencies, this proposed regulation at
Sec. 2640.301 would establish uniform procedural requirements for such
waivers and would provide guidance to agencies in making the
determinations necessary for the granting of waivers.
An agency granting a waiver pursuant to section 208(b)(1) should
observe a number of procedural requirements. First, the financial
interest involved, and the nature and circumstances of the particular
Government matter or matters in which the employee would act must be
fully disclosed to the Government official responsible for issuing the
waiver. If the official decides to grant the waiver, it must be in
writing and be issued by the person responsible for the employee's
appointment (or by a person to whom the responsibility to issue such
waivers has been delegated.) A waiver must be issued prior to any
action on the matter by the employee. The waiver should describe the
matter or matters to which it applies, the employee's role in these
matters, and any limitations to be placed on the employee's involvement
in them. There is no requirement in the rule as proposed that the
disqualifying financial interest, the particular matter to which the
waiver applies, or the
employee's role in the matter be described with any specific degree of
particularity. This would, for example, permit the agency issuing the
waiver to describe the employee's duties in a general way, or to
describe a class of matters to which the waiver would apply. Of course,
agencies should endeavor to formulate waivers with enough specificity
that a member of the public would have a clear understanding of the
circumstances to which the waiver applies. In addition, the waiver must
be based on a determination that the employee's financial interest is
not so substantial as to be deemed likely to affect the integrity of
the employee's services to the Government
se,
agencies should endeavor to formulate waivers with enough specificity
that a member of the public would have a clear understanding of the
circumstances to which the waiver applies. In addition, the waiver must
be based on a determination that the employee's financial interest is
not so substantial as to be deemed likely to affect the integrity of
the employee's services to the Government. A waiver may apply to both
present and future financial interests provided that the interests are
described with specificity.
In granting a waiver, section 208(b)(1) specifically requires an
agency to determine whether the employee's financial interest in the
matter is not so substantial as to affect the integrity of the
employee's services to the Government. In large part, this
determination depends on the size of the financial interest, its
importance to the employee, and the employee's ability to affect his
own financial interest directly. Information concerning an employee's
good character and past record are irrelevant in making the waiver
determination and should not be relied upon as a basis for granting a
waiver.
The proposed regulation at Sec. 2640.301(b) lists five factors that
an agency official may consider in judging the propriety of granting a
waiver. First, the responsible official should consider the type of
interest creating the disqualification, such as stock, bonds, or a job
offer. Consideration should also be given to the identity of the person
whose financial interest is involved. In particular, if the financial
interest is not the employee's own, but is the interest of one of the
other persons specified in section 208, the agency official should
examine the relationship of the person to the employee. Employment
interests often create ties stronger than mere stock ownership that
might affect an employee's judgment
ty of the person
whose financial interest is involved. In particular, if the financial
interest is not the employee's own, but is the interest of one of the
other persons specified in section 208, the agency official should
examine the relationship of the person to the employee. Employment
interests often create ties stronger than mere stock ownership that
might affect an employee's judgment. Moreover, the ethics official
should consider the effect of the matter on the interests of the person
specified in the statute, not just the ultimate effect, if any, on the
interests of the employee. Next, the official should consider the
dollar value of the disqualifying interest to the extent it is known or
can be estimated, and the value of the financial instrument or holding
which is creating the disqualifying interest. Finally, the responsible
official should consider the nature and importance of the employee's
role in the matter in which he would be allowed to act, including the
extent to which he would have to exercise discretion. For example, the
agency should consider whether the employee will play a primary role in
dealing with an entity in which he has a financial interest, or
contribute substantially to a decision affecting such an entity, or
play a peripheral role in a matter involving the entity.
Agencies may also consider certain other factors when deciding
whether an employee's financial interest is substantial enough to
affect the integrity of his services. A responsible official may
consider the sensitivity of the agency matter in which the employee
would act, the need for the employee's services in the particular
matter, and whether adjustments could be made in the employee's duties
that would reduce or eliminate the likelihood that the integrity of the
employee's services would be questioned
al enough to
affect the integrity of his services. A responsible official may
consider the sensitivity of the agency matter in which the employee
would act, the need for the employee's services in the particular
matter, and whether adjustments could be made in the employee's duties
that would reduce or eliminate the likelihood that the integrity of the
employee's services would be questioned. A decision by the responsible
official to grant a waiver pursuant to section 208(b)(1) constitutes a
determination under 5 CFR 2635.502 of the Standards of Ethical Conduct
that the Government's interest in having an employee participate in a
particular matter outweighs any questions concerning an employee's
impartiality.
IV. Waivers Issued Pursuant to 18 U.S.C. Section 208(b)(3)
This proposed regulation would also address the authority of
agencies to issue waivers pursuant to section 208(b)(3) for special
Government employees who are members of an advisory committee
established under the Federal Advisory Committee Act (5 U.S.C. app.) or
nominees to such a committee if these individuals have a disqualifying
financial interest. The basis for a determination to grant a waiver
under section 208(b)(3) is somewhat different from that which underlies
a waiver granted pursuant to section 208(b)(1). To allow an individual
to participate in advisory committee matters from which he would
otherwise be disqualified, the agency must balance the need for the
individual's services against the potential for a conflict of interest
created by the employee's disqualifying interest. After reviewing the
financial disclosure statement filed by the individual pursuant to the
Ethics in Government Act of 1978, the official responsible for
appointing the individual to the committee must certify that the need
for the individual's services outweighs the potential for conflict
created by the financial interest involved.
In making this certification, Sec
s disqualifying interest. After reviewing the
financial disclosure statement filed by the individual pursuant to the
Ethics in Government Act of 1978, the official responsible for
appointing the individual to the committee must certify that the need
for the individual's services outweighs the potential for conflict
created by the financial interest involved.
In making this certification, Sec. 2640.302(b) as proposed would
instruct the responsible official to consider the uniqueness of the
individual's qualifications and the difficulty of finding a similarly
qualified individual to serve on the committee. As in the case of
making a determination whether a waiver should be granted under section
208(b)(1), the official should also consider the type of interest that
is creating the disqualification, as well as its dollar value to the
extent it is known or can be estimated. Consideration should also be
given to the identity of the person whose financial interest is
creating the disqualification and that person's relationship to the
employee. Finally, the official should consider the likelihood that the
advisory committee will consider matters which will affect the
individual's financial interests individually or particularly.
The regulation at proposed Sec. 2640.302(a) also states that the
agency should follow procedural requirements similar to those for
granting individual waivers under 18 U.S.C. 208(b)(1). Waivers issued
pursuant to section 208(b)(3) may be applicable only to special
Government employee members or prospective members of advisory
committees within the meaning of the Federal Advisory Committee Act.
V. Consultation and Notification Concerning Waivers
s that the
agency should follow procedural requirements similar to those for
granting individual waivers under 18 U.S.C. 208(b)(1). Waivers issued
pursuant to section 208(b)(3) may be applicable only to special
Government employee members or prospective members of advisory
committees within the meaning of the Federal Advisory Committee Act.
V. Consultation and Notification Concerning Waivers
Proposed Sec. 2640.303, in accordance with section 301(d) of
Executive Order 12674, would require a responsible official, when
practicable, to consult formally or informally with the Office of
Government Ethics prior to granting a waiver under either Sec. 2640.301
or Sec. 2640.302 as proposed. The consultation need not take any
particular form and may be done informally by telephone. While these
waiver determinations are within an agency's discretion, consultation
with OGE affords the agency official an opportunity to benefit from
OGE's experience and knowledge as to how these provisions are generally
interpreted and whether the agency's proposed solution is legally
sufficient and is within the range of reasonable interpretations. After
issuance of a waiver, a copy of the waiver must be transmitted promptly
to OGE. See section 301(d) of E.O. 12674, as modified, and 5 CFR
2635.402(d)(4).
VI. Public Availability of Waivers
Agencies are generally required to make copies of waivers issued
pursuant
to 18 U.S.C. 208(b)(1) or (b)(3) available to the public upon request.
See 18 U.S.C. 208(d)(1) and proposed Sec. 2640.304. The procedures to
be used for providing access to these waivers are those which are used
for public access to financial disclosure statements under the Ethics
in Government Act. The procedures are described at 5 CFR 2634.603.
There are certain limitations on the public availability of waivers
granted pursuant to 18 U.S.C. 208(b)(1) and (b)(3)
tive Order 12866
In promulgating this proposed regulation, the Office of Government
Ethics has adhered to the regulatory philosophy and the applicable
principles of regulation set forth in section 1 of Executive Order
12866, Regulatory Planning and Review. This proposed rule has also been
reviewed by the Office of Management and Budget under that Executive
order.
Regulatory Flexibility Act
As Director of the Office of Government Ethics, I certify under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) that this proposed
regulation will not have a significant economic impact on a substantial
number of small entities because it affects only Federal employees.
Paperwork Reduction Act
The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply
because this proposed regulation does not contain information
collection requirements that require the approval of the Office of
Management and Budget.
List of Subjects in 5 CFR Part 2640
Conflict of interests, Government employees.
Approved: August 9th, 1995.
Donald E. Campbell,
Deputy Director, Office of Government Ethics.
Accordingly, for the reasons set forth in the preamble, the Office
of Government Ethics proposes to amend title 5, chapter XVI, subchapter
B of the Code of Federal Regulations by adding a new part 2640 to read
as follows:
PART 2640--INTERPRETATION, EXEMPTIONS AND WAIVER GUIDANCE
CONCERNING 18 U.S.C. 208 (ACTS AFFECTING A PERSONAL FINANCIAL
INTEREST)
Subpart A--General Provisions
Sec.
2640.101 Purpose.
2640.102 Definitions.
2640.103 Prohibition.
Subpart B--Exemptions Pursuant to 18 U.S.C. 208(b)(2)
2640.201 Exemptions for interests in mutual funds, common trust
funds, unit investment trusts, and employee benefit plans.
2640.202 Exemptions for interests in securities.
2640.203 Miscellaneous exemptions.
2640.204 Prohibited financial interests.
2640.205 Employee responsibility.
2640.206 Existing agency exemptions.
Subpart C--Individual Waivers
rt B--Exemptions Pursuant to 18 U.S.C. 208(b)(2)
2640.201 Exemptions for interests in mutual funds, common trust
funds, unit investment trusts, and employee benefit plans.
2640.202 Exemptions for interests in securities.
2640.203 Miscellaneous exemptions.
2640.204 Prohibited financial interests.
2640.205 Employee responsibility.
2640.206 Existing agency exemptions.
Subpart C--Individual Waivers
2640.301 Waivers issued pursuant to 18 U.S.C. 208(b)(1).
2640.302 Waivers issued pursuant to 18 U.S.C. 208(b)(3).
2640.303 Consultation and notification regarding waivers.
2640.304 Public availability of agency waivers.
Authority: 5 U.S.C. App. (Ethics in Government Act of 1978); 18
U.S.C. 208; E.O. 12674, 54 FR 15159, 3 CFR, 1989 Comp., p. 215, as
modified by E.O. 12731, 55 FR 42547, 3 CFR, 1990 Comp., p. 306.
Subpart A--General Provisions
Sec. 2640.101 Purpose.
18 U.S.C. 208(a) prohibits an officer or employee of the executive
branch, of any independent agency of the United States, of the District
of Columbia, or Federal Reserve bank director, officer, or employee, or
any special Government employee from participating in an official
capacity in particular matters in which he has a personal financial
interest, or in which certain persons or organizations with which he is
affiliated have a financial interest. The statute is intended to
prevent an employee from allowing personal interests to affect his
official actions, and to protect governmental processes from actual or
apparent conflicts of interests. However, in certain cases, the nature
and size of the financial interest and the nature of the matter in
which the employee would act are unlikely to affect an employee's
official actions. Accordingly, the statute permits waivers of the
disqualification provision in certain cases, either on an individual
basis or pursuant to general regulation
from actual or
apparent conflicts of interests. However, in certain cases, the nature
and size of the financial interest and the nature of the matter in
which the employee would act are unlikely to affect an employee's
official actions. Accordingly, the statute permits waivers of the
disqualification provision in certain cases, either on an individual
basis or pursuant to general regulation. Section 208(b)(2) provides
that the Director of the Office of Government Ethics may, by
regulation, exempt from the general prohibition, financial interests
which are too remote or too inconsequential to affect the integrity of
the services of the employees to which the prohibition applies. This
regulation describes those financial interests. The regulation also
provides guidance to agencies on the factors to consider when issuing
individual waivers under 18 U.S.C. 208(b)(1) or (b)(3), and provides an
interpretation of 18 U.S.C. 208(a).
Sec. 2640.102 Definitions.
For purposes of this part:
(a) Common trust fund means any fund as defined in 26 U.S.C. 584. A
common trust fund is maintained by a bank exclusively for the
collective investment and reinvestment of monies contributed to the
fund in its capacity as trustee, executor, administrator, or guardian.
Common trust funds are collections of individually established funds
for which a bank acts as fiduciary. The bank pools the funds for
investment purposes.
ny fund as defined in 26 U.S.C. 584. A
common trust fund is maintained by a bank exclusively for the
collective investment and reinvestment of monies contributed to the
fund in its capacity as trustee, executor, administrator, or guardian.
Common trust funds are collections of individually established funds
for which a bank acts as fiduciary. The bank pools the funds for
investment purposes.
(b) Diversified means that the fund, trust or plan does not have a
stated policy of concentrating its investments in any industry,
business, single country other than the United States, or bonds of a
single State within the United States and, in the case of:
(1) A mutual fund, means the assets of the mutual fund are
sufficiently varied that it meets the requirements of section 5(b)(1)
of the Investment Company Act of 1940, 15 U.S.C. 80a-5(b)(1), for a
diversified company;
(2) A common trust fund, means the fund is subject to the rules
regarding diversification established by the Office of the Comptroller
of the Currency at 12 CFR 9.18;
(3) A unit investment trust, means the assets of the trust are
sufficiently varied that it meets the requirements of section 851 of
the Internal Revenue Code, 26 U.S.C. 851, for a regulated investment
company; and
(4) An employee benefit plan, means that the plan's trustee has a
written policy of varying plan investments.
Note: A mutual fund meets the requirements of Section 5(b)(1) of
the Investment Company Act of 1940 if it is a ``diversified
company.'' A unit investment trust is diversified in accordance with
26 U.S.C. 851 if it is a ``regulated investment company.'' An
employee can determine if a fund or trust meets these standards by
locating a description of the fund as a ``diversified company'' or
the trust as a ``regulated investment company'' in the prospectus
for the fund or trust or by calling a broker or the manager of the
trust or fund
investment trust is diversified in accordance with
26 U.S.C. 851 if it is a ``regulated investment company.'' An
employee can determine if a fund or trust meets these standards by
locating a description of the fund as a ``diversified company'' or
the trust as a ``regulated investment company'' in the prospectus
for the fund or trust or by calling a broker or the manager of the
trust or fund. A common trust fund maintained by a national or State
bank can be presumed to be diversified in accordance with the
standards for diversification set by the Office of the Comptroller
of the Currency. An employee benefit plan is diversified if the plan
manager has a written policy of varying assets. This policy might be
found in materials describing the plan or may be obtained in a
written statement from the plan manager.
It is important to note that a mutual fund, unit investment
trust, common trust fund, or employee benefit plan that is
diversified for purposes of this regulation may not necessarily be
an excepted investment fund (EIF) for purposes of reporting
financial interests pursuant to 5 CFR 2634.311(c). In some cases, an
employee may have to report the underlying assets of a fund, trust
or plan on his financial disclosure statement even though an
exemption set forth in this regulation would permit the employee to
participate in a matter affecting the underlying assets of the fund,
trust or plan. Conversely, there may be situations in which no
exemption in this regulation is applicable to the assets of a fund,
trust or plan which is properly reported as an EIF on the employee's
financial disclosure statement.
(c) Employee means an officer or employee of the executive branch
of the United States, or of any independent agency of the United
States, a Federal Reserve bank director, officer, or employee, or an
officer or employee of the District of Columbia. The term also includes
a special Government employee as defined in 18 U.S.C. 202.
ed as an EIF on the employee's
financial disclosure statement.
(c) Employee means an officer or employee of the executive branch
of the United States, or of any independent agency of the United
States, a Federal Reserve bank director, officer, or employee, or an
officer or employee of the District of Columbia. The term also includes
a special Government employee as defined in 18 U.S.C. 202.
(d) Employee benefit plan means a plan as defined in section 3(3)
of the Employee Retirement Security Act of 1974, 29 U.S.C. 1002(3), and
that has more than one participant. An employee benefit plan is any
plan, fund or program established or maintained by an employer or an
employee organization, or both, to provide its participants medical,
disability, death, unemployment, or vacation benefits, training
programs, day care centers, scholarship funds, prepaid legal services,
deferred income, or retirement income.
(e) He, his, and him include she, hers, and her.
(f) Holdings means portfolio of investments.
(g) Independent trustee means a trustee who is independent of the
sponsor and the participants in a plan, or is a registered investment
advisor.
(h) Institution of higher education means an educational
institution as defined in 20 U.S.C. 1141 (a).
(i) Issuer means a person who issues or proposes to issue any
security, or has any outstanding security which it has issued.
(j) Long-term Federal Government security means a bond or note with
a maturity of one year or more issued by the United States Treasury
pursuant to 31 U.S.C. chapter 31.
(k) Municipal security means direct obligation of, or obligation
guaranteed as to principal or interest by, a State (or any of its
political subdivisions, or any municipal corporate instrumentality of
one or more States,) or the District of Columbia, Puerto Rico, the
Virgin Islands, or any other possession of the United States.
by the United States Treasury
pursuant to 31 U.S.C. chapter 31.
(k) Municipal security means direct obligation of, or obligation
guaranteed as to principal or interest by, a State (or any of its
political subdivisions, or any municipal corporate instrumentality of
one or more States,) or the District of Columbia, Puerto Rico, the
Virgin Islands, or any other possession of the United States.
(l) Mutual fund means an entity which is registered as a management
company under the Investment Company Act of 1940, as amended, (15
U.S.C. 80a-1 et seq.). For purposes of this rule, the term mutual fund
includes open-end and closed-end mutual funds and registered money
market funds.
(m) Particular matter involving specific parties includes any
judicial or other proceeding, application, request for a ruling or
other determination, contract, claim, controversy, investigation,
charge, accusation, arrest or other particular matter involving a
specific party or parties. The term typically involves a specific
proceeding affecting the legal rights of the parties, or an isolatable
transaction or related set of transactions between identified parties.
(n) Pension plan means any plan, fund or program maintained by an
employer or an employee organization, or both, to provide retirement
income to employees, or which results in deferral of income for periods
extending to, or beyond, termination of employment.
(o) Person means an individual, corporation, company, association,
firm, partnership, society or any other organization or institution.
(n) Pension plan means any plan, fund or program maintained by an
employer or an employee organization, or both, to provide retirement
income to employees, or which results in deferral of income for periods
extending to, or beyond, termination of employment.
(o) Person means an individual, corporation, company, association,
firm, partnership, society or any other organization or institution.
(p) Publicly traded security means a security as defined in
paragraph (r) of this section and which is:
(1) Registered with the Securities and Exchange Commission pursuant
to section 12 of the Securities Exchange Act of 1934 (15 U
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