[Federal Register Volume 60, Number 175 (Monday, September 11, 1995)]
[Proposed Rules]
[Pages 47208-47233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22174]




[[Page 47207]]

_______________________________________________________________________

Part II





Office of Government Ethics





_______________________________________________________________________



5 CFR Part 2640



Interpretation, Exemptions and Waiver Guidance Concerning Acts 
Affecting a Personal Financial Interest; Proposed Rule

Federal Register / Vol. 60, No. 175 / Monday, September 11, 1995 / 
Proposed Rules

[[Page 47208]]


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.

-----------------------------------------------------------------------

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.

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. 
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. 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.
    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 

[[Page 47209]]
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 
(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 * * *.

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. 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. 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.
    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 

[[Page 47210]]
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. 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. 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. 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). 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.''
---------------------------------------------------------------------------

    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). 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. 

[[Page 47211]]


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.
    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. 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. 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 
(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. 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 

[[Page 47212]]
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. 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.
    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. 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. 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. 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 

[[Page 47213]]
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.
---------------------------------------------------------------------------

    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. 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. 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. 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.
---------------------------------------------------------------------------

    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\

    \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.
---------------------------------------------------------------------------

    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 

[[Page 47214]]
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).
    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. 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. 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. 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 

[[Page 47215]]
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.
    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. 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. 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. 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.
    If the matter in which the employee would participate affects the 
State or 

[[Page 47216]]
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. 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. 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. 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. 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). 

[[Page 47217]]

    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. 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.
---------------------------------------------------------------------------

    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. 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 
(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. 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, 

[[Page 47218]]
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. 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. 
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. 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. 
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.
    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. 

[[Page 47219]]

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. 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. 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. 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. 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).
    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 

[[Page 47220]]
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. 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\

    \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. 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. 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. 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 

[[Page 47221]]
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. 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. 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

    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)

    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. 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 

[[Page 47222]]
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. 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. 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. 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. 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

    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 

[[Page 47223]]
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). Agencies may 
withhold from disclosure any information contained in a waiver which 
would be exempt from disclosure under the Freedom of Information Act, 5 
U.S.C. 552. In addition, for waivers issued under section 208(b)(3), an 
agency must withhold any information in the certification concerning an 
individual's financial interest that is more extensive than what is 
required to be disclosed by the individual in his financial disclosure 
statement under the Ethics Act. Agencies should also withhold 
information in any waiver which is otherwise subject to a prohibition 
on public disclosure under law.

VII. Matters of Regulatory Procedure

Administrative Procedure Act

    Interested persons are invited to submit written comments to OGE on 
this proposed regulation, to be received on or before November 13, 
1995. The Office of Government Ethics will review all comments received 
and consider any modifications to this rule as proposed which appear 
warranted before adopting a final rule on this matter.

Executive 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

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. 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.
    (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 

[[Page 47224]]

    (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. 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.
    (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.
    (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.
    (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.S.C. 781) 
and listed on a national or regional securities exchange or traded 
through NASDAQ;
    (2) Issued by an investment company registered pursuant to section 
8 of the Investment Company Act of 1940, as amended, (15 U.S.C. 80a-8); 
or
    (3) A corporate bond registered as an offering with the Securities 
and Exchange Commission under section 12 of the Securities Exchange Act 
of 1934 (15 U.S.C. 781) and issued by an entity whose stock is a 
publicly traded security.

    Note: National securities exchanges include the American Stock 
Exchange and the New York Stock Exchange. Regional exchanges include 
the Boston, Cincinnati, Intermountain (Salt Lake City), Midwest 
(Chicago), Pacific (Los Angeles and San Francisco), Philadelphia 
(Philadelphia and Miami), and Spokane stock exchanges.

    (q) Sector mutual fund means a mutual fund that concentrates its 
investments in an industry, business, single country other than the 
United States, or bonds of a single State within the United States.
    (r) Security means common stock, preferred stock, corporate bond, 
municipal security, mutual fund, long-term Federal Government security, 
and limited partnership interest.
    (s) Short-term Federal Government security means a bill with a 
maturity of less than one year issued by the United States Treasury 
pursuant to 31 U.S.C. chapter 31.
    (t) Special Government employee means those executive branch 
officers or employees specified in 18 U.S.C. 202(a). A special 
Government employee is retained, designated, appointed or employed to 
perform temporary duties either on a full-time or intermittent basis, 
with or without compensation, for a period not to exceed 130 days 
during any consecutive 365-day period.
    (u) Unit investment trust means an investment company as defined in 
15 U.S.C. 80a-4(2).


Sec. 2640.103  Prohibition.

    (a) Statutory prohibition. Unless permitted by 18 U.S.C. 208(b)(1)-
(4), an employee is prohibited by 18 U.S.C. 208(a) from participating 
personally and substantially in an official capacity in any particular 
matter in which, to his knowledge, he or any other person specified in 
the statute has a financial interest, if the particular matter will 
have a direct and predictable effect on that interest. The restrictions 
of 18 U.S.C. 208 are described more fully in 5 CFR 2635.401 and 
2635.402.
    (1) Particular matter. The term ``particular matter'' includes only 
matters that involve deliberation, decision, or action that is focused 
upon the interests of specific persons, or a discrete and identifiable 
class of persons. The term may include matters which do not involve 
formal parties and 

[[Page 47225]]
may extend to legislation or policy making that is narrowly focused on 
the interests of a discrete and identifiable class of persons. It does 
not, however, cover consideration or adoption of broad policy options 
directed to the interests of a large and diverse group of persons. The 
particular matters covered by this part include a judicial or other 
proceeding, application or request for a ruling or other determination, 
contract, claim, controversy, charge, accusation or arrest.

    Example 1: The Overseas Private Investment Corporation decides 
to hire a contractor to conduct EEO training for its employees. The 
award of a contract for training services is a particular matter.
    Example 2: The spouse of a high level official of the Internal 
Revenue Service (IRS) requests a meeting on behalf of her client (a 
major U.S. corporation) with IRS officials to discuss a provision of 
IRS regulations governing depreciation of equipment. The spouse will 
be paid a fee by the corporation for arranging and attending the 
meeting. The consideration of the spouse's request and the decision 
to hold the meeting are particular matters in which the spouse has a 
financial interest.
    Example 3: A regulation published by the Department of 
Agriculture applicable only to companies that operate meat packing 
plants is a particular matter.
    Example 4: A change by the Department of Labor to health and 
safety regulations applicable to all employers in the United States 
is not a particular matter. The change in the regulations is 
directed to the interests of a large and diverse group of persons.
    Example 5: The allocation of additional resources to the 
investigation and prosecution of white collar crime by the 
Department of Justice is not a particular matter. Similarly, 
deliberations on the general merits of an omnibus bill such as the 
Tax Reform Act of 1986 are not sufficiently focused on the interests 
of specific persons, or a discrete and identifiable group of persons 
to constitute participation in a particular matter.
    Example 6: The recommendations of the Council of Economic 
Advisors to the President about appropriate policies to maintain 
economic growth and stability are not particular matters. 
Discussions about economic growth policies are directed to the 
interests of a large and diverse group of persons.
    Example 7: The formulation and implementation of the response of 
the United States to the military invasion of a U.S. ally is not a 
particular matter. General deliberations, decisions and actions 
concerning a response are based on a consideration of the political, 
military, diplomatic and economic interests of every sector of 
society and are too diffuse to be focused on the interests of 
specific individuals or entities. However, at the time consideration 
is given to actions focused on specific individuals or entities, or 
a discrete and identifiable class of individuals or entities, the 
matters under consideration would be particular matters. These would 
include, for example, discussions whether to close a particular oil 
pumping station or pipeline in the area where hostilities are taking 
place, or a decision to seize a particular oil field or oil tanker.
    Example 8: A legislative proposal for broad health care reform 
is not a particular matter because it is not focused on the 
interests of specific persons, or a discrete and identifiable class 
of persons. It is intended to affect every person in the United 
States. However, the implementation, through regulations, of a 
section of the health care bill limiting the amount that can be 
charged for prescription drugs is sufficiently focused on the 
interests of pharmaceutical companies that it would be a particular 
matter.

    (2) Personal and substantial participation. To participate 
``personally'' means to participate directly. It includes the direct 
and active supervision of the participation of a subordinate in the 
matter. To participate ``substantially'' means that the employee's 
involvement is of significance to the matter. Participation may be 
substantial even though it is not determinative of the outcome of a 
particular matter. However, it requires more than official 
responsibility, knowledge, perfunctory involvement, or involvement on 
an administrative or peripheral issue. A finding of substantiality 
should be based not only on the effort devoted to the matter, but also 
on the importance of the effort. While a series of peripheral 
involvements may be insubstantial, the single act of approving or 
participating in a critical step may be substantial. Personal and 
substantial participation may occur when, for example, an employee 
participates through decision, approval, disapproval, recommendation, 
investigation or the rendering of advice in a particular matter.

    Example 1: An agency's Office of Enforcement is investigating 
the allegedly fraudulent marketing practices of a major corporation. 
One of the agency's personnel specialists is asked to provide 
information to the Office of Enforcement about the agency's 
personnel ceiling so that the Office can determine whether new 
employees can be hired to work on the investigation. The employee 
personnel specialist owns $10,000 worth of stock in the corporation 
that is the target of the investigation. She does not have a 
disqualifying financial interest in the matter (the investigation 
and possible subsequent enforcement proceedings) because her 
involvement is on a peripheral personnel issue and her participation 
cannot be considered ``substantial'' as defined in the statute.

    (3) Direct and predictable effect. (i) A particular matter will 
have a ``direct'' effect on a financial interest if there is a close 
causal link between any decision or action to be taken in the matter 
and any expected effect of the matter on the financial interest. An 
effect may be direct even though it does not occur immediately. A 
particular matter will not have a direct effect on a financial 
interest, however, if the chain of causation is attenuated or is 
contingent upon the occurrence of events that are speculative or that 
are independent of, and unrelated to, the matter. A particular matter 
that has an effect on a financial interest only as a consequence of its 
effects on the general economy does not have a direct effect within the 
meaning of this part.
    (ii) A particular matter will have a ``predictable'' effect if 
there is a real, as opposed to a speculative, possibility that the 
matter will affect the financial interest. It is not necessary, 
however, that the magnitude of the gain or loss be known, and the 
dollar amount of the gain or loss is immaterial.

    Example 1: An attorney at the Department of Justice is working 
on a case in which several large companies are defendants. If the 
Department wins the case, the defendants may be required to 
reimburse the Federal Government for their failure to adequately 
perform work under several contracts with the Government. The 
attorney's spouse is a salaried employee of one of the companies, 
working in a division that has no involvement in any of the 
contracts. She does not participate in any bonus or benefit plans 
tied to the profitability of the company, nor does she own stock in 
the company. Because there is no evidence that the case will have a 
direct and predictable effect on whether the spouse will retain her 
job or maintain the level of her salary, or whether the company will 
undergo any reorganization that would affect her interests, the 
attorney would not have a disqualifying financial interest in the 
matter. However, the attorney must consider, under the requirements 
of part 2635.502 of this chapter, whether his impartiality would be 
questioned if he continues to work on the case.
    Example 2: A special Government employee (SGE) whose principal 
employment is as a researcher at a major university is appointed to 
serve on an advisory committee that will evaluate the safety and 
effectiveness of a new medical device to regulate arrhythmic 
heartbeats. The device is being developed by Alpha Medical Inc., a 
company which also has contracted with the SGE's university to 
assist in developing another medical device related to kidney 
dialysis. There is no evidence that the advisory committee's 
determinations concerning the medical device under review will 
affect Alpha Medical's contract with the university to develop the 
kidney dialysis device. The SGE may participate in the committee's 
deliberations because those deliberations will not have a direct and 
predictable effect on the financial interests of the researcher or 
his employer.
    Example 3: The SGE in the preceding example is instead asked to 
serve on an advisory committee that has been convened 

[[Page 47226]]
to conduct a preliminary evaluation of the new kidney dialysis device 
developed by Alpha Medical under contract with the employee's 
university. Alpha's contract with the university requires the 
university to undertake additional testing of the device to address 
issues raised by the committee during its review. The committee's 
actions will have a direct and predictable effect on the 
university's financial interest.
    Example 4: An engineer at the Environmental Protection Agency 
(EPA) was formerly employed by Waste Management, Inc., a corporation 
subject to EPA's regulations concerning the disposal of hazardous 
waste materials. Waste Management is a large corporation, with less 
than 5% of its profits derived from handling hazardous waste 
materials. The engineer has a vested interest in a defined benefit 
pension plan sponsored by Waste Management which guarantees that he 
will receive payments of $500 per month beginning at age 62. As an 
employee of EPA, the engineer has been assigned to evaluate Waste 
Management's compliance with EPA hazardous waste regulations. 
Because there is no evidence that the engineer's monitoring 
activities will affect Waste Management's ability or willingness to 
pay his pension benefits when he is entitled to receive them at age 
62, he has no disqualifying financial interest in the Government 
matter. The EPA's monitoring activities will not have a direct and 
predictable effect on the employee's financial interest in his Waste 
Management pension. However, the engineer should consider whether, 
under the standards set forth in 5 CFR 2635.502, a reasonable person 
would question his impartiality if he acts in a matter in which 
Waste Management is a party.

    (b) Disqualifying financial interests. For purposes of 18 U.S.C. 
208(a) and this part, the term financial interest means the potential 
for gain or loss to the employee, or other person specified in section 
208, as a result of governmental action on the particular matter. The 
disqualifying financial interest might arise from ownership of certain 
financial instruments or investments such as stock, bonds, mutual 
funds, or real estate. Additionally, a disqualifying financial interest 
might derive from a salary, indebtedness, job offer, or any similar 
interest that may be affected by the matter.

    Example 1: An employee of the Department of the Interior owns 
transportation bonds issued by the State of Minnesota. The proceeds 
of the bonds will be used to fund improvements to certain State 
highways. In her official position, the employee is evaluating an 
application from Minnesota for a grant to support a State wildlife 
refuge. The employee's ownership of the transportation bonds does 
not create a disqualifying financial interest in Minnesota's 
application for wildlife funds because approval or disapproval of 
the grant will not in any way affect the current value of the bonds 
or have a direct and predictable effect on the State's ability or 
willingness to honor its obligation to pay the bonds when they 
mature.
    Example 2: An employee of the Bureau of Land Management owns 
undeveloped land adjacent to Federal lands in New Mexico. A portion 
of the Federal land will be leased by the Bureau to a mining company 
for exploration and development, resulting in an increase in the 
value of the surrounding privately owned land, including that owned 
by the employee. The employee has a financial interest in the lease 
of the Federal land to the mining company and, therefore, cannot 
participate in Bureau matters involving the lease unless he obtains 
an individual waiver pursuant to 18 U.S.C. 208(b)(1).
    Example 3: A special Government employee serving on an advisory 
committee studying the effectiveness of a new arthritis drug is a 
practicing physician with a specialty in treating arthritis. The 
drug being studied by the committee would be a low cost alternative 
to current treatments for arthritis. If the drug is ultimately 
approved, the physician will be able to prescribe the less expensive 
drug. The physician does not own stock in, or hold any position, or 
have any business relationship with the company developing the drug. 
Moreover, there is no indication that the availability of a less 
expensive treatment for arthritis will increase the volume and 
profitability of the doctor's private practice. Accordingly, the 
physician has no disqualifying financial interest in the actions of 
the advisory committee.

    (c) Interests of others. The financial interests of the following 
persons will serve to disqualify an employee to the same extent as the 
employee's own interests:
    (1) The employee's spouse;
    (2) The employee's minor child;
    (3) The employee's general partner;
    (4) An organization or entity which the employee serves as officer, 
director, trustee, general partner, or employee; and
    (5) A person with whom the employee is negotiating for, or has an 
arrangement concerning, prospective employment.

    Example 1: An employee of the Consumer Product Safety Commission 
(CPSC) has two minor children who have inherited shares of stock 
from their grandparents in a company that manufactures small 
appliances. Unless an exemption is applicable under section 2640.202 
of this part or he obtains a waiver under 18 U.S.C. 208(b)(1), the 
employee is disqualified from participating in a CPSC proceeding to 
require the manufacturer to remove a defective appliance from the 
market.
    Example 2: A newly appointed employee of the Department of 
Housing and Urban Development (HUD) is a general partner with three 
former business associates in a partnership that owns a travel 
agency. The employee knows that his three general partners are also 
partners in another partnership that owns a HUD-subsidized housing 
project. Unless he receives a waiver pursuant to 18 U.S.C. 208(b)(1) 
permitting him to act, the employee must disqualify himself from 
particular matters involving the HUD-subsidized project which his 
general partners own.
    Example 3: The spouse of an employee of the Department of Health 
and Human Services (HHS) works for a consulting firm that provides 
support services to colleges and universities on research projects 
they are conducting under grants from HHS. The spouse is a salaried 
employee who has no direct ownership interest in the firm such as 
through stockholding, and the award of a grant to a particular 
university will have no direct and predictable effect on his 
continued employment or his salary. Because the award of a grant 
will not affect the spouse's financial interest, section 208 would 
not bar the HHS employee from participating in the award of a grant 
to a university to which the consulting firm will provide services. 
However, the employee must consider whether her participation in the 
award of the grant would be barred under the impartiality provision 
in the Standards of Ethical Conduct for Employees of the Executive 
Branch at 5 CFR 2635.502.

    (d) Disqualification. Unless the employee is authorized to 
participate in the particular matter by virtue of an exemption or 
waiver described in subpart B or subpart C of this part, or the 
interest has been divested in accordance with paragraph (e) of this 
section, an employee shall disqualify himself from participating in a 
particular matter in which, to his knowledge, he or any other person 
specified in the statute has a financial interest, if the particular 
matter will have a direct and predictable effect on that interest. 
Disqualification is accomplished by not participating in the particular 
matter.
    (1) Notification. An employee who becomes aware of the need to 
disqualify himself from participation in a particular matter to which 
he has been assigned should notify the person responsible for his 
assignment. An employee who is responsible for his own assignments 
should take whatever steps are necessary to ensure that he does not 
participate in the matter from which he is disqualified. Appropriate 
oral or written notification of the employee's disqualification may be 
made to coworkers by the employee or a supervisor to ensure that the 
employee is not involved in a matter from which he is disqualified.
    (2) Documentation. An employee need not file a written 
disqualification statement unless he is required by part 2634 of this 
chapter to file written evidence of compliance with an ethics agreement 
with the Office of Government Ethics, is asked by an agency ethics 
official or the person responsible for his assignment to file a written 
disqualification statement, or is 

[[Page 47227]]
required to do so by agency supplemental regulation issued pursuant to 
5 CFR 2635.105. However, an employee may elect to create a record of 
his actions by providing written notice to a supervisor or other 
appropriate official.

    Example 1: The supervisor of an employee of the Department of 
Education asks the employee to attend a meeting on his behalf on 
developing national standards for science education in secondary 
schools. When the employee arrives for the meeting, she realizes one 
of the participants is the president of Education Consulting 
Associates (ECA), a firm which has been awarded a contract to 
prepare a bulletin describing the Department's policies on science 
education standards. The employee's spouse has a subcontract with 
ECA to provide the graphics and charts that will be used in the 
bulletin. Because the employee realizes that the meeting will 
involve matters relating to the production of the bulletin, the 
employee properly decides that she must disqualify herself from 
participating in the discussions. After withdrawing from the 
meeting, the employee should notify her supervisor about the reason 
for her disqualification. She may elect to put her disqualification 
statement in writing, or to simply notify her supervisor orally. She 
may also elect to notify appropriate coworkers about her need to 
disqualify herself from this matter.

    (e) Divestiture of a disqualifying financial interest. Upon sale or 
other divestiture of the asset or other interest that causes his 
disqualification from participation in a particular matter, an employee 
is no longer prohibited from acting in the particular matter.
    (1) Voluntary divestiture. An employee who would otherwise be 
disqualified from participation in a particular matter may voluntarily 
sell or otherwise divest himself of the interest that causes the 
disqualification.
    (2) Directed divestiture. An employee may be required to sell or 
otherwise divest himself of the disqualifying financial interest if his 
continued holding of that interest is prohibited by statute or by 
agency supplemental regulation issued in accordance with 
Sec. 2635.403(a) of this chapter, or if the agency determines in 
accordance with Sec. 2635.403(b) of this chapter that a substantial 
conflict exists between the financial interest and the employee's 
duties or accomplishment of the agency's mission.
    (3) Eligibility for special tax treatment. An employee who is 
directed to divest an interest may be eligible to defer the tax 
consequences of divestiture under subpart J of part 2634 of this 
chapter. An employee who divests before obtaining a certificate of 
divestiture will not be eligible for this special tax treatment.
    (f) Official duties that give rise to potential conflicts. Where an 
employee's official duties create a substantial likelihood that the 
employee may be assigned to a particular matter from which he is 
disqualified, the employee should advise his supervisor or other person 
responsible for his assignments of that potential so that conflicting 
assignments can be avoided, consistent with the agency's needs.

Subpart B--Exemptions Pursuant to 18 U.S.C. 208(b)(2)


Sec. 2640.201  Exemptions for interests in mutual funds, common trust 
funds, unit investment trusts, and employee benefit plans.

    (a) Diversified mutual funds, common trust funds, and unit 
investment trusts. An employee may participate in any particular 
matter, whether of general applicability or involving specific parties, 
affecting one or more holdings of a diversified mutual fund, a 
diversified common trust fund, or a diversified unit investment trust, 
where the disqualifying financial interest in the matter arises because 
of the direct or beneficial ownership by the employee, or any other 
person specified in section 208(a), of an interest in the trust or 
fund.

    Example 1: An employee owns shares worth $100,000 in several 
mutual funds whose portfolios contain stock in a small computer 
company. Each mutual fund prospectus describes the fund as a 
``diversified management company.'' The employee may participate in 
agency matters affecting the computer company.
    Example 2: An employee has owned shares in five different mutual 
funds for a number of years. Although each of the funds has numerous 
varied holdings, the employee is not sure whether the funds are 
actually ``diversified'' as defined in Sec. 2640.102(b). After 
searching his records, the employee finds prospectuses for three of 
the funds. One of these prospectuses indicates that the mutual fund 
is a ``diversified company'' and a second states that the fund is a 
``diversified management company.'' Neither indicates that the fund 
has a policy of concentrating its investments in a particular 
sector. Both funds are ``diversified'' mutual funds and the employee 
is not disqualified from acting in matters affecting the underlying 
holdings of the funds. For the remaining three funds, the employee 
calls the telephone number provided by the fund's sponsor for 
investor inquiries. After ascertaining that all three funds are 
``diversified companies'' and none has a policy of concentrating 
investments in a particular sector, the employee is free to act in 
matters affecting the funds' holdings. Once this determination has 
been made, no further action is required and the employee may rely 
on the exemption in Sec. 2640.201(a).
    Example 3: An auditor at the Internal Revenue Service (IRS) is 
one of the beneficiaries of a trust established by her father to 
provide a life income for his children. The trust is managed by a 
bank as a common trust fund. The IRS auditor may assume that the 
trust's assets are diversified and may act in IRS matters that would 
affect the trust's underlying assets.
    Example 4: A nonsupervisory employee of the Department of Energy 
owns shares in a mutual fund that expressly concentrates its 
holdings in the stock of utility companies. The employee may not 
rely on the exemption in Sec. 2640.201(a) to act in matters 
affecting a utility company whose stock is part of the mutual fund's 
portfolio because the fund is not a diversified fund as defined in 
Sec. 2640.102(b)(1). The employee may, however, seek an individual 
waiver under 18 U.S.C. 208(b)(1) permitting him to act. Moreover, 
depending upon the value of the employee's interest in the fund and 
the type of particular matter in which he would participate, one of 
the exemptions at Sec. 2640.202(a)-(c) for interests arising from 
publicly traded securities may be applicable.

    (b) Sector mutual funds. An employee may participate in any 
particular matter, whether of general applicability or involving 
specific parties, affecting one or more holdings of a sector mutual 
fund where the affected holding is not invested in the sector in which 
the fund concentrates, and where the disqualifying financial interest 
in the matter arises because of the direct or beneficial ownership by 
the employee, or any other person specified in section 208, of an 
interest in the fund.

    Example 1: An employee of the Federal Reserve owns shares in the 
mutual fund described in the preceding example. In addition to 
holdings in utility companies, the mutual fund contains stock in 
certain regional banks and bank holding companies whose financial 
interests would be affected by an investigation in which the Federal 
Reserve employee would participate. The employee is not disqualified 
from participating in the investigation because the banks that would 
be affected are not part of the sector in which the fund 
concentrates.

    (c) Employee benefit plans. An employee may participate in:
    (1) Any particular matter, whether of general applicability or 
involving specific parties, affecting one or more holdings of an 
employee benefit plan, where the disqualifying financial interest in 
the matter arises from membership by the employee, or any other person 
specified in section 208(a), in:
    (i) The Thrift Savings Plan for Federal employees described in 5 
U.S.C. 8437;
    (ii) A pension plan established or maintained by a State government 
or any political subdivision of a State government for its employees; 
or
    (iii) A diversified employee benefit plan, provided:
    (A) The investments of the plan are administered by an independent 
trustee, and the employee, or other person 

[[Page 47228]]
specified in section 208(a), does not participate in the selection of 
the plan's investments or designate specific plan investments (except 
for directing that contributions be divided among several different 
categories of investments, such as stocks, bonds or mutual funds, which 
are available to plan participants); and
    (B) The plan is not a profit-sharing or stock bonus plan.

    Note: Employee benefit plans that are tax deferred under 26 
U.S.C. 401(k) are not considered profit-sharing plans for purposes 
of this section. However, for the exemption to apply, 401(k) plans 
must meet the requirements of Sec. 2640.201(c)(1)(iii)(A).

    (2) Particular matters of general applicability, such as 
rulemaking, affecting the State or local government sponsor of a State 
or local government pension plan described in Sec. 2640.201(c)(1)(ii) 
where the only disqualifying financial interest in the matter arises 
because of participation by the employee, or other person specified in 
section 208(a), in the plan.

    Example 1: An attorney terminates his position with a law firm 
to take a position with the Department of Justice. As a result of 
his employment with the firm, the employee has interests in a 401(k) 
plan, the assets of which are invested primarily in stocks chosen by 
an independent financial management firm. He also participates in a 
defined contribution pension plan maintained by the firm, the assets 
of which are stocks, bonds, and financial instruments. The plan is 
managed by an independent trustee. Assuming that the manager of the 
pension plan has a written policy of diversifying plan investments, 
the employee may act in matters affecting the plan's holdings. The 
employee may also participate in matters affecting the holdings of 
his 401(k) plan if the individual financial management firm that 
selects the plan's investments has a written policy of diversifying 
the plan's assets. Employee benefit plans that are tax deferred 
under 26 U.S.C. 401(k) are not considered profit-sharing or stock 
bonus plans for purposes of this regulation.
    Example 2: An employee of the Department of Agriculture who is a 
former New York State employee has a vested interest in a pension 
plan established by the State of New York for its employees. She may 
participate in an agency matter that would affect a company whose 
stock is in the pension plan's portfolio. She also may participate 
in a matter of general applicability affecting all States, including 
the State of New York, such as the drafting and promulgation of a 
rule requiring States to expend additional resources implementing 
the Food Stamp program. Unless she obtains an individual waiver 
under 18 U.S.C. 208(b)(1), she may not participate in a matter 
involving the State of New York as a party, such as an application 
by the State for additional Federal funding for administrative 
support services, if that matter would affect the State's ability or 
willingness to honor its obligation to pay her pension benefits.


Sec. 2640.202  Exemptions for interests in securities.

    (a) De minimis exemption for all matters. An employee may 
participate in any particular matter involving specific parties, in 
which the disqualifying financial interest arises from the direct or 
beneficial ownership by the employee, his spouse or minor children of 
securities issued by one or more entities which are parties to the 
matter, if:
    (1) The securities are publicly traded, or are long-term Federal 
Government securities or municipal securities; and
    (2) The aggregate market value of the holdings of the employee, his 
spouse and minor children in the securities of all parties does not 
exceed $5,000.

    Example 1: An employee owns 100 shares of publicly traded stock 
valued at $3,000 in XYZ Corporation. As part of his official duties, 
the employee is evaluating bids for performing computer maintenance 
services at his agency and discovers that XYZ Corporation is one of 
the companies that has submitted a bid. The employee is not required 
to recuse himself from continuing to evaluate the bids.
    Example 2: In the preceding example, the employee and his spouse 
each own 100 shares of stock in XYZ Corporation, resulting in 
ownership of $6,000 worth of stock by the employee and his spouse. 
The exemption in Sec. 2640.202(a) would not permit the employee to 
participate in the evaluation of bids because the aggregate market 
value of the holdings of the employee, spouse and minor children in 
XYZ Corporation exceeds $5,000. The employee could, however, seek an 
individual waiver under 18 U.S.C. 208(b)(1) in order to participate 
in the evaluation of bids.
    Example 3: An employee is assigned to monitor XYZ Corporation's 
performance of a contract to provide computer maintenance services 
at the employee's agency. At the time the employee is first assigned 
these duties, he owns publicly traded stock in XYZ Corporation 
valued at less than $5,000. During the time the contract is being 
performed, however, the value of the employee's stock increases to 
$7,500. When the employee knows that the value of his stock exceeds 
$5,000, he must disqualify himself from any further participation in 
matters affecting XYZ Corporation or seek an individual waiver under 
18 U.S.C. 208(b)(1).

    (b) De minimis exemption when issuer is not a party. An employee 
may participate in any particular matter involving specific parties in 
which the disqualifying financial interest arises from the direct or 
beneficial ownership by the employee, his spouse, or minor children of 
securities issued by one or more entities that are not parties to the 
matter but that are affected by the matter, if:
    (1) The securities are publicly traded, or are long-term Federal 
Government securities or municipal securities; and
    (2) The aggregate market value of the holdings of the employee, his 
spouse and minor children in the securities of all affected entities 
(including securities exempted under paragraph (a) of this section) 
does not exceed $25,000.

    Example 1: An attorney at the Department of Labor is handling 
litigation brought by Allied Chemical Corporation challenging a 
provision in the Department's health and safety regulations that 
apply to companies which manufacture certain types of ether. If the 
plaintiff is successful, all companies subject to this provision in 
the health and safety rules will be able to reduce expenditures 
required for complying with the regulations. The attorney does not 
own any stock in Allied Chemical Corporation, but does own $15,000 
worth of stock in another company not a party to the litigation, but 
which is subject to the regulatory provision at issue in the 
litigation. The attorney may continue to handle the litigation.
    Example 2: A second attorney at the Department of Labor is asked 
to assist in handling the same litigation brought by Allied Chemical 
Corporation, as described in the preceding example. However, this 
attorney owns $4,000 worth of stock in Allied Chemical, as well as 
$12,000 worth of stock in each of two other chemical companies which 
are not parties to the litigation, but which are subject to the 
regulatory provision at issue and which would be affected by the 
outcome of the litigation. Unless the attorney obtains an individual 
waiver pursuant to section 208(b)(1), or sells a portion of his 
stock, he may not participate in matters involving this litigation. 
The aggregate market value of his holdings in affected entities 
exceeds $25,000.

    (c) De minimis exemption for matters of general applicability. An 
employee may participate in any particular matter of general 
applicability not involving specific parties, such as rulemaking, in 
which the disqualifying financial interest arises from the direct or 
beneficial ownership by the employee, his spouse or minor children of 
securities issued by one or more entities affected by the matter, if:
    (1) The securities are publicly traded, or are long-term Federal 
Government securities or municipal securities; and
    (2) The aggregate market value of the holdings of the employee, his 
spouse and minor children in:
    (i) Any one such entity does not exceed $25,000; and
    (ii) All entities affected by the matter does not exceed $50,000.

    Example 1: The Department of Commerce is in the process of 
formulating a regulation concerning unfair trade practices. The 
regulation will affect all foreign companies that sell automobiles 
in the United States. An employee of the Department who is assisting 
in drafting the regulation owns $10,000 worth of stock in one 
Japanese automobile manufacturer, $20,000 worth of stock in a German 
automobile manufacturer, and 

[[Page 47229]]
$7,500 worth of stock in a Swedish automobile company. Even though the 
employee owns $37,500 worth of stock in companies that will be 
affected by the regulation, she may participate in drafting the 
regulation because the value of the securities she owns does not 
exceed $25,000 in any one affected company and the total value of 
stock owned in all affected companies does not exceed $50,000.
    Example 2: A health scientist administrator employed in the 
Public Health Service at the Department of Health and Human Services 
is assigned to serve on a Departmentwide task force that will 
recommend changes in how Medicare reimbursements will be made to 
health care providers. The employee owns $10,000 worth of shares in 
a sector mutual fund invested primarily in health-related companies 
such as pharmaceuticals, developers of medical instruments and 
devices, managed care health organizations, and acute care 
hospitals. Because the fund is not a ``diversified mutual fund'' as 
defined in Sec. 2640.102(b), the exemption at Sec. 2640.201(a) is 
not applicable. However, because the fund is a ``publicly traded 
security'' as defined in Sec. 2640.102(q), the exemption for 
financial interests arising from ownership of a de minimis amount of 
securities at Sec. 2640.202(c) will permit the employee to 
participate on the task force.

    (d) Exemption for short-term Federal Government securities. An 
employee may participate in any particular matter, whether of general 
applicability or involving specific parties, in which the disqualifying 
financial interest arises from the direct or beneficial ownership by 
the employee, or any other person specified in section 208(a), of 
short-term Federal Government securities.
    (e) Exemption for interests of tax-exempt organizations. An 
employee may participate in any particular matter, whether of general 
applicability or involving specific parties, in which the disqualifying 
financial interest arises from the ownership of publicly traded or 
municipal securities, or long-term Federal Government securities by an 
organization which is tax exempt pursuant to 26 U.S.C. 501(c)(3), and 
of which the employee is an unpaid officer, director, or trustee, or an 
employee, if:
    (1) The matter affects only the organization's investments, not the 
organization directly;
    (2) The employee plays no role in making investment decisions for 
the organization, except for participating in the decision to invest in 
several different categories of investments such as stocks, bonds, or 
mutual funds;
    (3) The organization's holdings in one or more affected issuers 
represent no more than 20% of the organization's total investment 
portfolio; and
    (4) The organization's only relationship to the issuer, other than 
that which arises from routine commercial transactions, is that of 
investor.

    Example 1: An employee of the Federal Reserve is a director of 
the National Association to Save Trees (NAST), an environmental 
organization that is tax exempt under section 501(c)(3) of the 
Internal Revenue Code. The employee knows that NAST has an endowment 
fund that is partially (about 10% of the endowment's value) invested 
in the publicly traded stock of Computer Inc. The employee's 
position at the Federal Reserve involves the procurement of computer 
software, including software marketed by Computer Inc. The employee 
may participate in the procurement of software from Computer Inc. 
provided that he is not involved in selecting NAST's investments, 
and that NAST has no relationship to Computer Inc. other than as an 
investor in the company and routine purchaser of Computer Inc. 
software.

    (f) Exemption for certain interests of general partners. An 
employee may participate in any particular matter, whether of general 
applicability or involving specific parties, in which the disqualifying 
financial interest arises from:
    (1) The ownership of publicly traded securities, long-term Federal 
Government securities, or municipal securities by the employee's 
general partner, provided:
    (i) Ownership of the securities is not related to the partnership 
between the employee and his general partner, and
    (ii) The value of the securities does not exceed $200,000; or
    (2) Any interest of the employee's general partner if the 
employee's relationship to the general partner is as a limited partner 
in a partnership that has at least 100 limited partners.

    Example 1: An employee of the Department of Transportation is a 
general partner in a partnership that owns commercial property. The 
employee knows that one of his partners owns stock in an aviation 
company valued at $100,000 because the stock has been pledged as 
collateral for the purchase of the commercial property by the 
partnership. In the absence of an individual waiver under 18 U.S.C. 
208(b)(1), the employee may not act in a matter affecting the 
aviation company. Because the stock has been pledged as collateral, 
ownership of the securities is related to the partnership between 
the employee and his general partner.
    Example 2: An employee of the Pension Benefit Guaranty 
Corporation (PBGC) has a limited partnership interest in Ambank 
Partners, a large partnership with more than 500 limited partners. 
The partnership assets are invested in the securities of various 
financial institutions. Ambank's general partner is Capital 
Investment Services, an investment firm whose pension plan for its 
own employees is being examined by the PBGC for possible unfunded 
liabilities. Even though the employee's general partner (Capital 
Investment Services) has a financial interest in PBGC's review of 
the pension plan, the employee may participate in the review because 
his relationship with his general partner is that of a limited 
partner in a partnership that has at least 100 limited partners.


Sec. 2640.203  Miscellaneous exemptions.

    (a) Hiring decisions. An employee may participate in a hiring 
decision involving an applicant who is currently employed by a 
corporation that issues publicly traded securities, if the 
disqualifying financial interest arises from:
    (1) Ownership by the employee, or any other person specified in 
section 208, of publicly traded securities issued by the corporation; 
or
    (2) Participation by the employee, or any other person specified in 
section 208, in a vested pension plan sponsored by the corporation.
    (b) Employees on leave from institutions of higher education. An 
employee on a leave of absence from an institution of higher education 
may participate in any particular matter of general applicability, not 
involving specific parties, affecting the financial interests of the 
institution from which he is on leave, provided that the matter will 
not have a special or distinct effect on that institution other than as 
part of a class.

    Example 1: An employee at the Department of Defense (DOD) is on 
a leave of absence from his position as a tenured Professor of 
Engineering at the University of California (UC) at Berkeley. While 
at DOD, he is assigned to assist in developing a regulation which 
will contain new standards for the oversight of grants given by DOD. 
Even though the University of California at Berkeley is a DOD 
grantee, and will be affected by these new monitoring standards, the 
employee may participate in developing the standards because UC 
Berkeley will be affected only as part of the class of all DOD 
grantees. However, if the new standards would affect the employee's 
own financial interest, such as by affecting his tenure or his 
salary, the employee could not participate in the matter unless he 
first obtains an individual waiver under section 208(b)(1).
    Example 2: An employee on leave from a university could not 
participate in the development of an agency program of grants 
specifically designed to facilitate research in jet propulsion 
systems where the employee's university is one of just two or three 
universities likely to receive a grant under the new program. Even 
though the grant announcement is open to all universities, the 
employee's university is among the very few known to have facilities 
and equipment adequate to conduct the research. The matter would 
have a distinct effect on the institution other than as part of a 
class.

    (c) Multi-campus institutions of higher education. An employee 
may participate in 

[[Page 47230]]
any particular matter, whether of general applicability or involving 
specific parties, affecting one campus of a State multi-campus 
institution of higher education, if the employee's only 
disqualifying financial interest is employment in a position with no 
multi-campus responsibilities at a separate campus of the same 
multi-campus institution.

    Note: Many State institutions and systems of higher education 
are sufficiently separate from each other that an exemption is not 
necessary to permit an employee to participate in matters affecting 
another State educational institution. Whether State institutions 
constitute a State ``system'' must be resolved on an individual 
basis by the agency employing the exemption.

    Example 1: A special Government employee (SGE) member of an 
advisory committee convened by the National Science Foundation is a 
full-time professor in the School of Engineering at one campus of a 
State university. The SGE may participate in formulating the 
committee's recommendation to award a grant to a researcher at 
another campus of the same State university system.
    Example 2: A member of the Board of Regents at a State 
university is asked to serve on an advisory committee established by 
the Department of Health and Human Services to consider applications 
for grants for human genome research projects. An application from 
another university that is part of the same State system will be 
reviewed by the committee. Unless he receives an individual waiver 
under section 208 (b)(1) or (b)(3), the advisory committee member 
may not participate in matters affecting the second university that 
is part of the State system because as a member of the Board of 
Regents, he has duties and responsibilities that affect the entire 
State educational system.

    (d) Exemptions for financial interests arising from Federal 
Government employment or from Social Security or veterans' benefits. An 
employee may participate in any particular matter, whether of general 
applicability or involving specific parties, where the disqualifying 
financial interest arises from Federal Government salary or benefits, 
or from Social Security or veterans' benefits, except an employee may 
not:
    (1) Make determinations that individually or specially affect his 
own Government salary and benefits, or Social Security or veterans' 
benefits; or
    (2) Make determinations, requests, or recommendations that 
individually or specially relate to, or affect, the Government salary 
or benefits, or Social Security or veterans' benefits of any other 
person specified in section 208.

    Note: This exemption does not permit an employee to take any 
action in violation of any other statutory or regulatory 
requirement, such as the prohibition on the employment of relatives 
at 5 U.S.C. 3110.

    Example 1: An employee of the Office of Management and Budget 
may vigorously and energetically perform the duties of his position 
even though his outstanding performance would result in a 
performance bonus or other similar merit award.
    Example 2: A policy analyst at the Defense Intelligence Agency 
may request promotion to another grade or salary level. However, the 
analyst may not recommend or approve the promotion of her general 
partner to the next grade.
    Example 3: An engineer employed by the National Science 
Foundation may request that his agency pay the registration fees and 
appropriate travel expenses required for him to attend a conference 
sponsored by the Engineering Institute of America. However, the 
employee may not approve payment of his own travel expenses and 
registration fees.
    Example 4: A GS-14 attorney at the Department of Justice may 
review and make comments about the legal sufficiency of a bill to 
raise the pay level of all Federal employees paid under the General 
Schedule even though her own pay level, and that of her spouse who 
works at the Department of Labor, would be raised if the bill were 
to become law.
    Example 5: An employee of the Department of Veterans Affairs 
(VA) may assist in drafting a regulation that will provide expanded 
hospital benefits for veterans, even though he himself is a veteran 
who would be eligible for treatment in a hospital operated by the 
VA.
    Example 6: An employee of the Office of Personnel Management may 
participate in discussions with various health insurance providers 
to formulate the package of benefits that will be available to 
Federal employees who participate in the Government's Federal 
Employees Health Benefits Program, even though the employee will 
obtain health insurance from one of these providers through the 
program.
    Example 7: An employee of the Federal Supply Service Division of 
the General Services Administration (GSA) may participate in GSA's 
evaluation of the feasibility of privatizing the entire Federal 
Supply Service, even though the employee's own position would be 
eliminated if the Service were privatized.
    Example 8: Absent an individual waiver under section 208(b)(1), 
the employee in the preceding example could not participate in the 
implementation of a GSA plan to create an employee-owned private 
corporation which would carry out Federal Supply Service functions 
under contract with GSA. Because implementing the plan would result 
not only in the elimination of the employee's Federal position, but 
also in the creation of a new position in the new corporation to 
which the employee would be transferred, the employee would have a 
disqualifying financial interest in the matter arising from other 
than Federal salary and benefits, or Social Security or veterans' 
benefits.
    Example 9: A career member of the Senior Executive Service (SES) 
at the Internal Revenue Service (IRS) may serve on a performance 
review board that makes recommendations about the performance awards 
that will be awarded to other career SES employees at the IRS. The 
amount of the employee's own SES performance award would be affected 
by the board's recommendations because all SES awards are derived 
from the same limited pool of funds. However, the employee's 
activities on the board involve only recommendations, and not 
determinations that individually or specially affect his own award. 
Additionally, 5 U.S.C. 5384(c)(2) requires that a majority of the 
board's members be career SES employees.
    Example 10: In carrying out a reorganization of the Office of 
General Counsel (OGC) of the Federal Trade Commission, the Deputy 
General Counsel is asked to determine which of five Senior Executive 
Service (SES) positions in the OGC to abolish. Because her own 
position is one of the five SES positions being considered for 
elimination, the matter is one that would individually or specially 
affect her own salary and benefits and, therefore, the Deputy may 
not decide which position should be abolished.

    (e) Commercial discount and incentive programs. An employee may 
participate in any particular matter, whether of general applicability 
or involving specific parties, affecting the sponsor of a discount, 
incentive or other similar benefit program if the only disqualifying 
financial interest arises because of the participation of the employee, 
or any other person specified in section 208, in the program, provided:
    (1) The program is open to the general public; and
    (2) Participation in the program involves no other financial 
interest in the sponsor, such as stockholding.

    Example 1: An attorney at the Pension Benefit Guaranty 
Corporation who is a member of a frequent flier program sponsored by 
Alpha Airlines may assist in an action against Alpha for failing to 
make required payments to its employee pension fund, even though the 
agency action will cause Alpha to disband its frequent flier 
program.

    (f) Mutual insurance companies. An employee may participate in any 
particular matter, whether of general applicability or involving 
specific parties, affecting a mutual insurance company if the only 
disqualifying financial interest arises because of the employee's 
interest or the interest of any other individual specified in section 
208, as a policyholder, unless the matter would affect the company's 
ability to pay claims required under the terms of the policy or to pay 
the employee the cash value of the policy.

    Example 1: An administrative law judge at the Department of 
Labor receives dividends from a mutual insurance company which he 
takes in the form of reduced premiums on his life insurance policy. 
The amount of the dividend is based upon the company's overall 
profitability. Nevertheless, he may preside in a Department hearing 
involving a 

[[Page 47231]]
major corporation insured by the same company even though the insurance 
company will have to pay the corporation's penalties and other costs 
if the Department prevails in the hearing.
    Example 2: An employee of the Department of Justice is assigned 
to prosecute a case involving the fraudulent practices of an issuer 
of junk bonds. While developing the facts pertinent to the case, the 
employee learns that the mutual life insurance company from which he 
holds a life insurance policy has invested heavily in these junk 
bonds. If the Government succeeds in its case, the bonds will be 
worthless and the corresponding decline in the insurance company's 
investments will impair the company's ability to pay claims under 
the policies it has issued. The employee may not continue assisting 
in the prosecution of the case unless he obtains an individual 
waiver pursuant to section 208(a)(1).

    (g) Exemption for employment interests of special Government 
employees serving on advisory committees. A special Government employee 
serving on an advisory committee within the meaning of the Federal 
Advisory Committee Act (5 U.S.C. app.) may participate in any 
particular matter of general applicability, not involving specific 
parties, where the disqualifying financial interest arises from his 
non-Federal employment or non-Federal prospective employment, provided 
that the matter will not have a special or distinct effect on the 
employee or employer other than as part of a class. For purposes of 
this provision, ``disqualifying financial interest'' arising from non-
Federal employment does not include the interests of a special 
Government employee arising from the ownership of stock in his employer 
or prospective employer.

    Example 1: A chemist employed by a major pharmaceutical company 
has been appointed to serve on an advisory committee established to 
develop recommendations for new standards for AIDS vaccine trials 
involving human subjects. Even though the chemist's employer is in 
the process of developing an experimental AIDS vaccine and therefore 
will be affected by the new standards, the chemist may participate 
in formulating the advisory committee's recommendations. The 
chemist's employer will be affected by the new standards only as 
part of the class of all pharmaceutical companies and other research 
entities that are attempting to develop an AIDS vaccine.
    Example 2: The National Cancer Institute (NCI) has established 
an advisory committee to evaluate a university's performance of an 
NCI grant to study the efficacy of a newly developed breast cancer 
drug. An employee of the university may not participate in the 
evaluation of the university's performance because it is not a 
matter of general applicability.
    Example 3: An engineer whose principal employment is with a 
major Department of Defense (DOD) contractor is appointed to serve 
on an advisory committee established by DOD to develop concepts for 
the next generation of laser-guided missiles. The engineer's 
employer, as well as a number of other similar companies, has 
developed certain missile components for DOD in the past, and has 
the capability to work on aspects of the newer missile designs under 
consideration by the committee. The engineer owns $20,000 worth of 
stock in his employer. Because the exemption for the employment 
interests of special Government employees serving on advisory 
committees does not extend to financial interests arising from the 
ownership of stock, the engineer may not participate in committee 
matters affecting his employer unless he receives an individual 
waiver under section 208(b)(1) or (b)(3), or determines that the 
exemption for interests in securities at Sec. 2640.202(c) applies.

    (h) Directors of Federal Reserve Banks. A Director of a Federal 
Reserve Bank or a branch of a Federal Reserve Bank may participate in 
the following matters, even though they may be particular matters in 
which he, or any other person specified in section 208(a), has a 
disqualifying financial interest:
    (1) Establishment of rates to be charged for all advances and 
discounts by Federal Reserve Banks;
    (2) Consideration of monetary policy matters, regulations, statutes 
and proposed or pending legislation, and other matters of broad 
applicability intended to have uniform application to banks within the 
Reserve Bank district;
    (3) Approval or ratification of extensions of credit, advances or 
discounts to a depository institution that has not been determined to 
be in a hazardous financial condition by the President of the Reserve 
Bank; or
    (4) Approval or ratification of extensions of credit, advances or 
discounts to a depository institution that has been determined to be in 
a hazardous financial condition by the President of the Reserve Bank, 
provided that the disqualifying financial interest arises from the 
ownership of stock in, or service as an officer, director, trustee, 
general partner or employee, of an entity other than the depository 
institution, or its parent holding company or subsidiary of such 
holding company.
    (i) Medical products and devices. A special Government employee 
serving on an advisory committee within the meaning of the Federal 
Advisory Committee Act (5 U.S.C. app.) may participate in Federal 
advisory committee matters concerning the approval or classification of 
medical products or devices if the disqualifying financial interest 
arises from:
    (1) Employment by the special Government employee, or any other 
person specified in section 208(a), with a hospital or other similar 
medical facility whose only interest in the medical product or device 
is purchase of it for use by its patients; or
    (2) The prescription of medical products and devices for patients 
by the special Government employee, or any other person specified in 
section 208(a).


Sec. 2640.204  Prohibited financial interests.

    None of the exemptions set forth in Secs. 2640.201, 2640.202, or 
2640.203 apply to any financial interest held or acquired by an 
employee in violation of a statute or agency supplemental regulation 
issued in accordance with 5 CFR 2635.105, or that is otherwise 
prohibited under 5 CFR 2635.403(b).

    Example 1: The Office of the Comptroller of the Currency (OCC), 
in a regulation that supplements part 2635 of this chapter, 
prohibits certain employees from owning stock in commercial banks. 
If an OCC employee purchases stock valued at $2,000 in contravention 
of the regulation, the exemption at Sec. 2640.202(a) for interests 
arising from the ownership of no more than $5,000 worth of publicly 
traded stock will not apply to the employee's participation in 
matters affecting the bank.


Sec. 2640.205  Employee responsibility.

    Prior to taking official action in a matter which an employee knows 
would affect his financial interest or the interest of another person 
specified in 18 U.S.C. 208(a), an employee must determine whether one 
of the exemptions in Secs. 2640.201, 2640.202, or 2640.203 would permit 
his action notwithstanding the existence of the disqualifying interest. 
An employee who is unsure whether a waiver is applicable in a 
particular case, should consult an agency ethics official prior to 
taking action in a particular matter.


Sec. 2640.206  Existing agency exemptions.

    An employee who, prior to the effective date of this regulation, 
acted in an official capacity in a particular matter in which he had a 
financial interest, will be deemed to have acted in accordance with 
applicable regulations if he acted in reliance on an exemption issued 
by his employing Government agency pursuant to 18 U.S.C. 208(b)(2), as 
in effect prior to November 30, 1989.

Subpart C--Individual Waivers


Sec. 2640.301  Waivers issued pursuant to 18 U.S.C. 208(b)(1).

    (a) Requirements for issuing an individual waiver under 18 U.S.C. 
208(b)(1). Pursuant to 18 U.S.C. 208(b)(1), an agency may determine in 

[[Page 47232]]
an individual case that a disqualifying financial interest in a 
particular matter or matters is not so substantial as to be deemed 
likely to affect the integrity of the employee's services to the 
Government. Upon making that determination, the agency may then waive 
the employee's disqualification notwithstanding the financial interest, 
and permit the employee to participate in the particular matter. 
Waivers issued pursuant to section 208(b)(1) should comply with the 
following requirements:
    (1) The disqualifying financial interest, and the nature and 
circumstances of the particular matter or matters, must be fully 
disclosed to the Government official responsible for appointing the 
employee to his position (or other Government official to whom 
authority to issue such a waiver for the employee has been delegated);
    (2) The waiver must be issued in writing by the Government official 
responsible for appointing the employee to his position (or other 
Government official to whom the authority to issue such a waiver for 
the employee has been delegated);
    (3) The waiver should describe the disqualifying financial 
interest, the particular matter or matters to which it applies, the 
employee's role in the matter or matters, and any limitations on the 
employee's ability to act in such matters;
    (4) The waiver shall be based on a determination that the 
disqualifying financial interest is not so substantial as to be deemed 
likely to affect the integrity of the employee's services to the 
Government. Statements concerning the employee's good character are not 
material to, nor a basis for making, such a decision;
    (5) The waiver must be issued prior to the employee taking any 
action in the matter or matters; and
    (6) The waiver may apply to both present and future financial 
interests, provided the interests are described with sufficient 
specificity.

    Note: The disqualifying financial interest, the particular 
matter or matters to which the waiver applies, and the employee's 
role in such matters do not need to be described with any particular 
degree of specificity. For example, if a waiver were to apply to all 
matters which an employee would undertake as part of his official 
duties, the waiver document would not have to enumerate those 
duties. The information contained in the waiver, however, should 
provide a clear understanding of the nature and identity of the 
disqualifying financial interest, the matters to which the waiver 
will apply, and the employee's role in such matters.

    (b) Agency determination concerning substantiality of the 
disqualifying financial interest. In determining whether a 
disqualifying financial interest is sufficiently substantial to be 
deemed likely to affect the integrity of the employee's services to the 
Government, the responsible official may consider the following 
factors:
    (1) The type of interest that is creating the disqualification 
(e.g. stock, bonds, real estate, other securities, cash payment, job 
offer, or enhancement of a spouse's employment);
    (2) The identity of the person whose financial interest is 
involved, and if the interest is not the employee's, the relationship 
of that person to the employee;
    (3) The dollar value of the disqualifying financial interest, if it 
is known or can be estimated (e.g. the amount of cash payment which may 
be gained or lost, the salary of the job which will be gained or lost, 
the predictable change in either the market value of the stock or the 
actual or potential profit or loss or cost of the matter to the company 
issuing the stock, the change in the value of real estate or other 
securities);
    (4) The value of the financial instrument or holding from which the 
disqualifying financial interest arises (e.g. the face value of the 
stock, bond, other security or real estate) and its value in 
relationship to the individual's assets. If the disqualifying financial 
interest is that of a general partner or organization specified in 
section 208, this information must be provided only to the extent that 
it is known by the employee;
    (5) The nature and importance of the employee's role in the matter, 
including the extent to which the employee is called upon to exercise 
discretion in the matter.
    (6) Other factors which may be taken into consideration include:
    (i) The sensitivity of the matter;
    (ii) The need for the employee's services in the particular matter; 
and
    (iii) Adjustments that may 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 by a reasonable person.


Sec. 2640.302  Waivers issued pursuant to 18 U.S.C. 208(b)(3).

    (a) Requirements for issuing an individual waiver under 18 U.S.C. 
208(b)(3). Pursuant to 18 U.S.C. 208(b)(3), an agency may determine in 
an individual case that the prohibition of 18 U.S.C. 208(a) should not 
apply to a special Government employee serving on, or an individual 
being considered for, appointment to an advisory committee established 
under the Federal Advisory Committee Act, notwithstanding the fact that 
the individual has one or more financial interests that would be 
affected by the activities of the advisory committee. The agency's 
determination must be based on a certification that the need for the 
employee's services outweighs the potential for a conflict of interest 
created by the financial interest involved. Waivers issued pursuant to 
18 U.S.C. 208(b)(3) should comply with the following requirements:
    (1) The advisory committee upon which the individual is serving, or 
will serve, is an advisory committee within the meaning of the Federal 
Advisory Committee Act, 5 U.S.C. app.;
    (2) The waiver must be issued in writing by the Government official 
responsible for the individual's appointment (or other Government 
official to which authority to issue such waivers has been delegated) 
after the official reviews the financial disclosure report filed by the 
individual pursuant to the Ethics in Government Act of 1978;
    (3) The waiver must include a certification that the need for the 
individual's services on the advisory committee outweighs the potential 
for a conflict of interest;
    (4) The facts upon which the certification is based should be fully 
described in the waiver, including the nature of the financial 
interest, and the particular matter or matters to which the waiver 
applies;
    (5) The waiver should describe any limitations on the individual's 
ability to act in the matter or matters;
    (6) The waiver must be issued prior to the individual taking any 
action in the matter or matters; and
    (7) The waiver may apply to both present and future financial 
interests of the individual, provided the interests are described with 
sufficient specificity.
    (b) Agency certification concerning need for individual's services. 
In determining whether the need for an individual's services on an 
advisory committee outweighs the potential for a conflict of interest 
created by the disqualifying financial interest, the responsible 
official may consider the following factors:
    (1) The type of interest that is creating the disqualification 
(e.g. stock, bonds, real estate, other securities, cash payment, job 
offer, or enhancement of a spouse's employment);
    (2) The identity of the person whose financial interest is 
involved, and if the interest is not the individual's, the relationship 
of that person to the individual; 

[[Page 47233]]

    (3) The uniqueness of the individual's qualifications;
    (4) The difficulty of locating a similarly qualified individual 
without a disqualifying financial interest to serve on the committee;
    (5) The dollar value of the disqualifying financial interest, if it 
is known or can be estimated (e.g. the amount of cash payment which may 
be gained or lost, the salary of the job which will be gained or lost, 
the predictable change in either the market value of the stock or the 
actual or potential profit or loss or cost of the matter to the company 
issuing the stock, the change in the value of real estate or other 
securities);
    (6) The value of the financial instrument or holding from which the 
disqualifying financial interest arises (e.g. the face value of the 
stock, bond, other security or real estate) and its value in 
relationship to the individual's assets. If the disqualifying financial 
interest is that of a general partner or organization specified in 
section 208, this information must be provided only to the extent that 
it is known by the employee; and
    (7) The extent to which the disqualifying financial interest will 
be affected individually or particularly by the actions of the advisory 
committee.


Sec. 2640.303  Consultation and notification regarding waivers.

    When practicable, an official is required to consult formally or 
informally with the Office of Government Ethics prior to granting a 
waiver referred to in Secs. 2640.301 and 2640.302. A copy of each such 
waiver is to be forwarded to the Director of the Office of Government 
Ethics.


Sec. 2640.304  Public availability of agency waivers.

    (a) Availability. Subject to the limitations in paragraph (b) of 
this section, a copy of an agency waiver issued pursuant to 18 U.S.C. 
208(b)(1) or (b)(3) shall generally be made available upon request to 
the public by the issuing agency. Public release of waivers shall be in 
accordance with the procedures set forth in section 105 of the Ethics 
in Government Act of 1978, as amended. Those procedures are described 
in 5 CFR 2634.603.
    (b) Limitations on availability. In making a waiver issued pursuant 
to 18 U.S.C. 208(b)(1) or (b)(3) publicly available, an agency:
    (1) May withhold from public disclosure any information contained 
in the waiver that would be exempt from disclosure pursuant to 5 U.S.C. 
552;
    (2) Shall withhold from public disclosure information in a waiver 
issued pursuant to 18 U.S.C. 208(b)(3) concerning an individual's 
financial interest which is more extensive than that required to be 
disclosed by the individual in his financial disclosure report under 
the Ethics in Government Act of 1978, as amended; and
    (3) Shall withhold from public disclosure information in any waiver 
which is otherwise subject to a prohibition on public disclosure under 
law.

[FR Doc. 95-22174 Filed 9-8-95; 8:45 am]
BILLING CODE 6345-01-U