[Federal Register Volume 67, Number 53 (Tuesday, March 19, 2002)]
[Rules and Regulations]
[Pages 12443-12446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6617]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 Prices of new books are listed in the first FEDERAL REGISTER issue of each 
 week.
 
 ========================================================================
 

  Federal Register / Vol. 67, No. 53 / Tuesday, March 19, 2002 / Rules 
and Regulations  

[[Page 12443]]



OFFICE OF GOVERNMENT ETHICS

5 CFR Part 2640

RIN 3209-AA09


Exemption Amendments Under 18 U.S.C. 208(b)(2)

AGENCY: Office of Government Ethics (OGE).

ACTION: Final rule amendments.

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

SUMMARY: The Office of Government Ethics is issuing a final rule to 
amend the regulation that describes financial interests that are exempt 
from the prohibition in 18 U.S.C. 208(a). These final rule amendments 
revise the existing exemption regulation by: creating a new exemption 
for sector mutual funds; raising the de minimis exemption for matters 
affecting interests in securities from $5,000 to $15,000; and creating 
an exemption that permits an employee to act in certain particular 
matters that affect an entity in which the employee owns securities, 
where the entity is not a party to the matter.

EFFECTIVE DATE: April 18, 2002.

FOR FURTHER INFORMATION CONTACT: Richard Thomas, Associate General 
Counsel, Office of Government Ethics; Telephone: 202-208-8000; TDD: 
202-208-8025; FAX: 202-208-8037.

SUPPLEMENTARY INFORMATION:

I. Rulemaking History

    Section 208(a) generally prohibits employees of the executive 
branch from participating in an official capacity in particular matters 
in which they or certain others specified in the statute have a 
financial interest. Section 208(b)(2) of title 18 permits OGE to 
promulgate regulations describing financial interests that are exempted 
as being too remote or inconsequential to warrant disqualification 
pursuant to section 208(a). The Office of Government Ethics' executive 
branchwide section 208 regulations, including such exemptions, are 
codified at 5 CFR part 2640.
    On September 6, 2000, OGE published a set of proposed amendments to 
the regulation, proposing to revise some existing exemptions as well as 
to add some new exemptions. See 65 FR 53942-53946. The proposed rule 
provided a 90-day comment period. The Office of Government Ethics 
received 13 comment letters on the proposed rule. After carefully 
considering all comments and making appropriate modifications, OGE is 
publishing this final rule after obtaining the concurrence of the 
Department of Justice pursuant to section 201(c) of Executive Order 
12674, as modified by E.O. 12731. Also, as provided in section 402 of 
the Ethics in Government Act of 1978, as amended, 5 U.S.C. appendix, 
section 402, OGE has consulted with both the Department of Justice (as 
additionally required under 18 U.S.C. 208(d)(2)) and the Office of 
Personnel Management on this final rule.

II. Analysis of Comments and Revisions

    Of the thirteen comments submitted, ten were from executive branch 
Departments or agencies, one was from a professional association, and 
two were from individuals. Overall, the comments to the proposed rule 
were positive. Many commenters had specific suggestions pertaining to 
one or more components of the proposed rule. Two commenters expressed 
the view that the OGE Form 450 and SF 278 reporting requirements should 
be revised to no longer require a filer to disclose on his form assets 
which are exempt under 5 CFR part 2640. These reporting issues are 
separate and distinct from the issue of whether an exemption is 
warranted under section 208(b)(2). Although OGE will not address 
specific reporting issues in this rulemaking, comments relating to 
financial disclosure requirements have been considered as part of OGE's 
separate proposed revision of the Ethics in Government Act, as amended.
    The analysis below focuses on changes from the proposed amendments, 
either as recommended by the commenters or which OGE believes are 
otherwise appropriate. Many of the amendments proposed are being 
adopted as final without change in this rulemaking document.

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

Section 2640.201  Exemptions for Interests in Mutual Funds, Unit 
Investment Trusts, and Employee Benefit Plans

Sector Mutual Funds
    Several commenters recommended that OGE revise the proposed 
exemption for sector mutual funds to provide a total, rather than a 
$50,000 de minimis exemption. Two commenters suggested raising the de 
minimis amount. The Office of Government Ethics believes that the 
$50,000 de minimis exemption amount proposed is appropriate and is 
adopting it as final in Sec. 2640.201(b) as revised. Establishing a 
total exemption for all employees would be difficult in light of the 
legal standard that the exempted interest be ``remote and 
inconsequential.'' The $50,000 exemption being adopted is reasonably 
considered remote and inconsequential for all employees and is 
consistent with the de minimis exemption for particular matters of 
general applicability in existing paragraph (b) of Sec. 2640.202, which 
is being redesignated as paragraph (c) thereof (see below).
    This final rule contains one technical correction of the wording in 
the proposed rule. In the proposed rule, OGE inadvertently proposed 
limiting the existing exemption for sector mutual funds at 
Sec. 2640.201(b) by restricting the exemption to disqualifying 
financial interests arising from the ownership by the employee, his 
spouse or minor children of an interest in the fund. Consistent with 
the original exemption for sector mutual funds, OGE intended that the 
new exemption would include interests held by an employee and all the 
others whose financial interests are imputed to him under 18 U.S.C. 
208. This is reflected in the final rule by tracking the reference in 
the existing paragraph (b) of Sec. 2640.201 prior to this amendment. 
The wording and structure of the exemption also have been modified 
somewhat in this final rule to clarify its meaning.

[[Page 12444]]

Section 2640.202  Exemptions for Interests in Securities

De Minimis Exemption for Matters Involving Parties
    Several commenters were pleased with the proposed increase (now 
being adopted as final) in the de minimis exemption amount for 
securities in particular matters involving specific parties from $5,000 
to $15,000, under Sec. 2640.202(a) as proposed for revision. However, 
one commenter stated that the increase in the de minimis amount would 
lead to greater intrusion into the privacy of filers, by reducing the 
number of reported assets, but probing further into the values of 
assets not previously required to be reported on the OGE Form 450. As 
an initial matter, raising the de minimis amount will not affect the 
OGE Form 450 filer's reporting requirements. In addition, as mentioned 
earlier, the reporting requirements for both the OGE Form 450 and the 
SF 278 are separate matters from the focus of this rulemaking, which 
addresses whether certain financial interests are too remote or 
inconsequential under section 208(b)(2) to warrant disqualification 
under 18 U.S.C. 208(a).
De Minimis Exemption for Matters Affecting Nonparties
    The Office of Government Ethics received varied comments in 
response to proposed new Sec. 2640.203(m). Under that section, as 
proposed, an employee would have been able to participate in certain 
matters in litigation involving specific parties in which the employee 
had a disqualifying financial interest of up to $25,000 in securities 
issued by a nonparty affected by the litigation. Two commenters were 
generally satisfied with the proposed rule. Of those who expressed some 
dissatisfaction with the proposed rule, two recommended broadening the 
rule to encompass any particular matter affecting nonparties, rather 
than limiting the rule to matters in litigation. Two commenters 
recommended including an example or definitions.
    The Office of Government Ethics' original proposed part 2640 
regulations, published for comment in the Federal Register on September 
11, 1995, included a proposed exemption for disqualifying interests 
arising from ownership of securities issued by a nonparty. See 60 FR 
27228. In the comments to that proposed rule, some agencies expressed a 
concern that this specific proposed exemption would be too complex. As 
a result, OGE decided not to include the exemption in its final version 
of 5 CFR part 2640. Over the years, however, some agencies have 
continued to express a need for such an exemption. The strongest 
advocate stressed the need for an exemption for matters in litigation 
affecting nonparties, so OGE included this exemption in the proposed 
regulation published on September 6, 2000. As noted, two commenters to 
the proposed amendments supported broadening this exemption, 
essentially recommending that OGE establish in this final rule the 
exemption as proposed in September 1995. After additional 
consideration, OGE has decided to adopt in revised Sec. 2640.202(b) of 
this final rule a broader exemption than that proposed, so as to 
include any particular matter involving specific parties, not just 
matters in litigation. Because of its broadened scope, this new 
exemption is being moved to the primary section for interests in 
securities at Sec. 2640.202. The broader rule will be more useful to a 
greater range of agencies and will simplify the exemption by 
eliminating the need for determining whether a matter constitutes 
``litigation.''
    Moreover, to address the commenters' recommendations and to clarify 
the rule, OGE is adding an example to the exemption. One commenter 
requested that OGE define ``nonparty'' and offer guidance on how to 
identify nonparties and determine if they are affected by a matter. 
Because each situation may vary to such a degree that the question is 
best addressed on a case-by-case basis, OGE will not define 
``nonparty'' in this rulemaking. The Office of Government Ethics 
believes that the example now provided will promote a clearer 
understanding of the application of this exemption.
    In the proposed rule, OGE proposed to revise Example 2 after 
Sec. 2640.203(f), relating to interests in mutual insurance companies, 
to suggest that the proposed Sec. 2640.203(m) for matters in litigation 
could apply in the situation described in the example. Upon reflection, 
that suggestion was incorrect because the interests of a policy holder 
with a mutual insurance company would not fall within the definition of 
``security'' at Sec. 2640.102(r). Accordingly, this final rule does not 
contain any amendment to that example.
    The rule as proposed for particular matters affecting nonparties 
will be revised as described above and redesignated as new paragraph 
(b) of Sec. 2640.202. Existing paragraphs (b) through (e) of current 
Sec. 2640.202 are being redesignated as paragraphs (c) through (f), 
respectively, of that section.
    In addition, several existing examples in part 2640 are being 
revised (as proposed) to reflect the new de minimis exemption amounts.

III. Matters of Regulatory Procedure

Executive Order 12866

    In promulgating this final 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 Review and Planning. This regulation has also been 
reviewed by the Office of Management and Budget under that Executive 
order.

Executive Order 12988

    As Director of the Office of Government Ethics, I have reviewed 
this final amendatory regulation in light of section 3 of Executive 
Order 12988, Civil Justice Reform, and certify that it meets the 
applicable standards provided therein.

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 
amendatory rule will not have a significant economic impact on a 
substantial number of small entities because it primarily affects 
Federal executive branch employees.

Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply 
because this final regulation does not contain information collection 
requirements that require the approval of the Office of Management and 
Budget.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
chapter 25, subchapter II), this final rule will not significantly or 
uniquely affect small governments and will not result in increased 
expenditures by State, local, and tribal governments, in the aggregate, 
or by the private sector, of $100 million or more (as adjusted for 
inflation) in any one year.

Congressional Review Act

    The Office of Government Ethics has determined that this proposed 
rulemaking involves a nonmajor rule under the Congressional Review Act 
(5 U.S.C. chapter 8) and has submitted a report thereon to the U.S. 
Senate, House of Representatives and General Accounting Office in 
accordance with that law.

List of Subjects in 5 CFR Part 2640

    Conflicts of interests, Government employees.


[[Page 12445]]


    Approved: November 16, 2001.
Amy L. Comstock,
Director, Office of Government Ethics.

    Accordingly, for the reasons set forth in the preamble, the Office 
of Government Ethics is amending 5 CFR part 2640 as follows:

PART 2640--INTERPRETATION, EXEMPTIONS AND WAIVER GUIDANCE 
CONCERNING 18 U.S.C. 208 (ACTS AFFECTING A PERSONAL FINANCIAL 
INTEREST)

    1. The authority citation for part 2640 continues to read as 
follows:

    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

    2. Section 2640.102 is amended by revising paragraph (r) to read as 
follows:


Sec. 2640.102  Definitions.

* * * * *
* * * * *
    (r) Security means common stock, preferred stock, corporate bond, 
municipal security, long-term Federal Government security, and limited 
partnership interest. The term also includes ``mutual fund'' for 
purposes of Sec. 2640.202(e) and (f) and Sec. 2640.203(a).
* * * * *

    3. Section 2640.103 is amended by revising Example 1 following 
paragraph (a)(2) to read as follows:


Sec. 2640.103  Prohibition.

    (a) * * *
    (2) * * *

    Example 1 to paragraph (a)(2): 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 $20,000 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.
* * * * *

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

    4. Section 2640.201 is amended by:
    a. Revising the heading of Example 1 and revising Example 2 
following paragraph (a);
    b. Revising paragraph (b); and
    c. Revising the heading of Example 1 and adding new Examples 2 and 
3 following new paragraph (b)(2)(ii).
    The revisions and additions read as follows:


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

    (a) * * *

    Example 1 to paragraph (a): * * *
    Example 2 to paragraph (a): A nonsupervisory employee of the 
Department of Energy owns shares valued at $75,000 in a mutual fund 
that expressly concentrates its holdings in the stock of utility 
companies. The employee may not rely on the exemption in paragraph 
(a) of this section to act in matters affecting a utility company 
whose stock is a part of the mutual fund's portfolio because the 
fund is not a diversified fund as defined in Sec. 2640.102(a). The 
employee may, however, seek an individual waiver under 18 U.S.C. 
208(b)(1) permitting him to act.

    (b) Sector mutual funds. (1) An employee may participate in any 
particular matter 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 ownership of an interest in the fund.
    (2)(i) An employee may participate in a particular matter affecting 
one or more holdings of a sector mutual fund where the disqualifying 
financial interest in the matter arises because of ownership of an 
interest in the fund and the aggregate market value of interests in any 
sector fund or funds does not exceed $50,000.
    (ii) For purposes of calculating the $50,000 de minimis amount in 
paragraph (b)(2)(i) of this section, an employee must aggregate the 
market value of all sector mutual funds in which he has a disqualifying 
financial interest and that concentrate in the same sector and have one 
or more holdings that may be affected by the particular matter.

    Example 1 to paragraph (b): * * *
    Example 2 to paragraph (b): 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 $35,000 
worth of shares in the XYZ Health Sciences Fund, 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. The 
health scientist administrator may participate in the 
recommendations.
    Example 3 to paragraph (b): The spouse of the employee in the 
previous Example owns $40,000 worth of shares in ABC Specialized 
Portfolios: Healthcare, a sector mutual fund that also concentrates 
its investments in health-related companies. The two funds focus on 
the same sector and both contain holdings that may be affected by 
the particular matter. Because the aggregated value of the two funds 
exceeds $50,000, the employee may not rely on the exemption.
* * * * *
    5. Section 2640.202 is amended by:
    a. Revising paragraph (a)(2);
    b. Revising the heading of Example 1 and revising Examples 2 and 3 
following paragraph (a)(2);
    c. Redesignating paragraphs (b) through (e) as paragraphs (c) 
through (f), respectively;
    d. Adding a new paragraph (b);
    e. Adding new Example 1 following new paragraph (b)(2); and
    f. Revising the heading of Example 1 and removing Example 2 
following redesignated paragraph (c)(2).
    The revisions and additions read as follows:


Sec. 2640.202  Exemptions for interests in securities.

    (a) * * *
    (2) The aggregate market value of the holdings of the employee, his 
spouse, and his minor children in the securities of all entities does 
not exceed $15,000.

    Example 1 to paragraph (a):  * * *
    Example 2 to paragraph (a): In the preceding example, the 
employee and his spouse each own $8,000 worth of stock in XYZ 
Corporation, resulting in ownership of $16,000 worth of stock by the 
employee and his spouse. The exemption in paragraph (a) of this 
section 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 $15,000. 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 to paragraph (a):  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 $15,000. During the 
time the contract is being performed, however, the value of the 
employee's stock increases to $17,500. When the employee knows that 
the value of his stock exceeds $15,000, 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). 
Alternatively, the employee may divest the portion of his XYZ stock 
that exceeds $15,000. This can be

[[Page 12446]]

accomplished through a standing order with his broker to sell when 
the value of the stock exceeds $15,000.

    (b) De minimis exemption for matters affecting nonparties. An 
employee may participate in any particular matter involving specific 
parties in which the disqualifying financial interest arises from the 
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 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 to paragraph (b): A Food and Drug Administration 
advisory committee is asked to review a new drug application from 
Alpha Drug Co. for a new lung cancer drug. A member of the advisory 
committee owns $20,000 worth of stock in Mega Drug Co., which 
manufactures the only similar lung cancer drug on the market. If 
approved, the Alpha Drug Co.'s drug would directly compete with the 
drug sold by the Mega Drug Co., resulting in decreased sales of its 
lung cancer drug. The committee member may participate in the review 
of the new drug.

    (c) * * *

    Example 1 to paragraph (c):  * * *
* * * * *

    6. Section 2640.204 is amended by revising Example 1 which follows 
the section to read as follows:


Sec. 2640.204  Prohibited financial interests.

* * * * *
    Example 1 to Sec. 2640.204:  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 $15,000 worth of publicly traded stock will not apply to the 
employee's participation in matters affecting the bank.

[FR Doc. 02-6617 Filed 3-18-02; 8:45 am]
BILLING CODE 6345-01-U