[Federal Register Volume 69, Number 8 (Tuesday, January 13, 2004)]
[Proposed Rules]
[Pages 1954-1957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-685]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 69, No. 8 / Tuesday, January 13, 2004 / 
Proposed Rules

[[Page 1954]]



OFFICE OF GOVERNMENT ETHICS

5 CFR Part 2634

RIN 3209-AA00


Proposed Revisions to the Certificates of Divestiture Regulation

AGENCY: Office of Government Ethics (OGE).

ACTION: Proposed rule amendments.

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SUMMARY: The Office of Government Ethics is proposing a plain language 
revision of its regulation concerning Certificates of Divestiture. The 
proposed rule also would revise certain procedures for issuing 
Certificates of Divestiture and the definition of permitted property 
into which proceeds of the sale of property are reinvested.

DATES: Comments are invited and must be received in writing on or 
before March 15, 2004.

ADDRESSES: Send comments to the Office of Government Ethics, Suite 500, 
1201 New York Avenue, NW., Washington, DC 20005-3917. Attention: 
Deborah J. Bortot. Comments also may be sent electronically to OGE's 
Internet E-mail address: [email protected]. For E-mail messages, the 
subject line should include the following reference: ``Comments on 
proposed revisions to the Certificates of Divestiture regulation.''

FOR FURTHER INFORMATION CONTACT: Deborah J. Bortot, Office of 
Government Ethics; Telephone: 202-482-9300; TDD: 202-482-9293; FAX: 
202-482-9237.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 1043 of the Internal Revenue Code of 1986, 26 U.S.C. 1043, 
was enacted as part of the Ethics Reform Act of 1989 (Pub. L. 101-194). 
Section 1043 authorizes OGE to issue a Certificate of Divestiture to an 
eligible person who is divesting property in order to comply with a 
Federal conflict of interest law, regulation, rule, or Executive order, 
or if requested by a congressional committee as a condition of 
confirmation. A person who receives a Certificate of Divestiture may 
defer payment of capital gains tax as long as he or she timely 
purchases certain permitted property with the proceeds of the sale. OGE 
published an interim rule on April 18, 1990 (at 55 FR 14407-14409) 
implementing section 1043. On June 25, 1996, the Office of Government 
Ethics published a final rule at 61 FR 32633-32636. The final rule was 
based on comments to the interim rule and on OGE's experience under the 
interim rule and the May 1990 Technical Corrections to the Ethics 
Reform Act of 1989 (Pub. L. 101-280), which amended section 1043 of the 
Internal Revenue Code of 1986. The Certificates of Divestiture 
regulation is now codified at subpart J of 5 CFR part 2634. After 
reevaluating the regulation to see whether changes might be needed, OGE 
has decided to publish these proposed revisions to make certain 
improvements.

II. Discussion of Proposed Changes

    We are proposing to improve the current Certificates of Divestiture 
regulation by: Organizing the material more logically; using shorter 
sentences; eliminating unnecessary technical language; and stating the 
rule's requirements more clearly. We invite your comments as to whether 
this proposed rule would be easier to understand and how we could 
further improve its clarity. The following discussion summarizes the 
most important changes that OGE is proposing.
    To add more harmony and uniformity to ethics program rules, OGE is 
proposing a change to the meaning of ``diversified investment fund.'' 
In order to qualify for deferral of capital gains, an eligible person 
must reinvest proceeds from the sale of property pursuant to a 
Certificate of Divestiture into ``permitted property'' during the 60-
day period beginning on the date of such sale. ``Permitted property'' 
must consist only of obligations of the United States or ``diversified 
investment funds.'' Subpart J defines what constitutes a ``diversified 
investment fund'' for this purpose.
    Proposed Sec.  2634.1002 would change the meaning of a 
``diversified investment fund,'' in paragraph (2) of the definition of 
permitted property, to track the definition of ``diversified mutual 
fund'' and ``diversified unit investment trust'' as those terms are 
used in 5 CFR 2640.102. However, similar to current Sec.  2634.1003(a), 
proposed Sec.  2634.1002 would continue to explain that ethics program 
requirements applicable to specific agencies and positions might, in 
some cases, limit the choices of ``permitted property,'' including the 
specific ``diversified investment fund'' in which an employee may 
reinvest.
    Several changes are proposed that would streamline the procedures 
OGE uses to issue a Certificate of Divestiture. Unlike the current 
regulation, the proposed rule would permit an employee to submit a 
written request for a Certificate of Divestiture on behalf of another 
eligible person such as a spouse or minor child. Under proposed Sec.  
2634.1004(a)(3), the employee would have to state in the request that 
the eligible person holding the property required to be divested has 
agreed to divest the property.
    Proposed Sec.  2634.1004(b)(1) would clarify the information 
related to financial disclosure that OGE needs to receive as part of 
the Certificate of Divestiture request in the case of a Government 
employee who is not required to file a financial disclosure report. 
Whereas current Sec.  2634.1002(b)(1)(ii)(B) refers generally to 
information required to be disclosed on a financial disclosure report, 
a parallel provision in proposed Sec.  2634.1004(b)(1) would require an 
employee who does not file a financial disclosure report to submit a 
listing of the employee's interests that would be required to be 
disclosed on a confidential financial disclosure report excluding gifts 
and travel reimbursements. Further, while the current regulation is 
silent as to the timing and length of the period for reporting this 
information, the proposed rule would clarify that the reporting period 
is the preceding twelve months from the date the requirement to divest 
first applied or the date the employee first agreed that the property 
would be divested. In the case of an employee who is required to file a 
financial disclosure report, the proposed rule would continue to 
require that OGE receive a copy of the latest report filed by the 
employee. The submission of information related to financial disclosure 
ensures that OGE can determine whether the employee has

[[Page 1955]]

agreed to divest all similar interests that create a conflict of 
interest.
    In addition, the proposed rule would simplify the procedure for 
issuing a Certificate of Divestiture where a congressional committee 
requests divestiture of the property as a condition of confirmation and 
the request is consistent with a custom of the committee. To 
substantiate the request of a committee, proposed Sec.  2634.1004(c) 
would allow the designated agency ethics official to submit a statement 
that shows a custom of the committee requires the property be divested 
as a condition of confirmation.
    Finally, the proposed rule would also simplify the procedure 
related to the timing of a submission of a request to OGE. OGE will 
continue to consider requests submitted beyond the applicable time 
period for divestiture. However, proposed Sec.  2634.1004(e) would 
require the designated agency ethics official to provide OGE with an 
explanation for the delay if the request is not submitted within the 
applicable time period specified in proposed Sec.  2634.1004(e).

III. 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 March 15, 2004. 
The Office of Government Ethics will review all comments received and 
consider any modifications to this rule as proposed which appear 
warranted before adopting the final rule on this matter.

Executive Order 12866

    In promulgating this proposed rule, 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. In addition, these proposed amendments 
have been reviewed by the Office of Management and Budget under that 
Executive order. Moreover, in accordance with section 6(a)(3)(B) of 
E.O. 12866, the preamble to these proposed revisions, to be codified 
once finalized in a revised subpart J of 5 CFR part 2634, notes the 
legal basis and benefits of as well as the need for the regulatory 
action. There should be no appreciable increase in costs to OGE or the 
executive branch of the Federal Government in administering this 
regulation, once finalized, since the proposed provisions would only 
clarify and improve the Certificates of Divestiture regulatory 
procedures. Finally, this proposed rulemaking is not economically 
significant under the Executive order and will not interfere with 
State, local or tribal governments.

Executive Order 12988

    As Director of the Office of Government Ethics, I have reviewed 
this proposed 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 and members of their immediate 
families.

Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply 
to this proposed amended regulation because it does not contain any 
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 proposed 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 will, before the future final rule takes 
effect, submit 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 2634

    Certificates of divestiture, Conflict of interests, Financial 
disclosure, Government employees, Penalties, Privacy, Reporting and 
recordkeeping requirements, Trusts and trustees.

    Approved: January 7, 2004.
Marilyn L. Glynn,
Acting Director, Office of Government Ethics.
    Accordingly, for the reasons set forth in the preamble, the Office 
of Government Ethics proposes to amend subpart J of 5 CFR part 2634 as 
follows:

PART 2634--EXECUTIVE BRANCH FINANCIAL DISCLOSURE, QUALIFIED TRUSTS, 
AND CERTIFICATES OF DIVESTITURE

    1. The authority citation for part 2634 continues to read as 
follows:

    Authority: 5 U.S.C. App. (Ethics in Government Act of 1978); 26 
U.S.C. 1043; Pub. L. 101-410, 104 Stat. 890, 28 U.S.C. 2461 note 
(Federal Civil Penalties Inflation Adjustment Act of 1990), as 
amended by Sec. 31001, Pub. L. 104-134, 110 Stat. 1321 (Debt 
Collection Improvement Act of 1996); 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.
    2. Subpart J of part 2634 is revised to read as follows:
Subpart J--Certificates of Divestiture
Sec.
2634.1001 Overview.
2634.1002 Definitions.
2634.1003 General rule.
2634.1004 How to obtain a Certificate of Divestiture.
2634.1005 Rollover into permitted property.
2634.1006 Cases in which Certificates of Divestiture will not be 
issued.
2634.1007 Public access to a Certificate of Divestiture.

Subpart J--Certificates of Divestiture


Sec.  2634.1001  Overview.

    (a) Purpose. 26 U.S.C. 1043 and the rules of this subpart allow an 
eligible person to defer the payment of capital gains tax on property 
that is sold in order to comply with conflict of interest requirements. 
In order to defer the gains, an eligible person must obtain a 
Certificate of Divestiture from the Director of the Office of 
Government Ethics before the sale of the property. This subpart 
describes the circumstances when a Certificate of Divestiture may be 
obtained and establishes the procedure that the Office of Government 
Ethics uses to issue Certificates of Divestiture.
    (b) Scope. The Internal Revenue Service has jurisdiction over the 
tax aspects of a divestiture made pursuant to a Certificate of 
Divestiture. Internal Revenue Service requirements for reporting 
dispositions of property and making an election under section 1043 not 
to recognize capital gains must be followed by eligible persons wishing 
to make such an election. An eligible person seeking a Certificate of

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Divestiture should consult his personal tax advisor and the Internal 
Revenue Service for guidance on these matters.
    (c) Policy. The purpose of section 1043 and the rules of this 
subpart is to minimize the burden that would result from the payment of 
capital gains tax on the sale of assets to comply with conflict of 
interest requirements. Minimizing this burden will aid in attracting 
and retaining highly qualified personnel in the executive branch and 
will ensure the confidence of the public in the integrity of Government 
officials and decision-making processes.


Sec.  2634.1002  Definitions.

    For purposes of this subpart:
    Eligible person means:
    (1) Any officer or employee of the executive branch of the Federal 
Government, except a person who is a special Government employee as 
defined in 18 U.S.C. 202;
    (2) The spouse or any minor or dependent child of the individual 
referred to in paragraph (1) of this definition; and
    (3) Any trustee holding property in a trust in which an individual 
referred to in paragraph (1) or (2) of this definition has a beneficial 
interest in principal or income.
    Permitted property means:
    (1) An obligation of the United States; or
    (2) A diversified investment fund. A diversified investment fund is 
a diversified mutual fund or diversified unit investment trust, as 
defined in 5 CFR 2640.102(a), (k) and (u);
    (3) Provided, however, a permitted property cannot be any holding 
prohibited by statute, regulation, rule, or Executive order. As a 
result, requirements applicable to specific agencies and positions may 
limit an eligible person's choices of permitted property. An employee 
seeking a Certificate of Divestiture should consult the appropriate 
designated agency ethics official to determine whether a statute, 
regulation, rule, or Executive order may limit choices of permitted 
property.


Sec.  2634.1003  General rule.

    The Director of the Office of Government Ethics may issue a 
Certificate of Divestiture for specific property in accordance with the 
procedures of Sec.  2634.1004 of this subpart if the Director 
determines that divestiture of the property by an eligible person is 
reasonably necessary to comply with 18 U.S.C. 208, or any other Federal 
conflict of interest statute, regulation, rule, or Executive order, or 
if divestiture is required by a congressional committee as a condition 
of confirmation. A Certificate of Divestiture cannot be issued for 
property that already has been sold.

    Example 1 to Sec.  2634.1003: An employee is directed to divest 
shares of stock, a limited partnership interest, and foreign 
currencies. If the sale of these assets will result in capital gains 
under the Internal Revenue Code, the employee may request and 
receive a Certificate of Divestiture.
    Example 2 to Sec.  2634.1003: An employee of the Department of 
Commerce is directed to divest his shares of XYZ stock acquired 
through the exercise of options held in an employee benefit plan. 
His gain from the sale of the stock will be treated as ordinary 
income. Because only capital gains realized under Federal tax law 
are eligible for deferral under section 1043, a Certificate of 
Divestiture cannot be issued for the sale of the XYZ stock.
    Example 3 to Sec.  2634.1003: During her Senate confirmation 
hearing, a nominee to a Department of Defense (DOD) position is 
directed to divest stock in a DOD contractor as a condition of her 
confirmation. Eager to comply with the order to divest, the nominee 
sells her stock immediately after the hearing and prior to being 
confirmed by the Senate. Once she is a DOD employee, she requests a 
Certificate of Divestiture for the stock. Because the Office of 
Government Ethics cannot issue a Certificate of Divestiture for 
property that has already been divested, the employee's request for 
a Certificate of Divestiture will be denied.
    Example 4 to Sec.  2634.1003: After receiving a Certificate of 
Divestiture, the spouse of a Food and Drug Administration employee 
sold stock in a regulated company. Between the time of the request 
for the Certificate of Divestiture and the sale of the stock, the 
stock price dropped and the spouse sold the stock at a loss. Because 
the sale of the stock did not result in capital gains, the spouse 
has no need for the Certificate of Divestiture and cannot submit it 
to the Internal Revenue Service for deferral of gains. No further 
action need be taken by the employee or the employee's spouse in 
connection with the Certificate of Divestiture.


Sec.  2634.1004  How to obtain a Certificate of Divestiture.

    (a) Employee's request to the designated agency ethics official. An 
employee seeking a Certificate of Divestiture must submit a written 
request to the designated agency ethics official at his or her agency. 
The request must contain:
    (1) A full and specific description of the property that will be 
divested. For example, if the property is corporate stock, the request 
must include the number of shares for which the eligible person seeks a 
Certificate of Divestiture;
    (2) A brief description of how the eligible person acquired the 
property;
    (3) A statement that the eligible person holding the property has 
agreed to divest the property; and
    (4)(i) The date that the requirement to divest first applied; or
    (ii) The date the employee first agreed that the eligible person 
would divest the property in order to comply with conflict of interest 
requirements.
    (b) Designated agency ethics official's submission to the Office of 
Government Ethics. The designated agency ethics official must forward 
to the Director of the Office of Government Ethics the employee's 
written request described in paragraph (a) of this section. In 
addition, the designated agency ethics official must submit:
    (1) A copy of the employee's latest financial disclosure report. If 
the employee is not required to file a financial disclosure report, the 
designated agency ethics official must obtain from the employee, and 
submit to the Office of Government Ethics, a listing of the employee's 
interests that would be required to be disclosed on a confidential 
financial disclosure report excluding gifts and travel reimbursements. 
For purposes of this listing, the reporting period is the preceding 
twelve months from the date the requirement to divest first applied or 
the date the employee first agreed that the eligible person would 
divest the property;
    (2) An opinion that describes why divestiture of the property is 
reasonably necessary to comply with 18 U.S.C. 208, or any other Federal 
conflict of interest statute, regulation, rule, or Executive order; and
    (3) A brief description of the employee's position or a citation to 
a statute that sets forth the duties of the position.
    (c) Divestitures required by a congressional committee. In the case 
of a divestiture required by a congressional committee as a condition 
of confirmation, the designated agency ethics official must submit 
appropriate evidence that the committee requires the divestiture. A 
transcript of congressional testimony or a written statement from the 
designated agency ethics official concerning the committee's custom 
regarding divestiture are examples of evidence of the committee's 
requirements.
    (d) Divestitures for property held in a trust. In the case of 
divestiture of property held in a trust, the employee must submit a 
copy of the trust instrument, as well as a list of the trust's current 
holdings, unless the holdings are listed on the employee's most recent 
financial disclosure report. In certain cases involving divestiture of 
property held in a trust, the Director may not issue a Certificate of 
Divestiture unless the parties take actions which, in the

[[Page 1957]]

opinion of the Director, are appropriate to exclude, to the extent 
practicable, parties other than eligible persons from benefitting from 
the deferral of capital gains. Such actions may include, as permitted 
by applicable State law, division of the trust into separate 
portfolios, special distributions, dissolution of the trust, or 
anything else deemed feasible by the Director, in his or her sole 
discretion.

    Example 1 to paragraph (d): An employee has a 90% beneficial 
interest in an irrevocable trust created by his grandfather. His 
four adult children have the remaining 10% beneficial interest in 
the trust. A number of the assets held in the trust must be sold to 
comply with conflicts of interest requirements. Due to State law, no 
action can be taken to separate the trust assets. Because the adult 
children have a small interest in the trust and the assets cannot be 
separated, the Director may consider issuing a Certificate of 
Divestiture to the trustee for the sale of all of the conflicting 
assets.
    (e) Time requirements. A request for a Certificate of Divestiture 
does not extend the time in which an employee otherwise must divest 
property required to be divested pursuant to an ethics agreement, or 
prohibited by statute, regulation, rule, or Executive order. Therefore, 
an employee must submit his or her request for a Certificate of 
Divestiture as soon as possible once the requirement to divest becomes 
applicable. The Office of Government Ethics will consider requests 
submitted beyond the applicable time period for divestiture. If the 
designated agency ethics official submits a request to the Office of 
Government Ethics beyond the applicable time period for divestiture, he 
must explain the reason for the delay. (See 5 CFR 2634.802 and 2635.403 
for rules relating to the time requirements for divestiture.)
    (f) Response by the Office of Government Ethics. After reviewing 
the materials submitted by the employee and the designated agency 
ethics official, and making a determination that all requirements have 
been met, the Director will issue a Certificate of Divestiture. The 
certificate will be sent to the designated agency ethics official who 
will then forward it to the employee.


Sec.  2634.1005  Rollover into permitted property.

    (a) Reinvestment of proceeds. In order to qualify for deferral of 
capital gains, an eligible person must reinvest the proceeds from the 
sale of the property divested pursuant to a Certificate of Divestiture 
into permitted property during the 60-day period beginning on the date 
of the sale. The proceeds may be reinvested into one or more types of 
permitted property.

    Example 1 to paragraph (a): A recently hired employee of the 
Department of Transportation receives a Certificate of Divestiture 
for the sale of a large block of stock in an airline. He may split 
the proceeds of the sale and reinvest them in an S&P Index Fund, a 
diversified Growth Stock Fund, and U.S. Treasury bonds.
    Example 2 to paragraph (a): The Secretary of Treasury sells 
certain stock after receiving a Certificate of Divestiture and is 
considering reinvesting the proceeds from the sale into U.S. 
Treasury securities. However, because the Secretary of the Treasury 
is prohibited by 31 U.S.C. 329 from being involved in buying 
obligations of the United States Government, the Secretary cannot 
reinvest the proceeds in such securities. However, she may invest 
the proceeds in a diversified mutual fund. See the definition of 
permitted property at Sec.  2634.1002.

    (b) Internal Revenue Service reporting requirements. An eligible 
person who elects to defer the recognition of capital gains from the 
sale of property pursuant to a Certificate of Divestiture must follow 
Internal Revenue Service rules for reporting the sale of the property 
and the reinvestment transaction.


Sec.  2634.1006  Cases in which Certificates of Divestiture will not be 
issued.

    The Director of the Office of Government Ethics, in his or her sole 
discretion, may deny a request for a Certificate of Divestiture in 
cases where an unfair or unintended benefit would result. Examples of 
such cases include:
    (a) Employee benefit plans. The Director will not issue a 
Certificate of Divestiture if the property is held in a pension, 
profit-sharing, stock bonus, or other employee benefit plan and can 
otherwise be rolled over into an eligible tax-deferred retirement plan 
within the 60-day reinvestment period.
    (b) Complete divestiture. The Director will not issue a Certificate 
of Divestiture unless the employee agrees to divest all of the property 
that presents a conflict of interest, as well as other similar or 
related property that also presents a conflict of interest under a 
Federal conflict of interest statute, regulation, rule, or Executive 
order. However, any property that qualifies for a regulatory exemption 
at 5 CFR part 2640 need not be divested for a Certificate of 
Divestiture to be issued.

    Example 1 to paragraph (b): A new senior official at the Federal 
Aviation Administration owns stock in several airlines. The official 
is expected to participate in a matter dealing with the imposition 
of new safety standards on commercial airlines. The employee must 
divest his interest in all of the airline stock that exceeds the 
amounts he is permitted to retain under the exemptions to 18 U.S.C. 
208, which are described at 5 CFR part 2640.
    Example 2 to paragraph (b): A Department of Agriculture employee 
owns shares of stock in Better Workspace, Inc. valued at $25,000. As 
part of his official duties, the employee is assigned to evaluate 
bids for a contract to renovate office space at his agency. The 
Department's designated agency ethics official discovers that Better 
Workspace is one of the companies that has submitted a bid and 
directs the employee to sell his stock in the company. Because 
Better Workspace is a publicly traded security, the employee could 
retain up to $15,000 of the stock under the regulatory exemption for 
interests in securities at 5 CFR 2640.202(a). He would be able to 
request a Certificate of Divestiture for the $10,000 of Better 
Workspace stock that is not covered by the exemption. Alternatively, 
he could request a Certificate of Divestiture for the entire $25,000 
worth of stock. If he chooses to sell his stock down to an amount 
permitted under the regulatory exemption, the Office of Government 
Ethics will not issue additional Certificates of Divestiture if the 
value of the stock goes above $15,000 again.

    (c) Property acquired under improper circumstances. The Director 
will not issue a Certificate of Divestiture:
    (1) If the eligible person acquired the property at a time when its 
acquisition was prohibited by statute, regulation, rule, or Executive 
order; or
    (2) If circumstances would otherwise create the appearance of a 
conflict with the conscientious performance of Government 
responsibilities.


Sec.  2634.1007  Public access to a Certificate of Divestiture.

    A Certificate of Divestiture issued pursuant to the provisions of 
this subpart is available to the public in accordance with the rules of 
Sec.  2634.603 of this part.

[FR Doc. 04-685 Filed 1-12-04; 8:45 am]
BILLING CODE 6345-02-P