[Federal Register Volume 69, Number 144 (Wednesday, July 28, 2004)]
[Rules and Regulations]
[Pages 44893-44896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17200]



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  Federal Register / Vol. 69, No. 144 / Wednesday, July 28, 2004 / 
Rules and Regulations  

[[Page 44893]]



OFFICE OF GOVERNMENT ETHICS

5 CFR Part 2634

RIN 3209-AA00


Revisions to the Certificates of Divestiture Regulation

AGENCY: Office of Government Ethics (OGE).

ACTION: Final rule amendments.

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SUMMARY: In this final rule, the Office of Government Ethics has 
rewritten its regulation concerning Certificates of Divestiture in 
plain language. This rule also revises certain procedures for issuing 
Certificates of Divestiture and the definition of permitted property 
into which proceeds of the sale of property are reinvested.

DATES: Effective Date: August 27, 2004.

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 the Director of 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 OGE 
Certificates of Divestiture executive branchwide regulation is now 
codified at subpart J of 5 CFR part 2634.
    On January 13, 2004, OGE published a set of proposed amendments to 
the regulation, proposing to make certain improvements. See 69 FR 1954-
1957. The proposed rule provided a 60-day comment period. The Office of 
Government Ethics received one comment letter from an organization. 
After a careful review of the comment letter and making some additional 
plain language modifications, OGE is publishing this final rule.

II. Summary of Comments and Revisions

    We have attempted 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. The one comment 
letter suggested many changes to make the regulation even simpler. 
After careful review, OGE has adopted some of the suggestions. In 
particular, we have redrafted Sec. Sec.  2634.1001 and 2634.1003 of the 
proposed rule to make them easier to understand. Consequently, Sec.  
2634.1001 of the proposed rule is now divided into Sec. Sec.  2634.1001 
and 2634.1002, and proposed sections 2634.1002-2634.1007 have been 
renumbered in this final rule accordingly.
    The final rule retains the same revisions as set forth in the 
proposed rule. First, we changed the meaning of a ``diversified 
investment fund,'' in paragraph (2) of the definition of permitted 
property in new (renumbered) Sec.  2634.1003, to track the definition 
of diversified mutual fund and diversified unit investment trust as 
those terms are used in 5 CFR 2640.102.\1\ Second, several changes will 
streamline and simplify the procedure OGE uses to issue a Certificate 
of Divestiture. The final rule clarifies the information related to 
financial disclosure that needs to be submitted as part of the 
Certificate of Divestiture request and simplifies the procedure related 
to the timing of a submission of a request to OGE.
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    \1\ When the Certificate of Divestiture rule was first published 
in April 1990, the definition of ``diversified investment fund'' 
included common trust funds maintained by banks. At that time, 
common trust funds were required to be diversified under rules 
published by the Comptroller of the Currency. However, in December 
1996, the Office of the Comptroller of the Currency eliminated the 
diversification requirement. See 61 FR 68543, 68551. Therefore, 
common trust funds are not a suitable alternative for permitted 
property and have been deleted from the definition of diversified 
investment fund. Eligible persons who invested in common trust funds 
as permitted property prior to the effective date of this final rule 
may continue to hold those funds.
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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 Planning and Review. This regulation has also 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 preambles to the proposed and final revisions, to be codified in a 
revised subpart J of 5 CFR part 2634, note 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 it becomes 
effective, since the provisions only clarify and improve the 
Certificates of Divestiture regulatory procedures. Finally, this 
rulemaking is not economically significant under the Executive order 
and will not interfere with State, local or tribal governments.

Executive Order 12988

    As Acting 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 Acting Director of the Office of Government Ethics, I certify 
under the Regulatory Flexibility Act (5 U.S.C.

[[Page 44894]]

chapter 6) that this 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 final 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 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 rulemaking 
involves a nonmajor rule under the Congressional Review Act (5 U.S.C. 
chapter 8) and will submit a report thereon to the U.S. Senate, House 
of Representatives and General Accounting Office in accordance with 
that law at the same time this rulemaking document is sent to the 
Office of the Federal Register for publication in the Federal Register.

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: July 21, 2004.
Marilyn L. Glynn,
Acting Director, Office of Government Ethics.


0
Accordingly, for the reasons set forth in the preamble, the Office of 
Government Ethics is amending 5 CFR part 2634 as follows:

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

0
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.

0
2. Subpart J of part 2634 is revised to read as follows:

Subpart J--Certificates of Divestiture

Sec.
2634.1001 Overview.
2634.1002 Role of the Internal Revenue Service.
2634.1003 Definitions.
2634.1004 General rule.
2634.1005 How to obtain a Certificate of Divestiture.
2634.1006 Rollover into permitted property.
2634.1007 Cases in which Certificates of Divestiture will not be 
issued.
2634.1008 Public access to a Certificate of Divestiture.

Subpart J--Certificates of Divestiture


Sec.  2634.1001  Overview.

    (a) Scope. 26 U.S.C. 1043 and the rules of this subpart allow an 
eligible person to defer paying capital gains tax on property sold to 
comply with conflict of interest requirements. To defer the gains, an 
eligible person must obtain a Certificate of Divestiture from the 
Director of the Office of Government Ethics before selling the 
property. This subpart describes the circumstances when an eligible 
person may obtain a Certificate of Divestiture and establishes the 
procedure that the Office of Government Ethics uses to issue 
Certificates of Divestiture.
    (b) Purpose. The purpose of section 1043 and this subpart is to 
minimize the burden that would result from paying capital gains tax on 
the sale of assets to comply with conflict of interest requirements. 
Minimizing this burden aids in attracting and retaining highly 
qualified personnel in the executive branch and ensures the confidence 
of the public in the integrity of Government officials and decision-
making processes.


Sec.  2634.1002  Role of the Internal Revenue Service.

    The Internal Revenue Service (IRS) has jurisdiction over the tax 
aspects of a divestiture made pursuant to a Certificate of Divestiture. 
Eligible persons seeking to defer capital gains:
    (a) Must follow IRS requirements for reporting dispositions of 
property and electing under section 1043 not to recognize capital 
gains; and
    (b) Should consult a personal tax advisor or the IRS for guidance 
on these matters.


Sec.  2634.1003  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.  2634.1004  General rule.

    (a) The Director of the Office of Government Ethics may issue a 
Certificate of Divestiture for specific property in accordance with the 
procedures of Sec.  2634.1005 of this subpart if:
    (1) 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
    (2) A congressional committee requires divestiture as a condition 
of confirmation.
    (b) The Director of the Office of Government Ethics cannot issue a 
Certificate of Divestiture for property that already has been sold.

    Example 1 to Sec.  2634.1004: 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.  2634.1004: 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

[[Page 44895]]

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.  2634.1004: 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.  2634.1004: 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.  2634.1005  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 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.  2634.1006  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

[[Page 44896]]

such securities. However, she may invest the proceeds in a 
diversified mutual fund. See the definition of permitted property at 
Sec.  2634.1003.

    (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.  2634.1007  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 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 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.  2634.1008  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. 04-17200 Filed 7-27-04; 8:45 am]
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