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.

Proposed Rules Federal Register

14997 

Vol. 77, No. 50 

Wednesday, March 14, 2012 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

5 CFR Part 7501 

[Docket No. FR–5542–P–01] 

RIN 2501–AD55 

Supplemental Standards of Ethical 

Conduct for Employees of the 

Department of Housing and Urban 

Development 

AGENCY: Office of the Secretary, 

Department of Housing and Urban 

Development. 

ACTION: Proposed rule. 

SUMMARY: The Department of Housing 

and Urban Development (HUD), with 

the concurrence of the Office of 

Government Ethics (OGE), seeks 

comments on the proposed amendments 

to HUD’s Supplemental Standards of 

Ethical Conduct, which are regulations 

for HUD officers and employees that 

supplement the Standards of Ethical 

Conduct for Employees of the Executive 

Branch (Standards) issued by OGE. To 

ensure a comprehensive and effective 

ethics program at HUD, and to address 

ethical issues unique to HUD, the 

proposed rule reflects statutory changes 

that were enacted subsequent to the 

promulgation of HUD’s Supplemental 

Standards of Conduct regulation in 

1996; significantly, the transfer of 

general regulatory authority over the 

Federal National Mortgage Association 

and the Federal Home Loan Mortgage 

Corporation from HUD to the Federal 

Housing Finance Agency (FHFA). In 

addition, the proposed rule revises 

definitions used in HUD’s Supplemental 

Standards of Conduct to reflect updated 

titles and positions and clarifies existing 

prohibitions on certain financial 

interests and outside employment to 

better guide employee conduct, while 

upholding the integrity of HUD in the 

administration of its programs. 

DATES: Comment Due Date: May 14, 

2012. 

ADDRESSES: Interested persons are 

invited to submit comments regarding 

this proposed rule. All comments must 

be in writing and be addressed to the 

Regulations Division, Office of General 

Counsel, Department of Housing and 

Urban Development, 451 7th St. SW., 

Room 10276, Washington, DC 20410– 

0500. There are two methods for 

submitting public comments. All 

submissions must refer to the above 

docket number and title. 

1. Submission of Comments by Mail. 

Comments may be submitted by mail to 

the Regulations Division, Office of 

General Counsel, Department of 

Housing and Urban Development, 451 

7th Street SW., Room 10276, 

Washington, DC 20410–0500. 

2. Electronic Submission of 

Comments. Interested persons may 

submit comments electronically through 

the Federal eRulemaking Portal at 

www.regulations.gov. HUD strongly 

encourages commenters to submit 

comments electronically. Electronic 

submission of comments allows the 

commenter maximum time to prepare 

and submit a comment, ensures timely 

receipt by HUD, and enables HUD to 

make them immediately available to the 

public. Comments submitted 

electronically through the 

www.regulations.gov Web site can be 

viewed by other commenters and 

interested members of the public. 

Commenters should follow the 

instructions provided on that site to 

submit comments electronically. 

Note: To receive consideration as public 

comments, comments must be submitted 

through one of the two methods specified 

above. Again, all submissions must refer to 

the docket number and title of the rule. 

No Facsimile Comments. Facsimile 

(FAX) comments are not acceptable. 

Public Inspection of Public 

Comments. All properly submitted 

comments and communications 

submitted to HUD will be available for 

public inspection and copying between 

8 a.m. and 5 p.m. weekdays at the above 

address. Due to security measures at the 

HUD Headquarters building, an advance 

appointment to review the public 

comments must be scheduled by calling 

the Regulations Division at 202–402– 

3055 (this is not a toll-free number). 

Individuals with speech or hearing 

impairments may access this number 

via TTY by calling the Federal Relay 

Service, toll-free, at 800–877–8339. 

Copies of all comments submitted are 

available for inspection and 

downloading at www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: 

Robert H. Golden, Assistant General 

Counsel, Ethics Law Division, telephone 

number 202–402–6334, or Peter J. 

Constantine, Associate General Counsel 

for Ethics and Personnel Law, Office of 

General Counsel, Department of 

Housing and Urban Development, 451 

7th Street SW., Washington, DC 20410, 

telephone number 202–402–2377. 

Persons with hearing or speech 

impairments may access this number 

through TTY by calling the toll-free 

Federal Relay Service at 800–877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Executive Order 12674, as amended 

by Executive Order 12731, authorized 

OGE to establish a single, 

comprehensive, and clear set of 

executive-branch standards of conduct. 

On August 7, 1992, OGE published the 

Standards of Ethical Conduct for 

Employees of the Executive Branch 

(Standards), as codified at 5 CFR part 

2635. (See 57 FR 35006, as corrected at 

57 FR 48557 and 57 FR 52583.) The 

Standards, effective February 3, 1993, 

set uniform ethical conduct standards 

applicable to all executive branch 

personnel. 

With the concurrence of OGE, 5 CFR 

2635.105 authorizes executive branch 

agencies to publish agency-specific 

supplemental regulations necessary to 

implement their respective ethics 

programs. Pursuant to this authority, 

HUD, with OGE’s concurrence, 

published on July 9, 1996, a final rule 

to establish its supplementary standards 

of ethical conduct for HUD employees 

(61 FR 36246). HUD, with OGE’s 

concurrence, now proposes to amend its 

supplemental standards in order to 

successfully implement HUD’s ethics 

program in light of recent statutory 

changes to HUD’s programs and 

operations. One of the most significant 

statutory changes to HUD programs and 

operations was made by the Housing 

and Economic Recovery Act of 2008 

(HERA) (Pub. L. 110–289, approved July 

30, 2008). HERA transfers regulatory 

authority over the Federal National 

Mortgage Association (Fannie Mae) and 

the Federal Home Loan Mortgage 

Corporation (Freddie Mac) (collectively 

referred to as the Government 

Sponsored Enterprises, or GSEs) from 


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HUD to the Federal Housing Finance 

Agency (FHFA). Based on this transfer 

of regulatory authority, HUD has 

decided to remove provisions of its 

Supplemental Standards of Conduct 

that prohibit all HUD employees from 

owning certain financial interests issued 

by the GSEs. In addition, HUD has 

decided to remove § 7501.106 of its 

Supplemental Standards of Conduct 

that apply to employees whose duties 

involve the regulation or oversight of 

the GSEs. Section 7501.106 prohibits 

covered employees from, among other 

things, owning financial interests in 

certain mortgage institutions and from 

performing any work, either 

compensated or uncompensated, for or 

on behalf of a mortgage institution. The 

removal of § 7501.106 is based on 

HUD’s determination that this section is 

no longer necessary to ensuring the 

impartiality and integrity in the 

administration of HUD’s programs. 

In addition, this proposed rule revises 

definitions used in HUD’s Supplemental 

Standards of Conduct to reflect updated 

titles and positions and clarifies existing 

prohibitions on certain financial 

interests and outside employment to 

better guide employee conduct, while 

upholding the integrity of HUD in the 

administration of its programs. This rule 

also proposes to add a new § 7501.106 

that clarifies the authority of the HUD 

OIG in the agency’s ethics program and 

establishes it as a separate component as 

provided by 5 CFR 2635.203(a). 

II. Amendments Proposed by This Rule 

The following is a section-by-section 

overview of the amendments proposed 

by this rule. 

Section 7501.101 Purpose 

This section remains unchanged. 

Section 7501.102 Definitions 

Proposed § 7501.102 updates and 

clarifies key terms already in the current 

regulation. In addition, it adds new 

terms to reflect current HUD policy and 

removes terms that are no longer used 

in the regulation. Specifically, the 

proposed definitions of ‘‘Agency 

designee’’ and ‘‘Designated Agency 

Ethics Official (DAEO)’’ are revised to 

reflect updated office names and titles 

within the current HUD organization. 

Definitions of ‘‘Bureau,’’ ‘‘Bureau Ethics 

Counselor,’’ and ‘‘Deputy Bureau Ethics 

Counselor,’’ are proposed to clarify the 

Office of Inspector General’s 

responsibilities in HUD’s ethics 

program. Additionally, the reference to 

the Inspector General (IG) is removed 

from the definition of ‘‘agency 

designee’’ in favor of adding definitions 

for ‘‘Bureau,’’ ‘‘Bureau Ethics 

Counselor,’’ and ‘‘Deputy Bureau Ethics 

Counselor.’’ ‘‘Bureau’’ would be defined 

to mean the Office of the Inspector 

General (OIG). ‘‘Bureau Ethics 

Counselor’’ and ‘‘Deputy Bureau Ethics 

Counselor’’ would be defined to mean, 

respectively, the General Counsel for 

OIG and the OIG employees to whom 

the OIG General Counsel delegates 

responsibility to make determinations, 

issue explanatory guidance, or establish 

procedures necessary to implement this 

part, subpart I of 5 CFR part 2634, and 

5 CFR part 2635 for Bureau employees. 

HUD is proposing these amendments to 

make the structure of its ethics program 

more consistent with the structure used 

by other federal agencies and to more 

clearly describe the role and 

responsibilities of the IG in HUD’s 

ethics program. 

The proposed definition of 

‘‘employment’’ is also clarified to 

provide that employment includes 

uncompensated activity, such as 

volunteer work for others while offduty. 

The terms ‘‘assistance’’ and ‘‘security’’ 

are proposed to be removed from 

§ 7501.102, because these terms are no 

longer used in HUD’s supplemental 

regulations. 

Section 7501.103 Waivers 

Proposed § 7501.103 clarifies the 

procedure for requesting a waiver, and 

makes other minor changes to make the 

section clearer. Proposed § 7501.103 

adds the requirement that a waiver 

request be submitted in writing to an 

agency designee and should include the 

employee’s office and division; a 

description of the employee’s official 

duties; the nature and extent of the 

waiver; a detailed statement of facts to 

support the request; and the basis for 

the request, such as hardship. This 

amendment codifies HUD practice that 

a waiver request must be in writing, and 

provides direction to employees on 

what should be included in a waiver 

request for a thorough analysis to be 

conducted. The amendment further 

confirms HUD practice that hardship 

and other exigent circumstances are 

legitimate reasons for a waiver request, 

and such a request will be considered in 

light of HUD’s need to ensure public 

confidence in the impartiality and 

objectivity with which HUD programs 

are administered. This section also 

proposes to delegate authority to the 

Bureau Ethics Counselor to waive 

provisions of this part. 

The proposed section also makes 

minor textual changes in order to make 

the regulation easier to understand. 

These textual changes are not intended 

to change the meaning of the section. 

Section 7501.104 Prohibited Financial 

Interests 

Proposed § 7501.104 is amended to 

remove the reference to covered 

employees under § 7501.106(b)(1). This 

change reflects the proposed removal of 

§ 7501.106 as discussed in more detail 

below in this preamble. The proposed 

regulation continues to apply to all HUD 

employees, except special government 

employees, and to the employee’s 

spouse and minor children, because 

HUD has determined that ownership of 

the financial interests listed in this 

section by these individuals constitutes 

a significant risk of an apparent conflict 

of interest. Additionally, this section is 

revised to reflect the changes to HUD 

regulatory authority as the result of 

HERA, which transferred all general 

regulatory authority over Fannie Mae 

and Freddie Mac from HUD to the 

FHFA. 

Existing § 7501.104(a)(1) is proposed 

to be removed. The prohibition in this 

section was promulgated in 1968 after 

Congress provided HUD with general 

regulatory authority over Fannie Mae 

through the Federal National Mortgage 

Association Charter Act (12 U.S.C. 1716 

et seq.). Under this 1968 statute, HUD 

was directed to establish housing goals 

for Fannie Mae, specifically a goal for 

low- and moderate-income housing and 

a goal for housing located in central 

cities. Beginning in 1968, HUD’s 

Standards of Conduct prohibited 

employees from owning securities 

issued by Fannie Mae or securities 

collateralized by Fannie Mae securities. 

(See 24 CFR 0.735.205(a)(3) (1968).) 

Section 7501.104(a)(1) is no longer 

necessary since HERA transferred the 

general regulatory functions over Fannie 

Mae to FHFA. 

Existing § 7501.104(a)(2) is also 

proposed to be removed. In 1989, 

Congress passed the Financial 

Institutions Reform, Recovery, and 

Enforcement Act (FIRREA) and granted 

HUD essentially the same authority over 

Freddie Mac as it had over Fannie Mae. 

In response to this additional authority, 

HUD’s standards of conduct were 

updated to include a prohibition against 

owning securities issued by Freddie 

Mac or securities collateralized by 

Freddie Mac securities. HUD has 

determined that the prohibition is no 

longer necessary because of HERA. 

The remaining provisions are 

redesignated accordingly. 

Proposed § 7501.104(a)(1) adopts 

language from the current 

§ 7501.104(a)(3). 

Proposed § 7501.104(a)(2) is based on 

current § 7501.104(a)(4), but is revised 

to add clarity. Specifically, the revised 


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section replaces the phrase ‘‘in a 

multifamily project or single family 

dwelling, cooperative unit, or 

condominium unit’’ with the term 

‘‘project’’ in order to cover all HUD 

subsidized or insured projects that exist 

or may come to exist in the future. 

Employee ownership of homes with 

mortgages insured under programs of 

the Federal Housing Administration 

(FHA) and the purchase by employees 

of HUD-owned homes, which was an 

exception within the prohibition of 

§ 7501.104(a)(4), is now addressed in 

exceptions under proposed 

§ 7501.104(b). All remaining HUD 

projects, including multifamily projects, 

assisted living facilities, nursing homes, 

and hospitals, are now included in the 

revised prohibition in § 7501.104(a)(2). 

Finally, proposed § 7501.104(a)(2) now 

uses the term ‘‘financial interest’’ to 

replace ‘‘stock or other financial 

interest’’ and references OGE 

regulations at 5 CFR 2635.403(c) for a 

complete definition of the term 

‘‘financial interest,’’ including 

examples. 

Proposed § 7501.104(a)(3) revises the 

language in current § 7501.104(a)(5). A 

new exception is proposed that allows 

all new HUD employees who already 

have a tenant receiving Section 8 

subsidies to retain that tenant until the 

tenant terminates his or her lease. 

Proposed § 7501.104(a)(3)(i)(E) adds a 

new exception permitting HUD 

employees to receive a Section 8 

subsidy for the rental of properties 

located in areas of Presidentially 

declared emergency or natural disaster 

with prior written approval from an 

agency designee. HUD’s experience 

demonstrates that in rare instances (e.g., 

Hurricane Katrina in 2005 or the 2008 

flooding in Cedar Rapids, Iowa), there 

may be an extreme shortage of 

affordable housing in an area due to a 

natural disaster or other emergency. 

This exception would permit HUD 

employees with rentable properties in 

these areas to accept new tenants 

receiving Section 8 subsidies. These 

supplemental ethics regulations are 

intended to uphold the integrity of 

HUD’s administration of the Section 8 

program and are not intended to further 

restrict the availability of Section 8 

housing, especially in times of acute 

housing shortages. 

The exceptions provided by proposed 

§ 7501.104(a)(3) continue as long as the 

tenant continues to reside in the 

property and as long as the rent charged 

the tenant is not increased above the 

annual rate adjustments permitted by 

the Section 8 program. This first 

condition codifies HUD’s intent not to 

require an employee to terminate the 

rental arrangement early or require a 

Section 8 tenant to move based solely 

on these regulations. The second 

condition preserves the current 

language of the exceptions. 

Current § 7501.104(a)(6) is proposed 

to be removed. The current prohibition 

against ‘‘direct creditor interests’’ is 

undefined and unclear. 

Proposed § 7501.104(b), which 

provides exceptions to this section on 

prohibited financial interests, is revised 

to add the phrase ‘‘directly or indirectly 

receiving, acquiring or owning’’ to 

ensure consistency with § 7501.104(a). 

Additionally, this section proposes to 

expand the exceptions by eliminating 

from current § 7501.104(b)(1) the 

prohibition on owning investment funds 

that concentrate in residential mortgages 

or mortgage-backed securities. This 

prohibition is no longer needed to 

maintain the integrity of HUD in light of 

the fact that HUD no longer has 

regulatory authority over Fannie Mae 

and Freddie Mac. 

Proposed § 7501.104(b)(1) also 

provides an exception to the interests 

prohibited under proposed 

§ 7501.104(a)(2). Section 7501.104(b)(1) 

allows the employee, or the employee’s 

spouse or minor child, to have a 

financial interest in a publicly available 

or publicly traded investment fund that 

may include interests that are 

prohibited under § 7501.104(a)(2), as 

long as the employee, or the employee’s 

spouse or minor child, neither exercises 

control nor has the ability to exercise 

control over the fund or the financial 

interests held in the fund. This 

exception allows the employee, or the 

employee’s spouse or minor child, to 

have an interest in an investment fund 

that may hold interests in HUD 

subsidized projects. HUD’s experience 

has been that it is extremely difficult to 

determine which investment funds have 

interests in HUD-subsidized projects, 

since that information is not readily 

available. Therefore, HUD has decided 

that this type of interest does not 

present an appearance problem and is 

therefore permissible. 

Current § 7501.104(b)(2) is proposed 

to be removed. Read literally, this 

exception had no possible application to 

a limited partnership holding. Also, 

limited partnerships create no less of an 

appearance issue than other legal 

entities that could be used as an 

investment vehicle and do not warrant 

the specific exception. 

Proposed § 7501.104(b)(2) provides 

that a HUD employee may obtain 

mortgage insurance provided by FHA 

under section 203 of the National 

Housing Act (12 U.S.C. 1709) to assist 

in his or her purchase of a single-family 

home that serves as the employee’s 

principal residence and of one other 

single-family residence. Proposed 

§ 7501.104(b)(2) provides notice to HUD 

employees that they must adhere to the 

procedures established by the Assistant 

Secretary for Housing–FHA 

Commissioner in order to obtain FHA 

insurance. This exception was 

previously found in § 7501.104(b)(3). 

Proposed § 7501.104(b)(3) covers HUD 

employees’ purchases of HUD-owned 

homes. This provision is currently an 

exception within the prohibition of 

§ 7501.104(a)(4); however, since the 

provision is permissive, HUD has 

moved the exception to proposed 

§ 7501.104(b), where the other 

exceptions to the prohibitions to 

§ 7501.104(a) are located. Current 

§ 7501.104(a)(4) notifies employees that 

the purchase of HUD-held properties 

must be consistent with an Office of 

Housing handbook that is now outdated. 

To avoid the codification of references 

to HUD handbooks that may become 

obsolete, and thus create a discrepancy 

with the supplemental standards, 

proposed § 7501.104(b)(3) does not 

reference a specific Office of Housing 

handbook, but simply provides notice to 

HUD employees that they must adhere 

to the procedures established by the 

Assistant Secretary for Housing—FHA 

Commissioner in order to purchase a 

HUD-held property. 

Proposed § 7501.104(b)(4) has been 

added to ensure that the employment 

compensation and benefits package for 

an employee’s spouse is not covered as 

a prohibited financial interest if the 

employee’s spouse is employed by an 

entity that may have interests in HUD 

projects that are prohibited under 

proposed § 7501.104(a)(2). For example, 

an employee’s spouse is not restricted 

from earning a salary and other benefits 

as compensation for employment with a 

real estate development company that 

does multifamily business with HUD. 

Proposed § 7501.104(b)(5) contains a 

revised provision that permits 

employees, or their spouses or minor 

children, to hold Government National 

Mortgage Association (GNMA) 

securities. The ownership of GNMA 

securities is currently addressed in 

§ 7501.104(b)(1). Under this provision, 

an employee or the spouse or minor 

child of an employee may not own an 

interest in an investment fund that has 

an objective or practice of investing in 

residential mortgages or securities 

backed by residential mortgages except 

those of GNMA. Since HUD is 

proposing to revise § 7501.104(b)(1), the 

provision addressing ownership of 

GNMA securities is established as a 

separate exception. 


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Section 7501.105 Outside Activities 

Proposed § 7501.105 governs the 

outside activities of HUD employees. 

This proposed section has been revised 

to account for changes in HUD’s 

regulatory authority and to provide 

clarity on restricted real estate activities. 

The proposed rule is designed to 

balance several important ethical 

principles against an employee’s right to 

engage in outside activities. 

HUD has determined that maintaining 

the policy against employment in 

businesses related to real estate or 

manufactured housing is necessary to 

protect against questions regarding the 

impartiality and objectivity of 

employees in the administration of HUD 

programs. Allowing such activity would 

hinder HUD in meeting its missions if 

members of the public question whether 

HUD employees are using their public 

positions or HUD connections to 

advance their outside real estate-related 

employment. While HUD has 

determined that this concern remains 

valid, HUD has also concluded that 

implementing this rule in its current 

form has led to inconsistent application 

and confusion. Therefore, HUD is 

proposing a number of amendments to 

clarify the intent of the prohibition. 

Proposed § 7501.105(a)(1) is amended 

by removing the phrase ‘‘involving 

active participation’’ with a real estaterelated business. By removing this term, 

HUD does not intend to change the 

application of the prohibition contained 

in § 7501.105(a)(1) of the current rule; 

rather, HUD intends to make the 

prohibition less confusing and more 

transparent. The term ‘‘involving active 

participation’’ with a real estate-related 

business encompasses two prohibitions. 

First, it prohibits employment with a 

real estate-related business and, second, 

it prohibits ownership of a real estaterelated business. The term led to some 

confusion in the application of these 

prohibitions by conflating the concepts 

of employment in a business related to 

real estate and the ownership activities 

of operating or managing investment 

properties. To rectify any confusion, 

HUD has separated the prohibition 

against the ownership activities of 

operating and managing a real estaterelated business involving investment 

properties from the employment 

prohibition, by adding § 7501.105(a)(2), 

which prohibits the operation or 

management of investment properties to 

the extent that doing so rises to the level 

of a real estate business. To make the 

prohibition more transparent, HUD has 

decided to codify longstanding policy 

by listing several factors that it uses to 

consider whether the employee’s 

actions of operating or managing 

investment properties rises to the level 

of a real estate business and falls within 

the prohibition. HUD first announced 

these factors in the 1995 preamble to the 

proposed version of the current rule. By 

listing these factors in the rule, HUD has 

not changed the scope of the current 

prohibition; rather, it has made the 

prohibition more transparent by 

including in the rule the factors that are 

used to determine a violation of the 

prohibition. Therefore, HUD employees 

may continue to own or manage 

investment properties, so long as that 

ownership or management does not rise 

to the level of operation or management 

of a real estate-related business. In a 

further effort to make the rule more 

transparent, HUD has decided to codify 

existing policy by stating in 

§ 7501.105(a)(2) that HUD will consider 

these situations on an individual basis. 

Proposed § 7501.105(a)(3) is amended 

to prohibit outside employment with a 

registered lobbying organization that is 

registered to lobby HUD. The current 

regulation cites a repealed statute. The 

proposed change would incorporate the 

definition of a lobbyist under the 

Lobbying Disclosure Act (2 U.S.C. 1601, 

et seq.), although applying only to 

entities that lobby HUD. This change 

will allow easier compliance by 

employees and review by ethics staff 

because of the ease of checking the 

lobbying database of the U.S. House of 

Representatives and the U.S. Senate to 

determine if a potential employer is 

prohibited. 

Proposed § 7501.105(a)(4) is amended 

to remove the specific restriction on 

employees having outside positions 

with Fannie Mae and Freddie Mac. As 

previously discussed, HUD no longer 

has general regulatory authority over 

Fannie Mae and Freddie Mac. Further, 

under proposed § 7501.105(a)(1), 

employees would be prohibited from 

employment with a business related to 

real estate. This prohibition would 

cover employment with Fannie Mae and 

Freddie Mac. Therefore, a specific 

prohibition is not necessary. 

Proposed § 7501.105(b)(1)(ii) is 

amended to clarify that the outside 

employment prohibitions do not 

prohibit employees from serving as a 

member of an employee’s homeowners’ 

association. HUD previously permitted 

serving on the board of a cooperative 

and condominium association, and 

HUD has determined that serving on the 

board of a homeowners’ association 

does not create additional ethics 

concerns. 

HUD has added § 7501.105(b)(2), 

which codifies HUD’s longstanding 

policy that employees with a real estate 

agent’s license may continue to hold 

such license. An employee may only 

use his or her license in relation to 

purchasing or selling a single-family 

property for use as the employee’s 

primary residence, or for the primary 

residence of an immediate family of the 

employee. Employees seeking to use 

their real estate license for this purpose, 

however, must obtain the prior written 

approval of an agency ethics official. 

HUD has revised § 7501.105(c) to add 

the requirement for prior written 

approval from an agency ethics official 

for employees seeking to use their real 

estate license for this purpose. 

Proposed § 7501.105(c)(1) would 

require an employee to receive written 

approval prior to accepting a position of 

authority with a prohibited source. This 

section had previously extended only to 

organizations that directly or indirectly 

received HUD assistance. This section 

has been expanded to include all 

prohibited sources, because HUD has 

determined that taking a position of 

authority with any prohibited source, 

not just those which receive HUD 

funding, could create the appearance of 

a conflict of interest and should 

therefore be examined by an agency 

ethics official. Further, the section will 

now be easier for employees to 

understand, because prohibited source 

is a term with which they are familiar. 

As discussed, HUD proposes to add the 

requirement at § 7501.105(c)(1)(iv) for 

prior written approval from an agency 

ethics official for employees seeking to 

use their real estate license in relation 

to purchasing or selling a single-family 

property for use as the employee’s 

primary residence or as the primary 

residence of an immediate family 

member of the employee. 

Proposed § 7501.105 would eliminate 

the reference to voluntary services. That 

section cited only other regulations, and 

HUD has determined that it is no longer 

needed to ensure public confidence in 

the impartiality and objectivity with 

which HUD programs are administered. 

Proposed § 7501.105(d) incorporates 

HUD’s policy regarding liaison 

representatives, which was previously 

provided as a Note. This change will 

avoid any confusion over the concept 

and its authority. 

Section 7501.106 Bureau Instructions 

and Designation of Separate Agency 

Components 

HUD proposes to remove this section 

as currently codified. As previously 

discussed in this preamble, HUD no 

longer has general regulatory authority 

over Fannie Mae and Freddie Mac. In its 

place, HUD is proposing to add a new 

§ 7501.106 that clarifies the authority of 


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Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Proposed Rules 15001 

the Office of the Inspector General in 

the agency’s ethics program and 

establishes it as a separate component as 

provided for by 5 CFR 2635.203(a). 

In 1992, Congress enacted the Federal 

Housing Enterprise Financial Safety and 

Soundness Act (FHEFSSA) (12 U.S.C. 

4501 et seq.), which revamped the 

statutory requirements and regulatory 

structure of the GSEs by separating the 

GSEs’ financial regulation from its 

mission regulation. FHEFSSA also 

established the Office of Federal 

Housing Enterprise Oversight as an 

independent regulatory office within 

HUD to ensure the GSEs’ financial 

safety and soundness, while the 

Secretary of HUD retained responsibility 

for the mission regulation and all other 

general regulatory powers. FHEFSSA 

also required HUD to prohibit the GSEs 

from discriminating in their mortgage 

purchases. The fair housing authority 

was twofold: first, to take remedial 

action against lenders found to have 

engaged in discriminatory lending 

practices and second, to periodically 

review and comment on the GSEs’ 

underwriting and appraisal guidelines 

to ensure consistency with the Fair 

Housing Act (42 U.S.C. 3601 et seq.). In 

2008, HERA transferred all regulatory 

oversight of the GSEs from HUD to 

FHFA, except for this fair housing 

component. 

HUD’s only remaining direct 

regulation of the GSEs is the periodic 

review of their underwriting and 

appraisal guidelines by the Office of 

Systemic Investigation of HUD’s Office 

of Fair Housing and Equal Opportunity 

and by the Fair Housing Enforcement 

Division of HUD’s Office of General 

Counsel. For employees involved in 

these compliance reviews, 18 U.S.C. 

208, which prohibits employees from 

participating in matters that may affect 

their financial interests, would prohibit 

them from participating in official 

matters such as these reviews if the 

employee also owns a financial interest 

that could be affected by the review. 

Therefore, these employees would be 

required to recuse themselves from the 

official matter or divest their financial 

interest without the need for an 

additional HUD-specific regulation. The 

criminal statute is sufficient to insure 

against conflicts in those HUD 

employees when the periodic review is 

underway. 

HUD has determined that the 

prohibitions in the current § 7501.106 

are unnecessary given HUD’s very 

limited role regarding the GSEs. The 

current § 7501.106 prohibits certain 

employees that were involved with 

GSEs from owning securities in certain 

mortgage institutions that originate, 

insure, or service mortgages owned or 

guaranteed by the GSEs. However, HUD 

employees no longer regulate the GSEs 

in a way that could affect the stock 

value of these mortgage institutions. 

Additionally, there are other 

regulations that cover an appearance 

issue that might arise for those 

employees working on fair housing 

compliance review of the GSEs. 

Specifically, OGE regulations at 5 CFR 

2635.502 would apply and would limit 

the activity that employees who are 

involved in the periodic review of the 

GSEs can engage in with respect to a 

financial interest in a mortgage 

institution that currently originates, 

insures, or services mortgages owned or 

guaranteed by the GSEs. 

Accordingly removing these 

prohibitions would not compromise the 

integrity of HUD’s functions. 

The new proposed § 7501.106(a) 

delegates to the Bureau Ethics 

Counselor the authority to designate 

Deputy Bureau Ethics Counselors to 

make determinations, issue explanatory 

guidance, and establish procedures 

necessary to implement this part, 

subpart I of 5 CFR 2634, and 5 CFR part 

2635 for his or her bureau. The 

proposed rule also includes the 

concurrence of the Designated Agency 

Ethics Official on the delegation. This 

designation is consistent with 5 CFR 

2635.105(c), more clearly describes the 

role and responsibility of the OIG in the 

agency’s ethics program, and maintains 

the independence of the IG as provided 

for by the Inspector General Act, as 

amended. 

Additionally, consistent with 5 CFR 

2635.203(a), new proposed 

§ 7501.106(b) designates the OIG as a 

separate agency component. HUD is 

designating the OIG as a separate agency 

component to make the structure of its 

ethics program more consistent with the 

structure used by other federal agencies. 

HUD’s changes are intended to more 

clearly describe the role and 

responsibility of the OIG in the agency’s 

ethics program, and maintain the 

independence and authority of the IG. 

The designation as a separate agency 

component authorizes Bureau Ethics 

Counselors within the OIG to render 

legal ethics advice regarding the 

regulations contained in subpart B of 

5 CFR part 2635, governing gifts from 

outside sources; and 5 CFR 2635.807, 

governing teaching, speaking, or 

writing. 

III. Matters of Regulatory Procedure 

Administrative Procedure Act 

Interested persons are invited to 

submit written comments on this 

proposed amendatory rulemaking, to be 

received by DATES section of this 

proposed rule. The comments will be 

carefully considered and appropriate 

changes will be made before a final rule 

is adopted and published in the Federal 

Register. 

Executive Order 12866 and Executive 

Order 13563 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if the regulation is 

necessary, to select the regulatory 

approach that maximizes net benefits. 

Because this rule relates solely to the 

internal operations of HUD, this rule 

was determined to be not a significant 

regulatory action under section 3(f) of 

Executive Order 12866, Regulatory 

Planning and Review, and therefore was 

not reviewed by the Office of 

Management and Budget (OMB). 

Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(5 U.S.C. 601 et seq.) generally requires 

an agency to conduct a regulatory 

flexibility analysis of any rule subject to 

notice and comment rulemaking 

requirements, unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. This rule 

would not have a significant economic 

impact on a substantial number of small 

entities because this rule pertains only 

to HUD employees. 

Information Collection Requirements 

The Paperwork Reduction Act of 1995 

(44 U.S.C. 3501–3520) does not apply to 

this regulation because it does not 

contain information collection 

requirements subject to the approval of 

OMB. 

Environmental Impact 

In accordance with 40 CFR 1508.4 of 

the regulations of the Council on 

Environmental Quality and 24 CFR 

50.20(k) of the HUD regulations, the 

policies and procedures contained in 

this rule relate only to internal 

administrative procedures whose 

content does not constitute a 

development decision nor affect the 

physical condition of project areas or 

building sites, and therefore, are 

categorically excluded from the 

requirements of the National 

Environmental Policy Act. 

Executive Order 13132, Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits, to the extent 

practicable and permitted by law, an 

agency from promulgating a regulation 


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15002 Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Proposed Rules 

that has federalism implications and 

either imposes substantial direct 

compliance costs on state and local 

governments and is not required by 

statute or preempts state law, unless the 

relevant requirements of section 6 of the 

Executive Order are met. This rule does 

not have federalism implications and 

does not impose substantial direct 

compliance costs on state and local 

governments or preempt state law 

within the meaning of the Executive 

Order. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (2 U.S.C. 1531– 

1538) (UMRA) establishes requirements 

for federal agencies to assess the effects 

of their regulatory actions on state, 

local, and tribal governments, and on 

the private sector. Since it is only 

directed toward HUD employees, this 

rule would not impose any federal 

mandates on any state, local, or tribal 

governments, or on the private sector, 

within the meaning of the UMRA 

List of Subjects in 5 CFR Part 7501 

Conflicts of interests. 

Accordingly, for the reasons described 

in the preamble, HUD, with the 

concurrence of OGE, proposes to amend 

5 CFR part 7501, as follows: 

PART 7501—SUPPLEMENTAL 

STANDARDS OF ETHICAL CONDUCT 

FOR EMPLOYEES OF THE 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

Sec. 

7501.101 Purpose. 

7501.102 Definitions. 

7501.103 Waivers. 

7501.104 Prohibited financial interests. 

7501.105 Outside activities. 

7501.106 Bureau instructions and 

designation of separate agency 

component. 

Authority: 5 U.S.C. 301, 7301, 7351, 7353; 

5 U.S.C. App. (Ethics in Government Act of 

1978); 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; 5 CFR 

2635.105, 2635.203(a), 2635.403(a), 2635.803, 

2635.807. 

§ 7501.101 Purpose. 

In accordance with 5 CFR 2635.105, 

the regulations in this part apply to 

employees of the Department of 

Housing and Urban Development (HUD 

or Department) and supplement the 

Standards of Ethical Conduct for 

Employees of the Executive Branch 

contained in 5 CFR part 2635. 

Employees are required to comply with 

5 CFR part 2635, this part, and any 

additional rules of conduct that the 

Department is authorized to issue. 

§ 7501.102 Definitions. 

For purposes of this part, and 

otherwise as indicated, the following 

definitions shall apply: 

Agency designee, as used also in 5 

CFR part 2635, means the Associate 

General Counsel for Ethics and 

Personnel Law, the Assistant General 

Counsel for the Ethics Law Division, 

and the HUD Regional Counsels. 

Agency ethics official, as used also in 

5 CFR part 2635, means the agency 

designees as specified above. 

Affiliate means any entity that 

controls, is controlled by, or is under 

common control with another entity. 

Bureau means the Office of the 

Inspector General. 

Bureau Ethics Counselor means the 

General Counsel for the Bureau. 

Deputy Bureau Ethics Counselor 

means the Bureau employee or 

employees who the Bureau Ethics 

Counselor has delegated responsibility 

to act under § 7501.106 for the 

Bureau. 

Designated Agency Ethics Official 

(DAEO) means the General Counsel of 

HUD or the Deputy General Counsel for 

Operations in the absence of the General 

Counsel. 

Employment means any compensated 

or uncompensated (including volunteer 

work for others while off-duty) form of 

non-Federal activity or business 

relationship, including selfemployment, that involves the provision 

of personal services by the employee. It 

includes, but is not limited to, personal 

services as an officer, director, 

employee, agent, attorney, consultant, 

contractor, general partner, trustee, 

teacher, or speaker. It includes writing 

when done under an arrangement with 

another person for production or 

publication of the written product. 

§ 7501.103 Waivers. 

The Designated Agency Ethics 

Official, or the Bureau Ethics Counselor 

for a Bureau employee may waive any 

provision of this part upon finding that 

the waiver will not result in conduct 

inconsistent with 5 CFR part 2635 and 

is not otherwise prohibited by law and 

that application of the provision is not 

necessary to ensure public confidence 

in the Department’s impartial and 

objective administration of its programs. 

Each waiver shall be in writing and 

supported by a statement of the facts 

and findings upon which it is based and 

may impose appropriate conditions, 

such as requiring the employee’s 

execution of a written disqualification 

statement. A waiver will be considered 

only in response to a written waiver 

request submitted to an agency ethics 

official. The waiver request should 

include: 

(1) The requesting employee’s Branch, 

Unit, and a detailed description of his 

or her official duties; 

(2) The nature and extent of the 

proposed waiver; 

(3) A detailed statement of the facts 

supporting the request; and 

(4) The basis for the request, such as 

undue hardship or other exigent 

circumstances. 

§ 7501.104 Prohibited financial interests. 

(a) General requirement. This section 

applies to all HUD employees except 

special Government employees. Except 

as provided in paragraph (b) of this 

section, the employee, or the employee’s 

spouse or minor child, shall not directly 

or indirectly receive, acquire, or own: 

(1) Federal Housing Administration 

(FHA) debentures or certificates of 

claim. 

(2) A financial interest in a project, 

including any single family dwelling or 

unit, which is subsidized by the 

Department, or which is subject to a 

note or mortgage or other security 

interest insured by the Department. The 

definition of ‘‘financial interest’’ is 

found at 5 CFR 2635.403(c). 

(3)(i) Any Department subsidy 

provided pursuant to Section 8 of the 

United States Housing Act of 1937, as 

amended (42 U.S.C. 1437f), to or on 

behalf of a tenant of property owned by 

the employee or the employee’s spouse 

or minor child. However, such subsidy 

is permitted when: 

(A) The employee, or the employee’s 

spouse or minor child acquires, without 

specific intent as through inheritance, a 

property in which a tenant receiving 

such a subsidy already resides; 

(B) The tenant receiving such a 

subsidy lived in the rental property 

before the employee worked for the 

Department; 

(C) The tenant receiving such a 

subsidy is a parent, child, grandchild, or 

sibling of the employee; 

(D) The employee’s, or the employee’s 

spouse or minor child’s, rental property 

has an incumbent tenant who has not 

previously received such a subsidy and 

becomes the beneficiary thereof; or 

(E) The location of the rental property 

is in a Presidentially declared 

emergency or natural disaster area and 

the employee receives prior written 

approval from an agency designee. 

(ii) The exception provided by 

paragraph (a)(3)(i) of this section 

continues only as long as: 

(A) The tenant continues to reside in 

the property; and 

(B) There is no increase in that 

tenant’s rent upon the commencement 


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Federal Register / Vol. 77, No. 50 / Wednesday, March 14, 2012 / Proposed Rules 15003 

of subsidy payments other than normal 

annual adjustments under the Section 8 

program. 

(b) Exception to prohibition for 

certain interests. Nothing in this section 

prohibits the employee, or the 

employee’s spouse or minor child from 

directly or indirectly receiving, 

acquiring, or owning: 

(1) A financial interest in a publicly 

available or publicly traded investment 

fund that includes financial interests 

prohibited by paragraph (a)(2) of this 

section, so long as the employee neither 

exercises control nor has the ability to 

exercise control over the fund or the 

financial interests held in the fund; 

(2) Mortgage insurance provided 

pursuant to section 203 of the National 

Housing Act (12 U.S.C. 1709) on the 

employee’s principal residence and any 

one other single family residence. 

Employees must adhere to the 

procedures established by the Assistant 

Secretary for Housing—FHA 

Commissioner in order to obtain FHA 

insurance; 

(3) Department-owned single family 

property. Employees must adhere to the 

procedures established by the Assistant 

Secretary for Housing—FHA 

Commissioner in order to purchase a 

HUD-held property; 

(4) Employment compensation and 

benefit packages provided by the 

employer of an employee’s spouse that 

include financial interests prohibited by 

paragraph (a)(2) of this section; or 

(5) Government National Mortgage 

Association (GNMA) securities. 

(c) Reporting and divestiture. An 

employee must report, in writing, to the 

appropriate agency ethics official, any 

interest prohibited under paragraph (a) 

of this section acquired prior to the 

commencement of employment with the 

Department or without specific intent, 

as through gift, inheritance, or marriage, 

within 30 days from the date of the start 

of employment or acquisition of such 

interest. Such interest must be divested 

within 90 days from the date reported 

unless waived by the Designated 

Agency Ethics Official in accordance 

with § 7501.103. 

§ 7501.105 Outside activities. 

(a) Prohibited outside activities. 

Subject to the exceptions set forth in 

paragraph (b) of this section, HUD 

employees, except special Government 

employees, shall not engage in: 

(1) Employment with a business 

related to real estate or manufactured 

housing including, but not limited to, 

real estate brokerage, management and 

sales, architecture, engineering, 

mortgage lending, property insurance, 

appraisal services, title search services, 

construction, construction financing, 

land planning, or real estate 

development; 

(2) The operation or management of 

investment properties to the extent that 

it rises to the level of a real estaterelated business. HUD will determine 

whether an employee is operating or 

managing investment properties to an 

extent that it rises to the level of a real 

estate business based on the totality of 

the circumstances, and will consider 

whether the employee maintains an 

office; advertises or otherwise solicits 

clients or business; hires staff or 

employees; uses business stationary or 

other similar materials; files the 

business as a corporation, limited 

liability company, partnership, or other 

type of business association with a state 

government; establishes a formal or 

informal association with an existing 

business; hires a management company; 

and the nature and number of its 

investment properties; 

(3) Employment with a person or 

entity who registered as a lobbyist or 

lobbyist organization pursuant to 2 

U.S.C 1603(a) and engages in lobbying 

activity concerning the Department; 

(4) Employment as an officer or 

director with a Department-approved 

mortgagee, a lending institution, or an 

organization that services securities for 

the Department; or 

(5) Employment with the Federal 

Home Loan Bank System or any affiliate 

thereof. 

(b) Exceptions to employment 

prohibitions. The prohibitions set forth 

in paragraph (a) of this section do not 

apply to: 

(1) Serving as an officer or a member 

of the Board of Directors of: 

(i) A Federal Credit Union; 

(ii) A cooperative, condominium 

association, or homeowners association 

for a housing project that is not subject 

to regulation by the Department or, if so 

regulated, in which the employee 

personally resides; or 

(iii) An entity designated in writing 

by the Designated Agency Ethics 

Official. 

(2) Holding a real estate agent’s 

license; however, use of the license is 

limited as provided by paragraph (c) of 

this section. 

(c) Prior approval requirement. (1) 

Employees, except special Government 

employees, shall obtain the prior 

written approval of an Agency Ethics 

Official before accepting compensated 

or uncompensated employment: 

(i) As an officer, director, trustee, or 

general partner of, or in any other 

position of authority with a prohibited 

source, as defined at 5 CFR 2635.203(d); 

(ii) With a state or local government; 

(iii) In the same professional field as 

that of the employee’s official position; 

or 

(iv) As a real estate agent in relation 

to purchasing or selling a single family 

property for use as the employee’s 

primary residence, or the primary 

residence of the employee’s immediate 

family member. 

(2) Approval shall be granted unless 

the conduct is inconsistent with 5 CFR 

part 2635 or this part. 

(d) Liaison representative. An 

employee designated to serve in an 

official capacity as the Department’s 

liaison representative to an outside 

organization is not engaged in an 

outside activity to which this section 

applies. Notwithstanding, an employee 

may be designated to serve as the 

Department’s liaison representative only 

as authorized by law, and as approved 

by the Department under applicable 

procedures. 

§ 7501.106 Bureau instructions and 

designation of separate agency component. 

(a) Bureau instructions. With the 

concurrence of the Designated Agency 

Ethics Official, the Bureau Ethics 

Counselor is authorized, consistent with 

5 CFR 2635.105(c), to designate Deputy 

Bureau Ethics Counselors, to make a 

determination, issue explanatory 

guidance, and establish procedures 

necessary to implement this part, 

subpart I of 5 CFR part 2634, and 5 CFR 

part 2635 for the Bureau. 

(b) Designation of separate agency 

component. Pursuant to 5 CFR 

2635.203(a), the Office of the Inspector 

General is designated as a separate 

agency for purposes of the regulations 

contained in subpart B of 5 CFR part 

2635, governing gifts from outside 

sources; and 5 CFR 2635.807, governing 

teaching, speaking, or writing. 

Dated: February 15, 2012. 

Don W. Fox, 

Principal Deputy Director, Office of 

Government Ethics. 

[FR Doc. 2012–6177 Filed 3–13–12; 8:45 am] 

BILLING CODE 4210–67–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–109369–10] 

RIN 1545–BJ33 

Passive Activity Losses and Credits 

Limited; Hearing 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 


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