This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

32633

Vol. 61, No. 123

Tuesday, June 25, 1996

OFFICE OF GOVERNMENT ETHICS

5 CFR Part 2634

RIN 3209–AAO6

Public Financial Disclosure, Conflicts

of Interest, and Certificates of

Divestiture for Executive Branch

Officials

AGENCY: Office of Government Ethics

(OGE).

ACTION: Final rule.

SUMMARY: The Office of Government

Ethics is adopting as final, with certain

amendments, interim rules issued in

1990 implementing a provision of the

Ethics Reform Act of 1989, as amended,

which provides for tax deferral in

appropriate cases involving the sale of

property to comply with conflict of

interest requirements. The regulation

sets forth OGE’s procedure for issuing

Certificates of Divestiture authorizing

such sales, and defines the permitted

property into which the proceeds from

such sales must be reinvested. The

amendments being made in this

rulemaking document reflect certain

technical amendments to the underlying

statutory provision and some other

changes based on OGE’s experience

under, as well as the comments received

on, the interim regulation.

EFFECTIVE DATE: July 25, 1996.

FOR FURTHER INFORMATION CONTACT:

Norman B. Smith, Office of Government

Ethics, Suite 500, 1201 New York

Avenue, NW., Washington, DC 20005–

3917; telephone: 202–208–8000; FAX:

202–208–8037.

SUPPLEMENTARY INFORMATION:

A. Review of Statutory Change,

Comment Letters and Rule Changes

The Office of Government Ethics

published an interim regulation on

April 18, 1990 at 55 FR 14407–14409

establishing procedures with respect to

the issuance of Certificates of

Divestiture, which permit the

nonrecognition of gain upon the

disposition of property to comply with

conflicts of interest requirements. That

regulation is codified at subpart J of 5

CFR part 2634 of OGE’s executive

branch financial disclosure regulations.

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 (Public Law 101–194). Pursuant

to section 1043, the subpart J regulation

provides that OGE can issue a

Certificate of Divestiture with respect to

specific property, pursuant to the

procedures specified, based upon a

determination that such divestiture by

an executive branch official (or spouse

or minor/dependent child thereof) 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 is requested by a

congressional committee as a condition

of confirmation, in the case of an

‘‘eligible person’’ as defined in the rule.

The regulation also defines ‘‘permitted

property’’ into which the proceeds from

divestitures must be reinvested.

The Federal purpose reflected in

section 1043 of the Internal Revenue

Code and these rules is to minimize the

burden of Government service resulting

from gain on the sale of assets for which

divestiture is reasonably necessary

because of the conflict of interest laws,

in order to attract and retain desirable

personnel in the executive branch and

to ensure the confidence of the public

in the integrity of Government officials

and the Government’s decisional

processes within a framework of

procedural fairness achieved through

consistent application of the mandatory

procedure.

The Office of Government Ethics is

now adopting the interim Certificate of

Divestiture regulation as final, with a

few revisions as discussed herein. First,

one change reflects the inclusion of

certain trustees as eligible persons as set

forth in new paragraph (d) of

§ 2634.1002. The May 1990 Technical

Corrections to the Ethics Reform Act of

1989 (Pub. L. 101–280) added a new

subsection (b)(5) to section 1043 of the

Internal Revenue Code of 1986, which

expanded that section’s definition of

‘‘eligible person’’ in subsection (b)(1) of

section 1043 to include any trustee of a

trust with respect to which a beneficial

interest in property or income is either

held by, or attributable through a spouse

or minor or dependent child by Federal

ethics principles to, a Government

official.

The legislative history of this

provision evidences that the House

Committee on Ways and Means did not

intend through this amendment that the

tax benefits of the section’s

nonrecognition mechanism would be

generally available to beneficiaries of a

trust other than those referred to in

subsection (b)(1) (A) and (B) of section

1043 (that is the Government official

and any spouse and minor and

dependent children). The concern was

that there may be additional parties who

are beneficiaries of a trust who would

obtain an unintended benefit.

It is understood that the committee’s

intent was that the Office of

Government Ethics’ authority to issue

Certificates of Divestiture be restricted

as follows. A certificate will not be

issued unless the parties take those

actions which, in the opinion of the

OGE Director, are appropriate to

exclude parties in addition to those

referred to in subsection (b)(1) (A) and

(B) of section 1043 from participation in

the nonrecognition mechanism. Such

measures may include, as permitted by

applicable State trust and estate law,

division of the trust into separate

portfolios, special distributions,

dissolution of the trust, or any other

method deemed by the Director, in his

sole discretion, to be feasible under the

facts and circumstances to exclude

additional parties from benefiting from

the nonrecognition mechanism.

In view of the further analysis which

must be undertaken by the Office of

Government Ethics in the case of a

Certificate of Divestiture request with

respect to a trustee, it is now to be

expressly required, in new paragraph (d)

of § 2634.1002, that the case materials

furnished to the Office of Government

Ethics include a copy of the trust

instrument, full details as to its current

portfolio, and a memorandum analyzing

all beneficial interests in principal and

income. To the extent that there may be

additional parties with beneficial

interests, the Office of Government

Ethics may consult with representatives

of the Government official, trustee, and

other concerned parties, as appropriate,

in order to resolve the issues presented.
32634 Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Rules and Regulations

As a general premise, it must be

emphasized that the section 1043

mechanism applies to capital assets (as

defined by section 1221 of the Internal

Revenue Code, 26 U.S.C. 1221) held by

an eligible individual (as defined by

section 1043(b)). Not all transactions or

occurrences which result in the

realization of gain by an eligible

individual fall within the statutory

scheme. Some transactions and

occurrences simply do not fit the

statutory requirements, others may

present instances where certification

would give an unfair or unintended

benefit.

In this connection, the issues

involved in requests for Certificates of

Divestiture involving interests in

pension, profit- sharing, and stock

bonus plans are subject to considerable

subtlety and complexity. With respect to

such employee benefit plans, such an

unfair and unintended benefit would

occur upon certification of property

held or received during one step of a

sequence in avoidance of transferring an

otherwise qualifying rollover

distribution to an eligible retirement

plan within 60 days. In other words,

certificates may not be used to achieve

a tax advantaged removal of employee

benefit plan funds from the rules which

normally pertain to such plans in cases

where no capital gains tax would be

imposed if those rules were followed.

Accordingly, in the absence of a

demonstration that an interest in an

employee benefit plan is not eligible for

rollover treatment, a certificate will not

be issued with respect to such an

interest. Such a demonstration must

satisfy the Office of Government Ethics

that the plan administrator cannot make

a qualifying distribution in the case of

the eligible person to which the

provisions of section 402(f) of the

Internal Revenue Code, 26 U.S.C. 402(f),

would apply and that the particular

property interest proposed for

certification falls within the statutory

scheme of section 1043 of such Code.

The rules pertaining to these concerns

are contained in new paragraph (e) of

§ 2634.1002 to guard against unfair and

unintended benefits. The paragraph also

specifies that a certificate will not be

issued with respect to the exercise of

stock options that will result in

compensation income. Further, the

paragraph states that a certificate will

not be issued after the normally

applicable three-month period for

complying with an ethics agreement

with respect to divestiture (or any

extension of such period to which the

Office of Government Ethics has

concurred in writing), and that in order

for a certificate to be granted, the parties

must also agree to divest all similar or

related interests in property. The

statement of materials to be submitted

with a certificate request has been

clarified to ensure that adequate

information is received with respect to

additional interests in the case of

executive branch employees who do not

normally file financial disclosure

reports (see § 2634.1002(b)(1)(ii)(B)).

Finally, a new provision has been added

to specify that a certificate will not be

issued as to property acquired under

improper circumstances (see

§ 2634.1002(e)(6)).

The Office of Government Ethics

received comments from three agencies

on its April 1990 interim rules.

Paragraph (b)(1)(v) of § 2634.1002 is

being revised pursuant to the suggestion

of one agency that the documentation

required to substantiate the request of a

congressional committee that specific

property be divested conform to the

types of materials more readily available

in such circumstances. That provision

has been expanded to include as

appropriate documentation a letter to

the committee containing a promise

from the nominee to divest specified

property in accordance with the

committee’s request or, alternatively, a

transcript of congressional testimony

containing such a commitment by the

nominee pursuant to the committee’s

request. The agency also urged that

paragraph (c)(2) of § 2634.1002 be

expanded to include within the

definition of eligible person the spouse

and children of any officer or employee

referred to in paragraph (c)(1) of that

provision whose ownership of property

is attributable to such officer or

employee by a congressional committee.

However, such an expansion of the

scope of this provision would exceed

the statutory coverage of Internal

Revenue Code section 1043(b)(1)(B) and

is, therefore, impermissible. On the

other hand, it would seem that in most

situations where this concern would

arise divestiture would appear

reasonably necessary to comply with

Executive Order 12674 (as modified by

E.O. 12731) on Principles of Ethical

Conduct for Government Officers and

Employees and regulations pursuant to

such order, including 5 CFR part 2635

and any supplemental agency

regulations. Accordingly, the

appropriate statutory basis for the

issuance of a Certificate of Divestiture

would exist in the vast majority of

situations which can be anticipated.

One agency observed that the concept

of ‘‘investment fund’’ as defined for

purposes of Internal Revenue Code

section 1043 contrasts with that found

in section 102(f)(8) of the Ethics in

Government Act, 5 U.S.C. appendix,

section 102(f)(8). The concern was

further expressed that a third concept of

investment fund may exist under 18

U.S.C. 208 with respect to the

consideration of waivers under

subsection (b) of that provision.

However, such types of distinctions are

normally encountered in legislative

materials. The definition which appears

in § 2634.1003 of the Certificate of

Divestiture regulation is in accordance

with the statutory scheme of section

1043 of the Internal Revenue Code. In

any forthcoming regulations, the Office

of Government Ethics will continue to

achieve such harmony and uniformity

in ethics program rules as is permitted

by applicable statutes and their

legislative histories.

One agency criticized the regulations

for not specifying the time by which a

divestiture must occur after a Certificate

of Divestiture has been issued, or the

time by which a rollover must be

completed. The agency stated further

that an eligible person is not given any

guidance as to how to associate the

certificate with tax return material, and

that he should not be required to use a

certificate that has been issued to him.

First, while the availability of

Certificates of Divestiture will be

important to persons who receive them,

the primary focus of the ethics program

should be on the ethics agreement

mechanism of subpart H of 5 CFR part

2634 (or a similarly structured

agreement for any eligible nonreporting

individual seeking a certificate). There

should not be a request for a Certificate

of Divestiture in cases in which there is

not a binding ethics agreement to divest

property pursuant to the procedures

specified by subpart H (or under a

similarly structured arrangement),

normally within three months unless an

extension is granted. Such an agreement

should include a specification of the

time by which divestiture is to occur.

The time specified may be in terms of

a formula such as ‘‘thirty days after the

issuance of a Certificate of Divestiture

by the Office of Government Ethics, but

not later than llllllllll’’.

New paragraph (e)(4) of § 2634.1002 will

now provide that, in the case of an

agreement to implement a divestiture

required by statute, regulation, rule, or

executive order, the normal three-month

period will be deemed to start no later

than 10 days after such requirement

becomes applicable. However, it must

be realized that section 1043 is

essentially a tax matter. Except for those

specifics described as the scope of these

regulations in paragraph (b) of

§ 2634.1001, which is being revised to

take note of the 60-day period for
Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Rules and Regulations 32635

qualified rollovers and the types of

permitted property into which such

rollovers are to be made (United States

obligations and diversified investment

funds as defined in § 2634.1003) under

the statute, 26 U.S.C. 1043 (a) and (b)(3),

other aspects of the availability and use

of section 1043 and the certificates

issued pursuant to its mechanism are

the responsibility of the Internal

Revenue Service and beyond the

authorities delegated to the Office of

Government Ethics.

Finally, OGE is also clarifying a few

passages in the rule, including adding

an express statement (at

§ 2634.1002(b)(1)(i)) that a certificate

cannot be issued for property which has

already been divested, and is revising

the authority citation for the entire part

2634 regulation to ensure inclusion

once more of reference to 26 U.S.C.

1043, which was inadvertently omitted

in the 1995 edition of the CFR.

B. Matters of Regulatory Procedure

Executive Order 12866

In promulgating this final rule

issuance, the Office of Government

Ethics 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

final rule has also been reviewed by the

Office of Management and Budget under

that Executive order.

Regulatory Flexibility Act

As Director of the Office of

Government Ethics, I certify under the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) that this final regulation will

not have a significant economic impact

on a substantial number of small entities

because it only affects certain financial

interests of executive branch employees

and their immediate families.

Paperwork Reduction Act

The Paperwork Reduction Act (44

U.S.C. chapter 35) does not apply

because this regulatory issuance does

not contain any additional information

collection requirements that require the

approval of the Office of Management

and Budget.

List of Subjects in 5 CFR Part 2634

Administrative practice and

procedure, Certificates of divestiture,

Conflict of interests, Financial

disclosure, Government employees,

Penalties, Privacy, Reporting and

recordkeeping requirements, Trusts and

trustees.

Approved: April 18, 1996.

Stephen D. Potts,

Director, Office of Government Ethics.

Accordingly, for the reasons set forth

in the preamble, the Office of

Government Ethics is adopting the

interim regulation codified at subpart J

of 5 CFR part 2634, published at 55 FR

14407– 14409 (April 18, 1990), as a final

regulation with the following

amendments:

PART 2634—[AMENDED]

1. The authority citation for part 2634

is revised to read as follows:

Authority: 5 U.S.C. App. (Ethics in

Government Act of 1978); 26 U.S.C. 1043;

E.O. 12674, 54 FR 15159, 3 CFR, 1989 Comp.,

p. 215, as modified by E.O. 12731, 55 FR

42547, 3 CFR, 1990 Comp., p. 306.

Subpart J—Certificates of Divestiture

2. Paragraph (b) of § 2634.1002 is

amended by revising the second

sentence and adding a new third

sentence to read as follows:

§ 2634.1001 Nonrecognition for sales to

comply with conflict of interest

requirements; general considerations.

* * * * *

(b) Scope. * * * The rules of this

subpart relate to the issuance of

Certificates of Divestiture and the

permitted property into which a

reinvestment must be made during the

60-day period beginning on the date of

such a sale in order for nonrecognition

to be permitted. Such reinvestments are

called rollovers, and are limited to

obligations of the United States and

diversified investment funds as defined

in § 2634.1003. * * *

* * * * *

3. Section 2634.1002 is amended by

revising paragraphs (b)(1)(i), (b)(1)(ii),

(b)(1)(iv)(B), (b)(1)(v), and (c), and

adding new paragraphs (d) and (e) to

read as follows:

§ 2634.1002 Issuance of Certificates of

Divestiture.

* * * * *

(b) Procedural requirements—(1)

Required submissions. * * *

(i) A copy of a written request from

the eligible person who is to divest the

property (a Certificate of Divestiture

cannot be issued for property which has

already been divested) to the designated

agency ethics official to pursue

certification in the case of the property

to be divested, which includes:

(A) A commitment to complete the

divestiture on or before a specified date

which is no later than the end of the

three-month period referred to by

§ 2634.802(b) (or a similarly structured

agreement in any case to which

paragraph (b)(1)(ii)(B) of this section

applies), or any extension thereof

granted, or concurred with in writing,

by the Office of Government Ethics; and

(B) Full and complete information

concerning the facts and circumstances

relating to the acquisition of such

property and its contemplated

divestiture;

(ii) In the case of an individual

referred to in paragraph (c)(1) of this

section who:

(A) Is required by the rules of this part

or this title, to file a financial disclosure

report, a copy of the latest report which

has been filed; or

(B) Is not required to file a report

referred to in paragraph (b)(1)(ii)(A) of

this section, a memorandum from such

individual which discloses the

information with respect to the

specification of interests in property,

income, liabilities, agreements and

arrangements, and outside positions

which are required to be disclosed on

such a report;

* * * * *

(iv) * * *

(B) Analysis and opinion from such

designated agency ethics official

concerning the application of the rules

of this part in the case of the proposed

certification, including specification of

the date on which the three-month

period referred to by § 2634.802(b) (or a

similarly structured agreement in any

case to which paragraph (b)(1)(ii)(B) of

this section applies), or any extension

thereof granted, or concurred with in

writing, by the Office of Government

Ethics, will lapse; and

(v) In lieu of the materials described

in paragraph (b)(1)(iv) of this section, in

the case of the contemplated divestiture

of specific property pursuant to the

request of a congressional committee as

a condition of confirmation, such

materials shall include the written

acknowledgement of the Chairman of

such committee of such request, a letter

to the committee containing a promise

from the nominee to divest specified

property in accordance with such

request, or a transcript of congressional

testimony containing such a

commitment by the nominee pursuant

to such request.

* * * * *

(c) Eligible person. For purposes of

section 1043 and this subpart, the term

‘‘eligible person’’ includes:

(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 and any minor or

dependent child of an individual
32636 Federal Register / Vol. 61, No. 123 / Tuesday, June 25, 1996 / Rules and Regulations

referred to in paragraph (c)(1) of this

section whose ownership of property

required to be divested is attributable to

such person by 18 U.S.C. 208, or any

other Federal conflict of interest statute,

regulation, rule, or executive order; and

(3) Any trustee holding property in

trust required to be divested in which:

(i) An individual referred to in

paragraph (c)(1) of this section has a

beneficial interest in principal or

income; or

(ii) A spouse or any minor or

dependent child of an individual

referred to in paragraph (c)(2) of this

section has a beneficial interest in

principal or income which is

attributable to a person referred to in

paragraph (c)(1) of this section by 18

U.S.C. 208, or any other Federal conflict

of interest statute, regulation, rule, or

executive order.

(d) Special rules in the case of a

trustee who is an eligible person. (1)

Notwithstanding any other rule of this

subpart, in the case of a trustee who is

an eligible person pursuant to paragraph

(c)(3) of this section, a Certificate of

Divestiture will not be issued unless the

parties take those actions which, in the

opinion of the Director of the Office of

Government Ethics, are appropriate to

exclude parties in addition to those

referred to in paragraph (c) (1) and (2)

of this section from participation in the

nonrecognition mechanism. Such

measures may include, as permitted by

applicable State trust and estate law,

division of the trust into separate

portfolios, special distributions,

dissolution of the trust, or any other

method deemed by the Director, in his

sole discretion, to be feasible under the

facts and circumstances to exclude

additional parties from benefiting from

the nonrecognition mechanism.

(2) In view of the further analysis

which must be undertaken by the Office

of Government Ethics in the case of a

Certificate of Divestiture request with

respect to a trustee, the required

submissions in such a case shall include

in addition to the materials described in

paragraph (b)(1) of this section, a copy

of the trust instrument, full details as to

its current portfolio, and a

memorandum analyzing all beneficial

interests in principal and income. To

the extent that there may be additional

parties with beneficial interests, the staff

of the Office of Government Ethics may

consult with representatives of the

Government official, trustee, and other

concerned parties, as appropriate, in

order to resolve the issues presented in

light of the principles described in

paragraph (d)(1) of this section.

(e) Special rules in the case of

employees; unfair and unintended

benefits—(1) In general.

Notwithstanding any other rule of this

subpart, a Certificate of Divestiture will

not be issued in any case in which, in

the opinion of the Director of the Office

of Government Ethics, in his sole

discretion, an unfair or unintended

benefit would be conferred on an

eligible person. Paragraphs (e)(2)

through (g)(6) of this section give

examples of the application of the

general rule of this paragraph (e)(1).

(2) Employee benefit plans. With

respect to interests in pension, profitsharing, stock bonus and other

employee benefit plans, such an unfair

or unintended benefit would occur

upon certification of property held or

received during one step of a sequence

in avoidance of transferring an

otherwise qualifying rollover

distribution to an eligible retirement

plan within 60 days. In other words,

Certificates of Divestiture may not be

used to achieve a tax advantaged

removal of employee benefit plan funds

from the rules which normally pertain

to such plans in cases where no capital

gains tax would be imposed if those

rules were followed. Accordingly, in the

absence of a demonstration that an

interest in an employee benefit plan is

not eligible for rollover treatment, a

certificate will not be issued with

respect to such an interest. Such a

demonstration must satisfy the Office of

Government Ethics that the plan

administrator cannot make a qualifying

distribution in the case of the eligible

person to which the provisions of

section 402(f) of the Internal Revenue

Code of 1986 would apply and that the

particular property interest proposed for

certification falls within the statutory

scheme.

(3) Certain property received as

compensation for services. Such an

unfair and unintended benefit would

occur upon certification of property

received as compensation for services,

the gain from which would otherwise be

treated as earned income. For example,

with respect to the contemplated

exercise of a stock option granted by an

employer, such an unfair and

unintended benefit would occur upon

certification if such exercise or the sale

of the resultant stock would otherwise

result in earned income to the

employee.

(4) Nontimely divestitures. With

respect to any contemplated divestiture,

such an unfair or unintended benefit

would occur upon certification after the

three-month period referred to by

§ 2634.802(b) (or a similarly structured

agreement in any case to which

paragraph (b)(1)(ii)(B) of this section

applies) has lapsed, unless there is an

extension of time in a case of unusual

hardship as determined pursuant to

such section by the Office of

Government Ethics or the designated

agency ethics official (with the written

concurrence of the Office of

Government Ethics). In the case of such

an agreement to implement a divestiture

required by statute, regulation, rule, or

executive order, such three-month

period shall be deemed, for purposes of

this subpart, to have started no later

than 10 days after such requirement had

become applicable.

(5) Similar or related interests. With

respect to any contemplated divestiture,

such an unfair or unintended benefit

would occur unless all similar or related

interests in property were also subject to

a divestiture commitment.

(6) Property acquired under improper

circumstances. With respect to any

contemplated divestiture, such an unfair

advantage or unintended benefit would

occur if the property was acquired at a

time when the holding of such property

was prohibited by any law or regulation

or under circumstances which

otherwise would create the appearance

of a conflict with the conscientious

performance of governmental

responsibilities.

[FR Doc. 96–15970 Filed 6–24–96; 8:45 am]

BILLING CODE 6345–01–P

DEPARTMENT OF AGRICULTURE

Animal and Plant Health Inspection

Service

7 CFR Part 301

[Docket No. 95–087–1]

Japanese Beetle; Domestic Quarantine

and Regulations

AGENCY: Animal and Plant Health

Inspection Service, USDA.

ACTION: Interim rule.

SUMMARY: We are amending the

Japanese beetle quarantine and

regulations to add Minnesota and

Wisconsin to the list of quarantined

States and to provide greater specificity

about what actions must be taken to

prevent the spread of Japanese beetle by

aircraft from regulated airports. The

actions specified by these amendments

are necessary to prevent the spread of

Japanese beetle into noninfested areas of

the United States. We are also amending

the regulations to allow carriers at

regulated airports the option of

performing some activities under a

compliance agreement with the Animal

and Plant Health Inspection Service,