OFFICE OF GOVERNMENT ETHICS

                             92 X 19

       Letter to a Designated Agency Ethics Official dated
                          June 2, 1992


     This responds to your request for an informal opinion
concerning an application of 5 U.S.C. app.  502 and its
implementing regulation at 5 C.F.R. part 2636 (56 Fed. Reg. 1721-
1730, Jan. 17, 1991). You have asked whether [an employee] [of your
agency] may continue to receive income from the [particular health
care] practice he established prior to becoming a Government
official.  [The agency does not deal with health care issues].

     As I understand the facts as you have described them, upon
joining the Department in 1988 as a noncareer member of the Senior
Executive Service, [the employee] transferred the operation of his
practice to another [practitioner in his field] pursuant to a
renewable one-year contract.  The contract stipulates that [the
employee] would "employ" the [practitioner], whose duties involve
providing "professional [health care] services to [the employee's]
patients."  [The employee] retained the right to control, direct
and supervise the duties of the [practitioner] he hired.  All
patients remained [the employee's] "patients of record," and [the
employee] retained the right to approve his employee's time of
vacation.  In return, [the employee] agreed to provide an office,
supplies, equipment, and other appropriate facilities and services.
The contract states that the [practitioner] hired by [the employee]
will receive 35% of the practice's adjusted gross receipts or $20
per hour, whichever is greater.

     In 1991, [the employee] entered a second contract with a
different [practitioner] to provide services to his patients as
manager of his practice.  This contract also requires [the
employee] to provide an office, supplies, equipment, staff support
and other such appropriate facilities and services.  In this case,
the [practitioner] will be paid $600 per week or 30% of the
adjusted gross income of the practice, whichever is greater.  The
contract states that all patients treated at [the employee's]
office are considered to be [the employee's] patients. 
Additionally, the contract permits [the employee] to provide
services to his patients directly, provided that his income does
"not exceed such amount as may be permitted by
5 C.F.R. 2634.501(b)."

     5 U.S.C. app.  502[a] prohibits a covered noncareer employee
from receiving compensation for (1) practicing a profession that
involves a fiduciary relationship or (2) affiliating with or being
employed to perform professional duties by an entity which provides
professional services involving a fiduciary relationship.  The
provision further prohibits a covered noncareer employee from
permitting the use of his name by such an entity.
     In this case, there is no disagreement that [the employee] is
a covered noncareer employee within the meaning of the statute and
that [his type of health care services] is a profession which
involves a fiduciary relationship.  In your view, the issue to be
decided is whether the income received by [the employee] for
services provided by the [practitioners] he hired is "compensation"
as [that term is used in] section 502(a)(1).  You suggest that, in
[the employee's] case, the income he receives is essentially a
return on his investment in the physical assets of his practice and
is not "compensation" as [used] in 5 U.S.C. app.  502 or [as
defined in] its implementing regulation.

     The term "compensation" is defined in the prohibition's
implementing regulation to include "wages, salaries, honoraria,
commissions, professional fees and any other form of compensation
for services" other than salary and benefits paid by the United
States.  5 C.F.R.  2636.303(b).  Specifically excluded from the
definition is "income from investment activities where the
individual services are not a material factor in the production of
income" as well as "actual and necessary expenses incurred by the
employee in connection with an outside activity." Id. at
 2636.303(b)(4) and (6).  Compensation for services rendered in
satisfaction of a contractual obligation entered prior to
January 1, 1991, is also not considered "compensation" within the
meaning of the regulation.

     The regulation makes clear that the prohibition on receipt of
compensation applies not only in cases where the employee is
providing professional services, but also where he is affiliated
with an entity that provides professional services involving a
fiduciary relationship.  Id.  at  2636.305(a)(1)(ii).  In the
latter case, the prohibition is not merely on being affiliated with
such an entity, but is on receiving compensation for the
affiliation.  Where an employee is compensated by an entity because
of his affiliation with the entity, he has received "compensation"
for his services, i.e., his affiliation.

     Moreover, the regulation clearly indicates that a covered
employee may not allow the use of his name by any entity that
provides professional services involving a fiduciary relationship,
whether or not the employee receives compensation for permitting
the use of his name.  Id. at  2636.305(a)(2).  Thus, a covered
employee could not permit someone to simply manage or operate a
profession involving a fiduciary relationship on the employee's
behalf, while retaining the employee's name as a business
identifier.

     I am not persuaded that the facts in this case establish that
[the employee's] contractual arrangements concerning the operation
of his practice amount to creation of an "investment" interest and
that the compensation he received was a return on his investment in
the physical assets of his practice.  Both contracts demonstrate
that [the employee] hired someone to conduct the practice on his
behalf and that he retained full control over the operation of the
practice, including such routine matters as the time and place his
employee was required to provide the services, the length of his
vacations, and the type and amount of supplies and equipment to be
ordered.  Both contracts indicate that all patients remained [the
employee's] patients of record and that all relevant documents and
records belonged to [the employee].  The second contract also
specified that his [practitioner's] malpractice insurance must
designate [the employee] as an additional named insured.

     Because [the employee] continued personally and directly to
control the operation of his practice while he was a covered
noncareer employee, it is difficult to conclude that he was not
"affiliated" with an entity providing professional services
involving a fiduciary relationship.  Moreover, the fact that he
received money for the provision of these services and simply paid
his employee an established percentage or salary compels the
conclusion that he received "compensation" for his affiliation with
the practice.  On the other hand, there is no indication that the
[practitioners] hired by [the employee] were merely leasing his
office and equipment or that fees involved in this arrangement were
based on an estimate of the fair market value of the lease of [the
employee's] facilities and equipment, as you have suggested.

     Additionally, although nothing in the materials you have
provided demonstrates conclusively that [the employee] permitted
the use of his name by the practice, it appears that he took no
steps to see that his name was not used.  I recommend that you
inquire further whether the [practitioners] he hired did, in fact,
provide services under his name.

     In this connection, both [the employee] and you on his behalf
have argued that the statute at 5 U.S.C. app.  502(a)(2) and the
regulation at 5 C.F.R.  2636.305(a)(2) force employees who provide
professional services on a pro bono basis to violate state
licensing procedures and professional ethics codes requiring that
professional services be provided under the provider's individual
name.  In the absence of further information or evidence that there
is any such licensing procedure or ethics code that applies to [the
employee], I see no reason to address that argument.  Also, I note
that in your memorandum dated May 11, 1992, you cite the ABA Model
Code of Professional Responsibility, Ethical Canon 2-11, as an
example of a relevant code of professional ethics.  However, in
1983, that Code was replaced by the Model Rules of Professional
Conduct.  I can find nothing in the Model Rules, and in particular
in Rules 7.1-7.5 concerning Information About Legal Services, which
is inconsistent with the requirements of the statute or the
regulation.  In fact, Rule 7.5(c) states that "the name of a lawyer
holding a public office shall not be used in the name of a law
firm, or in communications on its behalf, during any substantial
period in which the lawyer is not actively and regularly practicing
with the firm."  ABA Model Rules of Professional Conduct Rule 7.5
(c)(1983).

     [The employee] has also stated that any compensation for
professional services he has received after January 1, 1991, is
less than the actual and necessary expenses incurred by him in
connection with his practice in 1991.  While it is not entirely
clear whether [the employee] is referring to compensation he
received for services personally provided by him or compensation
for affiliation with the practice, in either case the question of
whether his compensation exceeded his expenses is a factual one to
be determined after appropriate investigation.

     The restrictions of 5 U.S.C. app.  502 became effective on
January 1, 1991, the day the implementing regulation was published.
As the rule makes clear, the restrictions do not apply to
compensation for services rendered before that date or those
rendered in satisfaction of an obligation under a contract entered
prior to January 1, 1992.  Therefore, there is no restriction on
the receipt of compensation by [the employee] pursuant to the terms
of the contract dated July 12, 1988, during the one-year contract
renewal period which presumably began on July 12, 1990.  However,
receipt of compensation pursuant to any new contract or other
contract renewal after January 1, 1991, would be prohibited.  The
appropriate penalties for violations are described in 5 C.F.R.
 2636.104.  Unless [the employee] acted in good faith reliance on
an advisory opinion properly issued under 5 U.S.C.  2635.103,
activities in which he engaged which are inconsistent with the
statute and regulation should be referred to the Department of
Justice for appropriate civil action.

                                   Sincerely,

                                   Stephen D. Potts
                                   Director