[Federal Register: January 13, 2004 (Volume 69, Number 8)]
[Proposed Rules]
[Page 1954-1957]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ja04-16]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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OFFICE OF GOVERNMENT ETHICS
5 CFR Part 2634
RIN 3209-AA00
Proposed Revisions to the Certificates of Divestiture Regulation
AGENCY: Office of Government Ethics (OGE).
ACTION: Proposed rule amendments.
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SUMMARY: The Office of Government Ethics is proposing a plain language
revision of its regulation concerning Certificates of Divestiture. The
proposed rule also would revise certain procedures for issuing
Certificates of Divestiture and the definition of permitted property
into which proceeds of the sale of property are reinvested.
DATES: Comments are invited and must be received in writing on or
before March 15, 2004.
ADDRESSES: Send comments to the Office of Government Ethics, Suite 500,
1201 New York Avenue, NW., Washington, DC 20005-3917. Attention:
Deborah J. Bortot. Comments also may be sent electronically to OGE's
Internet E-mail address: usoge@oge.gov. For E-mail messages, the
subject line should include the following reference: ``Comments on
proposed revisions to the Certificates of Divestiture regulation.''
FOR FURTHER INFORMATION CONTACT: Deborah J. Bortot, Office of
Government Ethics; Telephone: 202-482-9300; TDD: 202-482-9293; FAX:
202-482-9237.
SUPPLEMENTARY INFORMATION:
I. Background
Section 1043 of the Internal Revenue Code of 1986, 26 U.S.C. 1043,
was enacted as part of the Ethics Reform Act of 1989 (Pub. L. 101-194).
Section 1043 authorizes OGE to issue a Certificate of Divestiture to an
eligible person who is divesting property in order to comply with a
Federal conflict of interest law, regulation, rule, or Executive order,
or if requested by a congressional committee as a condition of
confirmation. A person who receives a Certificate of Divestiture may
defer payment of capital gains tax as long as he or she timely
purchases certain permitted property with the proceeds of the sale. OGE
published an interim rule on April 18, 1990 (at 55 FR 14407-14409)
implementing section 1043. On June 25, 1996, the Office of Government
Ethics published a final rule at 61 FR 32633-32636. The final rule was
based on comments to the interim rule and on OGE's experience under the
interim rule and the May 1990 Technical Corrections to the Ethics
Reform Act of 1989 (Pub. L. 101-280), which amended section 1043 of the
Internal Revenue Code of 1986. The Certificates of Divestiture
regulation is now codified at subpart J of 5 CFR part 2634. After
reevaluating the regulation to see whether changes might be needed, OGE
has decided to publish these proposed revisions to make certain
improvements.
II. Discussion of Proposed Changes
We are proposing to improve the current Certificates of Divestiture
regulation by: Organizing the material more logically; using shorter
sentences; eliminating unnecessary technical language; and stating the
rule's requirements more clearly. We invite your comments as to whether
this proposed rule would be easier to understand and how we could
further improve its clarity. The following discussion summarizes the
most important changes that OGE is proposing.
To add more harmony and uniformity to ethics program rules, OGE is
proposing a change to the meaning of ``diversified investment fund.''
In order to qualify for deferral of capital gains, an eligible person
must reinvest proceeds from the sale of property pursuant to a
Certificate of Divestiture into ``permitted property'' during the 60-
day period beginning on the date of such sale. ``Permitted property''
must consist only of obligations of the United States or ``diversified
investment funds.'' Subpart J defines what constitutes a ``diversified
investment fund'' for this purpose.
Proposed Sec. 2634.1002 would change the meaning of a
``diversified investment fund,'' in paragraph (2) of the definition of
permitted property, to track the definition of ``diversified mutual
fund'' and ``diversified unit investment trust'' as those terms are
used in 5 CFR 2640.102. However, similar to current Sec. 2634.1003(a),
proposed Sec. 2634.1002 would continue to explain that ethics program
requirements applicable to specific agencies and positions might, in
some cases, limit the choices of ``permitted property,'' including the
specific ``diversified investment fund'' in which an employee may
reinvest.
Several changes are proposed that would streamline the procedures
OGE uses to issue a Certificate of Divestiture. Unlike the current
regulation, the proposed rule would permit an employee to submit a
written request for a Certificate of Divestiture on behalf of another
eligible person such as a spouse or minor child. Under proposed Sec.
2634.1004(a)(3), the employee would have to state in the request that
the eligible person holding the property required to be divested has
agreed to divest the property.
Proposed Sec. 2634.1004(b)(1) would clarify the information
related to financial disclosure that OGE needs to receive as part of
the Certificate of Divestiture request in the case of a Government
employee who is not required to file a financial disclosure report.
Whereas current Sec. 2634.1002(b)(1)(ii)(B) refers generally to
information required to be disclosed on a financial disclosure report,
a parallel provision in proposed Sec. 2634.1004(b)(1) would require an
employee who does not file a financial disclosure report to submit a
listing of the employee's interests that would be required to be
disclosed on a confidential financial disclosure report excluding gifts
and travel reimbursements. Further, while the current regulation is
silent as to the timing and length of the period for reporting this
information, the proposed rule would clarify that the reporting period
is the preceding twelve months from the date the requirement to divest
first applied or the date the employee first agreed that the property
would be divested. In the case of an employee who is required to file a
financial disclosure report, the proposed rule would continue to
require that OGE receive a copy of the latest report filed by the
employee. The submission of information related to financial disclosure
ensures that OGE can determine whether the employee has
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agreed to divest all similar interests that create a conflict of
interest.
In addition, the proposed rule would simplify the procedure for
issuing a Certificate of Divestiture where a congressional committee
requests divestiture of the property as a condition of confirmation and
the request is consistent with a custom of the committee. To
substantiate the request of a committee, proposed Sec. 2634.1004(c)
would allow the designated agency ethics official to submit a statement
that shows a custom of the committee requires the property be divested
as a condition of confirmation.
Finally, the proposed rule would also simplify the procedure
related to the timing of a submission of a request to OGE. OGE will
continue to consider requests submitted beyond the applicable time
period for divestiture. However, proposed Sec. 2634.1004(e) would
require the designated agency ethics official to provide OGE with an
explanation for the delay if the request is not submitted within the
applicable time period specified in proposed Sec. 2634.1004(e).
III. Matters of Regulatory Procedure
Administrative Procedure Act
Interested persons are invited to submit written comments to OGE on
this proposed regulation, to be received on or before March 15, 2004.
The Office of Government Ethics will review all comments received and
consider any modifications to this rule as proposed which appear
warranted before adopting the final rule on this matter.
Executive Order 12866
In promulgating this proposed rule, the Office of Government Ethics
has adhered to the regulatory philosophy and the applicable principles
of regulation set forth in section 1 of Executive Order 12866,
Regulatory Review and Planning. In addition, these proposed amendments
have been reviewed by the Office of Management and Budget under that
Executive order. Moreover, in accordance with section 6(a)(3)(B) of
E.O. 12866, the preamble to these proposed revisions, to be codified
once finalized in a revised subpart J of 5 CFR part 2634, notes the
legal basis and benefits of as well as the need for the regulatory
action. There should be no appreciable increase in costs to OGE or the
executive branch of the Federal Government in administering this
regulation, once finalized, since the proposed provisions would only
clarify and improve the Certificates of Divestiture regulatory
procedures. Finally, this proposed rulemaking is not economically
significant under the Executive order and will not interfere with
State, local or tribal governments.
Executive Order 12988
As Director of the Office of Government Ethics, I have reviewed
this proposed amendatory regulation in light of section 3 of Executive
Order 12988, Civil Justice Reform, and certify that it meets the
applicable standards provided therein.
Regulatory Flexibility Act
As Director of the Office of Government Ethics, I certify under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) that this proposed
amendatory rule will not have a significant economic impact on a
substantial number of small entities because it primarily affects
Federal executive branch employees and members of their immediate
families.
Paperwork Reduction Act
The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply
to this proposed amended regulation because it does not contain any
information collection requirements that require the approval of the
Office of Management and Budget.
Unfunded Mandates Reform Act
For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
chapter 25, subchapter II), this proposed rule will not significantly
or uniquely affect small governments and will not result in increased
expenditures by State, local, and tribal governments, in the aggregate,
or by the private sector, of $100 million or more (as adjusted for
inflation) in any one year.
Congressional Review Act
The Office of Government Ethics has determined that this proposed
rulemaking involves a nonmajor rule under the Congressional Review Act
(5 U.S.C. chapter 8) and will, before the future final rule takes
effect, submit a report thereon to the U.S. Senate, House of
Representatives and General Accounting Office in accordance with that
law.
List of Subjects in 5 CFR Part 2634
Certificates of divestiture, Conflict of interests, Financial
disclosure, Government employees, Penalties, Privacy, Reporting and
recordkeeping requirements, Trusts and trustees.
Approved: January 7, 2004.
Marilyn L. Glynn,
Acting Director, Office of Government Ethics.
Accordingly, for the reasons set forth in the preamble, the Office
of Government Ethics proposes to amend subpart J of 5 CFR part 2634 as
follows:
PART 2634--EXECUTIVE BRANCH FINANCIAL DISCLOSURE, QUALIFIED TRUSTS,
AND CERTIFICATES OF DIVESTITURE
1. The authority citation for part 2634 continues to read as
follows:
Authority: 5 U.S.C. App. (Ethics in Government Act of 1978); 26
U.S.C. 1043; Pub. L. 101-410, 104 Stat. 890, 28 U.S.C. 2461 note
(Federal Civil Penalties Inflation Adjustment Act of 1990), as
amended by Sec. 31001, Pub. L. 104-134, 110 Stat. 1321 (Debt
Collection Improvement Act of 1996); E.O. 12674, 54 FR 15159, 3 CFR,
1989 Comp., p. 215, as modified by E.O. 12731, 55 FR 42547, 3 CFR,
1990 Comp., p. 306.
2. Subpart J of part 2634 is revised to read as follows:
Subpart J--Certificates of Divestiture
Sec.
2634.1001 Overview.
2634.1002 Definitions.
2634.1003 General rule.
2634.1004 How to obtain a Certificate of Divestiture.
2634.1005 Rollover into permitted property.
2634.1006 Cases in which Certificates of Divestiture will not be
issued.
2634.1007 Public access to a Certificate of Divestiture.
Subpart J--Certificates of Divestiture
Sec. 2634.1001 Overview.
(a) Purpose. 26 U.S.C. 1043 and the rules of this subpart allow an
eligible person to defer the payment of capital gains tax on property
that is sold in order to comply with conflict of interest requirements.
In order to defer the gains, an eligible person must obtain a
Certificate of Divestiture from the Director of the Office of
Government Ethics before the sale of the property. This subpart
describes the circumstances when a Certificate of Divestiture may be
obtained and establishes the procedure that the Office of Government
Ethics uses to issue Certificates of Divestiture.
(b) Scope. The Internal Revenue Service has jurisdiction over the
tax aspects of a divestiture made pursuant to a Certificate of
Divestiture. Internal Revenue Service requirements for reporting
dispositions of property and making an election under section 1043 not
to recognize capital gains must be followed by eligible persons wishing
to make such an election. An eligible person seeking a Certificate of
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Divestiture should consult his personal tax advisor and the Internal
Revenue Service for guidance on these matters.
(c) Policy. The purpose of section 1043 and the rules of this
subpart is to minimize the burden that would result from the payment of
capital gains tax on the sale of assets to comply with conflict of
interest requirements. Minimizing this burden will aid in attracting
and retaining highly qualified personnel in the executive branch and
will ensure the confidence of the public in the integrity of Government
officials and decision-making processes.
Sec. 2634.1002 Definitions.
For purposes of this subpart:
Eligible person means:
(1) Any officer or employee of the executive branch of the Federal
Government, except a person who is a special Government employee as
defined in 18 U.S.C. 202;
(2) The spouse or any minor or dependent child of the individual
referred to in paragraph (1) of this definition; and
(3) Any trustee holding property in a trust in which an individual
referred to in paragraph (1) or (2) of this definition has a beneficial
interest in principal or income.
Permitted property means:
(1) An obligation of the United States; or
(2) A diversified investment fund. A diversified investment fund is
a diversified mutual fund or diversified unit investment trust, as
defined in 5 CFR 2640.102(a), (k) and (u);
(3) Provided, however, a permitted property cannot be any holding
prohibited by statute, regulation, rule, or Executive order. As a
result, requirements applicable to specific agencies and positions may
limit an eligible person's choices of permitted property. An employee
seeking a Certificate of Divestiture should consult the appropriate
designated agency ethics official to determine whether a statute,
regulation, rule, or Executive order may limit choices of permitted
property.
Sec. 2634.1003 General rule.
The Director of the Office of Government Ethics may issue a
Certificate of Divestiture for specific property in accordance with the
procedures of Sec. 2634.1004 of this subpart if the Director
determines that divestiture of the property by an eligible person is
reasonably necessary to comply with 18 U.S.C. 208, or any other Federal
conflict of interest statute, regulation, rule, or Executive order, or
if divestiture is required by a congressional committee as a condition
of confirmation. A Certificate of Divestiture cannot be issued for
property that already has been sold.
Example 1 to Sec. 2634.1003: An employee is directed to divest
shares of stock, a limited partnership interest, and foreign
currencies. If the sale of these assets will result in capital gains
under the Internal Revenue Code, the employee may request and
receive a Certificate of Divestiture.
Example 2 to Sec. 2634.1003: An employee of the Department of
Commerce is directed to divest his shares of XYZ stock acquired
through the exercise of options held in an employee benefit plan.
His gain from the sale of the stock will be treated as ordinary
income. Because only capital gains realized under Federal tax law
are eligible for deferral under section 1043, a Certificate of
Divestiture cannot be issued for the sale of the XYZ stock.
Example 3 to Sec. 2634.1003: During her Senate confirmation
hearing, a nominee to a Department of Defense (DOD) position is
directed to divest stock in a DOD contractor as a condition of her
confirmation. Eager to comply with the order to divest, the nominee
sells her stock immediately after the hearing and prior to being
confirmed by the Senate. Once she is a DOD employee, she requests a
Certificate of Divestiture for the stock. Because the Office of
Government Ethics cannot issue a Certificate of Divestiture for
property that has already been divested, the employee's request for
a Certificate of Divestiture will be denied.
Example 4 to Sec. 2634.1003: After receiving a Certificate of
Divestiture, the spouse of a Food and Drug Administration employee
sold stock in a regulated company. Between the time of the request
for the Certificate of Divestiture and the sale of the stock, the
stock price dropped and the spouse sold the stock at a loss. Because
the sale of the stock did not result in capital gains, the spouse
has no need for the Certificate of Divestiture and cannot submit it
to the Internal Revenue Service for deferral of gains. No further
action need be taken by the employee or the employee's spouse in
connection with the Certificate of Divestiture.
Sec. 2634.1004 How to obtain a Certificate of Divestiture.
(a) Employee's request to the designated agency ethics official. An
employee seeking a Certificate of Divestiture must submit a written
request to the designated agency ethics official at his or her agency.
The request must contain:
(1) A full and specific description of the property that will be
divested. For example, if the property is corporate stock, the request
must include the number of shares for which the eligible person seeks a
Certificate of Divestiture;
(2) A brief description of how the eligible person acquired the
property;
(3) A statement that the eligible person holding the property has
agreed to divest the property; and
(4)(i) The date that the requirement to divest first applied; or
(ii) The date the employee first agreed that the eligible person
would divest the property in order to comply with conflict of interest
requirements.
(b) Designated agency ethics official's submission to the Office of
Government Ethics. The designated agency ethics official must forward
to the Director of the Office of Government Ethics the employee's
written request described in paragraph (a) of this section. In
addition, the designated agency ethics official must submit:
(1) A copy of the employee's latest financial disclosure report. If
the employee is not required to file a financial disclosure report, the
designated agency ethics official must obtain from the employee, and
submit to the Office of Government Ethics, a listing of the employee's
interests that would be required to be disclosed on a confidential
financial disclosure report excluding gifts and travel reimbursements.
For purposes of this listing, the reporting period is the preceding
twelve months from the date the requirement to divest first applied or
the date the employee first agreed that the eligible person would
divest the property;
(2) An opinion that describes why divestiture of the property is
reasonably necessary to comply with 18 U.S.C. 208, or any other Federal
conflict of interest statute, regulation, rule, or Executive order; and
(3) A brief description of the employee's position or a citation to
a statute that sets forth the duties of the position.
(c) Divestitures required by a congressional committee. In the case
of a divestiture required by a congressional committee as a condition
of confirmation, the designated agency ethics official must submit
appropriate evidence that the committee requires the divestiture. A
transcript of congressional testimony or a written statement from the
designated agency ethics official concerning the committee's custom
regarding divestiture are examples of evidence of the committee's
requirements.
(d) Divestitures for property held in a trust. In the case of
divestiture of property held in a trust, the employee must submit a
copy of the trust instrument, as well as a list of the trust's current
holdings, unless the holdings are listed on the employee's most recent
financial disclosure report. In certain cases involving divestiture of
property held in a trust, the Director may not issue a Certificate of
Divestiture unless the parties take actions which, in the
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opinion of the Director, are appropriate to exclude, to the extent
practicable, parties other than eligible persons from benefitting from
the deferral of capital gains. Such actions may include, as permitted
by applicable State law, division of the trust into separate
portfolios, special distributions, dissolution of the trust, or
anything else deemed feasible by the Director, in his or her sole
discretion.
Example 1 to paragraph (d): An employee has a 90% beneficial
interest in an irrevocable trust created by his grandfather. His
four adult children have the remaining 10% beneficial interest in
the trust. A number of the assets held in the trust must be sold to
comply with conflicts of interest requirements. Due to State law, no
action can be taken to separate the trust assets. Because the adult
children have a small interest in the trust and the assets cannot be
separated, the Director may consider issuing a Certificate of
Divestiture to the trustee for the sale of all of the conflicting
assets.
(e) Time requirements. A request for a Certificate of Divestiture
does not extend the time in which an employee otherwise must divest
property required to be divested pursuant to an ethics agreement, or
prohibited by statute, regulation, rule, or Executive order. Therefore,
an employee must submit his or her request for a Certificate of
Divestiture as soon as possible once the requirement to divest becomes
applicable. The Office of Government Ethics will consider requests
submitted beyond the applicable time period for divestiture. If the
designated agency ethics official submits a request to the Office of
Government Ethics beyond the applicable time period for divestiture, he
must explain the reason for the delay. (See 5 CFR 2634.802 and 2635.403
for rules relating to the time requirements for divestiture.)
(f) Response by the Office of Government Ethics. After reviewing
the materials submitted by the employee and the designated agency
ethics official, and making a determination that all requirements have
been met, the Director will issue a Certificate of Divestiture. The
certificate will be sent to the designated agency ethics official who
will then forward it to the employee.
Sec. 2634.1005 Rollover into permitted property.
(a) Reinvestment of proceeds. In order to qualify for deferral of
capital gains, an eligible person must reinvest the proceeds from the
sale of the property divested pursuant to a Certificate of Divestiture
into permitted property during the 60-day period beginning on the date
of the sale. The proceeds may be reinvested into one or more types of
permitted property.
Example 1 to paragraph (a): A recently hired employee of the
Department of Transportation receives a Certificate of Divestiture
for the sale of a large block of stock in an airline. He may split
the proceeds of the sale and reinvest them in an S&P Index Fund, a
diversified Growth Stock Fund, and U.S. Treasury bonds.
Example 2 to paragraph (a): The Secretary of Treasury sells
certain stock after receiving a Certificate of Divestiture and is
considering reinvesting the proceeds from the sale into U.S.
Treasury securities. However, because the Secretary of the Treasury
is prohibited by 31 U.S.C. 329 from being involved in buying
obligations of the United States Government, the Secretary cannot
reinvest the proceeds in such securities. However, she may invest
the proceeds in a diversified mutual fund. See the definition of
permitted property at Sec. 2634.1002.
(b) Internal Revenue Service reporting requirements. An eligible
person who elects to defer the recognition of capital gains from the
sale of property pursuant to a Certificate of Divestiture must follow
Internal Revenue Service rules for reporting the sale of the property
and the reinvestment transaction.
Sec. 2634.1006 Cases in which Certificates of Divestiture will not be
issued.
The Director of the Office of Government Ethics, in his or her sole
discretion, may deny a request for a Certificate of Divestiture in
cases where an unfair or unintended benefit would result. Examples of
such cases include:
(a) Employee benefit plans. The Director will not issue a
Certificate of Divestiture if the property is held in a pension,
profit-sharing, stock bonus, or other employee benefit plan and can
otherwise be rolled over into an eligible tax-deferred retirement plan
within the 60-day reinvestment period.
(b) Complete divestiture. The Director will not issue a Certificate
of Divestiture unless the employee agrees to divest all of the property
that presents a conflict of interest, as well as other similar or
related property that also presents a conflict of interest under a
Federal conflict of interest statute, regulation, rule, or Executive
order. However, any property that qualifies for a regulatory exemption
at 5 CFR part 2640 need not be divested for a Certificate of
Divestiture to be issued.
Example 1 to paragraph (b): A new senior official at the Federal
Aviation Administration owns stock in several airlines. The official
is expected to participate in a matter dealing with the imposition
of new safety standards on commercial airlines. The employee must
divest his interest in all of the airline stock that exceeds the
amounts he is permitted to retain under the exemptions to 18 U.S.C.
208, which are described at 5 CFR part 2640.
Example 2 to paragraph (b): A Department of Agriculture employee
owns shares of stock in Better Workspace, Inc. valued at $25,000. As
part of his official duties, the employee is assigned to evaluate
bids for a contract to renovate office space at his agency. The
Department's designated agency ethics official discovers that Better
Workspace is one of the companies that has submitted a bid and
directs the employee to sell his stock in the company. Because
Better Workspace is a publicly traded security, the employee could
retain up to $15,000 of the stock under the regulatory exemption for
interests in securities at 5 CFR 2640.202(a). He would be able to
request a Certificate of Divestiture for the $10,000 of Better
Workspace stock that is not covered by the exemption. Alternatively,
he could request a Certificate of Divestiture for the entire $25,000
worth of stock. If he chooses to sell his stock down to an amount
permitted under the regulatory exemption, the Office of Government
Ethics will not issue additional Certificates of Divestiture if the
value of the stock goes above $15,000 again.
(c) Property acquired under improper circumstances. The Director
will not issue a Certificate of Divestiture:
(1) If the eligible person acquired the property at a time when its
acquisition was prohibited by statute, regulation, rule, or Executive
order; or
(2) If circumstances would otherwise create the appearance of a
conflict with the conscientious performance of Government
responsibilities.
Sec. 2634.1007 Public access to a Certificate of Divestiture.
A Certificate of Divestiture issued pursuant to the provisions of
this subpart is available to the public in accordance with the rules of
Sec. 2634.603 of this part.
[FR Doc. 04-685 Filed 1-12-04; 8:45 am]
BILLING CODE 6345-02-P