Additional Exemption for Mutual Funds and Unit Investment Trusts Under 18 U.S.C. 208(b)(2), 69041-69044 [05-22476]

Agencies

• Office of Government Ethics
• Government Ethics Office

[Federal Register Volume 70, Number 218 (Monday, November 14, 2005)]
[Rules and Regulations]
[Pages 69041-69044]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-22476]


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OFFICE OF GOVERNMENT ETHICS

5 CFR Part 2640

RIN 3209-AA09


Additional Exemption for Mutual Funds and Unit Investment Trusts 
Under 18 U.S.C. 208(b)(2)

AGENCY: Office of Government Ethics (OGE).

ACTION: Interim rule amendment with request for comments.

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SUMMARY: The Office of Government Ethics is issuing an interim rule 
amendment that permits Government employees to participate in certain 
particular matters of general applicability affecting mutual funds and 
unit investment trusts, notwithstanding the employees' disqualifying 
financial interest under 18 U.S.C. 208(a) arising from the ownership of 
mutual funds or unit investment trusts.

DATES: This interim regulation is effective November 14, 2005. Comments 
are invited and are due in writing by December 14, 2005.

ADDRESSES: You may submit comments, in writing, to OGE on this interim 
rule, identified by RIN 3209-AA09, by any of the following methods:
     E-Mail: usoge@oge.gov. Include the reference ``Interim 
Rule Exemption Under 18 U.S.C. 208(b)(2)'' in the subject line of the 
message.
     Fax: (202) 482-9237.
     Mail/Hand Delivery/Courier: Office of Government Ethics, 
Suite 500, 1201 New York Avenue, NW., Washington, DC 20005-3917, 
Attention: Richard M. Thomas, Associate General Counsel.
    Instructions: All submissions must include OGE's agency name and 
the Regulation Identifier Number (RIN), 3209-AA09, for this rulemaking.

FOR FURTHER INFORMATION CONTACT: Richard M. Thomas, Associate General 
Counsel, Office of Government Ethics; telephone: (202) 482-9300; TDD: 
(202) 482-9293; FAX: (202) 482-9237.

SUPPLEMENTARY INFORMATION: Section 208(a) of title 18 of the United 
States Code prohibits Government employees from participating in an 
official capacity in particular Government matters in which, to their 
knowledge, they or certain other persons specified in the statute have 
a financial interest, if the particular matter would have a direct and 
predictable effect on that interest.

[[Page 69042]]

Section 208(b)(2) of title 18 permits the Office of Government Ethics 
to promulgate regulations describing financial interests that are too 
remote or inconsequential to warrant disqualification pursuant to 
section 208(a).
    On August 28, 1995, the Office of Government Ethics published its 
first interim rule, with request for comments, promulgating certain 
miscellaneous exemptions under section 208(b)(2). 60 FR 44705 (August 
28, 1995). On December 18, 1996, the Office of Government Ethics 
published a comprehensive final rule, ``Interpretation, Exemptions and 
Waiver Guidance Concerning 18 U.S.C. 208 (Acts Affecting a Personal 
Financial Interest),'' codified at 5 CFR part 2640, which promulgated 
several additional exemptions and also adopted as final, with some 
modifications, the exemptions promulgated in the earlier interim rule. 
61 FR 66829 (December 18, 1996) (final rule); 60 FR 47207 (September 
11, 1995) (proposed rule). OGE subsequently has added and amended 
exemptions by interim rule, with request for comment, 65 FR 16511 
(March 29, 2000) (adopted as final, 65 FR 47830 (August 4, 2000)), and 
(after a proposed rule, 65 FR 53942 (September 6, 2000)) by final rule, 
67 FR 12443 (March 19, 2002).
    Among the exemptions OGE has promulgated are several that exempt 
certain financial interests in ``mutual funds'' and ``unit investment 
trusts,'' as those terms are defined in Sec.  2640.102(k) and (u). See 
5 CFR 2640.201(a) (diversified mutual funds and unit investment 
trusts), 2640.102(b)(1) (non-sector holdings of sector mutual fund), 
2640.201(b)(2) ($50,000 de minimis interest in sector mutual funds). As 
a general matter, such investment funds historically have been thought 
to raise fewer significant conflict of interest concerns than other 
types of investments, for several reasons. As OGE has noted previously, 
typically ``only a limited portion of the fund's assets [are] placed in 
the securities of any single issuer'' and usually ``an employee's 
interest in any one fund is only a small portion of the fund's total 
assets.'' 60 FR 47211 (September 11, 1995) (preamble to proposed rule). 
These popular investment vehicles are also subject to significant 
regulation by the Securities and Exchange Commission (SEC). In short, 
the risks and the expenses incident to such pooled investment vehicles 
generally pose fewer concerns that the financial interests will affect 
the integrity of the services of Government employees. Indeed, Congress 
itself has recognized the diminished conflicts potential by including 
certain investment funds as one of the few types of ``permitted 
property'' under 26 U.S.C. 1043, which allows Government employees to 
defer recognition of capital gains from sales to comply with conflict 
of interest requirements as long as the proceeds of the sale are 
invested in permitted property. See 5 CFR part 2634, subpart J 
(Certificates of Divestiture).
    All of these existing exemptions focus on employee interests 
arising from the ``holdings'' of the investment funds. This is not 
surprising, because common sense--as well as OGE's discussions with the 
SEC and other agencies--indicates that the principal determinant of 
mutual fund value is the performance of the underlying holdings.
    Since these exemptions were promulgated, however, OGE has become 
aware that employees at certain agencies may work on particular matters 
of general applicability that do not have an effect on individual fund 
holdings, but instead may have an effect on the mutual funds or unit 
investment trusts themselves. The SEC, for example, is the primary 
Federal regulator of investment companies and investment advisers, and 
the agency has advised OGE that its employees must address a variety of 
issues, through rulemaking and other Commission action, such as 
oversight of mutual fund fees and expenses, brokerage arrangements, 
valuation and pricing, management conflicts of interest, structural 
changes to the boards to address independence, etc. Similarly, some 
employees of the Internal Revenue Service may participate in certain 
taxation issues affecting regulated investment companies, such as the 
tax treatment of certain expenses and dividends. Difficult questions 
have arisen concerning whether the participation in such matters is 
even covered by 18 U.S.C. 208. In some cases, for example, it may be 
difficult to determine when such policy matters have a direct and 
predictable effect on the employee's financial interest in a particular 
investment fund. In some cases, moreover, employees may not have 
understood adequately the limits of existing OGE exemptions, which do 
not actually cover any financial interests other than those arising 
from the effect of Government action on the underlying holdings of 
funds. Given the popularity of investment funds--the SEC, for example, 
has advised OGE that, along with 48.1% of all American households who 
are invested in mutual funds directly or indirectly (see the Investment 
Company Institute (ICI) 2005 Investment Company Fact Book, Part I, 
Section 4, available online at https://www.ici.org), a significant 
percentage of SEC employees own mutual fund shares--it is especially 
important to dispel any uncertainty concerning the application of 
section 208 to such interests.
    Therefore, OGE is promulgating a new exemption, by adding a 
paragraph (d) to Sec.  2640.201 of 5 CFR, that covers interests in 
mutual funds and unit investment trusts other than interests arising 
from the holdings of such vehicles. As this action is intended, in 
part, to clarify the application of section 208 to such interests, the 
promulgation of this exemption should not be construed as an indication 
that any particular activity in which an employee might have 
participated in the past necessarily should be viewed as a violation of 
section 208. Moreover, it is also important to remember that interests 
arising from the effect of Government matters on the underlying 
holdings of mutual funds and unit investment trusts will continue to be 
addressed by the other exemptions noted above.
    The new exemption is limited to particular matters of general 
applicability, as defined in 5 CFR 2640.102(m). This would include, for 
example, rules and guidance documents that address all mutual funds or 
a class of investment companies. The exemption does not cover 
particular matters involving specific parties, as defined in 5 CFR 
2640.102(l), such as cases or investigations focusing on a particular 
investment company. Where an employee would be called upon to 
participate in a particular matter involving specific parties, 
potential conflicts should be evaluated on a case-by-case basis and may 
be resolved, as appropriate, through recusal, divestiture, or an 
individual waiver under 18 U.S.C. 208(b).
    The limitation to matters of general applicability is an important 
part of the justification for this exemption. As in other areas, OGE 
has determined that the potential for financial interests in this area 
to affect the integrity of an employee's services is limited when the 
particular matter affects an entire industry or class of entities, 
rather than focusing on the interests and rights of a particular 
company or other party. See generally 60 FR 47210 (``The regulation 
generally contains more expansive exemptions for participation in 
`matters of general applicability not involving specific parties' 
because it is less likely that an employee's integrity would be 
compromised by concern for his own financial interests when 
participating in these broader matters.''). The exemption thus would 
not cover those particular

[[Page 69043]]

matters that may be thought to pose the most acute potential for 
conflict, such as a proceeding with respect to a specific fund in which 
the employee has invested. Moreover, from discussions with various 
agencies, OGE has concluded that the impact of rules and other matters 
of general applicability on an employee's financial interest in a 
particular investment company is not likely to be so significant as to 
call into question the employee's integrity: As mentioned above, the 
value of an investor's interest in a fund is more directly a function 
of the performance of the underlying holdings rather than the effect of 
Government regulations on the management of the fund. Additionally, any 
such interests are so widely shared among the American public that 
employees certainly would not have a peculiar stake in such matters.
    This interim rule is being published after obtaining the 
concurrence of the Department of Justice pursuant to section 201(c) of 
Executive Order 12674. Also, as provided in section 402 of the Ethics 
in Government Act of 1978, as amended, 5 U.S.C. appendix, section 402, 
OGE has consulted with both the Department of Justice (as additionally 
required under 18 U.S.C. 208(d)(2)) and the Office of Personnel 
Management on this rule.

Matters of Regulatory Procedure

Administrative Procedure Act

    Pursuant to 5 U.S.C. 553 (b) and (d), as General Counsel of the 
Office of Government Ethics, I find that good cause exists for waiving 
the general requirements of notice of proposed rulemaking, opportunity 
for public comments, and 30-day delayed effective date for this interim 
rule amendment, and additionally that the 30-day delayed effective date 
does not apply because the rule grants or recognizes an exemption or 
relieves a restriction. These requirements are being waived because 
this rulemaking grants a new exemption under the applicable conflict of 
interest law, 18 U.S.C. 208. Moreover, delay in issuance of the rule 
would be contrary to the public interest because the interim rule 
clarifies the permissible limits of employees' official actions when 
certain of their financial interests may be affected, in view of 
questions of the type discussed above concerning the application of 18 
U.S.C. 208 to employee participation in certain matters affecting 
mutual funds and unit investment trusts. Nonetheless, interested 
persons are invited to submit written comments to OGE on this interim 
rule, to be received on or before December 14, 2005. The Office of 
Government Ethics will review all comments received and consider any 
modifications to this rule which appear warranted before adopting the 
final rule on this matter.

Regulatory Flexibility Act

    As General Counsel of the Office of Government Ethics, I certify 
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) that this 
interim rule will not have a significant economic impact on a 
substantial number of small entities because it primarily affects 
Federal executive branch employees.

Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply 
because this interim regulation does not contain information collection 
requirements that require 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 interim final rule will not 
significantly or uniquely affect small governments and will not result 
in increased expenditures by State, local, and tribal governments, in 
the aggregate, or by the private sector, of $100 million or more (as 
adjusted for inflation) in any one year.

Congressional Review Act

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

Executive Order 12866

    In promulgating this interim rule amendment, the Office of 
Government Ethics has adhered to the regulatory philosophy and the 
applicable principles of regulation set forth in section 1 of Executive 
Order 12866, Regulatory Planning and Review. This interim rule has also 
been reviewed by the Office of Management and Budget under that 
Executive order. Moreover, in accordance with section 6(a)(3)(B) of 
E.O. 12866, the preamble to this interim amendment 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 
amended regulation, since it only adds to OGE's financial interests 
regulation a new regulatory exemption affecting certain matters of 
general applicability. Finally, this rulemaking is not economically 
significant under the Executive order and will not interfere with 
State, local or tribal governments.

Executive Order 12988

    As General Counsel of the Office of Government Ethics, I have 
reviewed this interim amendatory regulation in light of section 3 of 
Executive Order 12988, Civil Justice Reform, and certify that it meets 
the applicable standards provided therein.

List of Subjects in 5 CFR Part 2640

    Conflict of interests, Government employees.

    Approved: November 7, 2005.
Marilyn L. Glynn,
General Counsel, Office of Government Ethics.

0
Accordingly, for the reasons set forth in the preamble, the Office of 
Government Ethics is amending 5 CFR part 2640 as follows:

PART 2640--INTERPRETATION, EXEMPTIONS AND WAIVER GUIDANCE 
CONCERNING 18 U.S.C. 208 (ACTS AFFECTING A PERSONAL FINANCIAL 
INTEREST)

0
1. The authority citation for part 2640 continues to read as follows:

    Authority: 5 U.S.C. App. (Ethics in Government Act of 1978); 18 
U.S.C. 208; 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 B--Exemptions Pursuant to 18 U.S.C. 208(b)(2)

0
2. Section 2640.201 is amended by adding a new paragraph (d) to read as 
follows:


Sec.  2640.201  Exemptions for interests in mutual funds, unit 
investments trusts, and employee benefit plans.

* * * * *
    (d) Matters affecting mutual funds and unit investment trusts. In 
addition to participation in the particular matters affecting the 
holdings of mutual funds and unit investment trusts as permitted under 
paragraphs (a) and (b) of this section, an employee may participate in 
any particular matter of general applicability affecting a mutual fund 
or unit investment trust where the disqualifying financial interest 
arises because of the ownership of an interest

[[Page 69044]]

in the mutual fund or unit investment trust.

[FR Doc. 05-22476 Filed 11-10-05; 8:45 am]
BILLING CODE 6345-01-P