CHAPTER C
CONFLICTS OF INTEREST
I. References.
A. 18 U.S.C. 201, 202, 203, 205, 206, 207, 208, 209.
B. Standards of Conduct for Employees of the Executive Branch, 5 C.F.R. Part 2635, Subparts D,E,F.
C. Joint Ethics Regulation, DOD 5500.7-R, Chapters 2 and 5.
D. 5 C.F.R. Part 2640, Interpretation, Exemptions and Waiver Guidance Concerning Acts Affecting a Personal Financial Interest; Proposed Rule: 60 Fed. R. 47208, et seq. (11 Sep 95); Final Rule: published 61 Fed. R. 66830, et seq. (18 Dec. 96), effective 17 Jan 97. Section 2, Chapter 5, Joint Ethics Regulation. JER Appendix D Rescinded.
E. 62 Fed. Reg. 48746 (17 Sep 97) - technical corrections.
F. 67 Fed. Reg. 12443-12446 (19 Mar 02) – Final Rule amending regulatory exemptions in 5 C.F.R. Part 2640.
(The above statutes and regulations are available at the Office of Government Ethics Website: "www.usoge.gov" at the DoD SOCO website: www.defenselink.mil/dodgc/defense_ethics.gov"), and at the Department of the Navy public ethics website: “http://www.ethics.navy.mil.”
II. INTRODUCTION.
A. General Principle: Federal employees may not take official action in matters in which they have a personal interest.
B. DEFINITION OF 'CONFLICT OF INTEREST'
A "conflict of interest" is a personal interest or relationship, as defined by law or regulation, that conflicts with the faithful performance of official duty.
III. OFFICIAL MATTERS: 18 U.S.C. 208 -- PROHiBITION AGAINST TAKING OFFICIAL ACTION WHEN A DISQUALIFYING FINANCIAL INTEREST EXISTS.
A. 18 U.S.C. 208 -- The Primary Conflicts of Interest Statute (a criminal statute).
B. Historical Perspective
C. What the Statute says: An employee is prohibited by criminal statute, 18 U.S.C. 208(a) from participating personally and substantially in an official capacity in any particular matter in which, to his knowledge, he or any person whose interests are imputed to him under this statute has a financial interest, if the particular matter will have a direct and predictable effect on that interest.
1. 18 U.S.C. 208 applies to officers and employees. It does not apply to enlisted personnel, because enlisted personnel are not included in the definition of officer or employee in 18 U.S.C. 202.
2. JER 5-301 applies the prohibition of section 208 to enlisted personnel: "Except as approved by the DoD Component DAEO or designee, an enlisted member, including an enlisted special Government employee, shall not participate personally and substantially as part of his official DoD duties, in any particular matter in which he, his spouse, minor child, partner, entity in which he is serving as an officer director, trustee, partner or employee or any entity with which he is negotiating or has an arrangement concerning prospective employment, has a financial interest."
D. What the Statute Means
1. If the Federal employee has a financial interest in a matter, it will prevent him/her from being entirely objective in carrying out the official duties related to that matter.
2. The fact that the Federal employee is an honest person is not relevant.
3. The fact that the Federal employee does not make the final decision is not relevant.
4. All that is necessary for a conflict of interest is that the Federal employee participates personally and substantially in the matter.
E. Definitions
1. Participate "personally" and "substantially" (5 C.F.R. 2635.402(b)(4))
a. "Participate" - decision, approval, recommendation, investigation or rendering advice (very low threshold).
b. To participate "personally" means directly, and includes the participation of a subordinate when actually directed by the Government employee in the matter.
c. "Substantially" means that the employee's involvement must be of significance to the matter, or form a basis for a reasonable appearance of such significance. It requires more than official responsibility, knowledge, perfunctory involvement, or involvement on an administrative or peripheral issue. A finding of substantially should be based not only on the effort devoted to the matter, but also on the importance of the effort. While a series of peripheral involvements may be insubstantial, the single act of approving or participating in a critical step may be substantial.
2. In a "particular matter" (5 C.F.R. 2635.402(b)(3))
a. A "particular matter" is one that is focused upon the interests of specific persons, or a discrete and identifiable class of persons. It does not extend to broad policy options or considerations directed toward the interest of a large and diverse group of personnel. Broad policy matters are generally not particular matters -- however, such broad policy matters may later become particular matters when they are implemented in a way that the interests of specific persons or groups of persons are distinctly affected.
b. A particular matter involving specific parties is one that typically involves a specific transaction affecting the legal rights of parties, such as a contract, grant, or in claim in litigation.
3. That has a "direct and predictable effect" (5 C.F.R. 2635.402(b)(1))
a. A particular matter will have a "direct" effect on a financial interest if there is a close causal link between any decision or action in the official matter and any expected effect of the matter on the financial interest.
b. A particular matter will have a "predictable" effect if there is a real, as opposed to speculative, possibility that the matter will affect the financial interest. The magnitude of the gain or loss does not need to be known; the dollar amount of the gain or loss is immaterial.
4. On the "financial interests" (5 C.F.R. 2635.403(c))
a. "Financial interests" include any current or contingent ownership, equity or security interest in real or personal property or a business and may include an indebtedness or compensated employment relations. It includes, stocks, bonds, partnership interests, fee and leasehold interests, mineral and other property rights, deeds of trusts, and liens, and extends to any right to purchase or acquire any such interest, such as stock options or commodity futures. It does not include a future interest created by someone other than the employee, his spouse or dependent child, or any right as a beneficiary of an estate that has not been settled.
b. Test: That there is a real possibility that the Federal employee may gain or lose as a result of developments in or resolution of the matter. There is no requirement that the financial interest be substantial. It is not necessary that the potential gain or loss be of any particular magnitude. Nor must the potential gain or loss be probable for the prohibition against official action to apply. All that is required is that there be a real, as opposed to speculative, possibility of benefit or detriment. 83 OGE 1 (1983); Accord., United States v. Gorman, 807 F.2d 1299, 1303 (6th Cir. 1986), cert. denied, 108 S. Ct. 68 (1987).
5. Of the employee or those financial interests "imputed to the employee" (5 C.F.R. 2635.402(b)(2))
a. The employee's spouse and minor children.
b. The employee's general partner.
c. An organization or entity which the employee serves as officer, director, trustee, general partner or employee.
d. An organization with whom the employee is negotiating for or has an arrangement concerning prospective employment.
(1) Note: the term "negotiating for or has an arrangement concerning prospective employment" is narrower than the term "seeking employment" in 5 C.F.R. 2635, Subpart F.
(2) Note: imputed interests do not automatically include a spouse's employer or one with whom the spouse is negotiating or has an arrangement concerning future employment. Look at the following:
(a) Does the spouse own stock in the company?
(b) Is the spouse earning pension rights in the company?
(c) What is the nature of the spouse's position?
(d) Will the spouse's position be affected in any way by the official matter?
F. Resolution of a Conflict of Interest
1. Disqualification. See JER 2-204 (requires written notice of disqualification)
2. Reassignment
3. Change of duties
4. Divestiture of Financial Interest
a. May defer taxes with a Certificate of Divestiture issued by the Director, Office of Government Ethics (see 5 C.F.R. 2634, subpart J)
5. Regulatory exemptions - 18 U.S.C. 208 (b) (2) and 5 C.F.R. 2640.201
6. Individual Waiver - 18 U.S.C. 208(b)(1) and 5 C.F.R. 2640.301
7. Waiver for Special Government Employees - 18 U.S.C. 208 (b)(3) and 5 C.F.R. 2640.302
G. Regulatory Exemptions (18 U.S.C. 208(b)(2))
1. The First Category of Exemptions: Exemptions for Pooled Investment Vehicles
a. Diversified Mutual Funds and Unit Investment Trusts - permits participation in any matter affecting the underlying holdings of a diversified mutual fund or unit investment trust
b. Sector Mutual Funds –
(1) permits participation in any particular matter affecting one or more holdings of a sector mutual fund where the affected holding is not invested in the sector in which the fund concentrates, and where the disqualifying financial interest in the matter arises because of ownership of an interest in the fund.
(2) permits participation in a particular matter affecting one or more holdings of a sector mutual fund where the disqualifying financial interest in the matter arises because of ownership of an interest in the fund and the aggregate.
c. Employee benefit Plans -- permits participation in any matter affecting the underlying holdings of an employee benefit plan, including
(1) The Thrift Savings Plan.
(2) State or local Government pension plan.
(3) Other diversified employee benefit plan, provided the plan is administered by an independent trustee, the employee does not select investment (other than categories of investments), and the plan is not a profit-sharing or stock bonus plan (other than 401(k) plan).
This provision also permits participation in matters of general applicability affecting the sponsor (the State or Local Government) of a State or local Government pension plan.
2. The Second Category of Exemptions: Exemptions for Securities
a. De Minimus for Party Matters -- permits participation in particular matters where the employee, spouse and minor child own no more than $15,000 worth of securities issued by the parties.
b. De Minimus for Matters Affecting Nonparties -- permits participation in particular matters involving specific parties in which the disqualifying financial interest arises from ownership of securities issued by one or more entities that are not parties to the matter but that are affected by the matter, if: (1) the securities are publicly traded or are long-term Federal Government or municipal securities and (2) the aggregate market value of the holdings in the securities affected does not exceed $25,000.
c. De Minimus for Matters of General Applicability -- permits participation in general matters where employee, spouse and minor child own no more than $25,000 worth of securities in one affected entity, and no more than a total of $50,000 worth of securities in all affected entities.
d. Short-term Federal Government Securities and Savings Bonds -- permits participation in any matter where employee owns Federal Government securities maturing in less than 1 year or savings bonds.
e. Securities Owned by Tax Exempt Organizations -- permits participation in any matter affecting entities whose securities are owned by a 501(c)(3) or (c)(4) organization (for which employee serves as unpaid officer, director, trustee, or employee), as long as the matter doesn't affect the organization directly, the employee has no role in selecting investments other than choosing among categories of investments, and the organizations only relationship to the issuer of the securities is that of investor (other than routine commercial transactions)
f. General Partners -- permits participation in any matter affecting
(1) an entity where the general partner owns no more than $200,000 worth of the entity's securities and the securities are not related to the partnership.
(2) any asset of the general partner where the employee's relationship to his partner is that of a limited partner in a partnership that has at least 100 limited partners.
3. The Third Category of Exemptions: Miscellaneous Exemptions
a. Hiring Decisions -- permits participation in a hiring decision where employee owns stock in prospective employee's company or where employee participates in company's pension plan.
b. Leave of Absence -- permits participation in matters of general applicability affecting an institution of higher education from which an employee is on a leave of absence, as long as the matter does not have a special effect on the institution other than as part of a class.
c. Multi-Campus Institutions -- permits participation in any matter affecting one campus of a state multicampus institution of higher education, provided that the only disqualifying financial interest is employment at another campus in the same system and the employee has no multi-campus responsibilities.
d. Official Duties that Affect Interest of Employees -- permits participation in any matter affecting Government salary and benefits, or Social Security or veterans' benefits, except that an employee cannot make determinations that individually or specially affect his own interests, or make determinations, requests, or recommendations that individually or specially relate to, or affect, the interests of his spouse, minor child or general partner.
e. Commercial Discount and Incentive Programs -- permits participation in any matter affecting the sponsor of a commercial discount, incentive, or similar program, as long as the program is open to the public and participation in the program does not involve any other financial interest in the sponsor (such as owning stock).
f. Mutual Insurance Companies -- permits participation in any matter affecting a mutual insurance company if employee is a policyholder, as long as the matter would not affect the company's ability to pay claims or to pay the cash value of the policy.
g. Special Government Employees -- permits an SGE serving on an advisory committee to participate in committees matters of general applicability where disqualifying interest arises from non-Federal employment, provided that matter does not have a special effect on employee or employer (Note: stock ownership is not an interest arising from employment).
h. Federal Reserve Directors
i. Medical Products and Devices -- permits an SGE serving on an advisory committee to participate in advisory committee matters concerning the approval or classification of medical products or devices, as long as the disqualifying financial interest arises from employment with a hospital or other medical facility which purchases the product or device for use by its patients, or prescription of the product or device for patients of the SGE.