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Code · REGISTER · 2008-06-25 · U.S. Small Business Administration · Notices

Notices. Notice and request for comments

103,081 words·~469 min read·/register/2008/06/25/08-1392

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

BILLING CODE 8010-01-P SMALL BUSINESS ADMINISTRATION Data Collection Available for Public Comments and Recommendations ACTION: Notice and request for comments. SUMMARY: In accordance with the Paperwork Reduction Act of 1995, this notice announces the Small Business Administration's intentions to request approval on a new and/or currently approved information collection. DATES: Submit comments on or before August 25, 2008. ADDRESSES: Send all comments regarding whether this information collection is necessary for the proper performance of the function of the agency, whether the burden estimates are accurate, and if there are ways to minimize the estimated burden and enhance the quality of the collection, to Lisa Lopez-Suarez, Senior Advisor, Office of Disaster, Small Business Administration, 409 3rd Street SW., 6th floor, Wash., DC 20416.
FOR FURTHER INFORMATION CONTACT: Lisa Lopez-Suarez, Senior Advisor, Office of Disaster, 202-619-0458, *lisa.lopez.suarez@sba.gov* , Curtis B. Rich, Management Analyst, 202-205-7030, *curtis.rich@sba.gov* . SUPPLEMENTARY INFORMATION: The Small Business Administration is authorized to make loans to victims of declared Disasters for the purpose of restoring their damaged property to, as near as possible, pre-disaster conditions. SBA's Office of Disaster Assistance provides customer service to individuals and businesses on the phone and via e-mail through its Disaster Assistance Customer Service Center (DACSC) and in-person through its Field Operations Centers (FOC). *Title:* “Customer Satisfaction Survey.” *Description of Respondents:* A team of Quality Assistance staff at the DACSC would conduct a brief telephone survey of a representative sample of customers to measure their satisfaction with the service received from the DACSC and FOC. *Form Numbers:* N/A. *Annual Responses:* 975. *Annual Burden:* 1,950.
Jacqueline White, Chief, Administrative Information Branch. [FR Doc. E8-14336 Filed 6-24-08; 8:45 am] BILLING CODE 8025-01-P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #11286 and #11287] Indiana Disaster Number IN-00019 AGENCY: U.S. Small Business Administration. ACTION: Amendment 3. SUMMARY: This is an amendment of the Presidential declaration of a major disaster for the State of Indiana (FEMA-1766-DR), dated 06/11/2008. *Incident:* Severe Storms, Flooding, and Tornadoes. *Incident Period:* 05/30/2008 and continuing.
EFFECTIVE DATE: 06/17/2008. *Physical Loan Application Deadline Date:* 08/11/2008. *EIDL Loan Application Deadline Date:* 03/11/2009. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION:
The notice of the Presidential disaster declaration for the State of INDIANA, dated 06/11/2008 is hereby amended to include the following areas as adversely affected by the disaster: *Primary Counties: (Physical Damage and Economic Injury Loans):* Gibson, Posey *Contiguous Counties: (Economic Injury Loans Only):* Indiana: Vanderburgh, Warrick Illinois: Gallatin, White Kentucky: Henderson, Union All other information in the original declaration remains unchanged. (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) Herbert L.
Mitchell, Associate Administrator for Disaster Assistance. [FR Doc. E8-14334 Filed 6-24-08; 8:45 am] BILLING CODE 8025-01-P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #11264 and #11265] Iowa Disaster Number IA-00015 AGENCY: U.S. Small Business Administration. ACTION: Amendment 3. SUMMARY: This is an amendment of the Presidential declaration of a major disaster for the State of Iowa (FEMA-1763-DR), dated 05/27/2008. *Incident:* Severe Storms, Tornadoes, and Flooding. *Incident Period:* 05/25/2008 and continuing.
EFFECTIVE DATE: 06/17/2008. Physical Loan Application Deadline Date: 07/28/2008. *EIDL Loan Application Deadline Date:* 02/27/2009. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION:
The notice of the Presidential disaster declaration for the State of Iowa, dated 05/27/2008 is hereby amended to include the following areas as adversely affected by the disaster: *Primary Counties: (Physical Damage and Economic Injury Loans):* Allamakee, Clayton, Des Moines, Fremont, Harrison *Contiguous Counties: (Economic Injury Loans Only):* Iowa: Crawford, Lee, Monona, Pottawattamie, Shelby Illinois: Henderson Nebraska: Burt, Cass, Otoe, Washington Wisconsin: Crawford, Grant, Vernon All other information in the original declaration remains unchanged.
(Catalog of Federal Domestic Assistance Numbers 59002 and 59008) Herbert L. Mitchell, Associate Administrator for Disaster Assistance. [FR Doc. E8-14333 Filed 6-24-08; 8:45 am] BILLING CODE 8025-01-P SMALL BUSINESS ADMINISTRATION Interest Rates The Small Business Administration publishes an interest rate called the optional “peg” rate (13 CFR 120.214) on a quarterly basis. This rate is a weighted average cost of money to the government for maturities similar to the average SBA direct loan.
This rate may be used as a base rate for guaranteed fluctuating interest rate SBA loans. This rate will be 4.5 (4 1/2 ) percent for the July-September quarter of FY 2008. Pursuant to 13 CFR 120.921(b), the maximum legal interest rate for any third party lender's commercial loan which funds any portion of the cost of a 504 project (see 13 CFR 120.801) shall be 6% over the New York Prime rate or, if that exceeds the maximum interest rate permitted by the constitution or laws of a given State, the maximum interest rate will be the rate permitted by the constitution or laws of the given State.
Grady B. Hedgespeth, Director, Office of Financial Assistance. [FR Doc. E8-14369 Filed 6-24-08; 8:45 am] BILLING CODE 8025-01-P SMALL BUSINESS ADMINISTRATION National Small Business Development Center Advisory Board AGENCY: U.S. Small Business Administration (SBA). ACTION: Notice of open Federal advisory committee meeting. SUMMARY: The SBA is issuing this notice to announce the location, date, time and agenda for the next meeting of the National Small Business Development Center
(SBDC)Advisory Board. DATES: The meeting will be held on Tuesday, July 15, 2008 at 1 p.m. EST. ADDRESSES: This meeting will be held via conference call. SUPPLEMENTARY INFORMATION: Pursuant to section 10(a) of the Federal Advisory Committee Act (5 U.S.C. Appendix 2), SBA announces the meeting of the National SBDC Advisory Board. This Board provides advice and counsel to the SBA Administrator and Associate Administrator for Small Business Development Centers. The purpose of this meeting is to discuss following issues pertaining to the SBDC Advisory Board: —Follow-up to June 10th meeting in North Carolina. —Recommendations for Board Orientation and Training. —SBA Update from AA/OSBDCs. —Annual Association of Small Business Development Center (ASBDC) Conference on September 2-5 in Chicago, IL. FOR FURTHER INFORMATION CONTACT: The meeting is open to the public however advance notice of attendance is requested. Anyone wishing to attend and/or make a presentation to the Board must contact Alanna Falcone by Friday, July 11, 2008, by fax or e-mail in order to be placed on the agenda. Alanna Falcone, Program Analyst, 409 Third Street, SW., Washington, DC 20416, Phone, 202-619-1612, Fax 202-481-0134, e-mail, *alanna.falcone@sba.gov* . Additionally, if you need accommodations because of a disability or require additional information, please contact Alanna Falcone at the information above. Cherylyn H. Lebon, Committee Management Officer. [FR Doc. E8-14335 Filed 6-24-08; 8:45 am] BILLING CODE 8025-01-P DEPARTMENT OF STATE [Public Notice: 6276] 60-Day Notice of Proposed Information Collection: DS-7001 and DS-7005, DOS-Sponsored Academic Exchange Program Application, OMB Control No. 1405-0138 ACTION: Notice of request for public comments. SUMMARY: The Department of State is seeking Office of Management and Budget
(OMB)approval for the information collection described below. The purpose of this notice is to allow 60 days for public comment in the **Federal Register** preceding submission to OMB. We are conducting this process in accordance with the Paperwork Reduction Act of 1995. • *Title of Information Collection:* DOS-sponsored Academic Exchange Program Application. • *OMB Control Number:* 1405-0138. • *Type of Request:* Revision of a Currently Approved Collection. • *Originating Office:* Bureau of Educational and Cultural Affairs, ECA/A/E/EUR. • *Form Numbers:* DS-7001, DS-7005. • *Respondents:* Applicants for the Academic Exchange Program. • *Estimated Number of Respondents:* 6638. • *Estimated Number of Responses:* 6638. • *Average Hours per Response:* 0.75. • *Total Estimated Burden:* 4978 hours. • *Frequency:* Annually. • *Obligation to Respond:* Voluntary. DATES: The Department will accept comments from the public up to 60 days from June 25, 2008. ADDRESSES: You may submit comments by any of the following methods: • E-mail: *ChavezCC@state.gov* . You must include the DS form number (if applicable), information collection title, and OMB control number in the subject line of your message. • Mail (paper, disk, or CD-ROM submissions): ECA/A/E/EUR, Carolina Chavez, SA-44, Room 246, 301 Fourth Street, SW., Washington, DC 20547. • Fax: 202-453-8524. • Hand Delivery or Courier: Same as mailing address. FOR FURTHER INFORMATION CONTACT: Direct requests for additional information regarding the collection listed in this notice, including requests for copies of the proposed information collection and supporting documents, to Carolina Chavez, U.S. Department of State, Bureau of Educational and Cultural Affairs, Room 246, 301 Fourth Street, SW., Washington, DC 20547, who may be reached on 202-453-8524 or *ChavezCC@state.gov* . SUPPLEMENTARY INFORMATION: We are soliciting public comments to permit the Department to: • Evaluate whether the proposed information collection is necessary for the proper performance of our functions. • Evaluate the accuracy of our estimate of the burden of the proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond, including the use of automated collection techniques or other forms of technology. Abstract of Proposed Collection This collection was formerly entitled Application and Evaluation of DOS-sponsored Academic Exchange Programs. The Department of State collects this information to identify qualified candidates for the Office's academic exchange programs. Methodology Applications are delivered physically to the offices of the grantee organization, submitted electronically, or through the mail. *Additional Information:* None. June 16, 2008. Thomas Farrell, Deputy Assistant Secretary for Academic Programs, Bureau of Educational and Cultural Affairs, Department of State. [FR Doc. E8-14375 Filed 6-24-08; 8:45 am] BILLING CODE 4710-05-P DEPARTMENT OF STATE [Public Notice: 6247] 30-Day Notice of Proposed Information Collection: DS-3091; Thomas R. Pickering Foreign Affairs Fellowship Program, OMB Control No. 1405-0143 ACTION: Notice of request for public comment and submission to OMB of proposed collection of information. SUMMARY: The Department of State has submitted the following information collection request to the Office of Management and Budget
(OMB)for approval in accordance with the Paperwork Reduction Act of 1995. • *Title of Information Collection:* Thomas R. Pickering Foreign Affairs Fellowship Program. • *OMB Control Number:* 1405-0143. • *Type of Request:* Revision of a Currently Approved Collection. • *Originating Office:* HR/REE/REC. • *Form Number:* DS-3091. • *Respondents:* College Students. • *Estimated Number of Respondents:* 500. • *Estimated Number of Responses:* 500. • *Average Hours per Response:* 5. • *Total Estimated Burden:* 2,500 hours. • *Frequency:* On Occasion. • *Obligation to Respond:* Required to Obtain or Retain a Benefit. DATES: Submit comments to the Office of Management and Budget
(OMB)for up to 30 days from June 25, 2008. ADDRESSES: Direct comments and questions to Katherine Astrich, the Department of State Desk Officer in the Office of Information and Regulatory Affairs at the Office of Management and Budget (OMB), who may be reached at 202-395-4718. You may submit comments by any of the following methods: • E-mail: *Katherine_T._Astrich@omb.eop.gov* . You must include the DS form number, information collection title, and OMB control number in the subject line of your message. • Mail (paper, disk, or CD-ROM submissions): Office of Foreign Missions, U.S. Department of State, 2201 C Street, NW., Washington, DC 20520. • Fax: 202-395-6974. FOR FURTHER INFORMATION CONTACT: You may obtain copies of the proposed information collection and supporting documents from Stedman D. Howard, Department of State, 2401 E. Street, NW., Washington, DC 20522, who may be reached at: 202-261-8958 or *Howardsd2@state.gov.* SUPPLEMENTARY INFORMATION: We are soliciting public comments to permit the Department to: • Evaluate whether the proposed collection of information is necessary for the proper performance of the functions. • Evaluate the accuracy of our estimate of the burden of the proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond, including through the use of automated collection techniques or other forms of technology. Abstract of Proposed Collection This collection is necessary for the process of identifying highly motivated students with an interest in international affairs. Our goal is to identify and select these students from a nation-wide pool of very talented applicants. Through our application process, the Thomas R. Pickering Foreign Affairs Fellowship has managed to attract many students from diverse backgrounds to consider a career in the Foreign Service. Methodology This information collection is posted on the Woodrow Wilson National Fellowship Foundation Web sites, where an applicant can complete, and submit, the application online. *Additional Information:* None. Dated: June 16, 2008. Ruben Torres, Executive Director, Bureau of Human Resources, Department of State. [FR Doc. E8-14376 Filed 6-24-08; 8:45 am] BILLING CODE 4710-15-P DEPARTMENT OF STATE [Public Notice 6275] Culturally Significant Objects Imported for Exhibition Determinations: “Artistic Luxury: Faberge Tiffany Lalique” SUMMARY: Notice is hereby given of the following determinations: Pursuant to the authority vested in me by the Act of October 19, 1965 (79 Stat. 985; 22 U.S.C. 2459), Executive Order 12047 of March 27, 1978, the Foreign Affairs Reform and Restructuring Act of 1998 (112 Stat. 2681, *et seq.* ; 22 U.S.C. 6501 note, *et seq.* ), Delegation of Authority No. 234 of October 1, 1999, Delegation of Authority No. 236 of October 19, 1999, as amended, and Delegation of Authority No. 257 of April 15, 2003 [68 FR 19875], I hereby determine that the objects to be included in the exhibition “Artistic Luxury: Faberge Tiffany Lalique,” imported from abroad for temporary exhibition within the United States, are of cultural significance. The objects are imported pursuant to loan agreements with the foreign owners or custodians. I also determine that the exhibition or display of the exhibit objects at the Cleveland Museum of Art, from on or about October 19, 2008, until on or about January 19, 2009; at the Palace of the Legion of Honor, Fine Arts Museums of San Francisco, from on or about February 14, 2009, to on or about May 31, 2009, and at possible additional exhibitions or venues yet to be determined, is in the national interest. Public Notice of these Determinations is ordered to be published in the **Federal Register** . FOR FURTHER INFORMATION CONTACT: For further information, including a list of the exhibit objects, contact Carol B. Epstein, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State (telephone: 202/453-8048). The address is U.S. Department of State, SA-44, 301 4th Street, SW., Room 700, Washington, DC 20547-0001. Dated: June 18, 2008. C. Miller Crouch, Principal Deputy Assistant Secretary for Educational and Cultural Affairs, Department of State. [FR Doc. E8-14378 Filed 6-24-08; 8:45 am] BILLING CODE 4710-05-P DEPARTMENT OF TRANSPORTATION Pipeline and Hazardous Materials Safety Administration [Docket No. PHMSA-RSPA-2004-19856] Pipeline Safety: Notice to Hazardous Liquid Pipeline Operators of Request for Voluntary Advance Notification of Intent To Transport Biofuels AGENCY: Pipeline and Hazardous Materials Safety Administration (PHMSA), DOT. ACTION: Notice; Issuance of Advisory Bulletin. SUMMARY: PHMSA is requesting that any hazardous liquid pipeline operator intending to transport ethanol, ethanol-gasoline blends, or other biofuels by pipeline voluntarily provide us with advance notice of their intent to transport these fuels to facilitate cooperation in achieving safety. We request that any operator intending to field test transportation of biofuels by pipeline notify PHMSA of such testing in advance so that PHMSA can work with the operator to address any safety concerns that arise. PHMSA will be interested in discussing the steps the operator will take to ensure safety during the test and informing the local emergency response officials about the product being transported. FOR FURTHER INFORMATION CONTACT: Alan Mayberry,
(202)366-5124, or by e-mail at *alan.mayberry@dot.gov.* SUPPLEMENTARY INFORMATION: I. Background On August 10, 2007, PHMSA published a **Federal Register** document regarding the transportation of ethanol and biofuels by pipeline (72 FR 45002). PHMSA advised pipeline operators that the transportation of batches of ethanol or other biofuels in an existing petroleum products pipeline, and the transportation of blends of biofuels and petroleum products, are subject to the pipeline safety regulations and standards. The document described the potential technical issues associated with transporting biofuels by pipeline including internal corrosion and stress corrosion cracking, and the performance of seals, gaskets and internal coatings. As with the transportation of any hazardous liquid by pipeline, operators intending to transport these new fuels are expected to conduct risk analysis, monitoring, and controls as needed to move biofuels safely as well as conduct spill response planning for the new product. PHMSA seeks to work with pipeline operators that plan to transport these new fuels in existing regulated hazardous liquid pipelines (or in new pipelines that might be constructed for the purpose of transporting ethanol or biofuels). Accordingly, we are requesting that operators provide us with advance notice of their intent to transport these fuels to facilitate cooperation in achieving safety. II. Advisory Bulletin (ADB-08-05) *To:* Owners and Operators of Hazardous Liquid Pipeline Systems. *Subject:* Notice to Operators of Request for Voluntary Advance Notification of Intent to Transport Biofuels. *Advisory:* On August 10, 2007, PHMSA published a **Federal Register** document on the applicability of the pipeline safety regulations to the transportation of ethanol and biofuels by pipeline (72 FR 45002). In the document, PHMSA noted the technical issues associated with transporting biofuels by pipeline including internal corrosion and stress corrosion cracking, and the performance of seals, gaskets and internal coatings. As with the transportation of any hazardous liquid by pipeline, operators intending to transport these new fuels are expected to conduct risk analysis, monitoring, and controls as needed to move biofuels safely as well as conduct spill response planning for the new product. PHMSA seeks to work with pipeline operators that plan to transport these new fuels in existing regulated hazardous liquid pipelines or in new pipelines that might be constructed for the purpose of transporting ethanol or biofuels. Accordingly, we are requesting that operators provide us with advance notice of their intent to transport these fuels to facilitate cooperation in achieving safety. *Notice of Field Testing:* PHMSA seeks to encourage field testing by pipeline operators to accelerate the development of knowledge about the safe and reliable transportation of ethanol and biofuels by pipeline. We are requesting that any operator intending to field test transportation of biofuels by pipeline provide advance notification to PHMSA of such testing so that PHMSA can work with the operator to address any safety concerns that arise. To the extent proprietary concerns permit, PHMSA also seeks to share in the evaluation of the results to supplement the information we are receiving from our collaborative research efforts and help facilitate standards development. Although such field testing would be limited in scope and duration, PHMSA will be interested in discussing the steps the operator will take to ensure safety during the test and inform local emergency response officials about the product being transported. *Commencement of Commercial Operations:* Under 49 CFR part 195, an operator is obligated to modify its operating procedures, integrity management programs, and emergency response plans, among other things, prior to commencing commercial transportation of a new hazardous liquid. Under part 194, operators must also update their spill response plans to account for the new product being transported. PHMSA will apply its proven risk-based regulatory approach to the operation of pipelines transporting these fuels. PHMSA requests that any operator intending to commence regular commercial transportation of ethanol or other biofuels provide advance notification to PHMSA as soon as possible, but preferably 60 days in advance, to provide time for review. PHMSA is interested in learning about: The work to be performed to prepare the pipeline for ethanol or biofuel service; the anticipated blend concentration and batch frequency; the additional employee training to be conducted; the additional emergency response planning and liaison with local emergency response officials, including spill response plans; and the plans for ongoing monitoring of the integrity of the pipe. We would also like to know what modifications operators will make to their written operating and maintenance procedures, including their integrity management program and spill response plans prior to commencement of operations. On being notified by an operator about the new biofuel operations and associated program modifications, PHMSA will work closely with the operator and provide technical review and feedback. *Submittal:* Notifications may be submitted in writing to: Information Resources Manager, Office of Pipeline Safety, Pipeline and Hazardous Materials Safety Administration, 1200 New Jersey Avenue, SE., Washington, DC 20590, by e-mail to *informationresourcesmanager@phmsa.dot.gov,* or by fax to 202-366-7128. PHMSA requests the name, title, telephone number, and e-mail address of the person responsible for compliance with the integrity management requirements and a physical description of facilities involved including pipe design, manufacture, vintage, diameter, relevant operating history, and presence of any breakout tanks along with project timelines. The public may view summaries of all notifications that have been submitted by operators, and the status of PHMSA review of each notification, via this Web site. PHMSA expects to receive fewer than ten notifications per year. *Review:* PHMSA will review all notifications received from operators. Review may include site inspections by PHMSA or state pipeline safety agencies, particularly in states with certified hazardous liquid programs. If PHMSA finds that an operator's plans and operating procedures need additional attention or modification, we will provide feedback to the operator. Authority: 49 U.S.C. chapter 601; 49 CFR 1.53. Issued in Washington, DC, on June 18, 2008. William H. Gute, Deputy Associate Administrator for Pipeline Safety. [FR Doc. E8-14137 Filed 6-24-08; 8:45 am] BILLING CODE 4910-60-P DEPARTMENT OF THE TREASURY Office of Thrift Supervision Amendment of a Savings Association's Bylaws AGENCY: Office of Thrift Supervision (OTS), Treasury. ACTION: Notice and request for comment. SUMMARY: The Department of the Treasury, as part of its continuing effort to reduce paperwork and respondent burden, invites the general public and other Federal agencies to comment on proposed and continuing information collections, as required by the Paperwork Reduction Act of 1995, 44 U.S.C. 3507. The Office of Thrift Supervision within the Department of the Treasury will submit the proposed information collection requirement described below to the Office of Management and Budget
(OMB)for review, as required by the Paperwork Reduction Act. Today, OTS is soliciting public comments on its proposal to extend this information collection. DATES: Submit written comments on or before August 25, 2008. ADDRESSES: Send comments, referring to the collection by title of the proposal or by OMB approval number, to Information Collection Comments, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552; send a facsimile transmission to
(202)906-6518; or send an e-mail to *infocollection.comments@ots.treas.gov* . OTS will post comments and the related index on the OTS Internet Site at *www.ots.treas.gov* . In addition, interested persons may inspect comments at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment, call
(202)906-5922, send an e-mail to *public.info@ots.treas.gov,* or send a facsimile transmission to
(202)906-7755. FOR FURTHER INFORMATION CONTACT: You can request additional information about this proposed information collection from Patricia D. Goings,
(202)906-65668, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. SUPPLEMENTARY INFORMATION: OTS may not conduct or sponsor an information collection, and respondents are not required to respond to an information collection, unless the information collection displays a currently valid OMB control number. As part of the approval process, we invite comments on the following information collection. Comments should address one or more of the following points: a. Whether the proposed collection of information is necessary for the proper performance of the functions of OTS; b. The accuracy of OTS's estimate of the burden of the proposed information collection; c. Ways to enhance the quality, utility, and clarity of the information to be collected; d. Ways to minimize the burden of the information collection on respondents, including through the use of information technology. We will summarize the comments that we receive and include them in the OTS request for OMB approval. All comments will become a matter of public record. In this notice, OTS is soliciting comments concerning the following information collection. *Title of Proposal:* Amendment of a Savings Association's Bylaws. *OMB Number:* 1550-0017. *Form Numbers:* N/A. *Regulation requirement:* 12 CFR 544.5 and 552.5. *Description:* All federally chartered savings associations are required to file bylaw amendment applications or notices with OTS. OTS Regions Office staff review the applications and notices to determine whether the bylaw amendments comply with the regulations and OTS policy. If an application or notice raises a significant issue of policy or law, or if it involves non-routine anti-takeover provisions or non-standard indemnification provisions, the Washington, DC office will also review the application or notice. *Type of Review:* Extension of a currently approved collection. *Affected Public:* Businesses or other for-profit. *Estimated Number of Respondents:* 57. *Estimated Number of Responses:* 57. *Estimated Frequency of Response:* Other; as needed. *Estimated Total Burden:* 456 hours. *Clearance Officer:* Ira L. Mills,
(202)906-6531, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. Dated: June 20, 2008. Deborah Dakin, Senior Deputy Chief Counsel, Regulations and Legislation Division. [FR Doc. E8-14379 Filed 6-24-08; 8:45 am] BILLING CODE 6720-01-P 73 123 Wednesday, June 25, 2008 Rules and Regulations Part II Office of Government Ethics 5 CFR Parts 2637 and 2641 Post-Employment Conflict of Interest Restrictions; Final Rule OFFICE OF GOVERNMENT ETHICS 5 CFR Parts 2637 and 2641 RIN 3209-AA14 Post-Employment Conflict of Interest Restrictions AGENCY: Office of Government Ethics (OGE). ACTION: Final rule. SUMMARY: OGE regulations have provided guidance concerning the post-employment conflict of interest restrictions of 18 U.S.C. 207 for Government employees terminating service between July 1, 1979 and December 31, 1990. As a result of amendments to section 207 that became effective January 1, 1991, and subsequently, employees terminating service in the executive branch or in an independent agency (or terminating service from certain high-level Government positions) since that date are subject to substantially revised post-employment restrictions. The purpose of these new regulations is to provide regulatory guidance explaining the scope and content of the statutory restrictions as they apply to employees terminating service on or after January 1, 1991. This final rule would expand the regulatory guidance OGE has previously published concerning the current version of section 207 and make minor modifications to those earlier rulemakings. It would also remove the old obsolete regulations from the Code of Federal Regulations. DATES: July 25, 2008. 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: I. Rulemaking History On February 18, 2003, the Office of Government Ethics
(OGE)published for comment a proposed rule that would provide guidance and certain implementing procedures concerning the post-employment conflict of interest statute, 18 U.S.C. 207, as applied to former officers and employees of the executive branch. *See* 68 FR 7844-7892 (February 18, 2003). The proposed rule was issued pursuant to OGE's authority under the Ethics in Government Act of 1978, as amended, and Executive Order 12674, as modified by E.O. 12731. As explained in the preamble, the proposed rule provided for minor modifications to existing guidance and procedures in part 2641, as well as substantially expanded guidance to address more comprehensively the application of section 207. The proposed rule also provided for the removal of part 2637 (formerly part 737). Part 2637 interpreted and implemented a version of section 207 that was in effect prior to January 1, 1991, the effective date of the relevant provisions of the Ethics Reform Act of 1989. Although part 2637 had provided comprehensive post-employment advice in the past, numerous statutory changes, beginning with the Ethics Reform Act of 1989, rendered the content of much of part 2637 inapplicable to the current statute. For this reason, the current version of part 2637 carries an introductory note emphasizing that the regulation applies to “individuals terminating Government service prior to January 1, 1991.” It is OGE's intent that the advice now contained in part 2641, as amended by the final rule, will provide both comprehensive and current guidance applicable to employees terminating subsequent to January 1, 1991. Therefore, part 2637 is being removed in its entirety, with the proviso that the last published edition of the 5 CFR in which part 2637 was published (the one revised as of January 1, 2008) will be retained by OGE, and should be retained by agency ethics officials, to provide interpretive guidance to employees who terminated service before January 1, 1991. The history of parts 2637 and 2641 is discussed in detail in the preamble to the proposed rule, at 68 FR 7844-7845. In addition, since the publication of the proposed rule, the appendices to part 2641 have been amended three times. First, by a final rule issued November 23, 2004, OGE modified the list of separate agency and departmental component designations in Appendix B, pursuant to 18 U.S.C. 207(h), for purposes of the one-year cooling-off restriction applicable to former senior employees of an agency or department, under 18 U.S.C. 207(c). *See* 69 FR 68053-68056 (November 23, 2004). Second, by a final rule issued March 8, 2007, OGE again modified the list of separate agency and departmental component designations in Appendix B and also modified the list of waived positions in Appendix A, pursuant to 18 U.S.C. 207(c)(2)(C), for purposes of the one-year restriction applicable to former senior employees. *See* 72 FR 10339-10342 (March 8, 2007). Third, by a final rule issued March 6, 2008, OGE once more modified the list of separate agency and departmental component designations in Appendix B. *See* 73 FR 12007-12009 (March 6, 2008). Additionally, three amendments to 18 U.S.C. 207 have become effective since the publication of the proposed rule, and the effect of these amendments is addressed in the final rule. First, the amendments enacted by section 209(d) of the E-Government Act of 2002, Public Law 107-347, were noted in the preamble of the proposed rule, but the amendments did not become effective until nearly two months after the proposed rule was published. *See* 68 FR 7844. The proposed rule did not implement these statutory amendments, but the preamble specifically invited comments concerning the implementation of the amendments and noted that the effect of the amendments would be addressed in the final rule, as appropriate. During the comment period applicable to the proposed rule, OGE received no recommendations concerning the implementation of these amendments, which involve the addition of a new category of senior employee under 18 U.S.C. 207(c)(2)(A)(v) and a new restriction on contract advice under section 207(l), both applicable only to former private sector assignees under the Information Technology Exchange Program. The final rule implements these amendments, as discussed more fully below, through changes to proposed sections 2641.104 (definition of senior employee), 2641.301(j) (waiver of restrictions of 18 U.S.C. 207(c) and
(f)for certain positions), and 2641.301(l) (guide to available exceptions and waivers), and the promulgation of new section 2641.207 (setting out basic outline of new restriction in 18 U.S.C. 207(l)). Second, one category of senior employees covered by 18 U.S.C. 207(c) was amended by section 1125(b)(1) of the National Defense Authorization Act for Fiscal Year 2004, Public Law 108-136, November 24, 2003. Therefore, as discussed more fully below, the definition of senior employee in proposed section 2641.104 has been revised to conform to the current version of 18 U.S.C. 207(c)(2)(A)(ii). Third, the Honest Leadership and Open Government Act of 2007 amended 18 U.S.C. 207(d) by extending the cooling-off period for very senior employees to two years, which is addressed in revised section 2641.205. *See* Public Law 110-81, sec. 101(a), September 14, 2007. Section 104 of the same Act also added a cross-reference, in 18 U.S.C. 207(j)(1)(B), to a revised exception in the Indian Self-Determination and Education Assistance Act; proposed section 2641.301(k)(4) has been revised accordingly. The proposed rule provided a 90-day comment period. Timely comments were received from 17 sources. After carefully considering all comments and making appropriate modifications, the Office of Government Ethics is publishing this final rule after consulting with the Office of Personnel Management and the Department of Justice in accordance with section 402(b) of the Ethics in Government Act, and further, pursuant to section 201(c) of Executive Order 12674, as modified by E.O. 12731, after obtaining the concurrence of the Department of Justice. II. Summary of Comments and Changes to Proposed Rule OGE received comments from 17 entities, all Federal executive branch offices. Most of these comments were from agency ethics offices. Two agency inspector general offices commented, as did the Office of the Vice President. Five different Department of Defense components commented, although these comments were substantially similar or identical in many respects. General Comments A number of commenters stated that the proposed rule generally was helpful, thorough and well-organized. Many of these commenters remarked that the examples included in the proposed rule were particularly useful. The Use of Examples With respect to the subject of examples, one agency thought that OGE generally needed to include more explanatory information in its examples. The same agency also recommended that OGE address, either in the preamble or the text of the rule, “the way in which examples are to be used as illustrative guidance.” Given the limits of the regulatory format, OGE has attempted to provide examples that contain sufficient explanatory information to illustrate the particular provision of the rule that is at issue. OGE's practice has been to include examples in most of its rules, e.g., 5 CFR parts 2634, 2635, 2637, and 2640, for the purpose of providing factual scenarios that demonstrate the operation of the substantive provisions articulated in the rules. These examples illustrate how OGE would apply the rule in certain contexts. Three agencies raised related questions about why various examples in the proposed regulation do not contain facts satisfying each element of the relevant statutory prohibition. OGE has organized its treatment of each of the prohibitions in section 207 by treating each element separately and then providing examples to illustrate that particular element. OGE believes that it would be unnecessarily discursive to reiterate each statutory element in each example and that the lack of focus would render the examples less convenient for readers to use in analyzing the particular element in the accompanying regulatory text. In a similar vein, one agency also commented on the absence of facts in one particular example to illustrate a knowledge element in the statute. *See* proposed § 2641.201(f) (example 3). The example to which this commenter referred is intended to illustrate the element that the post-employment contact must be “to or before” a Federal employee, not the scope of the statutory term “knowingly.” Additionally, it is important to note that OGE has not attempted to provide comprehensive guidance as to the scope of the knowledge requirement in the various prohibitions in section 207. In OGE's experience, knowledge questions more typically arise after the post-employment conduct has already occurred, and legal analysis of such issues is not always well-suited to a regulation that provides general, prospective guidance. Coordination With the Department of Justice One commenter recommended that part 2641 be issued “jointly” by the Director of OGE and the Attorney General. The commenter stated that, because “the Attorney General is the officer charged by law to enforce the criminal statutes, including section 207, the Attorney General's issuance of part 2641 along with the Director of OGE increases the likelihood that the Federal Courts, in construing section 207, will give the interpretive guidance in part 2641 judicial deference.” OGE has not followed this recommendation. Section 201(c) of Executive Order 12731 states that is the responsibility of OGE to promulgate regulations interpreting sections 207, 208, and 209 of title 18, United States Code. The Executive Order provides that OGE obtain the concurrence of the Attorney General, which OGE has done (and also did with the prior post-employment regulations, *see* 5 CFR 2637.101(b)). *Compare* E.O. 12731, section 201(c) (concurrence); *with id.,* section 301(a) (joint promulgation). OGE also has its own statutory rulemaking authority with respect to conflicts of interest in the executive branch, which is exercised in consultation with the Attorney General. *See* 5 U.S.C. app. section 402. Furthermore, it may be debatable whether joint promulgation of part 2641 with the Attorney General would necessarily entail judicial deference. *See Crandon* v. *United States,* 494 U.S. 152, 177
(1990)(Scalia, J., concurring). In any event, there is already a history of judicial recognition and reliance on OGE's section 207 regulations. *E.g., EEOC* v. *Exxon Corp.,* 202 F.3d 755 (5th Cir. 2000); *United States* v. *Nofziger,* 878 F.2d 442 (D.C. Cir. 1989); *U.S.* v. *Clark,* 333 F.Supp.2d 789 (E.D. Wisc. 2004); *U.S.* v. *Martin,* 39 F.Supp.2d 1333 (D. Utah 1999); *Conrad* v. *United Instruments, Inc.,* 988 F. Supp. 1223 (W.D. Wisc. 1997); *Robert E. Derecktor of R. I., Inc.* v. *U.S.,* 762 F. Supp. 1019 (D.R.I. 1991); *U.S.* v. *Dorfman,* 542 F.Supp. 402 (N.D. Ill. 1982). Legislative Recommendations Several agencies did not confine their comments to the proposed rule, but asked OGE to consider proposing legislative changes to the post-employment statute. Subsequently, OGE completed a review of the criminal conflict of interest statutes, pursuant to section 8403(d) of the Intelligence Reform and Terrorism Prevention Act of 2004, Public Law 108-458. *See* OGE, *Report to the President and to Congressional Committees on the Conflict of Interest Laws Relating to Executive Branch Employment* (January 2006), at *http://www.usoge.gov/pages/forms_pubs_otherdocs/fpo_files/reports_plans/rpt_title18.pdf.* In connection with this review, OGE solicited the views of the public with respect to possible changes to the criminal conflict of interest statutes, including 18 U.S.C. 207. *See* 70 FR 22661 (May 2, 2005); 67 **Federal Register** 43321 (June 27, 2002). OGE's evaluation of the need for legislation must be viewed as a separate undertaking from the present rulemaking, which is limited by the text of section 207 as it is currently written. OMB Circular A-76 Seven agencies, including four DOD components, submitted comments about the application of 18 U.S.C. 207 in the context of public-private competitions under Office of Management and Budget Circular A-76. *See* OMB Circular A-76, May 29, 2003, available at *http://www.whitehouse.gov/omb/circulars/a076/a76_rev2003.pdf.* In A-76 proceedings, an agency determines whether to contract out certain “commercial” (i.e., not inherently governmental) functions, after a competition between private bids and an agency tender offer based on the agency's cost estimate for performing the same function internally. The commenting agencies focused on a number of different elements of section 207(a) as they apply to A-76 proceedings: particular matter involving specific parties, *see* § 2641.201(h); same particular matter involving specific parties, *see* § 2641.201(h)(5); personal and substantial participation, *see* § 2641.201(i); and intent to influence, *see* § 2641.201(e). The central thrust of the arguments advanced by most of these agencies is that OGE should propound a “workable” interpretation of section 207 that does not interfere with the operation of the A-76 process. In particular, most of the commenting agencies were especially concerned that the interpretation of section 207 not unduly restrict affected employees, whose Government jobs may be contracted out, from going to work for a winning private bidder after those employees participated in some part of the A-76 process. Many affected employees are provided a “right of first refusal” to perform their privatized functions for the winning private bidder, *see* OMB Circular A-76, Attachment B, § D.3.a(2), and these agencies fear that this right may be eroded if significant numbers of affected employees are disqualified from performing private jobs involving communications or appearances that are deemed to be prohibited representational contacts under section 207. A related concern expressed by some of the commenters is that directly affected employees may be reluctant to participate in the A-76 process—whether by serving on the Most Efficient Organization or Performance Work Statement teams or simply by providing relevant job-related information to those teams—for fear of jeopardizing their ability to work for the winning bidder in the event that their Federal positions are eliminated. The final rule does not address issues pertaining to A-76 proceedings. For one thing, OGE did not raise this subject in the proposed rule. Moreover, the subjects are sufficiently complex and novel that OGE finds it prudent to defer any treatment, for example, to a later rulemaking or other guidance. Subpart A—General Provisions Section 2641.101—Purpose One agency commented on the note following proposed section 2641.101, now designated as paragraph
(b)of the section in this final rule, which indicates that part 2641 is not intended to address post-employment restrictions in statutes or authorities other than 18 U.S.C. 207. This agency asked that OGE maintain a list of post-employment restrictions, other than section 207, somewhere in part 2641. OGE expressly declined to propose such a list, as explained more fully in the preamble to the proposed rule. 68 **Federal Register** 7845. The commenter has not persuaded OGE that the reasons for so declining are no longer valid. OGE foresees a burden in maintaining such a list in the regulation and ensuring that it is accurate and up-to-date, which burden is not outweighed by the potential value. The commenter's suggestion that OGE could include a disclaimer in the regulation indicating that the list is not intended to be exhaustive simply underscores the risks and limitations inherent in promulgating such a list in the Code of Federal Regulations, especially in view of OGE's experience that post-employment restrictions are a relatively frequent subject of legislative action. However, OGE will consider compiling such a list and making it available to agencies and the public through the DAEOgram process. On a related topic, another agency recommended that OGE include, in example 1 following proposed § 2641.204(d), a cross-reference to the restrictions on the representational activities of current employees, under 18 U.S.C. 203 and 205. OGE has not followed this recommendation. The purpose of part 2641, and OGE's responsibility under section 201(c) of Executive Order 12731, is to provide guidance with respect to 18 U.S.C. 207, not guidance with respect to 18 U.S.C. 203 and 205. The rule cannot reasonably identify every restriction, other than section 207, that might apply to a hypothetical set of circumstances. Moreover, OGE believes that agency ethics officials may be relied upon to provide comprehensive training and counseling with respect to the entire range of ethical restrictions that may be applicable in a given situation. Section 2641.104—Definitions Employee OGE has made one change to the definition of “employee” as proposed in section 2641.104. In order to clarify that employees serving without compensation from the Government are subject to the post-employment law, OGE has added the phrase “employees serving without compensation” to the final sentence (before the parenthetical) in the definition. Former Employee Three agencies commented on the definition of “former employee” in proposed section 2641.104. OGE also received one comment concerning the treatment of the Vice President under this definition, which is discussed separately below, under “Applicability of Certain Provisions to the Vice President.” One of the agencies recommended that OGE amend example 4, in order to clarify when a special Government employee
(SGE)serving on an advisory committee becomes a former employee. Consistent with this comment, OGE is revising the example to make clear that the SGE in that example becomes a former employee when his appointment terminates, provided that there is no reappointment without a break in service. However, OGE is not adopting the commenter's suggestion that the SGE necessarily becomes a former employee immediately upon the expiration of the term of the advisory committee. Personnel appointments for SGEs could outlast the term of the committee on which they serve, and agencies sometimes may use SGEs for other expert or consultant services beyond the work of a particular advisory committee. Another agency recommended that OGE add a new example to illustrate the post-employment implications of what the agency stated was a common practice of appointing retired Foreign Service officers in civil service positions without any break in service. We have adopted this recommendation and have added a new example 6 to the definition of former employee. Additionally, we have amended the definition of “Government service” to emphasize that a period of Government service is not completed, and the individual does not therefore become a former employee, unless there is a break in service. A third agency recommended that examples 3 and 4 be amended to indicate that current Federal employees remain subject to the representational restrictions of 18 U.S.C. 203 and 205 even though they may not be former employees subject to the restrictions of 18 U.S.C. 207. We have not adopted this recommendation. Presumably, agencies already advise current employees, as appropriate, concerning their restrictions under sections 203 and 205, as well as any other applicable conflict of interest statutes or rules, and it is not the purpose of this post-employment rule to explain those requirements. Person One agency recommended that the definition of “person” be amended specifically to include Indian tribal governments. We have not made the recommended change. The definition of person in section 2641.104 emphasizes that it is “all-inclusive,” and it includes, among other things, “any other organization.” We believe that this definition is sufficiently broad to include tribal governments. Moreover, we note that similar definitions of person in other OGE regulations do not expressly address tribal governments, and we are not aware that this has created any particular difficulties. *See* 5 CFR 2635.102(k); 2638.104; 2640.102(o). Senior Employee OGE received two substantive comments concerning the definition of “senior employee,” which governs the application of the one-year cooling-off restriction of 18 U.S.C. 207(c) (described in § 2641.204). One comment was from an agency Inspector General office, which requested that OGE provide a new example addressing the effect of “Law Enforcement Availability Pay”
(LEAP)on the rate of basic pay of certain criminal investigators, for purposes of determining whether such investigators would be senior employees under 18 U.S.C. 207(c)(2)(A)(ii) and paragraph
(2)of the definition of senior employee in § 2641.104 as proposed. The commenter stated that “LEAP is not meant to ‘elevate’ a GS-14 or GS-15 supervisor into the ‘senior employee’ category” and urged OGE to determine that LEAP is not to be considered part of basic pay. We agree with the commenter that LEAP should not be viewed as part of basic pay for purposes of section 207(c)(2)(A)(ii). The statutory and regulatory provisions governing LEAP make clear that it is to be treated as part of basic pay only for certain specified purposes, which do not include the post-employment restrictions. *See* 5 U.S.C. 554a(h)(2); 5 CFR 550.186(b). We have confirmed this conclusion with the Office of Personnel Management. In view of the number of Federal investigators who may receive LEAP, we are adding a new example 3 following the definition of senior employee to provide guidance on this subject. A second agency commented that example 2 following the definition of senior employee does not adequately illustrate the fact that step increases, or their equivalent, must be considered in determining whether an employee's basic rate of pay equals or exceeds the threshold rate of basic pay for senior employee status. *See* 68 FR 7848. OGE has made no change to the rule as proposed in adopting it as final. Example 2 illustrates the point that basic pay, for pay systems employing pay bands, is the actual pay of the employee, including any periodic adjustments, not the minimum possible pay that employees in the system might receive. *See* OGE Informal Advisory Letters 98 x 2; 92 x 20. Finally, OGE has made two conforming amendments to the definition of senior employee to reflect statutory amendments to 18 U.S.C. 207(c) since the proposed rule was developed. First, a new paragraph
(6)has been added, to reflect section 209(d)(1) of the E-Government Act, Public Law 107-347, December 17, 2002, which became effective 120 days after enactment. This law amended 18 U.S.C. 207(c)(2)(A) by adding a new category of senior employee: Assignees from private sector organizations under the new Information Technology Exchange Program created by the Act. *See* 18 U.S.C. 207(c)(2)(a)(v). Second, paragraph
(2)of the proposed definition has been changed to reflect section 1125(b)(1) of the National Defense Authorization Act for Fiscal Year 2004, Public Law 108-136, November 24, 2003, which became effective on the first day of the first pay period on or after January 1, 2004. This law amended 18 U.S.C. 207(c)(2)(A)(ii) by replacing the former standard—a rate of basic pay equivalent to the former level 5 of the Senior Executive Service—with a standard based on 86.5 percent of level II of the Executive Schedule. As reflected in paragraph
(2)of the revised definition of senior employee in the final rule, the statutory amendment also provided that employees who had a rate of basic pay equivalent to level 5 of the SES on the day prior to enactment of the new law would be deemed senior employees for two years following the date of enactment. OGE also has made conforming changes to other parts of the rule that refer to the statutory pay threshold for senior employee status, including the provisions in § 2641.204(c) concerning the application of 18 U.S.C. 207(c) to special Government employees and Intergovernmental Personnel Act appointees or detailees. Section 2641.105—Advice Two commenters recommended that OGE amend proposed section 2641.105(e), concerning attorney-client privilege. They requested OGE to clarify that the Government itself still may be able to claim certain privileges, even though employees and former employees personally may not enjoy any personal attorney-client privilege with respect to information conveyed to ethics officials. OGE agrees that, although employees and former employees may not enjoy any personal attorney-client privilege with respect to their communications with ethics officials, this does not mean that the Government itself may not be able to claim its own privileges with respect to such communications. At the same time, however, OGE is concerned that nothing in the regulation should suggest that agencies may invoke attorney-client privilege in connection with an information request made by OGE. Therefore, we are modifying § 2641.105(e) in this final rule only so far as to emphasize that employees do not personally benefit from an attorney-client privilege: “A current or former employee who discloses information to an agency ethics official, to a Government attorney, or to an employee of the Office of Government Ethics does not personally enjoy an attorney-client privilege with respect to such communications.” One of the commenters also recommended that we revise proposed § 2641.105(b), concerning advice by OGE, to specify how conflicts of opinion between OGE and agency ethics officials will be resolved. We do not believe this subject is amenable to any general rule and therefore have not modified this section in the final rule. On the one hand, OGE recognizes and respects the opinions of agency ethics officials, and we start from the premise that those officials often are in a better position to obtain and understand the facts pertinent to post-employment questions involving their agencies. On the other hand, OGE cannot ignore its oversight responsibilities under title IV of the Ethics in Government Act. When differences of opinion arise, OGE must handle each case as the demands of the situation require. Section 2641.106—Applicability of Certain Provisions to the Vice President OGE received a set of comments from one commenter raising issues pertaining to the treatment of the Vice President under section 207 and the proposed rule. The commenter recommended an organizational change, which OGE has made in the final rule. This commenter recommended that OGE place all references to the application of section 207 to the Vice President in one stand-alone section in the rule. The commenter noted that the Vice President is subject only to section 207(d) and section 207(f) and recommended that a single provision governing the Vice President state this fact, without the need for any further references to the Vice President in the definitions of “employee,” “former employee,” or “very senior employee” in § 2641.104. Among other reasons, the commenter requested this change in order to avoid “the confusion that may result from straining the normal meaning of the words `employee' and `former employee' to reach (for one narrow purpose) a constitutional officer.” OGE agrees that this recommendation would add clarity. Consequently, this final rule removes the references to the Vice President in the various definitions from § 2641.104 as proposed, and adds a new § 2641.106 to the general provisions in subpart A of part 2641. Following the language proposed by the commenter, OGE has added the new § 2641.106, titled “Applicability of certain provisions to Vice President,” which reads: “Subsections 207(d) (relating to restrictions on very senior personnel) and 207(f) (restrictions with regard to foreign entities) of title 18, United States Code, apply to a Vice President, to the same extent as they apply to employees and former employees covered by those provisions. See §§ 2641.205 and 2641.206. There are no other restrictions in 18 U.S.C. 207 applicable to a Vice President.” Nevertheless, OGE has omitted one recommended phrase, which would have indicated that the Vice President is not subject to any other restriction in part 2641: For one thing, part 2641 itself does not impose any criminal restrictions, and, furthermore, there are other provisions in part 2641, for example, the sections dealing with certain exemptions or exceptions, that may be applicable to the Vice President. The same commenter also recommended a new section governing certain communications made by former employees at the request of the President or the Vice President. The recommended new section would state that whenever the President, in the performance of constitutional, statutory or ceremonial duties, requests information or advice from a former employee, the provision of such information or advice is made on behalf of the United States or on behalf of the former employee himself or herself and therefore is not prohibited by section 207. The recommended provision would apply this same standard to requests from the Vice President for information or advice, in aid of the President's functions. In support of this proposal, the commenter cited the President's “constitutionally-based right to gather information to aid the President in the performance of Presidential functions,” including the gathering of such information “through the Vice President.” OGE does not dispute the importance of the authority of the President and the Vice President to gather information in the performance of their constitutional duties. OGE also recognizes that constitutional considerations may have a bearing on post-employment issues in certain circumstances, including circumstances beyond those described by the commenter. *See, e.g., Conrad* v. *United Instruments* , 988 F. Supp. 1223, 1226 (W.D. Wisc. 1997) (first amendment); *U.S.* v. *Martin* , 39 F.Supp. 2d 1333 (D. Utah 1999) (sixth amendment). However, OGE does not believe that anything in the post-employment regulations should be viewed as determining, limiting, or otherwise addressing the scope of the constitutional authority of the President or Vice President. Such questions are beyond OGE's jurisdiction and the scope of this rule, and OGE would have to leave such questions to the guidance of the Department of Justice. Subpart B—Prohibitions Section 2641.201—Permanent Restriction Section 2641.201(d)—Communication or Appearance Five agencies raised concerns about the guidance in proposed § 2641.201(d) concerning the meaning of the statutory term “communication.” Specifically, these agencies raised questions about the concept, illustrated in example 5 to § 2641.201(d) as proposed, that a former employee can make a prohibited communication to the Government through a third party intermediary, provided that the former employee intends that the information be attributed to himself or herself. Several of these agencies also raised similar concerns about example 7 to proposed § 2641.201(f), as well as the note following proposed § 2641.205(g) and the related example 5 to proposed § 2641.205. Most of the commenters objected on the ground that these proposed provisions blurred the distinction between permissible behind-the-scenes assistance and prohibited contact with Government officials. Some also objected on the ground that the analysis, particularly in example 5 to proposed § 2641.201(d), depended too much on circumstantial evidence of the intent of the former employee that the information be attributed to himself or herself. Two agencies recommended that, if OGE were to retain any version of this third party intermediary concept, it should at least adopt a simpler standard, such as actual attribution by the third party ( *e.g.,* “Mr. A told me to tell you this”). Two other agencies also commented that the facts set out in example 4 to § 2641.201(d) as proposed—which deals with circumstances in which a former employee prepares a grant application and is listed as principal investigator—is difficult to reconcile with the result in example 5. As OGE pointed out in the preamble to the proposed rule, 68 FR 7850, 7852, 7860, the provisions cited above are based on an opinion issued by the Office of Legal Counsel, Department of Justice, Memorandum for Amy L. Comstock, Director, OGE, from Joseph R. Guerra, Deputy Assistant Attorney General, OLC, January 19, 2001 (OLC Opinion), available under “Other Ethics Guidance, Conflict of Interest Prosecution Surveys and OLC Opinions” on OGE's Web site, *http://www.usoge.gov* . Indeed, the facts of example 5 to proposed section 2641.201(d) are taken directly from the OLC Opinion, which several of the commenters acknowledged. Although we do not doubt that the OLC Opinion may make it somewhat more difficult to distinguish between permissible behind-the-scenes assistance and prohibited communications, we also think that it is more consistent with the purposes of section 207 to prohibit former employees from using third party intermediaries to make their contacts for them under circumstances in which the former employees intend to be recognized as the source of the information conveyed. *See* OLC Opinion at 5 (“any attempt to draw bright line rules would inevitably create artificial distinctions between equally pernicious types of conduct”). With respect to the concern that the circumstances in example 5 cannot sufficiently be distinguished from example 4 or other common situations in which we have said that former employees may engage in behind-the-scene activities, we believe that example 5 to section 2641.201(d) contains enough significant facts to make it clear that the former employee in that scenario does not intend to limit herself to behind-the-scenes assistance but rather intends to be identified as the real source of the communication. Accordingly, OGE has not revised the cited examples in this final rule. Finally, one agency proposed that the basic definition of “communication” in proposed § 2641.201(d)(1) should not itself contain any references to the former employee's intent that the information be attributed to himself or herself, but that additional numbered paragraphs be added to explain in more detail the relevance of attribution under different circumstances. This agency was concerned that the significance of the attribution principle might be lost on readers if it were simply folded into the basic definition of communication. OGE has not changed the definition in the final rule. For one thing, attribution is clearly part of the basic definition of communication found in the OLC Opinion. *See* OLC Opinion at 4 (“we conclude that a `communication' is the act of imparting or transmitting information with the intent that the information be attributed to the former official”). Moreover, we believe that proposed example 5 adequately illustrates the concept of attribution without further complicating the basic definition in § 2641.201(d)(1). Section 2641.201(e)—Intent To Influence OGE received nine substantive comments on the proposed treatment of the statutory element of intent to influence, including five comments from components of the Department of Defense that made similar or identical recommendations. Two agencies recommended that OGE use the word “appreciable” in various places in proposed § 2641.201(e)(2) and the accompanying examples—which illustrate situations in which intent to influence is not present—in order to emphasize, as proposed § 2641.201(e)(1)(ii) already does, that the representational activity must not merely present the “potential” for dispute but that such potential must be appreciable. Along similar lines, another agency recommended that OGE add the word “reasonably” before the proposed phrase “involves an appreciable element of actual or potential dispute or controversy” in § 2641.201(e)(1)(ii), which describes the basic concept of intent to influence. OGE has not adopted either recommendation in this final rule. The word “appreciable” already appears in the provision that defines the basic concept of intent to influence, § 2641.201(e)(1)(ii), and we think it is unnecessary to repeat the entire definition of intent to influence in every subsequent discussion. Furthermore, we think that insertion of the word “reasonably” would add little to the concept of “appreciable element of actual or potential dispute or controversy,” because the ordinary meaning of “appreciable” sufficiently limits the intended scope of the phrase. *See* Webster's Third New International Dictionary 105
(1986)(appreciable means “capable of being perceived and recognized”). Two agencies commented on proposed § 2641.201(e)(2)(vi), which recognizes certain circumstances in which there is no intent to influence during the course of a routine Government site visit to non-Federal premises used by actual or prospective contractors or grantees. Both agencies recommended that the provision not be limited to non-Federal premises, in recognition of the fact that many Government contracts are performed in Government space. OGE has not adopted this recommendation either. Section 2641.201(e)(2)(vi), both as proposed and in this final rule, restates a provision that has been in the prior section 207 regulations, in virtually the same form, for over two decades. *See* 5 CFR 2637.201(b)(4). This provision was intended to cover communications “strictly for the Government's convenience” given the practical realities of site visits. OGE Informal Advisory Letter 81 x 35. Government officials who have gone to the effort to conduct a routine site visit should not have to worry about cutting short their trip or curtailing their activities simply because they happen to encounter a former employee at the site. Where performance of the contract is to occur on Government premises, however, the Government's practical interests in scheduling site visits are not implicated. Moreover, where the former employee is present on Government premises on an ongoing basis to perform the contract, one can envision more potential for a wider range of communications than would be the case in an occasional site visit. Of course, the fact that a particular set of circumstances may not fall directly within one of the specific types of situations identified in the regulations as involving no intent to influence does not mean that the element of intent to influence is necessarily present. The situations addressed in § 2641.201(e)(2) are not intended to be exclusive, and other situations must be addressed in light of all the relevant facts. Another agency commented on § 2641.201(e)(4) of the proposed rule, which provides guidance on when an employee's mere “appearance,” even in the absence of a substantive “communication,” can be viewed as involving an intent to influence the Government. This commenter objected that the rule was too vague because it simply lists a set of factors that may be considered on a case-by-case basis, rather than a definitive set of circumstances that must be present for the statute to be implicated. OGE does not agree that interpretive guidance is fatally vague just because it provides factors to be considered in light of the totality of the circumstances. With a statutory concept such as intent to influence, any analysis unavoidably must involve the particularized consideration of all the relevant facts. *See, e.g., United States* v. *Schaltenbrand* , 930 F.2d 1554, 1560-61 (11th Cir. 1991) (reviewing entire record to determine whether former employee could be said to have acted as agent of contractor in meeting with Government). Therefore, this section has not been modified in the final rule OGE is now promulgating. Finally, six commenters, including five DOD components, commented on the application of proposed section 2641.201(e) to communications made by former employees during the course of performing a Government contract. The five DOD components made substantially similar proposals to exclude from the concept of intent to influence all communications required in order to perform a Government contract. All of the commenters on this subject indicated that the Government sometimes needs to hear the expert advice of former employees with respect to contracts in which they participated as a Government employee, even though the former employees may have gone to work for contractors on the same contract in which they participated personally and substantially for the Government. (Apart from issues under the intent to influence element, the subject of contacts made during the performance of contracts also raises issues under the “on behalf of another person” element, *see* § 2641.201(g), and the exception for communications on behalf of the United States, *see* § 2641.301(a), both of which are discussed below.) Some of the commenters specifically mentioned the prospect of increasing privatization of Government functions, for example, through public-private competitions under OMB Circular A-76, which may result in increasing numbers of former Government employees working for Government contractors on projects in which the former employees had prior Government involvement. OGE has dealt with similar questions many times over the years in published letters and other informal advice. For example, in OGE Informal Advisory Letter 99 x 19, we concluded that, although certain routine or ministerial communications made during contract performance may lack the requisite intent to influence, many contract performance communications may involve the potential for improper influence because the contractor and the Government have potentially differing views or interests with respect to the matter being discussed. *See also* OGE Informal Advisory Letter 03 x 6. The fact that a particular Government contract may require certain communications between the Government and the contractor does not eliminate this problem, as we noted in an early OGE advisory letter: “The very terms of the contract between [the Department] and [the Corporation] require communications between the two entities. Their personnel must confer on the terms of subcontracts which [the Corporation] has authority to recommend or award depending on the size of the subcontract. These communications, contractually appropriate, would become legally prohibited in most instances * * * if [the former employee] should perform these services for [the Corporation]. The purpose of the post-employment provisions is to avoid the `revolving door' syndrome inherent in which are the potentialities for the use of inside information and for continuing personal influence.” OGE Informal Advisory Letter 81 x 35; *see also* OGE Informal Advisory Article 95 x 10; 2 Op. O.L.C. 313 (1978). We also think it is significant that two related statutes, unlike section 207, contain express exceptions for certain representational activity during the performance of Government contracts. Sections 203 and 205 of title 18, which were enacted originally as part of the same legislation as section 207, expressly exempt certain representational activity “in the performance of work under a grant by, or a contract with or for the benefit of, the United States.” 18 U.S.C. 203(e), 205(f). These provisions indicate that Congress knew how to exempt, explicitly, representational activity in the performance of contracts. Perhaps more telling, these provisions also indicate that Congress carefully imposed very significant limitations and safeguards when it did choose to exempt such activity. *See* section 203(e) (applicable only to special Government employees; requires certification from agency head that activity is in national interest; requires publication of certification in **Federal Register** ); section 205(f) (same). It is difficult to believe that Congress would have intended a broad exclusion in section 207 without even mentioning the subject, let alone without imposing any limits on the circumstances under which such activity would be permitted. The proposition that Government contractors may have their own interests in recommending certain courses of action as opposed to others should not be surprising. This concern is even illustrated by newspaper headlines. *See* Ariana Eunjung Cha, *Shuttle Safety* vs. *Profit: Contractors Had `Potential' Conflict* , Washington Post, August 27, 2003, at A13. In some cases, for example, it may be more efficient or economical for a contractor to develop and communicate one option for the Government, even though the Government's interests might best be served by a fuller development of a range of alternatives, as discussed in example 5 following § 2641.201(e)(2). In any event, as we indicated in advisory opinion 99 x 19, this is not a subject with respect to which OGE can or should make broad pronouncements of safe harbor in the abstract. Therefore, we decline to include a broad exception for all communications required in the course of performing Government contracts and are not modifying this section in the final rule. We note, as we did in the preamble to the proposed rule, that some contract performance communications may well fall within other categories described in § 2641.201(e)(2), as illustrated by examples 3 and 7. *See* 68 **Federal Register** at 7850. Several commenters, recognizing that OGE might not be in a position to read a broad exclusion for contract performance communications into the statute, asked that OGE at least consider seeking legislation that would create an exception. OGE appreciates these comments and in fact has considered the merits of similar proposals in the context of the agency's review of the effectiveness of the conflict of interest statutes, which is discussed above under “Legislative Recommendations.” Finally, in this final rulemaking OGE has made minor changes to example 1 following section 2641.201(e)(3), in order to better illustrate the concept that changes in circumstances during the course of an originally permissible communication or appearance may render further contact impermissible. Section 2641.201(f)—To or Before an Employee of the United States One agency objected to the conclusion, in example 7 following proposed § 2641.201(f), that a communication conveyed to a Federal employee through an intermediary who is not a Federal employee would be covered by 18 U.S.C. 207. This issue is addressed above, under “Section 2641.201(d)—Communication or Appearance,” in the discussion of communications through a “third party intermediary.” OGE would add only that the idea of communications conveyed by means of another person is quite commonplace, as people routinely convey instructions or requests through a messenger of one kind or another. Therefore, OGE has not followed this agency's recommendation to revise example 7 in the final rule. For similar reasons, OGE does not believe it is necessary, as suggested by this agency and another commenter, to add a reference to third parties in the text of § 2641.201(f)(2), especially as example 7 amply illustrates the concept. It should be remembered also that the definition of “communication,” in § 2641.201(d)(1), expressly requires an intent on the part of the former employee that the message be attributed to himself or herself, and example 5 following that provision illustrates this attribution principle in the context of a communication through a third party. One agency also recommended that example 7 be revised to emphasize that the communication must not only be directed to, but also received by, an agency employee. OGE does not believe this change is necessary either. The basic description of the statutory element, in § 2641.201(f)(2), both as proposed and now final, already uses the language “[d]irected to and received by,” and the facts recited in example 7 make clear that the information was conveyed to “the project supervisor, who is an agency employee.” The same agency thought that proposed § 2641.201(f), which includes contacts with independent agencies in the legislative and judicial branches, was inconsistent with the definition of “agency” in § 2641.104, which does not include such legislative and judicial agencies. OGE does not believe that the provisions are inconsistent or should be revised. Although the definition of “agency” in proposed and now final § 2641.104 excludes agencies in the legislative and judicial branches, the relevant provision in § 2641.201(f)(1) expressly covers more than an agency as defined in § 2641.104: In subparagraph (i), it includes any “Agency,” but in subparagraph
(ii)it also includes any “Independent agency in the * * * legislative, or judicial branch.” This is necessary in order to emphasize that representational contacts with independent agencies of the legislative or judicial branches are covered by section 207, which is the point of subparagraph (ii). *See* 5 Op. O.L.C. 194
(1981)(related statute, 18 U.S.C. 205, covers representational contact with agencies of legislative branch). Another agency commented that example 3 following § 2641.201(f) as proposed should state that the former employee in that scenario knows that one of the persons to which she is directing her communications is a Government employee. The agency stated that the example as written does not account for the knowledge element in section 207(a). OGE has not followed this recommendation. As discussed elsewhere, it is not OGE's intent to illustrate every element of the statute in each example in the rule, as this would be impractical and would detract from the focus of the examples on individual elements. Moreover, OGE has not attempted to define the general scienter element in any of the prohibitions in section 207. Questions about whether a particular representational activity involves the requisite degree of scienter to warrant prosecution are usually addressed to the Department of Justice. Finally, in this final rule OGE has made minor modifications to two examples following § 2641.201(f) as proposed. OGE has modified example 5 for reasons discussed below under “Treaties and Trade Agreements.” OGE also has modified example 6 by coordinating it with the facts of the previous example, which not only illustrates the relationship among subparagraphs (i), (ii), and
(iii)of § 2641.201(f)(3), but also avoids extraneous issues pertaining to base closure decisions. Section 2641.201(g)—On Behalf of Any Other Person One agency recommended that OGE create an “exception” in proposed § 2641.201(g) to permit former employees to make certain contacts during the performance of a Government contract. According to this agency, a former employee who is now employed by a Government contractor should be permitted to make communications and appearances before the Government during the performance of the contract, provided that the contractor exerts no control over the former employee in the making of the communication or appearance. Under such circumstances, the commenter thought “it is at least arguable that the communication is not made on behalf of” the contractor. OGE has not followed this recommendation in the final rule. A contractor's employee is fulfilling his or her duties as an employee when performing the work of the contractor. Under such circumstances, OGE cannot avoid the conclusion that the contractor's employee is acting on behalf of his or her employer. *See, e.g.* , Restatement of the Law (Second) Agency section 2(2)
(1958)(servant is agent employed by master to perform service in his affairs whose physical conduct in performance of service is controlled or is subject to right to control by master); *id.,* comment a (servant is species of agent). Another agency recommended that OGE revise example 3 following proposed section 2641.201(g) in order to emphasize that it is primarily the element of “control” by another that is lacking. OGE agrees and has amended the final sentence in the example in the final rule accordingly. Section 2641.201(h)—Particular Matter Involving Specific Parties Basic Concept OGE received seven comments on proposed § 2641.201(h)(1), which articulates the basic statutory concept of “particular matter involving specific parties.” Six agencies objected to the use of the phrase “activity or undertaking” in the last sentence of paragraph (1): “These matters involve a specific activity or undertaking affecting the legal rights of the parties or an isolatable transaction or related set of transactions between identified parties, such as a specific contract, grant, license, product approval application, enforcement action, administrative adjudication, or court case.” These commenters perceived this phrase as an expansion beyond the settled understanding of the scope of the concept of particular matter involving specific parties. As one commenter pointed out, the corresponding provision in the old post-employment regulations lacks this phrase and instead reads: “Such a matter typically involves a specific proceeding affecting the legal rights of the parties or an isolatable transaction or related set of transactions between identifiable parties.” 5 CFR 2637.201(c)(1). In the view of these commenters, the proposed rule reflects a shift in focus from specific “proceedings” to a more expansive, and less well-defined, category of “activities or undertakings.” It was not OGE's intention to expand, narrow, or otherwise alter the accepted meaning of a statutory concept that has been fundamental not only to section 207 but also to many other provisions in the conflict of interest laws and ethics regulations for many years. However, in order to dispel any possible confusion concerning the intent of the rule, OGE is replacing the phrase, “involve a specific activity or undertaking,” with the language found in the former post-employment regulations (as well as in OGE's current financial conflict of interest regulations at 5 CFR 2640.102(l)): “typically involves a specific proceeding.” Nevertheless, in making this change, OGE emphasizes that it does not necessarily agree with several commenters who argued that the statutory definition of “particular matter,” in 18 U.S.C. 207(i)(3), was intended to limit the application of section 207(a) to those types of matters that are specifically enumerated in that statutory definition. Nothing in the legislative history of the Ethics Reform Act of 1989, which added the definition, suggests any intent to contract the scope of section 207(a). More important, the definition starts with the phrase “the term `particular matter' *includes* * * *” 18 U.S.C. 207(i)(3) (emphasis added). The word “includes,” in a statutory definition, is usually a term of enlargement, rather than limitation, and indicates that other items are includable even if not specifically enumerated. *See* Norman J. Singer, *Sutherland on Statutory Construction* 231 (2000). Four commenters also raised issues concerning the relationship between the concept of particular matter involving specific parties and the broader concept of “particular matter.” These commenters made several related points: The treatment of particular matter involving specific parties should not be more expansive than the statutory definition of particular matter in 18 U.S.C. 207(i)(3); OGE should not mix the concept of particular matter with the narrower category of particular matters involving specific parties; and the rule should make clear that general policy matters are not covered by the concept of particular matters involving specific parties. Although OGE understands these concerns, some of the commenters' proposals appear mutually inconsistent. For example, if OGE is to ensure that the description of particular matters involving specific parties is no broader than the statutory definition of “particular matter” in section 207(i)(3), it must somehow incorporate that statutory definition into the regulatory definition of particular matter involving specific parties. That is why the second sentence in paragraph (h)(1) begins with the definition of particular matter found in section 207(i)(3). However, in order to emphasize that this statutory category of particular matters is further narrowed by the addition of the phrase “involving a specific party or parties” in section 207(a), the second sentence of § 2641.201(h)(1), goes on to state that “such particular matters *also* must involve a specific party or parties in order to fall within the prohibition” (emphasis added). By drafting the rule in this way, it was OGE's intent to remain faithful to the statutory definition of “particular matter” while at the same time pointing out that the phrase is further limited when used in section 207(a) because of the additional requirement that the particular matter involve specific parties. Furthermore, OGE thinks it unlikely that readers might be misled to think that policy matters of general applicability would be covered by section 207(a), because the very next paragraph is pointedly titled “Matters of general applicability not covered,” and it expressly excludes “[l]egislation or rulemaking of general applicability and the formulation of general policies, standards or objectives, or other matters of general applicability.” § 2641.201(h)(2). In response to one comment specifically objecting to the use of the term “rulemaking” in paragraph (h)(1), OGE notes, first, that the statutory definition in 18 U.S.C. 207(i)(3) itself uses this word, and, second, that it has long been accepted that certain rulemakings, although rare, may be so focused on the rights of specifically identified parties as to fall within the ambit of section 207(a), even though most rulemaking proceedings are matters of general applicability beyond the scope of section 207(a). *See* OGE Informal Advisory Letter 96 x 7, n. 1. In response to all of the comments noted above, however, OGE has made one change in the final rule in order to emphasize the “specific party” limitation: the second sentence of paragraph (h)(1), while still starting with the broader statutory definition of “particular matter,” goes on to specify that “only” those particular matters that involve specific parties are covered by section 207(a)(1). Treaties and Trade Agreements One agency, whose comment was expressly endorsed by another agency, commented on proposed example 3 following § 2641.201(h)(1), which concludes that a treaty between the United States and a foreign government is a particular matter involving specific parties. See also proposed example 5 to § 2641.201(f); proposed example 1 to § 2641.202(j) (official responsibility for a class of treaty negotiations). The commenter objected that example 3 as proposed implies that all treaties are particular matters involving specific parties, even though treaties may involve the adoption of broad national policies that do not focus on the rights of any specific individual or non-sovereign organization. The basic argument is that treaties often are more analogous to legislation and rulemaking of general applicability, which are not particular matters involving specific parties, than to contracts, which are. Although not the focus of this comment, international trade agreements also raise similar concerns, and OGE did receive one comment from another agency, after the close of the comment period, recommending that OGE change the analysis in proposed example 3 as it would apply to international trade agreements. The conclusion in proposed example 3 is based largely on a 1979 opinion issued to the Department of State by the Office of Legal Counsel. *See* 3 Op. O.L.C. 373 (1979). This opinion, which held that the Panama Canal Treaty was a particular matter involving specific parties, expressly rejected the argument that treaties are more analogous to legislation and general rulemaking than to contracts: “Unlike general legislation or rulemaking, treaties are intended to affect specific participating parties, namely their signatories. In form, treaties closely resemble contracts, which are expressly covered by the statute. They are signed after the type of quasi-adversarial proceedings or negotiations that precede or surround the other types of `particular matters' enumerated in section 207(a). The phrase `involving a specific party or parties' has been read to limit the section's concern to `discrete and isolatable transactions between identifiable parties.' * * * Such a characterization aptly describes the treaty negotiation process.” *Id.* at 375. Relying on this same analysis, OGE later published an opinion concluding that “bilateral trade agreements,” like bilateral treaties, normally are to be viewed as particular matters involving specific parties. *See* OGE Informal Advisory Letter 90 x 7. The commenting agency, however, adduces arguments which it suggests may not have been considered in the 1979 OLC opinion. The agency contends that treaties have a status under international law akin to the status of domestic legislation, in that treaties are the “primary way of creating international legal regimes,” in the absence of any international legislative body comparable to the U.S. Congress that could create international legislation. The agency also points out that the U.S. Constitution expressly recognizes the status of treaties as a source of law equivalent to Federal legislation: “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the Supreme Law of the Land * * *.” United States Constitution, Art. VI, cl. 2. In this connection, OGE's own examination indicates that courts have long held that treaties are on the same footing with Federal legislation and in fact supersede prior acts of Congress. *See* *Foster* v. *Neilson* , 27 U.S. 253 (1829); *Whitney* v. *Robertson* , 124 U.S. 190 (1888); *Alvarez y Sanchez* v. *U.S.* , 216 U.S. 167 (1910). Finally, the agency cites a more recent unpublished OLC opinion, which concluded that certain deliberations, decisions and actions (including discussions with foreign governments) in response to the 1990 invasion of Kuwait by Iraq were not “particular matters.” Based on these arguments, the agency maintains that treaties should at least be evaluated on a case-by-case basis to determine whether they are particular matters involving specific parties. Although this commenter did not suggest specific criteria for making such determinations, OGE believes it is possible to articulate criteria that could be applied on a case-by-case basis. For example, one might argue that treaties that are narrowly focused on specific properties or territories are more closely akin to contractual exchanges of property. *Cf.* OGE 96 x 7 (although rulemaking usually does not involve parties, rule establishing health and safety standards for operations at a specific site was party matter). Arguably, this was the case with the Panama Canal treaty itself. By contrast, treaties addressing more general sovereign requirements, such as extradition procedures, might be viewed as more akin to general legislation. In the case of trade agreements, we believe that similar considerations can apply. Some trade agreements, such as the Uruguay Round Agreements under the auspices of the General Agreement on Tariffs and Trade, may be “adopted by the passage of implementing legislation by both Houses of Congress, together with signing by the President.” Opinion of Walter Dellinger, Assistant Attorney General, Office of Legal Counsel, November 22, 1994, available at *http://www.usdoj.gov/olc/gatt.htm* . In determining whether trade agreements are more akin to legislation of general application than to contracts, OGE thinks that relevant criteria could include such factors as whether the agreement addresses a wide range of economic sectors and issues. In this connection, OGE notes the difficulties that some agency ethics officials have experienced in the past in determining whether such matters as the various phases of World Trade Organization negotiations over a wide range of subjects are particular matters involving specific parties and, if so, how to define the scope or limits of any such matters. These matters often involve multi-faceted discussions among representatives of numerous countries in a decision-making process that more closely resembles legislative policymaking than contracting. Therefore, OGE is adding a new sentence, at the end of § 2641.201(h)(2) of the final rule, to provide guidance with respect to international agreements between sovereigns, such as treaties and trade agreements. In this final rule, OGE has moved proposed example 3 following § 2641.201(h)(1) to be a new example 7 following § 2641.201(h)(2), and the example text has been revised to follow more closely the facts in the OLC Panama Canal opinion. OGE also has added new example 8 following § 2641.201(h)(2) and has made related revisions to example 5 following § 2641.201(f) and example 1 following § 2641.202(j). Parties During Preliminary or Informal Stages Three agencies commented on the proposed guidance in § 2641.201(h)(4) concerning when a particular matter first may be said to involve specific parties. The comments particularly concerned the discussion of contracts in the last sentence of proposed paragraph (h)(4), as well as examples 4 and 5. The proposed rule stated that matters such as contracts “ordinarily” involve specific parties when expressions of interest are first received by the Government, but that, “in unusual circumstances,” a prospective contract may involve specific parties even earlier “if there are sufficient indicia that the Government has specifically identified a party.” Two agencies objected that this provision and the accompanying examples do not provide adequate guidance as to what might constitute “sufficient indicia” that the Government has identified parties prior to the expression of interest by those parties. These agencies believed that ethics officials and others would be led to conclude that a potential contract involves specific parties virtually any time the Government has conducted purely internal discussions about the possibility that a particular potential contractor might be particularly qualified to perform the work. In the view of these commenters, it will often be the case that the Government can identify potential contractors who might bid and who might be particularly well-qualified, and thus the “ordinary” rule that the Government must receive expressions of interest would be swallowed by the exception. Another agency indicated that sole source procurements are a good example of a contract that might be said to involve specific parties even before an expression of interest is received. Along the same lines, another agency suggested that internal discussions about a potential sole source procurement would be a clearer example than proposed example 5 of a situation where specific parties have been identified prior to any expression of interest by a prospective contractor. OGE did not mean to suggest in the proposed rule that parties are involved in a potential contract merely because the Government might be able to identify potentially qualified bidders in advance. OGE intended, in proposed example 5, to provide a number of factors indicating that a particular potential contractor was more directly involved because of work on a prior contract that is “intimately related” to the potential new contract. OGE recognizes, nonetheless, that the provision may be difficult to apply. Consequently, OGE is making two changes to the proposed rule in this final rulemaking. First, OGE is replacing proposed example 5 with a new example that deals specifically with a sole source procurement, which is determined to be a matter involving specific parties even prior to any expression of interest on the part of the prospective sole source contractor being considered internally by the Government. Second, OGE is making minor revisions to the last sentence of § 2641.201(h)(4) as proposed, in order to refer to sole source procurements, as well as other procurements (and prospective grants and agreements) in which the Government explicitly may identify a specific party prior to the receipt of a proposal or expression of interest. By making these changes, OGE does not mean to suggest that a sole source procurement is necessarily the only set of circumstances in which specific parties may be identified prior to an expression of interest in the contract, but it is probably the one most often encountered. Same Particular Matter Involving Specific Parties Eight agencies commented on proposed § 2641.201(h)(5), which provides guidance on determining whether two particular matters involving specific parties are the same. Five DOD agencies raised related questions concerning the treatment of multi-contract programs. By “multi-contract program,” the commenters appear to mean a large Government program, such as the development of a new generation of military aircraft, that is supported by a number of contracts to develop discrete aspects of the project, such as separate contracts to develop the engine, body, electronics, etc. In the view of these agencies, each of the separate contracts should be viewed as a separate particular matter involving specific parties, rather than simply as parts of the same project, viewed as one comprehensive particular matter involving specific parties. Depending on how the project is structured, OGE agrees with this point. OGE does not necessarily equate “Government program” with “particular matter involving specific parties.” For one thing, some Government programs are not even, in and of themselves, particular matters involving specific parties. For example, a Government program to understand the causes of a particular disease is not, in and of itself, a particular matter involving specific parties, even though the program may involve several grants, contracts or cooperative agreements all designed to support or implement different aspects of the overall program. *See, e.g.* , OGE Informal Advisory Letter 80 x 9; 5 CFR 2637.201(c)(1) (example 4). Furthermore, OGE generally views separate contracts as being separate particular matters involving specific parties, absent either some indication that one contract directly contemplated the other contract or other circumstances indicating that both contracts are really part of the same proceeding involving specific parties. *See id.* ; 5 CFR 2637.201(c)(4) (example 1). Although a number of commenters raised questions about whether OGE's 2002 Yucca Mountain opinion has opened the door to a general “doctrine of convergence,” whereby multiple contracts in support of a Government project can be viewed as being merged into a single “super contract,” OGE does not agree with that interpretation of the opinion: We concluded there that all of the contracts in that case were in support of one adjudicatory proceeding, and work produced under those contracts was directly involved in the ensuing adjudication, such that former employees who participated personally and substantially in the support contracts could not be permitted to represent private parties in the adjudication. *See* OGE Informal Advisory Letter 02 x 5, at 9 and n. 7. Not only did Yucca Mountain involve a very unique set of circumstances, but nothing in that opinion indicates that separate contracts must be viewed as being part of the same particular matter involving specific parties where those contracts are not directly in support of the same proceeding involving specific parties. Nevertheless, it is not clear from the examples proffered by the commenters exactly what the relationship is between the separate contracts involved in the particular Government programs. If, for example, the so-called “super contract” is a prime contract involving oversight of several subcontracts, it could be problematic to view the subcontracts as being separate particular matters from the prime contract, depending on the circumstances. *Cf.* OGE Informal Advisory Letter 82 x 2. Because the exact scenarios are not specified, and the same particular matter determination would have to depend on an examination of the circumstances of each situation, OGE does not believe this area is ripe for any general standard in the post-employment regulations at this time. However, in response to a related comment from another agency, OGE is making one change in the final rule. This commenter recommended that OGE add a new sentence at the end of proposed § 2641.201(h)(5) indicating that new contracts generally will be viewed as being separate particular matters from each other. The same agency also recommended the addition of an example illustrating that a new contract, even if awarded to an existing contractor with no major changes to the prior contract, is a new particular matter. OGE generally agrees with this recommendation. Therefore, OGE has reorganized § 2641.201(h)(5) in this final rule by designating the first part of the text as proposed, dealing with the same particular matter generally, as new subparagraph
(i)and by creating a new subparagraph (ii), emphasizing several considerations especially relevant in the case of contracts and other agreements. The new subparagraph adds, among other things, the following: “Generally, successive or otherwise separate contracts (or other agreements) will be viewed as different matters from each other, absent some indication that one contract (or other agreement) contemplated the other or that both are in support of the same specific proceeding.” OGE thought it necessary to include the qualifying clause at the end of the latter sentence because OGE has encountered various situations in which an initial contract contemplated additional contracts, *see* OGE 80 x 9, one contract was in support of agency operations in connection with another contract, *see* OGE 99 x 19, or successive support contracts were deemed inseparable from the same underlying adjudication, *see* OGE 02 x 5. We also agree that a new example 2 illustrating the more typical “successive contract” question would be helpful, and we are including the recommended example in the final rule, with certain modifications. The new subparagraph
(ii)also addresses another related issue that was raised by several commenters: The treatment of what some have called “umbrella” contracts, which involve multiple task orders or delivery orders placed against an existing contract. Several DOD agencies referred to the procurement mechanism for indefinite delivery contracts, outlined in the Federal Acquisition Regulation at 48 CFR 16.500-16.506, as one example. As described by these agencies, such contracts often involve a “broad scope of work encompassing a wide geographical area.” Under such contracts, according to these agencies, “the general nature of the work ( *e.g.* , environmental remediation) and contract terms will remain the same,” while “the precise timing, quantity, location, and specific performance of the work may vary from delivery order to delivery order.” In at least some cases, the actual scope of work under the task or delivery orders is separately negotiated by different agency offices with different needs, sometimes even with multiple contractors competing for work under the same task or delivery order. In response to these comments, OGE has added subparagraph (ii)(c) to the final version of § 2641.201(h)(5). This provision states OGE's general view that a contract is almost always a single particular matter involving specific parties. However, the provision recognizes that, in compelling circumstances, an umbrella contract may be of such magnitude and cover such a large scope of work that it could be divided into individual particular matters involving specific parties. Accordingly, the provision acknowledges that agencies may determine that such a contract is divisible into separate particular matters involving specific parties where articulated lines of division exist. The regulation lists various considerations for agencies to take into account when applying the previously described factors in determining whether two particular matters involving specific parties are the same. These agency determinations may be made in consultation with OGE and, if more than one agency is involved, other affected agencies. OGE wants to emphasize that the treatment of certain large umbrella contracts under this rule is a special case, owing to the use of distinct task or delivery orders that sometimes can involve very different circumstances. In this connection, it is also relevant that individual task or delivery orders sometimes are viewed as having the attributes of contracts in and of themselves. *See, e.g.* , Comptroller General Decisions B-278404.2
(1998)(task orders are “contracts” within the overall contract, under the FAR definition of contract at 48 CFR 2.101); B-277979
(1998)(delivery order is a “contract” under FAR definition of contract). Therefore, nothing in this provision should be taken as authority for dividing contracts generally, or for dividing other kinds of particular matters involving specific parties, such as lawsuits or enforcement actions. New examples 7 and 8 have been added to § 2641.201(h)(5) of the final rule to illustrate situations in which it would be justifiable for an agency to make the determination that an umbrella contract should be divided into individual particular matters involving specific parties. Example 7, the substance of which was taken from submitted comments, also includes a caution that anyone participating personally and substantially in the overall contract will be deemed to have also participated personally and substantially in all particular matters involving specific parties that result from an agency determination to divide such contract. The basis for this conclusion is that each task or delivery order is subject to the terms and conditions of the overall contract. *See, e.g.* , 48 CFR 52.216-18. Three agencies proposed identical language for a new example to illustrate that a contract “may become a different particular matter involving specific parties as a result of changes in the work to be performed under the contract, not as a result of a specific milestone, such as a contract modification.” OGE has not made the recommended change in the final rule. OGE already has provided several “contracting” examples following § 2641.201(h)(5). The examples cannot illustrate every type of contract issue that may arise under that section, nor are those examples that are included intended to be exhaustive. Another agency proposed a fact-specific and agency-specific example to illustrate when two proceedings related to antitrust issues are to be viewed as the same particular matter. Again, OGE believes that an additional example is unnecessary at this time, in view of the relatively large number of examples already included. One agency recommended that re-numbered example 6 (proposed example 5), which concerns the relationship between certain wiretap applications and subsequent prosecutions, be rewritten with the assistance of the Department of Justice in order to make the example more clear and detailed. OGE has not changed the example. This example, in its present form, has been in the prior post-employment regulations for over two decades, and we are not aware that it has created any particular difficulties during that time. *See* 5 CFR 2637.201(c)(4) (example 2). Moreover, the prior post-employment regulations, like the present regulations in part 2641, were developed in consultation with the Department of Justice. *See* 5 U.S.C. app. section 402(b)(2); Executive Order 12731, section 201(c) (1990); 5 CFR 2637.101(b). Also in connection with example 6, we note that another agency recommended that OGE provide a new example following proposed § 2641.201(h)(3) to illustrate that the same parties need not always be present for a matter to be deemed the same particular matter involving specific parties. We believe that example 6 to § 2641.201(h)(5) already illustrates this point, and, in fact, the example recommended by this agency is very similar to example 6. Therefore, we are not including the recommended new example in the final rule. Section 2641.201(i)—Personal and Substantial Participation OGE received several comments on aspects of the proposed provision dealing with personal and substantial participation. One agency thought it was potentially confusing to include the phrase, “to purposefully forbear in order to affect the outcome of a matter,” in the definition of participation. *See* proposed § 2641.201(i)(1). The agency thought that this language might suggest that every act of forbearance, including recusal from a matter, could constitute personal and substantial participation in a matter. OGE has not changed the text of proposed § 2641.201(i)(1) in adopting it as final. For one thing, the prior post-employment rule had similar language concerning the subject of inaction, and we are not aware that this language created any particular confusion over the last two decades. *See* 5 CFR 2637.201(d)(3). Moreover, the proposed rule makes clear that definition includes only “purposeful” forbearance with the object to “affect the outcome of the matter,” which plainly does not include every kind of inaction. OGE also does not believe that such purposeful forbearance reasonably can be confused with recusal, as the latter constitutes the removal of the employee from a matter, whereas the former involves intentional inaction in order to affect a matter to which an employee remains assigned. At the recommendation of this agency, however, OGE has provided a new example to this section in the final rule to illustrate what is meant by purposeful forbearance to affect the outcome of a matter. New example 7 pertains to the director of an office who must personally sign off on every application for a certain type of agency assistance. A particular application comes across her desk, but she intentionally takes no action on it because of her belief that the application may raise difficult policy concerns for her agency at this time. As a consequence of her inaction, resolution of the application is deferred indefinitely. The example concludes that the employee has participated personally and substantially in the matter. Another agency commented that example 2 following proposed § 2641.201(i) did not contain sufficient facts to support the conclusion that the attorney in that scenario, who provided advice concerning discovery strategy in a lawsuit, participated substantially in that matter. OGE does not believe that further detail is needed and has not modified the text of the example in this final rule. Advice concerning discovery strategy requires the exercise of discretion and professional judgment and does not concern an aspect that is merely peripheral to a lawsuit, but rather pertains to an integral and important part of the litigation process. One agency commented on example 4, which concludes that a supervisor did not participate in any particular matter merely by checking on the status of a subordinate's work on all matters of a certain type without commenting on any particular matter. The agency recommended that OGE state more specifically that the supervisor did not participate “substantially” in any particular matter. OGE agrees that the agency's recommendation more fully describes the application of the statutory element and has revised the wording of the example accordingly. Section 2641.201(j)—U.S. Is Party or Has Direct and Substantial Interest One agency commented on OGE's proposed treatment of what it means for the United States to have a direct and substantial interest. This agency stated that it frequently must advise former employees concerning representational activity in various antitrust proceedings and that it has found the example dealing with antitrust proceedings in the prior post-employment regulations to be particularly helpful. *See* 5 CFR 2637.201(c)(5) (example 1). The agency noted that the proposed rule did not include this example and requested that OGE restore the example to § 2641.201(j). OGE agrees that the particular example from the old post-employment regulations is useful, not only for the reasons stated by the commenter, but also because it illustrates circumstances in which an agency can be said to have a direct and substantial interest in a matter involving purely private parties, which is a question that arises periodically. *See* OGE Informal Advisory Letter 94 x 7 (relying on example 1 to 5 CFR 2637.201(c)(5)). Therefore, OGE is adding this example to the final rule. Section 2641.202—Two-Year Restriction Concerning Matters Under Official Responsibility Four agencies commented on proposed § 2641.202, interpreting 18 U.S.C. 207(a)(2), the two-year restriction on representation of others in connection with a particular matter involving specific parties with respect to which the former employee had official responsibility. One agency commented on example 7 following proposed § 2641.202(j), which illustrates when an employee temporarily acting as head of an office does not acquire official responsibility for all matters pending in the office. This commenter recommended that OGE add an additional scenario to the example, positing that the acting official actually assigned a matter to a subordinate during this period of temporary service. OGE has not made this change in the final rule, as it would raise complicated questions, extraneous to the purpose of the example, concerning whether, or under what factual circumstances, the assignment of work might constitute personal and substantial participation, not just official responsibility. Another agency objected that example 4 following proposed § 2641.202(j) is not a good illustration of the knowledge requirement in section 207(a)(2), which is set out in proposed § 2641.202(j)(7). The same agency also recommended that the basic definition of “official responsibility” in proposed § 2641.202(j)(1) should specify that nonsupervisory employees have no official responsibility for their own work. Example 4 was not intended to address the issue of knowledge of one's official responsibility, and, in fact, makes no reference to this subject. Moreover, § 2641.202(j)(1) already does state that “[a] nonsupervisory employee does not have official responsibility for his own assignments within the meaning of section 207(a)(2).” A different agency objected to the latter provision and found it illogical to say that a nonsupervisory employee does not have official responsibility for his or her own assignments. OGE does not agree with this comment. As described by the Senate Judiciary Committee in connection with the 1962 act, the rationale for the restriction is that there is “a distinct possibility of harm to the Government when a *supervisory employee* may sever his connection with it one day and come back the next seeking an advantage for a private interest in the very area where he has just had *supervisory functions* .” S. Rep. 2213, 87th Cong., 2d Sess., 1962 U.S.C.C.A.N. 3861 (emphasis added). The proposed rule, by limiting “official responsibility” to persons with supervisory functions, is consistent with the legislative purpose. The same agency also objected to two other aspects of the treatment of official responsibility. First, the agency argued that the list of sources that ordinarily determine the scope of an employee's official responsibility—i.e., “those functions assigned by statute, regulation, Executive order, job description, or delegation of authority”—is too limited and ignores the reality of the workplace. *See* § 2641.202(j)(1). The commenter, however, did not suggest any additional or alternative sources of official authority, or any other method for determining the scope of official authority. More important, the language in question is virtually identical to the language that has been used in the prior post-employment regulation for over two decades, and OGE is not aware that this provision has proven inadequate. *See* 5 CFR 2637.202(b)(2). Therefore, as noted, OGE is not changing § 2641.202(j)(1) in this final rule. Second, the agency objected to proposed § 2641.202(j)(5), which indicates that an employee's self-disqualification or avoidance of personal participation in a matter is not sufficient to remove the matter from his or her official responsibility. The agency recommended, instead, a kind of totality-of-the-circumstances test that would recognize recusal as an appropriate means to limit official responsibility in some cases. OGE has not made the recommended change to this section of the final rule. A very similar provision concerning self-disqualification has been a part of the post-employment rules since 1979, and OGE has seen no indication during that time that this approach has, as the commenter predicted with respect to the proposed rule, done “serious harm to the Executive Branch's continuing problems in recruiting and retaining talented individuals from outside of Government to serve in managerial positions.” *See* 5 CFR 2637.202(b)(5). Moreover, the court in *United States* v. *Dorfman* specifically endorsed OGE's approach with respect to self-disqualification and added that a contrary rule would mean that employees “could selectively recuse themselves from particular matters actually pending under their official responsibility enabling them to participate directly in those matters a year hence,” thus evading the intent of Congress “ ‘to avoid even the appearance of a public office being used for personal or private gain.’ ” 542 F. Supp. 402, 409-410 (N.D. Ill. 1982) (quoting S. Rep. 170, 95th Cong., 2d Sess. 32 (1977)). One agency acknowledged that example 9 following proposed § 2641.202(j) was intended to illustrate the effect of a break in Government service on the application of 18 U.S.C. 207(a)(2), as discussed in the preamble to the proposed rule at 68 FR 7857. However, this agency recommended that the effect of a break in service be discussed in the regulatory text of this provision as well. The agency made a similar comment in connection with proposed § 2641.204, concerning the effect of a break in service on the application of 18 U.S.C. 207(c), as illustrated by example 3 following proposed section 2641.204(g). OGE has not made the recommended changes to these sections in the final rule. The effect of a break in service is a subject relevant to all of the prohibitions discussed in the rule, not just the prohibitions discussed in §§ 2641.202 and 2641.204. Consequently, the requirement that an individual must have “completed a period of service as an employee” is already treated generally in the definition of “former employee” in § 2641.104 and is illustrated in example 3 following that definition, which discusses “break in service.” In any event, we believe that the examples cited by the agency adequately illustrate the application of 18 U.S.C. 207 in situations involving a break in service. Moreover, as noted above, OGE has revised the definition of “Government service” in § 2641.104 of the final rule to illustrate the effect of a break in service. Finally, OGE has modified example 1 following § 2641.202(j), for reasons discussed above under “Treaties and Trade Agreements.” Section 2641.203—One-Year Restriction Concerning Trade or Treaty Negotiations One agency commented that it was not immediately clear, from the language of proposed § 2641.203(a), whether “on the basis of covered information” modifies only “advise” or also modifies “represent” and “aid.” This commenter recommended that the rule be revised to track the language of the statute more closely by placing the phrase “on the basis of covered information” before “represent, aid, or advise,” thus clarifying that the phrase modifies all three verbs. It was not OGE's intention, in proposed § 2641.203(a), to go beyond a recitation of the basic statutory prohibition. As discussed in the preamble to the proposed rule, 68 FR 7857, the present rule is intended only to provide a brief introductory summary of the statute, and paragraphs have been reserved for additional guidance in the future. Therefore, OGE is making the recommended change to § 2641.203(a) of the final rule, in order to follow the statutory language more closely. Section 2641.204—One-Year Restriction for Senior Employees Proposed section 2641.204 interprets various elements of the so-called “one-year cooling-off period” for senior employees. OGE received comments on several parts of this provision, discussed below. As noted above, in connection with the definition of “senior employee” in § 2641.104, 18 U.S.C. 207(c) has been amended twice since the proposed rule was developed, and those amendments are implemented in the final definition of “senior employee.” Section 2641.204(c)—SGEs and IPAs Five agencies, including four DOD components, commented on proposed § 2641.204(c), which concerns special issues arising in the application of section 207(c) to special Government employees
(SGEs)and persons assigned to the Federal Government under the Intergovernmental Personnel Act (IPAs). With respect to SGEs, one agency commented on the statement in the preamble to the proposed rule that “certain de minimis activities performed by an SGE on a given day might not be sufficient to count that day, under limited circumstances.” 68 FR 7858. The commenter agreed with this statement, but recommended that it be incorporated into the text of § 2641.204(c)(1). OGE has not changed the text of this section in the final rule. Delineation of the circumstances in which certain de minimis activities would not be sufficient to count as a day of service would require an extended explication that is not well-suited to the text of this provision. Moreover, the question of when to count a particular day of service for an SGE is not peculiar to section 207(c), and we believe this issue is better addressed in more general guidance concerning the ethical requirements applicable to SGEs. *See* OGE DAEOgram DO-07-002, available on OGE's Web site at *http://www.usoge.gov/pages/daeograms/dgr_files/2007/do07002.pdf* . With respect to IPAs, four DOD components made essentially the same point concerning proposed § 2641.204(c)(2). These commenters objected to the fact that the proposed rule makes the applicability of section 207(c) turn on the amount of pay received by IPA detailees and appointees, without sufficient regard for either the source of pay (i.e., Federal or non-Federal) or the level of responsibility associated with the particular position. OGE has not changed the rule in response to these comments. As explained in the preamble to the proposed rule, 68 FR 7858, § 2641.204(c)(2) merely implements an opinion on this subject issued by the Office of Legal Counsel, Department of Justice. *See* “Applicability of the Post-Employment Restrictions of 18 U.S.C. 207(c) to Assignees Under the Intergovernmental Personnel Act,” Memorandum of Daniel L. Koffsky, Acting Deputy Assistant Attorney General, Office of Legal Counsel, Department of Justice, to Susan F. Beard, Acting Assistant General Counsel, Department of Energy, June 26, 2000, available at *http://www.usdoj.gov/olc/doe207.htm* . One commenter also objected that the focus on an individual's pay, for purposes of applying section 207(c) to IPA personnel, appears to be at odds with OGE's recent guidance concerning the circumstances in which IPA detailees are required to file a public financial disclosure statement, under section 101 of the Ethics in Government Act of 1978 (EIGA), as amended. *See* OGE Informal Advisory Memorandum 02 x 11. As OGE has explained on other occasions, the language and legislative history of the financial disclosure provisions in EIGA differ from those of 18 U.S.C. 207(c), and different approaches to coverage are warranted. *See* OGE Informal Advisory Letter 98 x 2. Section 2641.204(g)—To or Before an Employee of Former Agency One commenter suggested that proposed § 2641.204(g)(1)(iii), which states that a former senior employee may not contact “an individual detailed to the former senior employee's former agency from another agency,” is inconsistent with a provision in proposed § 2641.201(f), which states that the permanent restriction of section 207(a)(1) applies to contacts with any employee who is detailed to the various entities listed in proposed § 2641.201(f). The reference to detailees in proposed § 2641.204(g)(1)(iii) was intended to implement a statutory provision that has particular significance in connection with the senior employee restriction. Specifically, § 2641.204(g)(1)(iii) implements 18 U.S.C. 207(g), which states that “a person who is detailed from one department, agency, or other entity to another department, agency, or other entity shall, during the period such person is detailed, be deemed to be an officer or employee of both departments, agencies, or such entities.” Proposed § 2641.204(g)(1)(iii) therefore emphasized that a detailee from another agency is also deemed to be an employee of the former senior employee's former agency. However, to clarify that the rule is intended to implement section 207(g), OGE is revising the provision in this final rule to track the language of the statute more closely. The revised final rule provision also indicates that detailees from the legislative and judicial branches are included. For similar reasons, OGE is making a minor change to § 2641.204(g)(3)(ii). As proposed, this provision stated that a communication or appearance is to or before an employee of the former senior employee's former agency if, inter alia, it is directed to and received by “an employee *in his capacity as an employee of a former senior employee's former agency* ” (emphasis added). OGE is concerned that the highlighted language could be interpreted as indicating that an employee of the former senior employee's agency may be contacted if that employee is serving on a detail to a different agency and is acting in his capacity as a detailee to that agency. Such an interpretation would be inconsistent with 18 U.S.C. 207(g), as explained in OGE Informal Advisory Letter 03 x 9, which concluded that the representational bar applies to contacts with current employees of the former senior employee's former agency, even if those employees happen to be on a detail to another agency in which the former senior employee did not serve. Therefore, the final rule simply uses the phrase, “in his official capacity,” without the further limitation that the contact be made with an employee specifically in his capacity as an employee of the former senior employee's former agency. Another commenter asked why proposed § 2641.204(g)(4) repeated the “public commentary” provision from proposed § 2641.201(f)(3), even though other elements common to the senior employee restriction and the permanent restriction are handled simply by cross-references to § 2641.201. The treatment in § 2641.204(g)(4) actually differs from the provision in 2641.201(f)(3) in an important respect. Whereas the permanent restriction covers contacts with employees of a broad range of Federal entities, the senior employee cooling-off period applies only to contacts with the individual's own former agency. Therefore, the provisions in § 2641.204(g)(4) contain references to the former agency, in place of the broader language found in § 2641.201(f)(3). Section 2641.205—Two-Year Restriction for Very Senior Employees Two agencies commented on proposed § 2641.205(g), specifically the conclusion, which is reflected in the proposed explanatory note to paragraph
(g)and in proposed example 5 to § 2641.205, that a former very senior employee is considered to be communicating with an official described in 5 U.S.C. 5312-5316 if the communication is made to a subordinate of such official with the intent that the information be conveyed directly to the official and attributed to the former very senior employee. Both commenters objected to this conclusion on the same grounds on which they objected to similar provisions in proposed § 2641.201(d) and (f), *i.e.,* they disagreed that a prohibited communication could include a communication conveyed through a third party to an officer or employee of the United States. As discussed in the preamble to the proposed rule, 68 FR 7860, the principle that section 207 may cover certain communications conveyed through a third party is supported by a 2001 opinion issued by the Office of Legal Counsel. Memorandum for Amy L. Comstock, Director, OGE, from Joseph R. Guerra, Deputy Assistant Attorney General, OLC, January 19, 2001, available under “Other Ethics Guidance, Conflict of Interest Prosecution Surveys and OLC Opinions” on OGE's Web site, *http://www.usoge.gov.* The rationale is further discussed above, under “Section 2641.201(d)—Communication or Appearance” and “Section 2641.201(f)—To or Before an Employee of the United States.” For these reasons, OGE has retained the explanatory note to paragraph
(g)of § 2641.205 and example 5 to that section in this final rule. OGE has, however, made minor changes to example 5, including an additional sentence at the end of the example, to emphasize that the circumstances indicate the former very senior employee intends that the information he provides to the subordinate will be conveyed directly to the Secretary of Labor and attributed to the former senior employee; these changes are consistent with the language of the explanatory note. Finally, subsequent to the publication of the proposed rule, Congress amended 18 U.S.C. 207(d) to extend the cooling-off period for very senior employees from one year to two years. *See* Public Law 110-81, § 101(a), September 14, 2007. Therefore, § 2641.205 has been modified in the final rule to replace all references to a one-year cooling-off period with references to a two-year period. The two-year restriction provided in the amendments to 18 U.S.C. 207(d) is applicable to very senior employees who “who leave Federal office or employment to which such amendments apply on or after * * * December 31, 2007.” Public Law 110-81, section 105(a). Very senior employees who left office or employment prior to this effective date remain subject to the previous one-year restriction. Section 2641.206—Foreign Entity Restriction Three DOD components submitted virtually identical comments on proposed § 2641.206, pertaining to the foreign entity restriction found in 18 U.S.C. 207(f). They pointed out that recitation of the basic prohibition, in proposed § 2641.201(a), does not reproduce the statutory language limiting the restriction on representation of foreign entities to representation before “an officer or employee of any department or agency of the United States.” The omission of the language cited by these commenters was inadvertent, and OGE agrees that the rule as proposed should be changed and has done so in this final rule to reflect more clearly the statutory language. It should be noted, however, that this change will not affect the final rule's treatment of the separate prohibition on aiding and advising foreign entities. Additionally, OGE has modified proposed § 2641.206(a) in this final rule to reflect subsequent guidance provided by the Office of Legal Counsel in a 2004 opinion issued to OGE. Memorandum of Renée Lettow Lerner, Deputy Assistant Attorney General, for Marilyn L. Glynn, Acting Director, OGE, June 22, 2004, available at *http://www.usoge.gov/pages/laws_regs_fedreg_stats/lrfs_files/othr_gdnc/olc_06_22_04.pf.* This opinion concludes that 18 U.S.C. 207(f) prohibits covered former employees from representing a foreign entity before Members of Congress. The opinion cites the language in section 207(i)(1)(B), which indicates that Members of Congress are included in the term “officer or employee” for purposes of describing the persons to whom representational contacts may not be made under section 207(f). In this connection, the opinion also concludes that the term “department,” as included in the language of section 207(f) prohibiting representational contact with an “officer or employee of any department or agency,” includes the legislative department, *i.e.,* the legislative branch of the Federal Government. OGE has reworked the final rule consistent with the OLC opinion. Section 2641.207—Information Technology Exchange Program Assignee Restriction The final rule includes a new section, § 2641.207, which provides a brief description of a new restriction in 18 U.S.C. 207(l) that became effective after the proposed rule was published. Section 209(c) of the E-Government Act of 2002, Public Law 107-347, December 17, 2002, created the Information Technology Exchange Program. Under this new program, an agency and a “private sector organization” may agree to the assignment of certain information technology personnel from the private sector organization to the agency for a period of time. Section 209(d)(3) of the Act amended 18 U.S.C. 207 by adding a new section (l), which applies to former assignees to an agency under the program. Specifically, section 207(l) prohibits these former assignees, for one year after the termination of their assignment, from representing or aiding, counseling or assisting in representing any other person in connection with any contract with their former agency. Section 2641.207 is not intended to provide comprehensive guidance with respect to 18 U.S.C. 207(l). Rather, it is intended to provide a basic description of the restriction, and consequently paragraphs
(d)and
(e)are reserved. As OGE and other officials in the executive branch acquire more experience with the operation of the Information Technology Exchange Program and the post-employment issues related to former private sector assignees under the program, it is expected that OGE will revisit the reserved provisions. Subpart C—Exceptions, Waivers and Separate Components Section 2641.301—Statutory Exceptions and Waivers Section 2641.301(a)—Action on Behalf of United States Section 2641.301(a) interprets both the exemption in 18 U.S.C. 207(j)(1) for acts done in carrying out official duties on behalf of the United States and the parenthetical exemption, found in sections 207(a), (b), (c), and (d), for communications and appearances on behalf of the United States. One agency recommended that the rule as proposed be revised to permit certain communications and appearances made by a former employee during the performance of a contract with the Government. Specifically, this agency argued that communications made to perform contracts pertaining to “internal agency operations” would be analogous to the other types of activities recognized to be on behalf the United States in proposed § 2641.301(a)(2). For the reasons discussed above, under “Section 2641.201(e)—Intent to Influence,” we do not view contacts made during the performance of a Government contract to be free from the concerns at which section 207 is directed. As we indicated in that earlier discussion, the Government and its contractors have their own interests in the performance of a contract, which are not necessarily identical. Moreover, as we discussed in the preamble to the proposed rule, not all contractors agree to represent or act on behalf of the Government. *See* 68 **Federal Register** at 7862. Accordingly, with the exception of the one change discussed in the next paragraph, OGE has not modified the text of § 2641.301(a) in adopting it as final in this rulemaking document. We have made one change, however, to the language of § 2641.301(a)(2)(ii)(1). As proposed, this provision required that the activity be undertaken as a “representative of the United States pursuant to a specific agreement with the United States to provide representational services *involving a fiduciary duty* to the United States” (emphasis added). The final rule omits the phrase pertaining to fiduciary services. OGE has made this change so that this provision will more closely parallel the provision in the rule in which OGE states what it means for a former employee to act “on behalf of” another person, § 2641.201(g)(1). Although the latter provision describes a number of circumstances that no doubt involve fiduciary duties, the rule does not require a showing that a former employee has fiduciary duties in order to be acting on behalf of another person. Since the same statutory language is at issue in § 2641.301(a)(2), OGE has concluded that it is unnecessary to include the fiduciary duty phrase in this provision. The practical effect of this change may not be great, as we would expect that most instances in which there is a specific agreement to provide representational services to the United States will involve some kind of fiduciary relationship, such as a contract to provide legal services to the Government. Another agency proposed that OGE add a new example following § 2641.301(a) to illustrate that the representation of a “co-party,” such as a co-defendant in a lawsuit in which the United States also is a defendant, does not constitute acting on behalf of the United States. This agency reported that former employees frequently assume, erroneously, that they may represent a co-party with the United States because they do not see this as switching sides. OGE certainly agrees that the representation of a co-party does not constitute acting on behalf of the United States. OGE is not sure, however, how frequently this is misunderstood. Moreover, the potential for misunderstanding is diminished by § 2641.301(a)(2)(B), which states that a “former employee will not be deemed to engage in an activity on behalf of the United States merely because * * * he or the person on whose behalf he is acting may share the same objective as the Government.” OGE also notes that there are already seven examples following paragraph
(a)of § 2641.301. Therefore, OGE has determined that the proposed new example is not necessary and has not made the recommended change in this final rule. Section 2641.301(b)—Acting as Elected Official of State or Local Government One agency commented on proposed § 2641.301(b), which interprets the part of 18 U.S.C. 207(j)(1) that excepts acts done in carrying out official duties as an elected official of a State or local government. The commenter objected to example 2 following the proposed provision. Example 2 states that a former employee who serves in a non-elective position with a State government is not eligible for this exception. The commenter stated that the proposed communication in that example is otherwise permissible under a different exception—18 U.S.C. 207(j)(2)(A), as implemented by proposed 5 CFR 2641.301(c)—and recommended that OGE use a different scenario that is not covered by some other exception. OGE does not agree that the scenario in proposed example 2 would be covered by the exception in section 207(j)(2)(A) and, therefore, is not changing this example in the final rule. In this example, the individual had participated personally and substantially as a Federal employee in the decision to award a grant to a state for a particular construction project. The exception in section 207(j)(2)(A) does not apply to the permanent restriction on representation of others in connection with particular matters involving specific parties in which the former employee participated personally and substantially. Section 2641.301(c)—Representation of Specified Entities Two agencies commented on proposed section 2641.301(c), which interprets 18 U.S.C. 207(j)(2), the exception to the prohibitions of section 207(c) and
(d)for representation of certain specified entities. One agency requested that OGE provide an additional example to illustrate the scope of the exception for representation as an employee of an “accredited, degree-granting institution of higher education, as defined in section 101 of the Higher Education Act of 1965 [20 U.S.C. 1001].” Section 207(j)(2)(B). Specifically, this commenter requested a new example “clarifying” that private colleges are included in the definition. OGE does not believe that an additional example is necessary and has not added one in the final rule. The definition of institution of higher education, which is referenced in both the rule and the statute, makes clear that both “public” and “other nonprofit” institutions are covered. 20 U.S.C. 1001(a)(4). Moreover, if only public institutions, and not private colleges, were included in section 207(j)(2)(B), the provision would be surplusage, as section 207(j)(2)(A) already covers “an agency or instrumentality of a State or local government.” As discussed above, under “Section 2641.301(b)—Acting as Elected Official of State or Local Government,” another agency suggested that the exception in section 207(j)(2)(A) would cover activity otherwise prohibited by the permanent restriction in section 207(a)(1). It bears repeating that section 207(j)(2)(A)—unlike the exception for actions as an elected State or local government official in section 207(j)(1)—is not an exception to the permanent restriction or any other prohibition applicable to executive branch personnel besides the cooling-off provisions in section 207(c) and (d). Section 2641.301(d)—Uncompensated Statements Based on Special Knowledge Two agencies commented on § 2641.301(d) as proposed, interpreting the exception in 18 U.S.C. 207(j)(4). One agency objected that the proposed definition of “statement” is too narrow. Proposed § 2641.301(d) provides that a “statement for purposes of this paragraph is a communication of facts directly observed by the former employee.” The commenter asserted that this definition would preclude certain “innocent” communications that are not, strictly speaking, facts that the former employee observed, “such as a statement defining a technical principle or asserting that the principle is widely interpreted a certain way.” OGE acknowledges that its interpretation of the exception for statements based on special knowledge is relatively narrow, but this is consistent with the history of the provision. As discussed more fully in the preamble to the proposed rule, this exception was originally provided in the 1978 Act to mitigate the impact of the new senior employee cooling-off restriction, which then prohibited even self-representation. 68 **Federal Register** 7863. After section 207(c) was amended in 1989 to remove the ban on self-representation, the need for reliance on the special knowledge exception was greatly reduced, and OGE believes it would undermine the purposes of section 207(c) to take an expansive view of the exception that would allow a wide range of representational activity solely on the ground that the former employee has personal familiarity with certain “principles.” Moreover, OGE notes that its definition of “statement” is not unusual. *See Black's Law Dictionary* 1263
(1979)(“a declaration of matters of fact”). That is not to say that a statement of fact would fall outside the scope of the exception simply because the former employee made incidental references to certain principles necessary to understand the significance of the facts conveyed. Nevertheless, in view of the fact that the statute already contains other exceptions allowing “expert” communications under carefully limited circumstances—e.g., 18 U.S.C. 207(j)(5), (6)(A)—OGE cannot read section 207(j)(4) as a broad license for former employees to engage in communications focusing on general principles with which they may claim some particular expertise. However, recognizing that statements based on inferences from facts observed by a former employee may be permissible, OGE has revised the text of § 2641.301(d)(2) by removing the word “directly.” A second agency proposed that OGE include an express statement, either in a note or in the text of section 2641.301(d), to the effect that “statements and opinions made on one's own behalf are not prohibited.” OGE has not followed this recommendation in the final rule. The provisions stating the basic prohibitions to which this exception applies are quite clear in excluding self-representation. *See* § 2641.201(g)(2), as referenced in §§ 2641.204(h) and 2641.205(h). Section 2641.301(e)—Scientific or Technological Information Two agencies commented on proposed § 2641.301(e), which implements the exception in 18 U.S.C. 207(j)(5) for communicating scientific or technological information. One agency recommended that OGE remove a parenthetical reference in proposed § 2641.301(e)(5)(iii)(E) to a deputy or acting head of an agency, since there are no other references to deputy or acting agency heads in the provision. By technical correction published in the **Federal Register** on March 31, 2003, 68 FR 15385, OGE already removed this phrase from the proposed rule as “unintended text.” Another agency commented on the list of possible considerations for agency procedures in § 2641.301(e)(4)(i) as proposed. The agency recommended that OGE specify, in § 2641.301(e)(4)(i)(B), when a former employee must give notice that he or she is invoking the exemption pursuant to agency procedures. OGE does not agree with this recommendation and is adopting this section as final without change. It is not OGE's intent to mandate any particular procedures for agencies that wish to implement section 207(j)(5) through agency procedures. The statute itself specifies that the procedures must be “acceptable to the department or agency concerned.” Agencies may well have different preferences with respect to the timing of any notices or the need for any such notices at all. Section 2641.301(f)—Testimony Under Oath and Statements Under Penalty of Perjury One agency commented on proposed § 2641.301(f), which interprets the exception in 18 U.S.C. 207(j)(6) for testimony under oath and statements required to be made under the penalty of perjury. The agency referenced § 2641.301(f)(2)(ii), which deals with the limitation, found in section 207(j)(6)(A), on service as an expert witness in matters covered by the permanent ban in section 207(a)(1). This provision states that the limitation on expert testimony may be lifted by court order and then specifies that neither a subpoena nor a court order qualifying an individual as an expert satisfies the court order requirement in section 207(j)(6)(A). The commenter asked that OGE address specifically whether experts appointed by a court itself, pursuant to Rule 706 of the Federal Rules of Evidence, would be covered by the “pursuant to court order” language in the exception. In adopting § 2641.301(f) as final, OGE has not changed the rule text as proposed to address this subject. By its own terms, Rule 706 does not displace authorities permitting parties to call “expert witnesses of their own selection.” Rule 706(d). Under Rule 706, court-appointed experts may be appointed by the court either upon the motion of the parties or upon the court's own motion, and the latter may be either with or without nominations by the parties. Rule 706 also contemplates that the parties may agree upon an expert to be appointed by the court. Furthermore, Rule 706 provides that the appointed expert then may be called to testify by either party, or by the court itself, and that either party may cross-examine the expert, including that party that called the expert as a witness. Under some or all of these possible scenarios, there may be questions as to whether 18 U.S.C. 207(a)(1) even applies in the first place, as it may not be clear whether the court-appointed experts are acting “on behalf of” any party within the meaning of the statute. *See* § 2641.201(g). OGE does not believe this regulation is the appropriate place to opine generally about Rule 706. Such questions as may actually arise can be handled on a case-by-case basis. The same agency also commented on the relationship between section 207(j)(6) and a provision in the Indian Self-Determination and Education Assistance Act, 25 U.S.C. 450i(j), which is listed as a miscellaneous statutory exception in section 2641.301(k) of the proposed rule. This comment is addressed below, under “Section 2641.301(k)—Miscellaneous Statutory Exemptions.” Section 2641.301(h)—Acting on Behalf of International Organization OGE received one comment on proposed § 2641.301(h), which concerns the provision in 18 U.S.C. 207(j)(3) for waivers issued by the Secretary of State to permit former employees to represent, aid or advise an international organization in which the United States participates. The comment, from the Department of State, suggested that a statement in the preamble to the proposed rule, to the effect that the “Secretary of State has issued several section 207(j)(3) waivers,” does not completely reflect the actual operation of this provision in the Department. 68 **Federal Register** 7866. Specifically, the comment pointed out that the Secretary of State had delegated the authority to issue such waivers to the Assistant Secretary for International Affairs, who has issued a number of waivers. OGE takes notice of this delegation, which was issued by the Secretary of State in 1992. The same commenter objected to the language of the proposed rule stating that “the Secretary of State may grant a *former employee* a waiver.” Proposed § 2641.301(h)(1) (emphasis added). The commenter pointed out that the statutory provision itself does not even use the phrase “former employee” or otherwise specify that a waiver must be issued to a former employee, as opposed to a current employee who has plans for post-employment activity on behalf of an international organization. The commenter noted that “207(j)(3) certifications are usually issued prior to the employees' departure from U.S. Government service, to apply prospectively with the employees' taking up of the position at the international organization.” The commenter recommended that OGE use the following substitute language in the first sentence of § 2641.301(h)(1): “(1) The Secretary of State may grant an individual certification that one or more of the restrictions in 18 U.S.C. 207 not apply where the former employee would act on behalf of, or provide advice or aid to, an international organization in which the United States participates.” OGE has largely adopted the recommended language in this final rule, with minor modifications for the sake of consistency with the statutory language and the treatment of other waiver provisions in subpart C of the rule: “(1) The Secretary of State may grant an individual waiver of one or more of the restrictions in 18 U.S.C. 207 where the former employee would appear or communicate on behalf of, or provide aid or advice to, an international organization in which the United States participates.” OGE recommends, however, that any current employees who receive such waivers be counseled that the waivers permit only certain activities covered by section 207 and do not affect any restrictions still applicable to current employees under 18 U.S.C. 203 and 205. Section 2641.301(j)—Waiver of Certain Senior Positions In this final rule, OGE has modified the proposed version of § 2641.301(j), which pertains to the authority of OGE, under 18 U.S.C. 207(c)(2)(C), to waive the application of section 207(c) and
(f)with respect to certain senior positions. The revisions were necessary because, as described above in connection with the definition of “senior employee,” a new category of senior employee was added by the E-Government Act of 2002. *See* 18 U.S.C. 207(c)(2)(A)(v). This new category, assignees from private organizations under the Information Technology Exchange Program, is not covered by the position waiver provision in section 207(c)(2)(C). Therefore, this section of the rule being adopted as final has been changed to make clear that assignees under the Information Technology Exchange Program may not benefit from a position waiver. Section 2641.301(k)—Miscellaneous Statutory Exemptions Proposed § 2641.301(k) lists statutes, other than section 207 itself, that provide relief from the post-employment restrictions. OGE specifically invited commenters on the proposed rule to review the list of miscellaneous statutory exceptions and suggest modifications or additions, in part because such provisions occasionally are enacted as part of organic acts and other legislation not primarily focused on conflict of interest subjects. 68 **Federal Register** 7868. Only one agency responded to this invitation, and it proposed the addition of three statutory provisions. Two of those statutes, however, do not actually provide exceptions to the prohibitions of 18 U.S.C. 207, but rather add certain post-employment restrictions or requirements for employees in specific positions or agencies. *See* Public Law 99-239, section 107
(1986)(extending certain provisions of section 207(b), as it then read, with respect to persons involved in Micronesian status negotiations or Micronesian Interagency Group); Public Law 104-293, section 402
(1996)(requiring agreements restricting post-employment activities of Central Intelligence Agency employees). Consequently, OGE does not believe it would be appropriate to list these statutes in a provision devoted to “Miscellaneous statutory exceptions.” The third statute suggested by the commenter, Public Law 97-241, section 120 (1982), is an actual exception to section 207. The exception is applicable to private sector representatives, designated to speak on behalf of or otherwise represent the interests of the United States on a United States delegation to an international telecommunication meeting or conference, provided that the Secretary of State (or a designee) certifies that no Government employee on the delegation is well qualified to represent United States interests with respect to such matter and that the designation serves the national interest. OGE has added a new paragraph (k)(8) to § 2641.301 of this final rule to reflect this statutory exemption. Another agency submitted detailed comments on proposed § 2641.301(k)(4), which lists a statutory exception, found in the Indian Self-Determination and Education Assistance Act, 25 U.S.C. 450i(j), for certain activity on behalf of Indian tribal organizations and inter-tribal consortia. Among other things, the commenter recommended that OGE's rule “elaborate” on the scope of coverage of this provision, explain the effect of a notice requirement specified in the provision, clarify the applicability of this provision to expert testimony, and reflect the charging practices of the Department of Justice. OGE has not made these recommended changes in the final rule. OGE does not believe that part 2641 is the appropriate place to provide detailed guidance concerning the Indian Self-Determination and Education Assistance Act. The rule as proposed and as now being adopted as final does not contemplate detailed guidance with respect to any of the miscellaneous provisions not set out in section 207 itself. (As noted below, section 207 now has been amended to add a cross-reference to the provision in the Indian Self-Determination and Education Assistance Act, but the substance of the exception continues to be set out in the latter, rather than in section 207.) Section 2641.301(k) is intended simply to alert readers to the general substance of certain exceptions that would not be apparent from a reading of section 207 alone. Moreover, with respect to the Indian Self-Determination and Education Assistance Act specifically, we have stated that “this statute would normally be interpreted by the Office of the Solicitor of the Department of the Interior,” OGE Informal Advisory Letter 82 x 11, and we ordinarily would not address significant legal issues arising under the statute without the benefit of review by that Department. In this connection, we note that the Department of the Interior did not comment on proposed § 2641.301(k)(4). Finally, subsequent to the publication of the proposed rule and the receipt of comments, Congress amended the exception in the Indian Self-Determination and Education Assistance Act, and also added a cross-reference to this provision in 18 U.S.C. 207(j)(1)(B). *See* Public Law 110-81, section 104, September 14, 2007. The general description of this exception in § 2641.301(k)(4) has been modified accordingly. Section 2641.301(l)—Guide to Available Exceptions and Waivers OGE has revised the chart set out at § 2641.301(l) as proposed by adding a new column indicating which exemption or waiver provisions are applicable to the new restriction, 18 U.S.C. 207(l), with regard to private sector assignees under the Information Technology Exchange Program. Appendix A—Positions Waived Pursuant to 18 U.S.C. 207(c)(2)(C) Appendix A of part 2641 lists those positions that have been waived by OGE, pursuant to its authority under 18 U.S.C. 207(c)(2)(C). Regulations implementing this provision have been previously codified at 5 CFR 2641.201(d) and will be set forth in § 2641.301(j) of this final rule once it becomes effective on July 25, 2008. Subsequent to the proposed rule, OGE revised the list of waived positions in appendix A. *See* 72 FR 10339-10342 (March 8, 2007). This final rule therefore reflects the revised list. Appendix B—Agency Components for Purposes of 18 U.S.C. 207(c) OGE received comments from one agency concerning appendix B to part 2641, which sets out agency components that have been designated by OGE, pursuant to 18 U.S.C. 207(h), as separate agencies, for purposes of the one-year cooling-off restriction for senior employees. The comments proposed certain amendments to the list of components for this agency. It was not OGE's intent to use this rulemaking as the vehicle to add or delete components in appendix B. OGE requires that agencies submit annual updates verifying the accuracy and appropriateness of the list of components and has made numerous additions and deletions with respect to the list since 1991, as described above and in the preamble to the proposed rule. 68 **Federal Register** 7844. OGE contacted this commenting agency and advised that its proposed amendments to appendix B would be considered separately, in connection with OGE's annual review of agency submissions. Therefore, Appendix B is revised as proposed, except that the final rule also reflects amendments to Appendix B made by final rules published on November 23, 2004, March 8, 2007, and March 6, 2008, which were issued subsequent to the proposed rule. *See* 69 FR 68053-68056 (November 23, 2004); 72 FR 10339-10342 (March 8, 2007); 73 FR 12007-12009 (March 6, 2008). III. Matters of Regulatory Procedure Regulatory Flexibility Act As Director of OGE, I certify under the Regulatory Flexibility Act (5 U.S.C. chapter 6) that this rule will not have a significant economic impact on a substantial number of small entities because it affects only current and former Federal employees. Paperwork Reduction Act The Paperwork Reduction Act (44 U.S.C. chapter 35) does not apply to this rule because it does not contain an information collection requirement that requires 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 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 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 Government Accountability 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 final rule, OGE 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 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 final regulation 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 the final rule because provisions only concern the current post-employment law in effect. 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 Director of the Office of Government Ethics, I have reviewed this final 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 Parts 2637 and 2641 Conflict of interests, Government employees. Approved: June 4, 2008. Robert I. Cusick, Director, Office of Government Ethics. Accordingly, for the reasons set forth in the preamble, under the authority of 5 U.S.C. App. (Ethics in Government Act of 1978), 18 U.S.C. 207, and Executive Order 12674, as modified by Executive Order 12731, the Office of Government Ethics is amending 5 CFR chapter XVI as follows. 1. Part 2637 is removed; and 2. Part 2641 is revised to read as follows: PART 2641—POST-EMPLOYMENT CONFLICT OF INTEREST RESTRICTIONS Subpart A—General Provisions Sec. 2641.101 Purpose. 2641.102 Applicability. 2641.103 Enforcement and penalties. 2641.104 Definitions. 2641.105 Advice. 2641.106 Applicability of certain provisions to Vice President. Subpart B—Prohibitions 2641.201 Permanent restriction on any former employee's representations to United States concerning particular matter in which the employee participated personally and substantially. 2641.202 Two-year restriction on any former employee's representations to United States concerning particular matter for which the employee had official responsibility. 2641.203 One-year restriction on any former employee's representations, aid, or advice concerning ongoing trade or treaty negotiation. 2641.204 One-year restriction on any former senior employee's representations to former agency concerning any matter, regardless of prior involvement. 2641.205 Two-year restriction on any former very senior employee's representations to former agency or certain officials concerning any matter, regardless of prior involvement. 2641.206 One-year restriction on any former senior or very senior employee's representations on behalf of, or aid or advice to, foreign entity. 2641.207 One-year restriction on any former private sector assignee under the Information Technology Exchange Program representing, aiding, counseling or assisting in representing in connection with any contract with former agency. Subpart C—Exceptions, Waivers and Separate Components 2641.301 Statutory exceptions and waivers. 2641.302 Separate agency components. Appendix A to Part 2641—Positions Waived From 18 U.S.C. 207(c) and
(f)Appendix B to Part 2641—Agency Components for Purposes of 18 U.S.C. 207(c) Authority: 5 U.S.C. App. (Ethics in Government Act of 1978); 18 U.S.C. 207; 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 A—General Provisions § 2641.101 Purpose. 18 U.S.C. 207 prohibits certain acts by former employees (including current employees who formerly served in “senior” or “very senior” employee positions) which involve, or may appear to involve, the unfair use of prior Government employment. None of the restrictions of section 207 prohibits any former employee, regardless of Government rank or position, from accepting employment with any particular private or public employer. Rather, section 207 prohibits a former employee from providing certain services to or on behalf of non-Federal employers or other persons, whether or not done for compensation. These restrictions are personal to the employee and are not imputed to others. ( *See* , however, the note following § 2641.103 concerning 18 U.S.C. 2.)
(a)This part 2641 explains the scope and content of 18 U.S.C. 207 as it applies to former employees of the executive branch or of certain independent agencies (including current employees who formerly served in “senior” or “very senior” employee positions). Although certain restrictions in section 207 apply to former employees of the District of Columbia, Members and elected officials of the Congress and certain legislative staff, and employees of independent agencies in the legislative and judicial branches, this part is not intended to provide guidance to those individuals.
(b)Part 2641 does not address post-employment restrictions that may be contained in laws or authorities other than 18 U.S.C. 207. These restrictions include those in 18 U.S.C. 203 and 41 U.S.C. 423(d). § 2641.102 Applicability. Since its enactment in 1962, 18 U.S.C. 207 has been amended several times. As a consequence of these amendments, former executive branch employees are subject to varying post-employment restrictions depending upon the date they terminated Government service (or service in a “senior” or “very senior” employee position).
(a)*Employees terminating on or after January 1, 1991* . Former employees who terminated or employees terminating Government service (or service in a “senior” or “very senior” employee position) on or after January 1, 1991, are subject to the provisions of 18 U.S.C. 207 as amended by the Ethics Reform Act of 1989, title I, Public Law 101-194, 103 Stat. 1716 (with amendments enacted by Act of May 4, 1990, Pub. L. 101-280, 104 Stat. 149) and by subsequent amendments. This part 2641 provides guidance concerning section 207 to these former employees.
(b)*Employees terminating between July 1, 1979 and December 31, 1990* . Former employees who terminated service between July 1, 1979, and December 31, 1990, are subject to the provisions of section 207 as amended by the Ethics in Government Act of 1978, title V, Public Law 95-521, 92 Stat. 1864 (with amendments enacted by Act of June 22, 1979, Pub. L. 96-28, 93 Stat. 76). Regulations providing guidance concerning 18 U.S.C. 207 to these employees were last published in the 2008 edition of title 5 of the Code of Federal Regulations, revised as of January 1, 2008.
(c)*Employees terminating prior to July 1, 1979* . Former employees who terminated service prior to July 1, 1979, are subject to the provisions of 18 U.S.C. 207 as enacted in 1962 by the Act of October 23, 1962, Public Law 87-849, 76 Stat. 1123. Note to § 2641.102: The provisions of this part 2641 reflect amendments to 18 U.S.C. 207 enacted subsequent to the Ethics Reform Act of 1989 and before July 25, 2008. An employee who terminated Government service (or service in a “senior” or “very senior” employee position) between January 1, 1991, and July 25, 2008 may have become subject, upon termination, to a version of the statute that existed prior to the effective date of one or more of those amendments. Those amendments concerned
(1)changes, effective in 1990, 1996, and 2004 concerning the rate of basic pay triggering “senior employee” status for purposes of section 207(c);
(2)the reinstatement and subsequent amendment of the Presidential waiver authority in section 207(k);
(3)the length of the restriction set forth in section 207(f) as applied to a former United States Trade Representative or Deputy United States Trade Representative;
(4)the addition of section 207(j)(7), an exception to section 207(c) and (d);
(5)a change to section 207(j)(2)(B), an exception to section 207(c) and (d);
(6)the addition of assignees under the Information Technology Exchange Program to the categories of “senior employee” for purposes of section 207(c);
(7)the addition of section 207(l), applicable to former private sector assignees under the Information Technology Exchange Program;
(8)a change to the length of the restriction set forth in section 207(d); and
(9)the addition of a cross-reference in section 207(j)(1)(B) to a revised exception in the Indian Self-Determination and Education Assistance Act. § 2641.103 Enforcement and penalties.
(a)*Enforcement* . Criminal and civil enforcement of the provisions of 18 U.S.C. 207 is the responsibility of the Department of Justice. An agency is required to report to the Attorney General any information, complaints or allegations of possible criminal conduct in violation of title 18 of the United States Code, including possible violations of section 207 by former officers and employees. *See* 28 U.S.C. 535. When a possible violation of section 207 is referred to the Attorney General, the referring agency shall concurrently notify the Director of the Office of Government Ethics of the referral in accordance with 5 CFR 2638.603.
(b)*Penalties and injunctions* . 18 U.S.C. 216 provides for the imposition of one or more of the following penalties and injunctions for a violation of section 207:
(1)*Criminal penalties* . 18 U.S.C. 216(a) sets forth the maximum imprisonment terms for felony and misdemeanor violations of section 207. Section 216(a) also provides for the imposition of criminal fines for violations of section 207. For the amount of the criminal fines that may be imposed, *see* 18 U.S.C. 3571.
(2)*Civil penalties* . 18 U.S.C. 216(b) authorizes the Attorney General to take civil actions to impose civil penalties for violations of section 207 and sets forth the amounts of the civil fines.
(3)*Injunctive relief* . 18 U.S.C. 216(c) authorizes the Attorney General to seek an order from a United States District Court to prohibit a person from engaging in conduct which violates section 207.
(c)*Other relief* . In addition to any other remedies provided by law, the United States may, pursuant to 18 U.S.C. 218, void or rescind contracts, transactions, and other obligations of the United States in the event of a final conviction pursuant to section 207, and recover the amount expended or the thing transferred or its reasonable value. Note to § 2641.103: A person or entity who aids, abets, counsels, commands, induces, or procures commission of a violation of section 207 is punishable as a principal under 18 U.S.C. 2. § 2641.104 Definitions. For purposes of this part: *Agency* means any department, independent establishment, commission, administration, authority, board or bureau of the United States or Government corporation. The term includes any independent agency not in the legislative or judicial branches. *Agency ethics official* means the designated agency ethics official
(DAEO)or the alternate DAEO, appointed in accordance with 5 CFR 2638.202(b), and any deputy ethics official described in 5 CFR 2638.204. *Department* means one of the executive departments listed in 5 U.S.C. 101. *Designated agency ethics official*
(DAEO)means the official designated under 5 CFR 2638.201 to coordinate and manage an agency's ethics program. *Employee* means, for purposes of determining the individuals subject to 18 U.S.C. 207, any officer or employee of the executive branch or any independent agency that is not a part of the legislative or judicial branches. The term does not include the President or the Vice President, an enlisted member of the Armed Forces, or an officer or employee of the District of Columbia. The term includes an individual appointed as an employee or detailed to the Federal Government under the Intergovernmental Personnel Act (5 U.S.C. 3371-3376) or specifically subject to section 207 under the terms of another statute. It encompasses senior employees, very senior employees, special Government employees, and employees serving without compensation. (This term is redefined elsewhere in this part, as necessary, when the term is used for other purposes.) *Executive branch* includes an executive department as defined in 5 U.S.C. 101, a Government corporation, an independent establishment (other than the Government Accountability Office), the Postal Service, the Postal Regulatory Commission, and also includes any other entity or administrative unit in the executive branch. *Former employee* means an individual who has completed a period of service as an employee. Unless otherwise indicated, the term encompasses a former senior employee and a former very senior employee. An individual becomes a former employee at the termination of Government service, whereas an individual becomes a former senior employee or a former very senior employee at the termination of service in a senior or very senior employee position. Example 1 to the definition of former employee: An individual served as an employee of the Agency for International Development, an agency within the executive branch. Since he was, therefore, an “employee” as that term is defined in this section by virtue of having served in the executive branch, he became a “former employee” when he terminated Government service to pursue his hobbies. Example 2 to the definition of former employee: An individual served as an employee of the Tennessee Valley Authority (TVA). Since the TVA is a corporation owned or controlled by the Government of the United States, she served as an employee in the “executive branch” as that term is defined in this section. She became a “former employee,” therefore, when she terminated Government service to do some traveling. Example 3 to the definition of former employee: An individual terminated a GS-14 position in the executive branch to accept a position in the legislative branch. He did not become a “former employee” when he terminated service in the executive branch since he did not terminate “Government service” as that term is defined in this section. Example 4 to the definition of former employee: An individual is appointed by the President to serve as a special Government employee on the Oncological Drug Advisory Committee at the Department of Health and Human Services. The special Government employee meets with the committee five days per year. She does not terminate Government service at the end of each meeting of the committee and therefore does not at that time become a “former employee.” She becomes a “former employee” when her appointment terminates, provided that she is not reappointed without break in service to the same or another Federal Government position. Example 5 to the definition of former employee: An individual is a Major in the U.S. Army Reserve. The Major earns points toward retirement by participating in weekend drills and performing active duty for training for two weeks each year. The Major is not a special Government employee when he performs weekend drills, but is considered to be one while on active duty for training. The Major is considered to be a “former employee” when he terminates each period of active duty for training. Example 6 to the definition of former employee: A foreign service officer served as a “senior employee” of the Department of State. After retiring, and with no break in service, he accepted a civil service appointment on a temporary basis, at the GS-15 level. Since he did not terminate Government service, he did not become a “former employee” when he retired from the foreign service. He did, however, become a “former senior employee.” *Former senior employee* is an individual who terminates service in a senior employee position (without successive Government service in another senior position). *Former very senior employee* is an individual who terminates service in a very senior employee position (without successive Government service in another very senior employee position). *Government corporation* means, for purposes of determining the individuals subject to 18 U.S.C. 207, a corporation that is owned or controlled by the Government of the United States. For purposes of identifying or determining individuals with whom post-employment contact is restricted, matters to which the United States is a party or has a direct and substantial interest, decisions which a former senior or very senior employee cannot seek to influence on behalf of a foreign entity, and whether a former employee is acting on behalf of the United States, it means a corporation in which the United States has a proprietary interest as distinguished from a custodial or incidental interest as shown by the functions, financing, control, and management of the corporation. *Government service* means a period of time during which an individual is employed by the Federal Government without a break in service. As applied to a special Government employee (SGE), Government service refers to the period of time covered by the individual's appointment or appointments (or other act evidencing employment with the Government), regardless of any interval or intervals between days actually served. *See* example 4 to the definition of former employee in this section. In the case of Reserve officers of the Armed Forces or officers of the National Guard of the United States who are not otherwise employees of the United States, Government service shall be considered to end upon the termination of a period of active duty or active duty for training during which they served as SGEs. *See* example 5 to the definition of former employee in this section. *He* , *his* , and *him* include she, hers, and her, and vice versa. *Judicial branch* means the Supreme Court of the United States; the United States courts of appeals; the United States district courts; the Court of International Trade; the United States bankruptcy courts; any court created pursuant to Article I of the United States Constitution, including the United States Court of Appeals for the Armed Forces, the United States Claims Court, and the United States Tax Court, but not including a court of a territory or possession of the United States; the Federal Judicial Center; and any other agency, office, or entity in the judicial branch. *Legislative branch* means the Congress; it also means the Office of the Architect of the Capitol, the United States Botanic Garden, the Government Accountability Office, the Government Printing Office, the Library of Congress, the Office of Technology Assessment, the Congressional Budget Office, the United States Capitol Police, and any other agency, entity, office, or commission established in the legislative branch. *Person* includes an individual, corporation, company, association, firm, partnership, society, joint stock company, or any other organization, institution, or entity, including any officer, employee, or agent of such person or entity. Unless otherwise indicated, the term is all-inclusive and applies to commercial ventures and nonprofit organizations as well as to foreign, State and local governments. The term includes the “United States” as that term is defined in § 2641.301(a)(1). *Senior employee* means an employee, other than a very senior employee, who is:
(1)Employed in a position for which the rate of pay is specified in or fixed according to 5 U.S.C. 5311-5318 (the Executive Schedule);
(2)Employed in a position for which the employee is paid at a rate of basic pay which is equal to or greater than 86.5 percent of the rate of basic pay for level II of the Executive Schedule; or, for a period of two years following November 24, 2003, was employed on November 23, 2003 in a position for which the rate of basic pay was equal to or greater than the rate of basic pay payable for level 5 of the Senior Executive Service; for purposes of this paragraph, “rate of basic pay” does not include locality-based adjustments or additional pay such as bonuses, awards and various allowances;
(3)Appointed by the President to a position under 3 U.S.C. 105(a)(2)(B);
(4)Appointed by the Vice President to a position under 3 U.S.C. 106(a)(1)(B);
(5)An active duty commissioned officer of the uniformed services serving in a position for which the pay grade (as specified in 37 U.S.C. 201) is pay grade O-7 or above; or
(6)Assigned from a private sector organization under chapter 37 of 5 U.S.C. (Information Technology Exchange Program). Example 1 to the definition of senior employee: A former administrative law judge serves on a commission created within the executive branch to adjudicate certain claims arising from a recent military operation. The position is uncompensated but the judge receives travel expenses. The judge is not employed in a position for which the rate of pay is specified in or fixed according to the Executive Schedule, is not serving in a position to which he was appointed by the President or Vice President under 3 U.S.C. 105(a)(2)(B) or 106(a)(1)(B), and is not employed in a position for which his rate of basic pay is equal to or greater than 86.5 percent of the rate of basic pay for level II of the Executive Schedule. He is not a senior employee. Example 2 to the definition of senior employee: A doctor is hired to fill a “senior-level” position and is initially compensated pursuant to 5 U.S.C. 5376 at a rate of basic pay slightly less than 86.5 percent of the rate of basic pay payable for level II of the Executive Schedule. If both the annual pay adjustment provided for in 5 CFR 534.504 and the periodic pay adjustment authorized in 5 CFR 534.503 result in a rate of basic pay equal to or above 86.5 percent of the rate of basic pay payable for level II of the Executive Schedule, the doctor will become a senior employee. Example 3 to the definition of senior employee: A criminal investigator in the Office of the Inspector General at the Department of Housing and Urban Development is a GS-15 employee but also receives Law Enforcement Availability Pay (LEAP), pursuant to 5 U.S.C. 5545a. Even if the sum of the employee's LEAP payment plus the employee's basic pay for GS-15 equaled 86.5 percent of the rate of basic pay for level II of the Executive Schedule, LEAP is not considered part of an employee's “rate of basic pay” for purposes of section 207(c), and therefore the employee would not be a “senior employee.” *Special Government employee* means an officer or employee of the executive branch or an independent agency, as specified in 18 U.S.C. 202(a). A special Government employee is retained, designated, appointed, or employed to perform temporary duties either on a full-time or intermittent basis, with or without compensation, for a period not to exceed 130 days during any period of 365 consecutive days. *State* means one of the fifty States of the United States and the District of Columbia, the Commonwealth of Puerto Rico, and any territory or possession of the United States. *Very senior employee* means an employee who is:
(1)Employed in a position which is either listed in 5 U.S.C. 5312 or for which the rate of pay is equal to the rate of pay payable for level I of the Executive Schedule;
(2)Employed in a position in the Executive Office of the President which is either listed in 5 U.S.C. 5313 or for which the rate of pay is equal to the rate of pay payable for level II of the Executive Schedule;
(3)Appointed by the President to a position under 3 U.S.C. 105(a)(2)(A); or
(4)Appointed by the Vice President to a position under 3 U.S.C. 106(a)(1)(A). § 2641.105 Advice.
(a)*Agency ethics officials.* Current or former employees or others who have questions about 18 U.S.C. 207 or about this part 2641 should seek advice from a designated agency ethics official or another agency ethics official. The agency in which an individual formerly served has the primary responsibility to provide oral or written advice concerning a former employee's post-employment activities. An agency ethics official, in turn, may consult with other agencies, such as those before whom a post-employment communication or appearance is contemplated, and with the Office of Government Ethics.
(b)*Office of Government Ethics.* The Office of Government Ethics
(OGE)will provide advice to agency ethics officials and others concerning 18 U.S.C. 207 and this part 2641. OGE may provide advice orally or through issuance of a written advisory opinion and shall, as appropriate, consult with the agency or agencies concerned and with the Department of Justice.
(c)*Effect of advice.* Reliance on the oral or written advice of an agency ethics official or the OGE cannot ensure that a former employee will not be prosecuted for a violation of 18 U.S.C. 207. However, good faith reliance on such advice is a factor that may be taken into account by the Department of Justice
(DOJ)in the selection of cases for prosecution. In the case in which OGE issues a formal advisory opinion in accordance with subpart C of 5 CFR part 2638, the DOJ will not prosecute an individual who acted in good faith in accordance with that opinion. *See* 5 CFR 2638.309.
(d)*Contacts to seek advice.* A former employee will not be deemed to act on behalf of any other person in violation of 18 U.S.C. 207 when he contacts an agency ethics official or other employee of the United States for the purpose of seeking guidance concerning the applicability or meaning of section 207 as applied to his own activities.
(e)*No personal attorney-client privilege.* A current or former employee who discloses information to an agency ethics official, to a Government attorney, or to an employee of the Office of Government Ethics does not personally enjoy an attorney-client privilege with respect to such communications. § 2641.106 Applicability of certain provisions to Vice President. Subsections 207(d) (relating to restrictions on very senior personnel) and 207(f) (restrictions with regard to foreign entities) of title 18, United States Code, apply to a Vice President, to the same extent as they apply to employees and former employees covered by those provisions. *See* §§ 2641.205 and 2641.206. There are no other restrictions in 18 U.S.C. 207 applicable to a Vice President. Subpart B—Prohibitions § 2641.201 Permanent restriction on any former employee's representations to United States concerning particular matter in which the employee participated personally and substantially.
(a)*Basic prohibition of 18 U.S.C. 207(a)(1).* No former employee shall knowingly, with the intent to influence, make any communication to or appearance before an employee of the United States on behalf of any other person in connection with a particular matter involving a specific party or parties, in which he participated personally and substantially as an employee, and in which the United States is a party or has a direct and substantial interest.
(b)*Exceptions and waivers.* The prohibition of 18 U.S.C. 207(a)(1) does not apply to a former employee who is:
(1)Acting on behalf of the United States. *See* § 2641.301(a).
(2)Acting as an elected State or local government official. *See* § 2641.301(b).
(3)Communicating scientific or technological information pursuant to procedures or certification. *See* § 2641.301(e).
(4)Testifying under oath. *See* § 2641.301(f). (Note that this exception from § 2641.201 is generally not available for expert testimony. *See* § 2641.301(f)(2).)
(5)Acting on behalf of an international organization pursuant to a waiver. *See* § 2641.301(h).
(6)Acting as an employee of a Government-owned, contractor-operated entity pursuant to a waiver. *See* § 2641.301(i).
(c)*Commencement and length of restriction.* 18 U.S.C. 207(a)(1) is a permanent restriction that commences upon an employee's termination from Government service. The restriction lasts for the life of the particular matter involving specific parties in which the employee participated personally and substantially.
(d)*Communication or appearance* —(1) *Communication.* A former employee makes a communication when he imparts or transmits information of any kind, including facts, opinions, ideas, questions or direction, to an employee of the United States, whether orally, in written correspondence, by electronic media, or by any other means. This includes only those communications with respect to which the former employee intends that the information conveyed will be attributed to himself, although it is not necessary that any employee of the United States actually recognize the former employee as the source of the information.
(2)*Appearance.* A former employee makes an appearance when he is physically present before an employee of the United States, in either a formal or informal setting. Although an appearance also may be accompanied by certain communications, an appearance need not involve any communication by the former employee.
(3)*Behind-the-scenes assistance.* Nothing in this section prohibits a former employee from providing assistance to another person, provided that the assistance does not involve a communication to or an appearance before an employee of the United States. Example 1 to paragraph (d): A former employee of the Federal Bureau of Investigation makes a brief telephone call to a colleague in her former office concerning an ongoing investigation. She has made a communication. If she personally attends an informal meeting with agency personnel concerning the matter, she will have made an appearance. Example 2 to paragraph (d): A former employee of the National Endowment for the Humanities
(NEH)accompanies other representatives of an NEH grantee to a meeting with the agency. Even if the former employee does not say anything at the meeting, he has made an appearance (although that appearance may or may not have been made with the intent to influence, depending on the circumstances). Example 3 to paragraph (d): A Government employee administered a particular contract for agricultural research with Q Company. Upon termination of her Government employment, she is hired by Q Company. She works on the matter covered by the contract, but has no direct contact with the Government. At the request of a company vice president, she prepares a paper describing the persons at her former agency who should be contacted and what should be said to them in an effort to increase the scope of funding of the contract and to resolve favorably a dispute over a contract clause. She may do so. Example 4 to paragraph (d): A former employee of the National Institutes of Health
(NIH)prepares an application for an NIH research grant on behalf of her university employer. The application is signed and submitted by another university officer, but it lists the former employee as the principal investigator who will be responsible for the substantive work under the grant. She has not made a communication. She also may sign an assurance to the agency that she will be personally responsible for the direction and conduct of the research under the grant, pursuant to § 2641.201(e)(2)(iv). Moreover, she may personally communicate scientific or technological information to NIH concerning the application, provided that she does so under circumstances indicating no intent to influence the Government pursuant to § 2641.201(e)(2) or she makes the communication in accordance with the exception for scientific or technological information in § 2641.301(e). Example 5 to paragraph (d): A former employee established a small government relations firm with a highly specialized practice in certain environmental compliance issues. She prepared a report for one of her clients, which she knew would be presented to her former agency by the client. The report is not signed by the former employee, but the document does bear the name of her firm. The former employee expects that it is commonly known throughout the industry and the agency that she is the author of the report. If the report were submitted to the agency, the former employee would be making a communication and not merely confining herself to behind-the-scenes assistance, because the circumstances indicate that she intended the information to be attributed to herself.
(e)*With the intent to influence* —(1) *Basic concept.* The prohibition applies only to communications or appearances made by a former Government employee with the intent to influence the United States. A communication or appearance is made with the intent to influence when made for the purpose of:
(i)Seeking a Government ruling, benefit, approval, or other discretionary Government action; or
(ii)Affecting Government action in connection with an issue or aspect of a matter which involves an appreciable element of actual or potential dispute or controversy. Example 1 to paragraph (e)(1): A former employee of the Administration on Children and Families
(ACF)signs a grant application and submits it to ACF on behalf of a nonprofit organization for which she now works. She has made a communication with the intent to influence an employee of the United States because her communication was made for the purpose of seeking a Government benefit. Example 2 to paragraph (e)(1): A former Government employee calls an agency official to complain about the auditing methods being used by the agency in connection with an audit of a Government contractor for which the former employee serves as a consultant. The former employee has made a communication with the intent to influence because his call was made for the purpose of seeking Government action in connection with an issue involving an appreciable element of dispute.
(2)*Intent to influence not present.* Certain communications to and appearances before employees of the United States are not made with the intent to influence, within the meaning of paragraph (e)(1) of this section, including, but not limited to, communications and appearances made solely for the purpose of:
(i)Making a routine request not involving a potential controversy, such as a request for publicly available documents or an inquiry as to the status of a matter;
(ii)Making factual statements or asking factual questions in a context that involves neither an appreciable element of dispute nor an effort to seek discretionary Government action, such as conveying factual information regarding matters that are not potentially controversial during the regular course of performing a contract;
(iii)Signing and filing the tax return of another person as preparer;
(iv)Signing an assurance that one will be responsible as principal investigator for the direction and conduct of research under a Federal grant ( *see* example 4 to paragraph
(d)of this section);
(v)Filing a Securities and Exchange Commission
(SEC)Form 10-K or similar disclosure forms required by the SEC;
(vi)Making a communication, at the initiation of the Government, concerning work performed or to be performed under a Government contract or grant, during a routine Government site visit to premises owned or occupied by a person other than the United States where the work is performed or would be performed, in the ordinary course of evaluation, administration, or performance of an actual or proposed contract or grant; or
(vii)Purely social contacts ( *see* example 4 to paragraph
(f)of this section). Example 1 to paragraph (e)(2): A former Government employee calls an agency to ask for the date of a scheduled public hearing on her client's license application. This is a routine request not involving a potential controversy and is not made with the intent to influence. Example 2 to paragraph (e)(2): In the previous example, the agency's hearing calendar is quite full, as the agency has a significant backlog of license applications. The former employee calls a former colleague at the agency to ask if the hearing date for her client could be moved up on the schedule, so that her client can move forward with its business plans more quickly. This is a communication made with the intent to influence. Example 3 to paragraph (e)(2): A former employee of the Department of Defense
(DOD)now works for a firm that has a DOD contract to produce an operator's manual for a radar device used by DOD. In the course of developing a chapter about certain technical features of the device, the former employee asks a DOD official certain factual questions about the device and its properties. The discussion does not concern any matter that is known to involve a potential controversy between the agency and the contractor. The former employee has not made a communication with the intent to influence. Example 4 to paragraph (e)(2): A former medical officer of the Food and Drug Administration
(FDA)sends a letter to the agency in which he sets out certain data from safety and efficacy tests on a new drug for which his employer, ABC Drug Co., is seeking FDA approval. Even if the letter is confined to arguably “factual” matters, such as synopses of data from clinical trials, the communication is made for the purpose of obtaining a discretionary Government action, i.e., approval of a new drug. Therefore, this is a communication made with the intent to influence. Example 5 to paragraph (e)(2): A former Government employee now works for a management consulting firm, which has a Government contract to produce a study on the efficiency of certain agency operations. Among other things, the contract calls for the contractor to develop a range of alternative options for potential restructuring of certain internal Government procedures. The former employee would like to meet with agency representatives to present a tentative list of options developed by the contractor. She may not do so. There is a potential for controversy between the Government and the contractor concerning the extent and adequacy of any options presented, and, moreover, the contractor may have its own interest in emphasizing certain options as opposed to others because some options may be more difficult and expensive for the contractor to develop fully than others. Example 6 to paragraph (e)(2): A former employee of the Internal Revenue Service
(IRS)prepares his client's tax return, signs it as preparer, and mails it to the IRS. He has not made a communication with the intent to influence. In the event that any controversy should arise concerning the return, the former employee may not represent the client in the proceeding, although he may answer direct factual questions about the records he used to compile figures for the return, provided that he does not argue any theories or positions to justify the use of one figure rather than another. Example 7 to paragraph (e)(2): An agency official visits the premises of a prospective contractor to evaluate the testing procedure being proposed by the contractor for a research contract on which it has bid. A former employee of the agency, now employed by the contractor, is the person most familiar with the technical aspects of the proposed testing procedure. The agency official asks the former employee about certain technical features of the equipment used in connection with the testing procedure. The former employee may provide factual information that is responsive to the questions posed by the agency official, as such information is requested by the Government under circumstances for its convenience in reviewing the bid. However, the former employee may not argue for the appropriateness of the proposed testing procedure or otherwise advocate any position on behalf of the contractor.
(3)*Change in circumstances.* If, at any time during the course of a communication or appearance otherwise permissible under paragraph (e)(2) of this section, it becomes apparent that circumstances have changed which would indicate that any further communication or appearance would be made with the intent to influence, the former employee must refrain from such further communication or appearance. Example 1 to paragraph (e)(3): A former Government employee accompanies another employee of a contractor to a routine meeting with agency officials to deliver technical data called for under a Government contract. During the course of the meeting, an unexpected dispute arises concerning certain terms of the contract. The former employee may not participate in any discussion of this issue. Moreover, if the circumstances clearly indicate that even her continued presence during this discussion would be an appearance made with the intent to influence, she should excuse herself from the meeting.
(4)*Mere physical presence intended to influence.* Under some circumstances, a former employee's mere physical presence, without any communication by the employee concerning any material issue or otherwise, may constitute an appearance with the intent to influence an employee of the United States. Relevant considerations include such factors as whether:
(i)The former employee has been given actual or apparent authority to make any decisions, commitments, or substantive arguments in the course of the appearance;
(ii)The Government employee before whom the appearance is made has substantive responsibility for the matter and does not simply perform ministerial functions, such as the acceptance of paperwork;
(iii)The former employee's presence is relatively prominent;
(iv)The former employee is paid for making the appearance;
(v)It is anticipated that others present at the meeting will make reference to the views or past or present work of the former employee;
(vi)Circumstances do not indicate that the former employee is present merely for informational purposes, for example, merely to listen and record information for later use;
(vii)The former employee has entered a formal appearance in connection with a legal proceeding at which he is present; and
(viii)The appearance is before former subordinates or others in the same chain of command as the former employee. Example 1 to paragraph (e)(4): A former Regional Administrator of the Occupational Safety and Health Administration
(OSHA)becomes a consultant for a company being investigated for possible enforcement action by the regional OSHA office. She is hired by the company to coordinate and guide its response to the OSHA investigation. She accompanies company officers to an informal meeting with OSHA, which is held for the purpose of airing the company's explanation of certain findings in an adverse inspection report. The former employee is introduced at the meeting as the company's compliance and governmental affairs adviser, but she does not make any statements during the meeting concerning the investigation. She is paid a fee for attending this meeting. She has made an appearance with the intent to influence. Example 2 to paragraph (e)(4): A former employee of an agency now works for a manufacturer that seeks agency approval for a new product. The agency convenes a public advisory committee meeting for the purpose of receiving expert advice concerning the product. Representatives of the manufacturer will make an extended presentation of the data supporting the application for approval, and a special table has been reserved for them in the meeting room for this purpose. The former employee does not participate in the manufacturer's presentation to the advisory committee and does not even sit in the section designated for the manufacturer. Rather, he sits in the back of the room in a large area reserved for the public and the media. The manufacturer's speakers make no reference to the involvement or views of the former employee with respect to the matter. Even though the former employee may be recognized in the audience by certain agency employees, he has not made an appearance with the intent to influence because his presence is relatively inconspicuous and there is little to identify him with the manufacturer or the advocacy of its representatives at the meeting.
(f)To or before an employee of the United States—(1) Employee of the United States. For purposes of this paragraph, an “employee of the United States” means the President, the Vice President, and any current Federal employee (including an individual appointed as an employee or detailed to the Federal Government under the Intergovernmental Personnel Act (5 U.S.C. 3371-3376)) who is detailed to or employed by any:
(i)Agency (including a Government corporation);
(ii)Independent agency in the executive, legislative, or judicial branch;
(iii)Federal court; or
(iv)Court-martial.
(2)*To or before.* Except as provided in paragraph (f)(3) of this section, a communication “to” or appearance “before” an employee of the United States is one:
(i)Directed to and received by an entity specified in paragraphs (f)(1)(i) through (f)(1)(iv) of this section even though not addressed to a particular employee, e.g., as when a former employee mails correspondence to an agency but not to any named employee; or
(ii)Directed to and received by an employee in his capacity as an employee of an entity specified in paragraphs (f)(1)(i) through (f)(1)(iv) of this section, e.g., as when a former employee directs remarks to an employee representing the United States as a party or intervenor in a Federal or non-Federal judicial proceeding. A former employee does not direct his communication or appearance to a bystander who merely happens to overhear the communication or witness the appearance.
(3)*Public commentary.*
(i)A former employee who addresses a public gathering or a conference, seminar, or similar forum as a speaker or panel participant will not be considered to be making a prohibited communication or appearance if the forum:
(A)Is not sponsored or co-sponsored by an entity specified in paragraphs (f)(1)(i) through (f)(1)(iv) of this section;
(B)Is attended by a large number of people; and
(C)A significant proportion of those attending are not employees of the United States.
(ii)In the circumstances described in paragraph (f)(3)(i) of this section, a former employee may engage in exchanges with any other speaker or with any member of the audience.
(iii)A former employee also may permit the broadcast or publication of a commentary provided that it is broadcast or appears in a newspaper, periodical, or similar widely available publication. Example 1 to paragraph (f): A Federal Trade Commission
(FTC)employee participated in the FTC's decision to initiate an enforcement proceeding against a particular company. After terminating Government service, the former employee is hired by the company to lobby key Members of Congress concerning the necessity of the proceeding. He may contact Members of Congress or their staff since a communication to or appearance before such persons is not made to or before an “employee of the United States” as that term is defined in paragraph (f)(1) of this section. Example 2 to paragraph (f): In the previous example, the former FTC employee arranges to meet with a Congressional staff member to discuss the necessity of the proceeding. A current FTC employee is invited by the staff member to attend and is authorized by the FTC to do so in order to present the agency's views. The former employee may not argue his new employer's position at that meeting since his arguments would unavoidably be directed to the FTC employee in his capacity as an employee of the FTC. Example 3 to paragraph (f): The Department of State granted a waiver pursuant to 18 U.S.C. 208(b)(1) to permit one of its employees to serve in his official capacity on the Board of Directors of a private association. The employee participates in a Board meeting to discuss what position the association should take concerning the award of a recent contract by the Department of Energy (DOE). When a former DOE employee addresses the Board to argue that the association should object to the award of the contract, she is directing her communication to a Department of State employee in his capacity as an employee of the Department of State. Example 4 to paragraph (f): A Federal Communications Commission
(FCC)employee participated in a proceeding to review the renewal of a license for a television station. After terminating Government service, he is hired by the company that holds the license. At a cocktail party, the former employee meets his former supervisor who is still employed by the FCC and begins to discuss the specifics of the license renewal case with him. The former employee is directing his communication to an FCC employee in his capacity as an employee of the FCC. Moreover, as the conversation concerns the license renewal matter, it is not a purely social contact and satisfies the element of the intent to influence the Government within the meaning of paragraph
(e)of this section. Example 5 to paragraph (f): A Federal Trade Commission economist participated in her agency's review of a proposed merger between two companies. After terminating Government service, she goes to work for a trade association that is interested in the proposed merger. She would like to speak about the proposed merger at a conference sponsored by the trade association. The conference is attended by 100 individuals, 50 of whom are employees of entities specified in paragraphs (f)(1)(i) through (f)(1)(iv) of this section. The former employee may speak at the conference and may engage in a discussion of the merits of the proposed merger in response to a question posed by a Department of Justice employee in attendance. Example 6 to paragraph (f): The former employee in the previous example may, on behalf of her employer, write and permit publication of an op-ed piece in a metropolitan newspaper in support of a particular resolution of the merger proposal. Example 7 to paragraph (f): ABC Company has a contract with the Department of Energy which requires that contractor personnel work closely with agency employees in adjoining offices and work stations in the same building. After leaving the Department, a former employee goes to work for another corporation that has an interest in performing certain work related to the same contract, and he arranges a meeting with certain ABC employees at the building where he previously worked on the project. At the meeting, he asks the ABC employees to mention the interest of his new employer to the project supervisor, who is an agency employee. Moreover, he tells the ABC employees that they can say that he was the source of this information. The ABC employees in turn convey this information to the project supervisor. The former employee has made a communication to an employee of the Department of Energy. His communication is directed to an agency employee because he intended that the information be conveyed to an agency employee with the intent that it be attributed to himself, and the circumstances indicate such a close working relationship between contractor personnel and agency employees that it was likely that the information conveyed to contractor personnel would be received by the agency.
(g)*On behalf of any other person* —(1) *On behalf of.*
(i)A former employee makes a communication or appearance on behalf of another person if the former employee is acting as the other person's agent or attorney or if:
(A)The former employee is acting with the consent of the other person, whether express or implied; and
(B)The former employee is acting subject to some degree of control or direction by the other person in relation to the communication or appearance.
(ii)A former employee does not act on behalf of another merely because his communication or appearance is consistent with the interests of the other person, is in support of the other person, or may cause the other person to derive a benefit as a consequence of the former employee's activity.
(2)*Any other person.* The term “person” is defined in § 2641.104. For purposes of this paragraph, the term excludes the former employee himself or any sole proprietorship owned by the former employee. Example 1 to paragraph (g): An employee of the Bureau of Land Management
(BLM)participated in the decision to grant a private company the right to explore for minerals on certain Federal lands. After retiring from Federal service to pursue her hobbies, the former employee becomes concerned that BLM is misinterpreting a particular provision of the lease. The former employee may contact a current BLM employee on her own behalf in order to argue that her interpretation is correct. Example 2 to paragraph (g): The former BLM employee from the previous example later joins an environmental organization as an uncompensated volunteer. The leadership of the organization authorizes the former employee to engage in any activity that she believes will advance the interests of the organization. She makes a communication on behalf of the organization when, pursuant to this authority, she writes to BLM on the organization's letterhead in order to present an additional argument concerning the interpretation of the lease provision. Although the organization did not direct her to send the specific communication to BLM, the circumstances establish that she made the communication with the consent of the organization and subject to a degree of control or direction by the organization. Example 3 to paragraph (g): An employee of the Administration for Children and Families wrote the statement of work for a cooperative agreement to be issued to study alternative workplace arrangements. After terminating Government service, the former employee joins a nonprofit group formed to promote family togetherness. He is asked by his former agency to attend a meeting in order to offer his recommendations concerning the ranking of the grant applications he had reviewed while still a Government employee. The management of the nonprofit group agrees to permit him to take leave to attend the meeting in order to present his personal views concerning the ranking of the applications. Although the former employee is a salaried employee of the non-profit group and his recommendations may be consistent with the group's interests, the circumstances establish that he did not make the communication subject to the control of the group. Example 4 to paragraph (g): An Assistant Secretary of Defense participated in a meeting at which a defense contractor pressed Department of Defense
(DOD)officials to continue funding the contractor's sole source contract to develop the prototype of a specialized robot. After terminating Government service, the former Assistant Secretary approaches the contractor and suggests that she can convince her former DOD colleagues to pursue development of the prototype robot. The contractor agrees that the former Assistant Secretary's proposed efforts could be useful and asks her to set up a meeting with key DOD officials for the following week. Although the former Assistant Secretary is not an employee of the contractor, the circumstances establish that she is acting subject to some degree of control or direction by the contractor.
(h)*Particular matter involving a specific party or parties* —(1) *Basic concept.* The prohibition applies only to communications or appearances made in connection with a “particular matter involving a specific party or parties.” Although the statute defines “particular matter” broadly to include “any investigation, application, request for a ruling or determination, rulemaking, contract, controversy, claim, charge, accusation, arrest, or judicial or other proceeding,” 18 U.S.C. 207(i)(3), only those particular matters that involve a specific party or parties fall within the prohibition of section 207(a)(1). Such a matter typically involves a specific proceeding affecting the legal rights of the parties or an isolatable transaction or related set of transactions between identified parties, such as a specific contract, grant, license, product approval application, enforcement action, administrative adjudication, or court case. Example 1 to paragraph (h)(1): An employee of the Department of Housing and Urban Development approved a specific city's application for Federal assistance for a renewal project. After leaving Government service, she may not represent the city in relation to that application as it is a particular matter involving specific parties in which she participated personally and substantially as a Government employee. Example 2 to paragraph (h)(1): An attorney in the Department of Justice drafted provisions of a civil complaint that is filed in Federal court alleging violations of certain environmental laws by ABC Company. The attorney may not subsequently represent ABC before the Government in connection with the lawsuit, which is a particular matter involving specific parties.
(2)*Matters of general applicability not covered.* Legislation or rulemaking of general applicability and the formulation of general policies, standards or objectives, or other matters of general applicability are not particular matters involving specific parties. International agreements, such as treaties and trade agreements, must be evaluated in light of all relevant circumstances to determine whether they should be considered particular matters involving specific parties; relevant considerations include such factors as whether the agreement focuses on a specific property or territory, a specific claim, or addresses a large number of diverse issues or economic interests. Example 1 to paragraph (h)(2): A former employee of the Mine Safety and Health Administration
(MSHA)participated personally and substantially in the development of a regulation establishing certain new occupational health and safety standards for mine workers. Because the regulation applies to the entire mining industry, it is a particular matter of general applicability, not a matter involving specific parties, and the former employee would not be prohibited from making post-employment representations to the Government in connection with this regulation. Example 2 to paragraph (h)(2): The former employee in the previous example also assisted MSHA in its defense of a lawsuit brought by a trade association challenging the same regulation. This lawsuit is a particular matter involving specific parties, and the former MSHA employee would be prohibited from representing the trade association or anyone else in connection with the case. Example 3 to paragraph (h)(2): An employee of the National Science Foundation formulated policies for a grant program for organizations nationwide to produce science education programs targeting elementary school age children. She is not prohibited from later representing a specific organization in connection with its application for assistance under the program. Example 4 to paragraph (h)(2): An employee in the legislative affairs office of the Department of Homeland Security
(DHS)drafted official comments submitted to Congress with respect to a pending immigration reform bill. After leaving the Government, he contacts DHS on behalf of a private organization seeking to influence the Administration to insist on certain amendments to the bill. This is not prohibited. Generally, legislation is not a particular matter involving specific parties. However, if the same employee had participated as a DHS employee in formulating the agency's position on proposed private relief legislation granting citizenship to a specific individual, this matter would involve specific parties, and the employee would be prohibited from later making representational contacts in connection with this matter. Example 5 to paragraph (h)(2): An employee of the Food and Drug Administration
(FDA)drafted a proposed rule requiring all manufacturers of a particular type of medical device to obtain pre-market approval for their products. It was known at the time that only three or four manufacturers currently were marketing or developing such products. However, there was nothing to preclude other manufacturers from entering the market in the future. Moreover, the regulation on its face was not limited in application to those companies already known to be involved with this type of product at the time of promulgation. Because the proposed rule would apply to an open-ended class of manufacturers, not just specifically identified companies, it would not be a particular matter involving specific parties. After leaving Government, the former FDA employee would not be prohibited from representing a manufacturer in connection with the final rule or the application of the rule in any specific case. Example 6 to paragraph (h)(2): A former agency attorney participated in drafting a standard form contract and certain standard terms and clauses for use in all future contracts. The adoption of a standard form and language for all contracts is a matter of general applicability, not a particular matter involving specific parties. Therefore, the attorney would not be prohibited from representing another person in a dispute involving the application of one of the standard terms or clauses in a specific contract in which he did not participate as a Government employee. Example 7 to paragraph (h)(2): An employee of the Department of State participated in the development of the United States' position with respect to a proposed treaty with a foreign government concerning transfer of ownership with respect to a parcel of real property and certain operations there. After terminating Government employment, this individual seeks to represent the foreign government before the Department with respect to certain issues arising in the final stage of the treaty negotiations. This bilateral treaty is a particular matter involving specific parties, and the former employee had participated personally and substantially in this matter. Note also that certain employees may be subject to additional restrictions with respect to trade and treaty negotiations or representation of a foreign entity, pursuant to 18 U.S.C. 207(b) and (f). Example 8 to paragraph (h)(2): The employee in the previous example participated for the Department in negotiations with respect to a multilateral trade agreement concerning tariffs and other trade practices in regard to various industries in 50 countries. The proposed agreement would provide various stages of implementation, with benchmarks for certain legislative enactments by signatory countries. These negotiations do not concern a particular matter involving specific parties. Even though the former employee would not be prohibited under section 207(a)(1) from representing another person in connection with this matter, she must comply with any applicable restrictions in 18 U.S.C. 207(b) and (f).
(3)*Specific parties at all relevant times* . The particular matter must involve specific parties both at the time the individual participated as a Government employee and at the time the former employee makes the communication or appearance, although the parties need not be identical at both times. Example 1 to paragraph (h)(3): An employee of the Department of Defense
(DOD)performed certain feasibility studies and other basic conceptual work for a possible innovation to a missile system. At the time she was involved in the matter, DOD had not identified any prospective contractors who might perform the work on the project. After she left Government, DOD issued a request for proposals to construct the new system, and she now seeks to represent one of the bidders in connection with this procurement. She may do so. Even though the procurement is a particular matter involving specific parties at the time of her proposed representation, no parties to the matter had been identified at the time she participated in the project as a Government employee. Example 2 to paragraph (h)(3): A former employee in an agency inspector general's office conducted the first investigation of its kind concerning a particular fraudulent accounting practice by a grantee. This investigation resulted in a significant monetary recovery for the Government, as well as a settlement agreement in which the grantee agreed to use only certain specified accounting methods in the future. As a result of this case, the agency decided to issue a proposed rule expressly prohibiting the fraudulent accounting practice and requiring all grantees to use the same accounting methods that had been developed in connection with the settlement agreement. The former employee may represent a group of grantees submitting comments critical of the proposed regulation. Although the proposed regulation in some respects evolved from the earlier fraud case, which did involve specific parties, the subsequent rulemaking proceeding does not involve specific parties.
(4)*Preliminary or informal stages in a matter* . When a particular matter involving specific parties begins depends on the facts. A particular matter may involve specific parties prior to any formal action or filings by the agency or other parties. Much of the work with respect to a particular matter is accomplished before the matter reaches its final stage, and preliminary or informal action is covered by the prohibition, provided that specific parties to the matter actually have been identified. With matters such as grants, contracts, and other agreements, ordinarily specific parties are first identified when initial proposals or indications of interest, such as responses to requests for proposals
(RFP)or earlier expressions of interest, are received by the Government; in unusual circumstances, however, such as a sole source procurement or when there are sufficient indicia that the Government has explicitly identified a specific party in an otherwise ordinary prospective grant, contract, or agreement, specific parties may be identified even prior to the receipt of a proposal or expression of interest. Example 1 to paragraph (h)(4): A Government employee participated in internal agency deliberations concerning the merits of taking enforcement action against a company for certain trade practices. He left the Government before any charges were filed against the company. He has participated in a particular matter involving specific parties and may not represent another person in connection with the ensuing administrative or judicial proceedings against the company. Example 2 to paragraph (h)(4): A former special Government employee
(SGE)of the Agency for Health Care Policy and Research served, before leaving the agency, on a “peer review” committee that made a recommendation to the agency concerning the technical merits of a specific grant proposal submitted by a university. The committee's recommendations are nonbinding and constitute only the first of several levels of review within the agency. Nevertheless, the SGE participated in a particular matter involving specific parties and may not represent the university in subsequent efforts to obtain the same grant. Example 3 to paragraph (h)(4): Prior to filing a product approval application with a regulatory agency, a company sought guidance from the agency. The company provided specific information concerning the product, including its composition and intended uses, safety and efficacy data, and the results and designs of prior studies on the product. After a series of meetings, the agency advised the company concerning the design of additional studies that it should perform in order to address those issues that the agency still believed were unresolved. Even though no formal application had been filed, this was a particular matter involving specific parties. The agency guidance was sufficiently specific, and it was clearly intended to address the substance of a prospective application and to guide the prospective applicant in preparing an application that would meet approval requirements. An agency employee who was substantially involved in developing this guidance could not leave the Government and represent the company when it submits its formal product approval application. Example 4 to paragraph (h)(4): A Government scientist participated in preliminary, internal deliberations about her agency's need for additional laboratory facilities. After she terminated Government service, the General Services Administration issued a request for proposals
(RFP)seeking private architectural services to design the new laboratory space for the agency. The former employee may represent an architectural firm in connection with its response to the RFP. During the preliminary stage in which the former employee participated, no specific architectural firms had been identified for the proposed work. Example 5 to paragraph (h)(4): In the previous example, the proposed laboratory was to be an extension of a recently completed laboratory designed by XYZ Architectural Associates, and the Government had determined to pursue a sole source contract with that same firm for the new work. Even before the firm was contacted or expressed any interest concerning the sole source contract, the former employee participated in meetings in which specifications for a potential sole source contract with the firm were discussed. The former employee may not represent XYZ before the Government in connection with this matter.
(5)*Same particular matter* —(i) *General.* The prohibition applies only to communications or appearances in connection with the same particular matter involving specific parties in which the former employee participated as a Government employee. The same particular matter may continue in another form or in part. In determining whether two particular matters involving specific parties are the same, all relevant factors should be considered, including the extent to which the matters involve the same basic facts, the same or related parties, related issues, the same confidential information, and the amount of time elapsed.
(ii)*Considerations in the case of contracts, grants, and other agreements* . With respect to matters such as contracts, grants or other agreements:
(A)A new matter typically does not arise simply because there are amendments, modifications, or extensions of a contract (or other agreement), unless there are fundamental changes in objectives or the nature of the matter;
(B)Generally, successive or otherwise separate contracts (or other agreements) will be viewed as different matters from each other, absent some indication that one contract (or other agreement) contemplated the other or that both are in support of the same specific proceeding;
(C)A contract is almost always a single particular matter involving specific parties. However, under compelling circumstances, distinct aspects or phases of certain large umbrella-type contracts, involving separate task orders or delivery orders, may be considered separate individual particular matters involving specific parties, if an agency determines that articulated lines of division exist. In making this determination, an agency should consider the relevant factors as described above. No single factor should be determinative, and any divisions must be based on the contract's characteristics, which may include, among other things, performance at different geographical locations, separate and distinct subject matters, the separate negotiation or competition of individual task or delivery orders, and the involvement of different program offices or even different agencies. Example 1 to paragraph (h)(5): An employee drafted one provision of an agency contract to procure new software. After she left Government, a dispute arose under the same contract concerning a provision that she did not draft. She may not represent the contractor in this dispute. The contract as a whole is the particular matter involving specific parties and may not be fractionalized into separate clauses for purposes of avoiding the prohibition of 18 U.S.C. 207(a)(1). Example 2 to paragraph (h)(5): In the previous example, a new software contract was awarded to the same contractor through a full and open competition, following the employee's departure from the agency. Although no major changes were made in the contract terms, the new contract is a different particular matter involving specific parties. Example 3 to paragraph (h)(5): A former special Government employee
(SGE)recommended that his agency approve a new food additive made by Good Foods, Inc., on the grounds that it was proven safe for human consumption. The Healthy Food Alliance
(HFA)sued the agency in Federal court to challenge the decision to approve the product. After leaving Government service, the former SGE may not serve as an expert witness on behalf of HFA in this litigation because it is a continuation of the same product approval matter in which he participated personally and substantially. Example 4 to paragraph (h)(5): An employee of the Department of the Army negotiated and supervised a contract with Munitions, Inc. for four million mortar shells meeting certain specifications. After the employee left Government, the Army sought a contract modification to add another one million shells. All specifications and contractual terms except price, quantity and delivery dates were identical to those in the original contract. The former Army employee may not represent Munitions in connection with this modification, because it is part of the same particular matter involving specific parties as the original contract. Example 5 to the paragraph (h)(5): In the previous example, certain changes in technology occurred since the date of the original contract, and the proposed contract modifications would require the additional shells to incorporate new design features. Moreover, because of changes in the Army's internal system for storing and distributing shells to various locations, the modifications would require Munitions to deliver its product to several de-centralized destination points, thus requiring Munitions to develop novel delivery and handling systems and incur new transportation costs. The Army considers these modifications to be fundamental changes in the approach and objectives of the contract and may determine that these changes constitute a new particular matter. Example 6 to paragraph (h)(5): A Government employee reviewed and approved certain wiretap applications. The prosecution of a person overheard during the wiretap, although not originally targeted, must be regarded as part of the same particular matter as the original wiretap application. The reason is that the validity of the wiretap may be put in issue and many of the facts giving rise to the wiretap application would be involved. Example 7 to paragraph (h)(5): The Navy awards an indefinite delivery contract for environmental remediation services in the northeastern U.S. A Navy engineer is assigned as the Navy's technical representative on a task order for remediation of an oil spill at a Navy activity in Maine. The Navy engineer is personally and substantially involved in the task order (e.g., he negotiates the scope of work, the labor hours required, and monitors the contractor's performance). Following successful completion of the remediation of the oil spill in Maine, the Navy engineer leaves Government service and goes to work for the Navy's remediation contractor. In year two of the contract, the Navy issues a task order for the remediation of lead-based paint at a Navy housing complex in Connecticut. The contractor assigns the former Navy engineer to be its project manager for this task order, which will require him to negotiate with the Navy about the scope of work and the labor hours under the task order. Although the task order is placed under the same indefinite delivery contract (the terms of which remain unchanged), the Navy would be justified in determining that the lead-based paint task order is a separate particular matter as it involves a different type of remediation, at a different location, and at a different time. Note, however, that the engineer in this example had not participated personally and substantially in the overall contract. Any former employee who had—for example, by participating personally and substantially in the initial award or subsequent oversight of the umbrella contract—will be deemed to have also participated personally and substantially in any individual particular matters resulting from the agency's determination that such contract is divisible. Example 8 to paragraph (h)(5): An agency contracts with Company A to install a satellite system connecting the headquarters office to each of its twenty field offices. Although the field offices are located at various locations throughout the country, each installation is essentially identical, with the terms of each negotiated in the main contract. Therefore, this contract should not be divided into separate particular matters involving specific parties.
(i)*Participated personally and substantially* —(1) *Participate* . To “participate” means to take an action as an employee through decision, approval, disapproval, recommendation, the rendering of advice, investigation, or other such action, or to purposefully forbear in order to affect the outcome of a matter. An employee can participate in particular matters that are pending other than in his own agency. An employee does not participate in a matter merely because he had knowledge of its existence or because it was pending under his official responsibility. An employee does not participate in a matter within the meaning of this section unless he does so in his official capacity.
(2)*Personally* . To participate “personally” means to participate:
(i)Directly, either individually or in combination with other persons; or
(ii)Through direct and active supervision of the participation of any person he supervises, including a subordinate.
(3)*Substantially* . To participate “substantially” means that the employee's involvement is of significance to the matter. Participation may be substantial even though it is not determinative of the outcome of a particular matter. However, it requires more than official responsibility, knowledge, perfunctory involvement, or involvement on an administrative or peripheral issue. A finding of substantiality should be based not only on the effort devoted to a 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. Provided that an employee participates in the substantive merits of a matter, his participation may be substantial even though his role in the matter, or the aspect of the matter in which he is participating, may be minor in relation to the matter as a whole. Participation in peripheral aspects of a matter or in aspects not directly involving the substantive merits of a matter (such as reviewing budgetary procedures or scheduling meetings) is not substantial. Example 1 to paragraph (i): A General Services Administration
(GSA)attorney drafted a standard form contract and certain standard terms and clauses for use in future contracts. A contracting officer uses one of the standard clauses in a subsequent contract without consulting the GSA attorney. The attorney did not participate personally in the subsequent contract. Example 2 to paragraph (i): An Internal Revenue Service
(IRS)attorney is neither in charge of nor does she have official responsibility for litigation involving a particular delinquent taxpayer. At the request of a co-worker who is assigned responsibility for the litigation, the lawyer provides advice concerning strategy during the discovery stage of the litigation. The IRS attorney participated personally in the litigation. Example 3 to paragraph (i): The IRS attorney in the previous example had no further involvement in the litigation. She participated substantially in the litigation notwithstanding that the post-discovery stages of the litigation lasted for ten years after the day she offered her advice. Example 4 to paragraph (i): The General Counsel of the Office of Government Ethics
(OGE)contacts the OGE attorney who is assigned to evaluate all requests for “certificates of divestiture” to check on the status of the attorney's work with respect to all pending requests. The General Counsel makes no comment concerning the merits or relative importance of any particular request. The General Counsel did not participate substantially in any particular request when she checked on the status of all pending requests. Example 5 to paragraph (i): The OGE attorney in the previous example completes his evaluation of a particular certificate of divestiture request and forwards his recommendation to the General Counsel. The General Counsel forwards the package to the Director of OGE with a note indicating her concurrence with the attorney's recommendation. The General Counsel participated substantially in the request. Example 6 to paragraph (i): An International Trade Commission
(ITC)computer programmer developed software designed to analyze data related to unfair trade practice complaints. At the request of an ITC employee who is considering the merits of a particular complaint, the programmer enters all the data supplied to her, runs the computer program, and forwards the results to the employee who will make a recommendation to an ITC Commissioner concerning the disposition of the complaint. The programmer did not participate substantially in the complaint. Example 7 to paragraph (i): The director of an agency office must concur in any decision to grant an application for technical assistance to certain nonprofit entities. When a particular application for assistance comes into her office and is presented to her for decision, she intentionally takes no action on it because she believes the application will raise difficult policy questions for her agency at this time. As a consequence of her inaction, the resolution of the application is deferred indefinitely. She has participated personally and substantially in the matter.
(j)*United States is a party or has a direct and substantial interest* —(1) *United States* . For purposes of this paragraph, the “United States” means:
(i)The executive branch (including a Government corporation);
(ii)The legislative branch; or
(iii)The judicial branch.
(2)*Party or direct and substantial interest* . The United States may be a party to or have a direct and substantial interest in a particular matter even though it is pending in a non-Federal forum, such as a State court. The United States is neither a party to nor does it have a direct and substantial interest in a particular matter merely because a Federal statute is at issue or a Federal court is serving as the forum for resolution of the matter. When it is not clear whether the United States is a party to or has a direct and substantial interest in a particular matter, this determination shall be made in accordance with the following procedure:
(i)*Coordination by designated agency ethics official* . The designated agency ethics official
(DAEO)for the former employee's agency shall have the primary responsibility for coordinating this determination. When it appears likely that a component of the United States Government other than the former employee's former agency may be a party to or have a direct and substantial interest in the particular matter, the DAEO shall coordinate with agency ethics officials serving in those components.
(ii)*Agency determination* . A component of the United States Government shall determine if it is a party to or has a direct and substantial interest in a matter in accordance with its own internal procedures. It shall consider all relevant factors, including whether:
(A)The component has a financial interest in the matter;
(B)The matter is likely to have an effect on the policies, programs, or operations of the component;
(C)The component is involved in any proceeding associated with the matter, e.g., as by having provided witnesses or documentary evidence; and
(D)The component has more than an academic interest in the outcome of the matter. Example 1 to paragraph (j): An attorney participated in preparing the Government's antitrust action against Z Company. After leaving the Government, she may not represent Z Company in a private antitrust action brought against it by X Company on the same facts involved in the Government action. Nor may she represent X Company in that matter. The interest of the United States in preventing both inconsistent results and the appearance of impropriety in the same factual matter involving the same party, Z Company, is direct and substantial. However, if the Government's antitrust investigation or case is closed, the United States no longer has a direct and substantial interest in the case. § 2641.202 Two-year restriction on any former employee's representations to United States concerning particular matter for which the employee had official responsibility.
(a)*Basic prohibition of 18 U.S.C. 207(a)(2)* . For two years after his Government service terminates, no former employee shall knowingly, with the intent to influence, make any communication to or appearance before an employee of the United States on behalf of any other person in connection with a particular matter involving a specific party or parties, in which the United States is a party or has a direct and substantial interest, and which such person knows or reasonably should know was actually pending under his official responsibility within the one-year period prior to the termination of his Government service.
(b)*Exceptions and waivers* . The prohibition of 18 U.S.C. 207(a)(2) does not apply to a former employee who is:
(1)Acting on behalf of the United States. *See* § 2641.301(a).
(2)Acting as an elected State or local government official. *See* § 2641.301(b).
(3)Communicating scientific or technological information pursuant to procedures or certification. *See* § 2641.301(e).
(4)Testifying under oath. *See* § 2641.301(f).
(5)Acting on behalf of an international organization pursuant to a waiver. *See* § 2641.301(h).
(6)Acting as an employee of a Government-owned, contractor-operated entity pursuant to a waiver. *See* § 2641.301(i).
(c)*Commencement and length of restriction* . 18 U.S.C. 207(a)(2) is a two-year restriction that commences upon an employee's termination from Government service. *See* example 9 to paragraph
(j)of this section.
(d)*Communication or appearance. See* § 2641.201(d).
(e)*With the intent to influence. See* § 2641.201(e).
(f)*To or before an employee of the United States See* § 2641.201(f).
(g)*On behalf of any other person. See* § 2641.201(g).
(h)*Particular matter involving a specific party or parties. See* § 2641.201(h).
(i)*United States is a party or has a direct and substantial interest. See* § 2641.201(j).
(j)*Official responsibility* —(1) *Definition* . “Official responsibility” means the direct administrative or operating authority, whether intermediate or final, and either exercisable alone or with others, and either personally or through subordinates, to approve, disapprove, or otherwise direct Government action. Ordinarily, the scope of an employee's official responsibility is determined by those functions assigned by statute, regulation, Executive order, job description, or delegation of authority. All particular matters under consideration in an agency are under the official responsibility of the agency head and each is under that of any intermediate supervisor who supervises a person, including a subordinate, who actually participates in the matter or who has been assigned to participate in the matter within the scope of his official duties. A nonsupervisory employee does not have official responsibility for his own assignments within the meaning of section 207(a)(2). Authority to direct Government action concerning only ancillary or nonsubstantive aspects of a matter, such as budgeting, equal employment, scheduling, or format requirements does not, ordinarily, constitute official responsibility for the matter as a whole.
(2)*Actually pending* . A matter is actually pending under an employee's official responsibility if it has been referred to the employee for assignment or has been referred to or is under consideration by any person he supervises, including a subordinate. A matter remains pending even when it is not under “active” consideration. There is no requirement that the matter must have been pending under the employee's official responsibility for a certain length of time.
(3)*Temporary duties* . An employee ordinarily acquires official responsibility for all matters within the scope of his position immediately upon assuming the position. However, under certain circumstances, an employee who is on detail (or other temporary assignment) to a position or who is serving in an “acting” status might not be deemed to have official responsibility for any matter by virtue of such temporary duties. Specifically, an employee performing such temporary duties will not thereby acquire official responsibility for matters within the scope of the position where he functions only in a limited “caretaker” capacity, as evidenced by such factors as:
(i)Whether the employee serves in the position for no more than 60 consecutive calendar days;
(ii)Whether there is actually another incumbent for the position, who is temporarily absent, for example, on travel or leave;
(iii)Whether there has been no event triggering the provisions of 5 U.S.C. 3345(a); and
(iv)Whether there are any other circumstances indicating that, given the temporary nature of the detail or acting status, there was no reasonable expectation of the full authority of the position.
(4)*Effect of leave status.* The scope of an employee's official responsibility is not affected by annual leave, terminal leave, sick leave, excused absence, leave without pay, or similar absence from assigned duties.
(5)*Effect of disqualification.* Official responsibility for a matter is not eliminated through self-disqualification or avoidance of personal participation in a matter, as when an employee is disqualified from participating in a matter in accordance with subparts D, E, or F of 5 CFR part 2635 or part 2640. Official responsibility for a matter can be terminated by a formal modification of an employee's responsibilities, such as by a change in the employee's position description.
(6)*One-year period before termination.* 18 U.S.C. 207(a)(2) applies only with respect to a particular matter that was actually pending under the former employee's official responsibility:
(i)At some time when the matter involved a specific party or parties; and
(ii)Within his last year of Government service.
(7)*Knowledge of official responsibility.* A communication or appearance is not prohibited unless, at the time of the proposed post-employment communication or appearance, the former employee knows or reasonably should know that the matter was actually pending under his official responsibility within the one-year period prior to his termination from Government service. It is not necessary that a former employee have known during his Government service that the matter was actually pending under his official responsibility. Note to paragraph (j): 18 U.S.C. 207(a)(2) requires only that the former employee “reasonably should know” that the matter was pending under his official responsibility. Consequently, when the facts suggest that a particular matter involving specific parties could have been actually pending under his official responsibility, a former employee should seek information from an agency ethics official or other Government official to clarify his role in the matter. *See* § 2641.105 concerning advice. Example 1 to paragraph (j): The position description of an Assistant Secretary of Housing and Urban Development specifies that he is responsible for a certain class of grants. These grants are handled by an office under his supervision. As a practical matter, however, the Assistant Secretary has not become involved with any grants of this type. The Assistant Secretary has official responsibility for all such grants as specified in his position description. Example 2 to paragraph (j): A budget officer at the National Oceanic and Atmospheric Administration
(NOAA)is asked to review NOAA's budget to determine if there are funds still available for the purchase of a new hurricane tracking device. The budget officer does not have official responsibility for the resulting contract even though she is responsible for all budget matters within the agency. The identification of funds for the contract is an ancillary aspect of the contract. Example 3 to paragraph (j): An Internal Revenue Service
(IRS)auditor worked in the office responsible for the tax-exempt status of nonprofit organizations. Subsequently, he was transferred to the IRS office concerned with public relations. When contacted by an employee of his former office for advice concerning a matter involving a certain nonprofit organization, the auditor provides useful suggestions. The auditor's supervisor in the public relations office does not have official responsibility for the nonprofit matter since it does not fall within the scope of the auditor's current duties. Example 4 to paragraph (j): An information manager at the Central Intelligence Agency
(CIA)assigns a nonsupervisory subordinate to research an issue concerning a request from a news organization for information concerning past agency activities. Before she commences any work on the assignment, the subordinate terminates employment with the CIA. The request was not pending under the subordinate's official responsibility since a non-supervisory employee does not have official responsibility for her own assignments. (Once the subordinate commences work on the assignment, she may be participating “personally and substantially” within the meaning of 18 U.S.C. 207(a)(1) and § 2641.201(i).) Example 5 to paragraph (j): A regional employee of the Federal Emergency Management Agency requests guidance from the General Counsel concerning a contractual dispute with Baker Company. The General Counsel immediately assigns the matter to a staff attorney whose workload can accommodate the assignment, then retires from Government two days later. Although the staff attorney did not retrieve the assignment from his in-box prior to the General Counsel's departure, the Baker matter was actually pending under the General Counsel's official responsibility from the time the General Counsel received the request for guidance. Example 6 to paragraph (j): A staff attorney in the Federal Emergency Management Agency's Office of General Counsel is consulted by procurement officers concerning the correct resolution of a contractual matter involving Able Company. The attorney renders an opinion resolving the question. The same legal question arises later in several contracts with other companies but none of the disputes with such companies is referred to the Office of General Counsel. The General Counsel had official responsibility for the determination of the Able Company matter, but the subsequent matters were never actually pending under his official responsibility. Example 7 to paragraph (j): An employee of the National Endowment for the Humanities becomes “acting” Division Director of the Division of Education Programs when the Division Director is away from the office for three days to attend a conference. During those three days, the employee has authority to direct Government action in connection with many matters with which she ordinarily would have no involvement. However, in view of the brief time period and the fact that there remains an incumbent in the position of Division Director, the agency ethics official properly may determine that the acting official did not acquire official responsibility for all matters then pending in the Division. Example 8 to paragraph (j): A division director at the Food and Drug Administration disqualified himself from participating in the review of a drug for Alzheimer's disease, in accordance with subpart E of 5 CFR part 2635, because his brother headed the private sector team which developed the drug. The matter was instead assigned to the division director's deputy. The director continues to have official responsibility for review of the drug. The division director also would have retained official responsibility for the matter had he either asked his supervisor or another division director to oversee the matter. Example 9 to paragraph (j): The Deputy Secretary of a department terminates Government service to stay home with her newborn daughter. Four months later, she returns to the department to serve on an advisory committee as a special Government employee (SGE). After three months, she terminates Government service once again in order to accept a part-time position with a public relations firm. The 18 U.S.C. 207(a)(2) bar commences when she resigns as Deputy Secretary and continues to run for two years. (Any action taken in carrying out official duties as a member of the advisory committee would be undertaken on behalf of the United States and would, therefore, not be restricted by 18 U.S.C. 207(a)(2). *See* § 2641.301(a).) A second two-year restriction commences when she terminates from her second period of Government service but it applies only with respect to any particular matter actually pending under her official responsibility during her three-month term as an SGE. § 2641.203 One-year restriction on any former employee's representations, aid, or advice concerning ongoing trade or treaty negotiation.
(a)*Basic prohibition of 18 U.S.C. 207(b).* For one year after his Government service terminates, no former employee shall, on the basis of “covered information,” knowingly represent, aid, or advise any other person concerning an ongoing trade or treaty negotiation in which, during his last year of Government service, he participated personally and substantially as an employee. “Covered information” refers to agency records which were accessible to the employee which he knew or should have known were designated as exempt from disclosure under the Freedom of Information Act (5 U.S.C. 552).
(b)*Exceptions and waivers.* The prohibition of 18 U.S.C. 207(b) does not apply to a former employee who is:
(1)Acting on behalf of the United States. *See* § 2641.301(a).
(2)Acting as an elected State or local government official. *See* § 2641.301(b).
(3)Testifying under oath. *See* § 2641.301(f).
(4)Acting on behalf of an international organization pursuant to a waiver. *See* § 2641.301(h).
(5)Acting as an employee at a Government-owned, contractor-operated entity pursuant to a waiver. *See* § 2641.301(i).
(c)*Commencement and length of restriction.* 18 U.S.C. 207(b) commences upon an employee's termination from Government service. The restriction lasts for one year or until the termination of the negotiation, whichever occurs first.
(d)*Represent, aid, or advise.* [Reserved]
(e)*Any other person.* [Reserved]
(f)*On the basis of.* [Reserved]
(g)*Covered Information.* [Reserved]
(h)*Ongoing trade or treaty negotiation.* [Reserved]
(i)*Participated personally and substantially.* [Reserved] § 2641.204 One-year restriction on any former senior employee's representations to former agency concerning any matter, regardless of prior involvement.
(a)Basic prohibition of 18 U.S.C. 207(c). For one year after his service in a senior position terminates, no former senior employee may knowingly, with the intent to influence, make any communication to or appearance before an employee of an agency in which he served in any capacity within the one-year period prior to his termination from a senior position, if that communication or appearance is made on behalf of any other person in connection with any matter on which the former senior employee seeks official action by any employee of such agency. An individual who served in a “very senior employee” position is subject to the broader two-year restriction set forth in 18 U.S.C. 207(d) in lieu of that set forth in section 207(c). *See* § 2641.205.
(b)*Exceptions and waivers.* The prohibition of 18 U.S.C. 207(c) does not apply to a former senior employee who is:
(1)Acting on behalf of the United States. *See* § 2641.301(a).
(2)Acting as an elected State or local government official. *See* § 2641.301(b).
(3)Acting on behalf of specified entities. *See* § 2641.301(c).
(4)Making uncompensated statements based on special knowledge. *See* § 2641.301(d).
(5)Communicating scientific or technological information pursuant to procedures or certification. *See* § 2641.301(e).
(6)Testifying under oath. *See* § 2641.301(f).
(7)Acting on behalf of a candidate or political party. *See* § 2641.301(g).
(8)Acting on behalf of an international organization pursuant to a waiver. *See* § 2641.301(h).
(9)Acting as an employee of a Government-owned, contractor-operated entity pursuant to a waiver. *See* § 2641.301(i).
(10)Subject to a waiver issued for certain positions. *See* § 2641.301(j).
(c)*Applicability to special Government employees and Intergovernmental Personnel Act appointees or detailees—*
(1)*Special Government employees.*
(i)18 U.S.C. 207(c) applies to an individual as a result of service as a special Government employee
(SGE)who:
(A)Served in a senior employee position while serving as an SGE; and
(B)Served 60 or more days as an SGE during the one-year period before terminating service as a senior employee.
(ii)Any day on which work is performed shall count toward the 60-day threshold without regard to the number of hours worked that day or whether the day falls on a weekend or holiday. For purposes of determining whether an SGE's rate of basic pay is equal to or greater than 86.5 percent of the rate of basic pay for level II of the Executive Schedule, within the meaning of the definition of senior employee in § 2641.104, the employee's hourly rate of pay (or daily rate divided by eight) shall be multiplied by 2087, the number of Federal working hours in one year. (In the case of a Reserve officer of the Armed Forces or an officer of the National Guard who is an SGE serving in a senior employee position, 18 U.S.C. 207(c) applies if the officer served 60 or more days as an SGE within the one-year period prior to his termination from a period of active duty or active duty for training.)
(2)*Intergovernmental Personnel Act appointees or detailees.* 18 U.S.C. 207(c) applies to an individual serving as a senior employee pursuant to an appointment or detail under the Intergovernmental Personnel Act, 5 U.S.C. 3371-3376. An individual is a senior employee if he received total pay from Federal or non-Federal sources equal to or greater than 86.5 percent of the rate of basic pay for level II of the Executive Schedule (exclusive of any reimbursement for a non-Federal employer's share of benefits not paid to the employee as salary), and:
(i)The individual served in a Federal position ordinarily compensated at a rate equal to or greater than 86.5 percent of level II of the Executive Schedule, regardless of what portion of the pay is derived from Federal expenditures or expenditures by the individual's non-Federal employer;
(ii)The individual received a direct Federal payment, pursuant to 5 U.S.C. 3374(c)(1), that supplemented the salary that he received from his non-Federal employer; or
(iii)The individual's non-Federal employer received Federal reimbursement equal to or greater than 86.5 percent of level II of the Executive Schedule. Example 1 to paragraph (c): An employee of a private research institution serves on an advisory committee that convenes periodically to discuss United States policy on foreign arms sales. The expert is compensated at a daily rate which is the equivalent of 86.5 percent of the rate of basic pay for a full-time employee at level II of the Executive Schedule. The individual serves two hours per day for 65 days before resigning from the advisory committee nine months later. The individual becomes subject to 18 U.S.C. 207(c) when she resigns from the advisory committee since she served 60 or more days as a special Government employee during the one-year period before terminating service as a senior employee. Example 2 to paragraph (c): An individual is detailed from a university to a Federal department under the Intergovernmental Personnel Act to do work that had previously been performed by a GS-15 employee. While on detail, the individual continues to receive pay from the university in an amount $5,000 less than 86.5 percent of the rate of basic pay for level II of the Executive Schedule. In addition, the department pays a $25,000 supplement directly to the individual, as authorized by 5 U.S.C. 3374(c)(1). Since the employee's total pay is equal to or greater than 86.5 percent of the rate of basic pay for level II of the Executive Schedule, and a portion of that compensation is paid directly to the individual by the department, he becomes subject to 18 U.S.C. 207(c) when his detail ends.
(d)*Commencement and length of restriction.* 18 U.S.C. 207(c) is a one-year restriction. The one-year period is measured from the date when the employee ceases to serve in a senior employee position, not from the termination of Government service, unless the two events occur simultaneously. (In the case of a Reserve officer of the Armed Forces or an officer of the National Guard who is a special Government employee serving in a senior employee position, section 207(c) is measured from the date when the officer terminates a period of active duty or active duty for training.) Example 1 to paragraph (d): An employee at the Department of Labor
(DOL)serves in a senior employee position. He then accepts a GS-15 position at the Federal Labor Relations Authority
(FLRA)but terminates Government service six months later to accept a job with private industry. 18 U.S.C. 207(c) commences when he ceases to be a senior employee at DOL, even though he does not terminate Government service at that time. (Any action taken in carrying out official duties on behalf of FLRA while still employed by that agency would be undertaken on behalf of the United States and would, therefore, not be restricted by section 207(c). *See* § 2641.301(a).) Example 2 to paragraph (d): In the previous example, the DOL employee accepts a senior employee position at FLRA rather than a GS-15 position. The bar of section 207(c) commences when, six months later, he terminates service in the second senior employee position to accept a job with private industry. (The bar will apply with respect to both the DOL and FLRA. *See* paragraph
(g)of § 2641.204 and examples 2 and 3 to that paragraph.)
(e)*Communication or appearance.* *See* § 2641.201(d).
(f)*With the intent to influence.* *See* § 2641.201(e).
(g)*To or before employee of former agency* —(1) *Employee.* For purposes of this paragraph, a former senior employee may not contact:
(i)Any current Federal employee of the former senior employee's “former agency” as defined in paragraph (g)(2) of this section;
(ii)An individual detailed under the Intergovernmental Personnel Act (5 U.S.C. 3371-3376) to the former senior employee's former agency;
(iii)An individual detailed to the former senior employee's former agency from another department, agency or other entity, including agencies and entities within the legislative or judicial branches;
(iv)An individual serving with the former senior employee's former agency as a collateral duty pursuant to statute or Executive order; and
(v)In the case of a communication or appearance made by a former senior employee who is barred by 18 U.S.C. 207(c) from communicating to or appearing before the Executive Office of the President, the President and Vice President.
(2)*Former agency.* The term “agency” is defined in § 2641.104. Unless eligible to benefit from the designation of distinct and separate agency components as described in § 2641.302, a former senior employee's former agency will ordinarily be considered to be the whole of any larger agency of which his former agency was a part on the date he terminated senior service.
(i)*One-year period before termination.* 18 U.S.C. 207(c) applies with respect to agencies in which the former senior employee served within the one-year period prior to his termination from a senior employee position.
(ii)*Served in any capacity.* Once the restriction commences, 18 U.S.C. 207(c) applies with respect to any agency in which the former senior employee served in any capacity during the one-year period, regardless of his position, rate of basic pay, or pay grade.
(iii)*Multiple Assignments.* An employee can simultaneously serve in more than one agency. A former senior employee will be considered to have served in his own employing entity and in any entity to which he was detailed for any length of time or with which he was required to serve as a collateral duty pursuant to statute or Executive order.
(iv)*Effect of organizational changes.* If a former senior employee's former agency has been significantly altered by organizational changes after his termination from senior service, it may be necessary to determine whether a successor entity is the same agency as the former senior employee's former agency. The appropriate designated agency ethics official, in consultation with the Office of Government Ethics, shall identify the entity that is the individual's former agency. Whether a successor entity is the same as the former agency depends upon whether it has substantially the same organizational mission, the extent of the termination or dispersion of the agency's functions, and other factors as may be appropriate.
(A)*Agency abolished or substantially changed.* If a successor entity is not identifiable as substantially the same agency from which the former senior employee terminated, the 18 U.S.C. 207(c) prohibition will not bar communications or appearances by the former senior employee to that successor entity.
(B)*Agency substantially the same.* If a successor entity remains identifiable as substantially the same entity from which the former senior employee terminated, the 18 U.S.C. 207(c) bar will extend to the whole of the successor entity.
(C)*Employing entity is made separate.* If an employing entity is made separate from an agency of which it was a part, but it remains identifiable as substantially the same entity from which the former senior employee terminated senior service before the entity was made separate, the 18 U.S.C. 207(c) bar will apply to a former senior employee of that entity only with respect to the new separate entity.
(D)*Component designations.* If a former senior employee's former agency was a designated “component” within the meaning of § 2641.302 on the date of his termination as senior employee, *see* § 2641.302(g).
(3)*To or before.* Except as provided in paragraph (g)(4) of this section, a communication “to” or appearance “before” an employee of a former senior employee's former agency is one:
(i)Directed to and received by the former senior employee's former agency, even though not addressed to a particular employee; or
(ii)Directed to and received by an employee of a former senior employee's former agency in his official capacity, including in his capacity as an employee serving in the agency on detail or, if pursuant to statute or Executive order, as a collateral duty. A former senior employee does not direct his communication or appearance to a bystander who merely happens to overhear the communication or witness the appearance.
(4)*Public commentary.*
(i)A former senior employee who addresses a public gathering or a conference, seminar, or similar forum as a speaker or panel participant will not be considered to make a prohibited communication or appearance if the forum:
(A)Is not sponsored or co-sponsored by the former senior employee's former agency;
(B)Is attended by a large number of people; and
(C)A significant proportion of those attending are not employees of the former senior employee's former agency.
(ii)In the circumstances described in paragraph (g)(4)(i) of this section, a former senior employee may engage in exchanges with any other speaker or with any member of the audience.
(iii)A former senior employee also may permit the broadcast or publication of a commentary provided that it is broadcast or appears in a newspaper, periodical, or similar widely-available publication. Example 1 to paragraph (g): Two months after retiring from a senior employee position at the United States Department of Agriculture (USDA), the former senior employee is asked to represent a poultry producer in a compliance matter involving the producer's storage practices. The former senior employee may not represent the poultry producer before a USDA employee in connection with the compliance matter or any other matter in which official action is sought from the USDA. He has ten months remaining of the one-year bar which commenced upon his termination as a senior employee with the USDA. Example 2 to paragraph (g): An individual serves for several years at the Commodity Futures Trading Commission
(CFTC)as a GS-15. With no break in service, she then accepts a senior employee position at the Export-Import Bank of the United States (Ex-Im Bank) where she remains for nine months until she leaves Government service in order to accept a position in the private sector. Since the individual served in both the CFTC and the Ex-Im Bank within her last year of senior service, she is barred by 18 U.S.C. 207(c) as to both agencies for one year commencing from her termination from the senior employee position at the Ex-Im Bank. Example 3 to paragraph (g): An individual serves for several years at the Securities and Exchange Commission
(SEC)in a senior employee position. He terminates Government service in order to care for his parent who is recovering from heart surgery. Two months later, he accepts a senior employee position at the Overseas Private Investment Corporation
(OPIC)where he remains for nine months until he leaves Government service in order to accept a position in the private sector. The 18 U.S.C. 207(c) bar commences when he resigns from the SEC and continues to run for one year. (Any action taken in carrying out official duties as an employee of OPIC would be undertaken on behalf of the United States and would, therefore, not be restricted by section 207(c). *See* § 2641.301(a).) A second one-year restriction commences when he resigns from OPIC. The second restriction will apply with respect to OPIC only. Upon his termination from the OPIC position, he will have one remaining month of the section 207(c) restriction arising from his termination of his SEC position. This remaining month of restriction will run concurrently with the first month of the one-year OPIC restriction. Example 4 to paragraph (g): An architect serves in a senior employee position in the Agency for Affordable Housing. Subsequent to her termination from the position, the agency is abolished and its functions are distributed among three other agencies within three departments, the Department of Housing and Urban Development, the Department of the Interior, and the Department of Justice. None of these successor entities is identifiable as substantially the same entity as the Agency for Affordable Housing, and, accordingly, the 18 U.S.C. 207(c) bar will not apply to the architect. Example 5 to paragraph (g): A chemist serves in a senior employee position in the Agency for Clean Rivers. Subsequent to his termination from the position, the mission of the Agency for Clean Rivers is expanded and it is renamed the Agency for Clean Water. A number of employees from the Agency for Marine Life are transferred to the reorganized agency. If it is determined that the Agency for Clean Water is substantially the same entity from which the chemist terminated, the section 207(c) bar will apply with respect to the chemist's contacts with all of the employees of the Agency for Clean Water, including those employees who recently transferred from the Agency for Marine Life. He would not be barred from contacting an employee serving in one of the positions that had been transferred from the Agency for Clean Rivers to the Agency for Clean Land.
(h)*On behalf of any other person. See* § 2641.201(g).
(i)*Matter on which former senior employee seeks official action* —(1) *Seeks official action.* A former senior employee seeks official action when the circumstances establish that he is making his communication or appearance for the purpose of inducing a current employee, as defined in paragraph
(g)of this section, to make a decision or to otherwise act in his official capacity.
(2)*Matter.* The prohibition on seeking official action applies with respect to any matter, including:
(i)Any “particular matter involving a specific party or parties” as defined in § 2641.201(h);
(ii)The consideration or adoption of broad policy options that are directed to the interests of a large and diverse group of persons;
(iii)A new matter that was not previously pending at or of interest to the former senior employee's former agency; and
(iv)A matter pending at any other agency in the executive branch, an independent agency, the legislative branch, or the judicial branch. Example 1 to paragraph (i): A former senior employee at the National Capital Planning Commission
(NCPC)wishes to contact a friend who still works at the NCPC to solicit a donation for a local charitable organization. The former senior employee may do so since the circumstances establish that he would not be making the communication for the purpose of inducing the NCPC employee to make a decision in his official capacity about the donation. Example 2 to paragraph (i): A former senior employee at the Department of Defense wishes to contact the Secretary of Defense to ask him if he would be interested in attending a cocktail party. At the party, the former senior employee would introduce the Secretary to several of the former senior employee's current business clients who have sought the introduction. The former senior employee and the Secretary do not have a history of socializing outside the office, the Secretary is in a position to affect the interests of the business clients, and all expenses associated with the party will be paid by the former senior employee's consulting firm. The former senior employee should not contact the Secretary. The circumstances do not establish that the communication would be made other than for the purpose of inducing the Secretary to make a decision in his official capacity about the invitation. Example 3 to paragraph (i): A former senior employee at the National Science Foundation
(NSF)accepts a position as vice president of a company that was hurt by recent cuts in the defense budget. She contacts the NSF's Director of Legislative and Public Affairs to ask the Director to contact a White House official in order to press the need for a new science policy to benefit her company. The former senior employee made a communication for the purpose of inducing the NSF employee to make a decision in his official capacity about contacting the White House. § 2641.205 Two-year restriction on any former very senior employee's representations to former agency or certain officials concerning any matter, regardless of prior involvement.
(a)*Basic prohibition of 18 U.S.C. 207(d).* For two years after his service in a very senior employee position terminates, no former very senior employee shall knowingly, with the intent to influence, make any communication to or appearance before any official appointed to an Executive Schedule position listed in 5 U.S.C. 5312-5316 or before any employee of an agency in which he served as a very senior employee within the one-year period prior to his termination from a very senior employee position, if that communication or appearance is made on behalf of any other person in connection with any matter on which the former very senior employee seeks official action by any official or employee.
(b)*Exceptions and waivers.* The prohibition of 18 U.S.C. 207(d) does not apply to a former very senior employee who is:
(1)Acting on behalf of the United States. *See* § 2641.301(a).
(2)Acting as an elected State or local government official. *See* § 2641.301(b).
(3)Acting on behalf of specified entities. *See* § 2641.301(c).
(4)Making uncompensated statements based on special knowledge. *See* § 2641.301(d).
(5)Communicating scientific or technological information pursuant to procedures or certification. *See* § 2641.301(e).
(6)Testifying under oath. *See* § 2641.301(f).
(7)Acting on behalf of a candidate or political party. *See* § 2641.301(g).
(8)Acting on behalf of an international organization pursuant to a waiver. *See* § 2641.301(h).
(9)Acting as an employee of a Government-owned, contractor-operated entity pursuant to a waiver. *See* § 2641.301(i).
(c)*Commencement and length of restriction.* 18 U.S.C. 207(d) is a two-year restriction. The two-year period is measured from the date when the employee ceases to serve in a very senior employee position, not from the termination of Government service, unless the two events occur simultaneously. *See* examples 1 and 2 to paragraph
(d)of § 2641.204.
(d)*Communication or appearance. See* § 2641.201(d).
(e)*With the intent to influence. See* § 2641.201(e).
(f)*To or before employee of former agency. See* § 2641.204(g), except that this section covers only former very senior employees and applies only with respect to the agency or agencies in which a former very senior employee served as a very senior employee, and very senior employees do not benefit from the designation of distinct and separate agency components as referenced in § 2641.204(g)(2).
(g)*To or before an official appointed to an Executive Schedule position. See* § 2641.204(g)(3) for “to or before,” except that this section covers only former very senior employees and also extends to a communication or appearance before any official currently appointed to a position that is listed in sections 5 U.S.C. 5312-5316. Note to paragraph (g): A communication made to an official described in 5 U.S.C. 5312-5316 can include a communication to a subordinate of such official with the intent that the information be conveyed directly to the official and attributed to the former very senior employee.
(h)*On behalf of any other person. See* § 2641.201(g).
(i)*Matter on which former very senior employee seeks official action. See* § 2641.204(i), except that this section only covers former very senior employees. Example 1 to § 2641.205: The former Attorney General may not contact the Assistant Attorney General of the Antitrust Division on behalf of a professional sports league in support of a proposed exemption from certain laws, nor may he contact the Secretary of Labor. He may, however, speak directly to the President or Vice President concerning the issue. Example 2 to § 2641.205: The former Director of the Office of Management and Budget
(OMB)is now the Chief Executive Officer of a major computer firm and wishes to convince the new Administration to change its new policy concerning computer chips. The former OMB Director may contact an employee of the Department of Commerce who, although paid at a level fixed according to level III of the Executive Schedule, does not occupy a position actually listed in 5 U.S.C. 5312-5316. She could not contact an employee working in the Office of the United States Trade Representative, an office within the Executive Office of the President (her former agency). Example 3 to § 2641.205: A senior employee serves in the Department of Agriculture for several years. He is then appointed to serve as the Secretary of Health and Human Services
(HHS)but resigns seven months later. Since the individual served as a very senior employee only at HHS, he is barred for two years by 18 U.S.C. 207(d) as to any employee of HHS and any official currently appointed to an Executive Schedule position listed in 5 U.S.C. 5312-5316, including any such official serving in the Department of Agriculture. (In addition, a one-year section 207(c) bar commenced when he terminated service as a senior employee at the Department of Agriculture.) Example 4 to § 2641.205: The former Secretary of the Department of Labor may not represent another person in a meeting with the current Secretary of Transportation to discuss a proposed regulation on highway safety standards. Example 5 to § 2641.205: In the previous example, the former very senior employee would like to meet instead with the special assistant to the Secretary of Transportation. The former employee knows that the special assistant has a close working relationship with the Secretary. The former employee expects that the special assistant would brief the Secretary about any discussions at the proposed meeting and refer specifically to the former employee. Because the circumstances indicate that the former employee intends that the information provided at the meeting would be conveyed by the assistant directly to the Secretary and attributed to the former employee, he may not meet with the assistant. § 2641.206 One-year restriction on any former senior or very senior employee's representations on behalf of, or aid or advice to, a foreign entity.
(a)*Basic prohibition of 18 U.S.C. 207(f).* For one year after service in a senior or very senior employee position terminates, no former senior employee or former very senior employee shall knowingly represent a foreign government or foreign political party before an officer or employee of an agency or department of the United States, or aid or advise such a foreign entity, with the intent to influence a decision of such officer or employee. For purposes of describing persons who may not be contacted with the intent to influence, under 18 U.S.C. 207(f) and this section, the phrase “officer or employee” includes the President, the Vice President, and Members of Congress, and the term “department” includes the legislative branch of government.
(b)*Exceptions and waivers.* The prohibition of 18 U.S.C. 207(f) does not apply to a former senior or former very senior employee who is:
(1)Acting on behalf of the United States. *See* § 2641.301(a). (Note, however, the limitation in § 2641.301(a)(2)(ii).)
(2)Acting as an elected State or local government official. *See* § 2641.301(b).
(3)Testifying under oath. *See* § 2641.301(f).
(4)Acting on behalf of an international organization pursuant to a waiver. *See* § 2641.301(h).
(5)Acting as an employee of a Government-owned, contractor-operated entity pursuant to a waiver. *See* § 2641.301(i).
(6)Subject to a waiver issued for certain positions. *See* § 2641.301(j).
(c)*Commencement and length of restriction* —(1) *Generally.* Except as provided in paragraph (c)(2) of this section, 18 U.S.C. 207(f) is a one-year restriction. The one-year period is measured from the date when an employee ceases to be a senior or very senior employee, not from the termination of Government service, unless the two occur simultaneously. *See* examples 1 and 2 to paragraph
(d)of § 2641.204.
(2)*U.S. Trade Representative or Deputy U.S. Trade Representative.* 18 U.S.C. 207(f) is a permanent restriction as applied to a former U.S. Trade Representative or Deputy U.S. Trade Representative.
(d)*Represent, aid, or advise.* [Reserved]
(e)*With the intent to influence.* [Reserved]
(f)*Decision of employee of an agency.* [Reserved]
(g)*Foreign entity.* [Reserved] § 2641.207 One-year restriction on any former private sector assignee under the Information Technology Exchange Program representing, aiding, counseling or assisting in representing in connection with any contract with former agency.
(a)*Basic prohibition of 18 U.S.C. 207(l).* For one year after the termination of his assignment from a private sector organization to an agency under the Information Technology Exchange Program, 5 U.S.C. chapter 37, no former assignee shall knowingly represent, or aid, counsel or assist in representing any other person in connection with any contract with that agency.
(b)*Exceptions and waivers.* The prohibition of 18 U.S.C. 207(l) does not apply to a former employee who is:
(1)Acting on behalf of the United States. *See* § 2641.301(a).
(2)Acting as an elected State or local government official. *See* § 2641.301(b).
(3)Testifying under oath. *See* § 2641.301(f).
(4)Acting on behalf of an international organization pursuant to a waiver. *See* § 2641.301(h).
(5)Acting as an employee of a Government-owned, contractor-operated entity pursuant to a waiver. *See* § 2641.301(i).
(c)*Commencement and length of restriction.* 18 U.S.C. 207(l) is a one-year restriction. The one-year period is measured from the date when the individual's assignment under the Information Technology Exchange Program terminates.
(d)*Represent, aid, counsel, or assist in representing.* [Reserved]
(e)*In connection with any contract with the former agency.* [Reserved] Subpart C—Exceptions, Waivers and Separate Components § 2641.301 Statutory exceptions and waivers.
(a)*Exception for acting on behalf of United States.* A former employee is not prohibited by any of the prohibitions of 18 U.S.C. 207 from engaging in any activity on behalf of the United States.
(1)*United States.* For purposes of this paragraph, the term “United States” means:
(i)The executive branch (including a Government corporation);
(ii)The legislative branch; or
(iii)The judicial branch.
(2)*On behalf of the United States.* A former employee will be deemed to engage in the activity on behalf of the United States if he acts in accordance with paragraph (a)(2)(i) or (a)(2)(ii) of this section.
(i)*As employee of the United States.* A former employee engages in an activity on behalf of the United States when he carries out official duties as a current employee of the United States.
(ii)*As other than employee of the United States.*
(A)Provided that he does not represent, aid, or advise a foreign entity in violation of 18 U.S.C. 207(f), a former employee engages in an activity on behalf of the United States when he serves: ( *1* ) As a representative of the United States pursuant to a specific agreement with the United States to provide representational services to the United States; or ( *2* ) As a witness called by the United States (including a Congressional committee or subcommittee) to testify at a Congressional hearing (even if applicable procedural rules do not require him to declare by oath or affirmation that he will testify truthfully).
(B)A former employee will not be deemed to engage in an activity on behalf of the United States merely because he is performing work funded by the Government, because he is engaging in the activity in response to a contact initiated by the Government, because the Government will derive some benefit from the activity, or because he or the person on whose behalf he is acting may share the same objective as the Government. Note to paragraph (a)(2)(ii): *See also* § 2641.301(f) concerning the permissibility of testimony under oath, including testimony as an expert witness, when a former employee is called as a witness by the United States. Example 1 to paragraph (a): An employee of the Department of Transportation
(DOT)transfers to become an employee of the Pension Benefit Guaranty Corporation (PBGC). The PBGC, a wholly owned Government corporation, is a corporation in which the United States has a proprietary interest. The former DOT employee may press the PBGC's point of view in a meeting with DOT employees concerning an airline bankruptcy case in which he was personally and substantially involved while at the DOT. His communications to the DOT on behalf of the PBGC would be made on behalf of the United States. Example 2 to paragraph (a): A Federal Transit Administration
(FTA)employee recommended against the funding of a certain subway project. After terminating Government service, she is hired by a Congressman as a member of his staff to perform a variety of duties, including miscellaneous services for the Congressman's constituents. The former employee may contact the FTA on behalf of a constituent group as part of her official duties in order to argue for the reversal of the subway funding decision in which she participated while still an employee of the FTA. Her communications to the FTA on behalf of the constituent group would be made on behalf of the United States. Example 3 to paragraph (a): A Postal Service attorney participated in discussions with the Office of Personnel Management
(OPM)concerning a dispute over the mailing of health plan brochures. After terminating Government service, the attorney joins a law firm as a partner. He is assigned by the firm's managing partner to represent the Postal Service pursuant to a contract requiring the firm to provide certain legal services. The former senior employee may represent the Postal Service in meetings with OPM concerning the dispute about the health plan brochures. The former senior employee's suggestions to the Postal Service concerning strategy and his arguments to OPM concerning the dispute would be made on behalf of the United States (even though he is also acting on behalf of his law firm when he performs representational services for the United States). A communication to the Postal Service concerning a disagreement about the law firm's fee, however, would not be made on behalf of the United States. Example 4 to paragraph (a): A former senior employee of the Food and Drug Administration (FDA), now an employee of a drug company, is called by a Congressional committee to give unsworn testimony concerning the desirability of instituting cost controls in the pharmaceutical industry. The former senior employee may address the committee even though her testimony will unavoidably also be directed to a current employee of the FDA who has also been asked to testify as a member of the same panel of experts. The former employee's communications at the hearing, provided at the request of the United States, would be made on behalf of the United States. Example 5 to paragraph (a): A National Security Agency
(NSA)analyst drafted the specifications for a contract that was awarded to the Secure Data Corporation to develop prototype software for the processing of foreign intelligence information. After terminating Government service, the analyst is hired by the corporation. The former employee may not attempt to persuade NSA officials that the software is in accord with the specifications. Although the development of the software is expected to significantly enhance the processing of foreign intelligence information and the former employee's opinions might be useful to current NSA employees, his communications would not be made on behalf of the United States. Example 6 to paragraph (a): A senior employee at the Department of the Air Force specialized in issues relating to the effective utilization of personnel. After terminating Government service, the former senior employee is hired by a contractor operating a Federally Funded Research and Development Center (FFRDC). The FFRDC is not a “Government corporation” as defined in § 2641.104. The former senior employee may not attempt to convince the Air Force of the manner in which Air Force funding should be allocated among projects proposed to be undertaken by the FFRDC. Although the work performed by the FFRDC will be determined by the Air Force, may be accomplished at Government-owned facilities, and will benefit the Government, her communications would not be made on behalf of the United States. Example 7 to paragraph (a): A Department of Justice
(DOJ)attorney represented the United States in a civil enforcement action against a company that had engaged in fraudulent activity. The settlement of the case required that the company correct certain deficiencies in its operating procedures. After terminating Government service, the attorney is hired by the company. When DOJ auditors schedule a meeting with the company's legal staff to review company actions since the settlement, the former employee may not attempt to persuade the auditors that the company is complying with the terms of the settlement. Although the former employee's insights might facilitate the audit, his communications would not be made on behalf of the United States even though the Government's auditors initiated the contact with the former employee. Note to paragraph (a): See also example 9 to paragraph
(j)of § 2641.202 and example 1 to paragraph
(d)of § 2641.204.
(b)*Exception for acting on behalf of State or local government as elected official.* A former employee is not prohibited by any of the prohibitions of 18 U.S.C. 207 from engaging in any post-employment activity on behalf of one or more State or local governments, provided the activity is undertaken in carrying out official duties as an elected official of a State or local government. Example 1 to paragraph (b): A former employee of the Department of Housing and Urban Development
(HUD)participated personally and substantially in the evaluation of a grant application from a certain city. After terminating Government service, he was elected mayor of that city. The former employee may contact an Assistant Secretary at HUD to argue that additional funds are due the city under the terms of the grant. Example 2 to paragraph (b): A former employee of the Federal Highway Administration
(FHWA)participated personally and substantially in the decision to provide funding for a bridge across the White River in Arkansas. After terminating Government service, she accepted the Governor's offer to head the highway department in Arkansas. A communication to or appearance before the FHWA concerning the terms of the construction grant would not be made as an elected official of a State or local government.
(c)*Exception for acting on behalf of specified entities.* A former senior or very senior employee is not prohibited by 18 U.S.C. 207(c) or (d), or §§ 2641.204 or 2641.205, from making a communication or appearance on behalf of one or more entities specified in paragraph (c)(1) of this section, provided the communication or appearance is made in carrying out official duties as an employee of a specified entity.
(1)*Specified entities.* For purposes of this paragraph, a specified entity is:
(i)An agency or instrumentality of a *State or local government* ;
(ii)A *hospital or medical research organization* , if exempted from taxation under 26 U.S.C. 501(c)(3); or
(iii)An *accredited, degree-granting institution of higher education* , as defined in 20 U.S.C. 1001.
(2)*Employee.* For purposes of this paragraph, the term “employee” of a specified entity means a person who has an employee-employer relationship with an entity specified in paragraph (c)(1) of this section. It includes a person who is employed to work part-time for a specified entity. The term excludes an individual performing services for a specified entity as a consultant or independent contractor. Example 1 to paragraph (c): A senior employee leaves her position at the National Institutes of Health
(NIH)and takes a full-time position at the Gene Research Foundation, a tax-exempt organization pursuant to 26 U.S.C. 501(c)(3). As an employee of a 501(c)(3) tax-exempt medical research organization, the former senior employee is not barred by 18 U.S.C. 207(c) from representing the Foundation before the NIH. Example 2 to paragraph (c): A former senior employee of the Environmental Protection Agency
(EPA)joins a law firm in Richmond, Virginia. The firm is hired by the Commonwealth of Virginia to represent it in discussions with the EPA about an environmental impact statement concerning the construction of a highway interchange. The former senior employee's arguments concerning the environmental impact statement would not be made as an employee of the Commonwealth of Virginia. Example 3 to paragraph (c): A former senior employee becomes an employee of the ABC Association. The ABC Association is a nonprofit organization whose membership consists of a broad representation of State health agencies and senior State health officials, and it performs services from which certain State governments benefit, including collecting information from its members and conveying that information and views to the Federal Government. However, the ABC Association has not been delegated authority by any State government to perform any governmental functions, and it does not operate under the regulatory, financial, or management control of any State government. Therefore, the ABC Association is not an agency or instrumentality of a State government, and the former senior employee may not represent the organization before his former agency within one year after terminating his senior employee position.
(d)*Exception for uncompensated statements based on special knowledge.* A former senior or very senior employee is not prohibited by 18 U.S.C. 207(c) or (d), or §§ 2641.204 or 2641.205, from making a statement based on his own special knowledge in the particular area that is the subject of the statement, provided that he receives no compensation for making the statement.
(1)*Special knowledge.* A former employee has special knowledge concerning a subject area if he is familiar with the subject area as a result of education, interaction with experts, or other unique or particularized experience.
(2)*Statement.* A statement for purposes of this paragraph is a communication of facts observed by the former employee.
(3)*Compensation.* Compensation includes any form of remuneration or income that is given in consideration, in whole or in part, for the statement. It does not include the payment of actual and necessary expenses incurred in connection with making the statement. Example 1 to paragraph (d): A senior employee of the Department of the Treasury was personally and substantially involved in discussions with other Department officials concerning the advisability of a three-phase reduction in the capital gains tax. After Government service, the former senior employee affiliates with a nonprofit group that advocates a position on the three-phase capital gains issue that is similar to his own. The former senior employee, who receives no salary from the nonprofit organization, may meet with current Department officials on the organization's behalf to state what steps had previously been taken by the Department to address the issue. The statement would be permissible even if the nonprofit organization reimbursed the former senior employee for his actual and necessary travel expenses incurred in connection with making the statement. Example 2 to paragraph (d): A former senior employee becomes a government relations consultant, and he enters into a $5,000 per month retainer agreement with XYZ Corporation for government relations services. He would like to meet with his former agency to discuss a regulatory matter involving his client. Even though he would not be paid by XYZ specifically for this particular meeting, he nevertheless would receive compensation for any statements at the meeting, because of the monthly payments under his standing retainer agreement. Therefore he may not rely on the exception for uncompensated statements based on special knowledge.
(e)*Exception for furnishing scientific or technological information.* A former employee is not prohibited by 18 U.S.C. 207(a), (c), or (d), or §§ 2641.201, 2641.202, 2641.204, or 2641.205, from making communications, including appearances, solely for the purpose of furnishing scientific or technological information, provided the communications are made either in accordance with procedures adopted by the agency or agencies to which the communications are directed or the head of such agency or agencies, in consultation with the Director of the Office of Government Ethics, makes a certification published in the **Federal Register** .
(1)*Purpose of information.* A communication made solely for the purpose of furnishing scientific or technological information may be:
(i)Made in connection with a matter that involves an appreciable element of actual or potential dispute;
(ii)Made in connection with an effort to seek a discretionary Government ruling, benefit, approval, or other action; or
(iii)Inherently influential in relation to the matter in dispute or the Government action sought.
(2)*Scientific or technological information.* The former employee must convey information of a scientific or technological character, such as technical or engineering information relating to the natural sciences. The exception does not extend to information associated with a nontechnical discipline such as law, economics, or political science.
(3)*Incidental references or remarks.* Provided the former employee's communication primarily conveys information of a scientific or technological character, the entirety of the communication will be deemed made solely for the purpose of furnishing such information notwithstanding an incidental reference or remark:
(i)Unrelated to the matter to which the post-employment restriction applies;
(ii)Concerning feasibility, risk, cost, speed of implementation, or other considerations when necessary to appreciate the practical significance of the basic scientific or technological information provided; or
(iii)Intended to facilitate the furnishing of scientific or technological information, such as those references or remarks necessary to determine the kind and form of information required or the adequacy of information already supplied. Example 1 to paragraph (e)(3): After terminating Government service, a former senior employee at the National Security Agency
(NSA)accepts a position as a senior manager at a firm specializing in the development of advanced security systems. The former senior employee and another firm employee place a conference call to a current NSA employee to follow up on an earlier discussion in which the firm had sought funding from the NSA to develop a certain proposed security system. After the other firm employee explains the scientific principles underlying the proposed system, the former employee may not state the system's expected cost. Her communication would not primarily convey information of a scientific or technological character. Example 2 to paragraph (e)(3): If, in the previous example, the former senior employee explained the scientific principles underlying the proposed system, she could also have stated its expected cost as an incidental reference or remark.
(4)*Communications made under procedures acceptable to the agency.*
(i)An agency may adopt such procedures as are acceptable to it, specifying conditions under which former Government employees may make communications solely for the purpose of furnishing scientific or technological information, in light of the agency's particular programs and needs. In promulgating such procedures, an agency may consider, for example, one or more of the following:
(A)Requiring that the former employee specifically invoke the exception prior to making a communication (or series of communications);
(B)Requiring that the designated agency ethics official for the agency to which the communication is directed (or other agency designee) be informed when the exception is used;
(C)Limiting communications to certain formats which are least conducive to the use of personal influence;
(D)Segregating, to the extent possible, meetings and presentations involving technical substance from those involving other aspects of the matter; or
(E)Employing more restrictive practices in relation to communications concerning specified categories of matters or specified aspects of a matter, such as in relation to the pre-award as distinguished from the post-award phase of a procurement.
(ii)The Director of the Office of Government Ethics may review any agency implementation of this exception in connection with OGE's executive branch ethics program oversight responsibilities. *See* 5 CFR part 2638. Example 1 to paragraph (e)(4): A Marine Corps engineer participates personally and substantially in drafting the specifications for a new assault rifle. After terminating Government service, he accepts a job with the company that was awarded the contract to produce the rifle. Provided he acts in accordance with agency procedures, he may accompany the President of the company to a meeting with Marine Corps employees and report the results of a series of metallurgical tests. These results support the company's argument that it has complied with a particular specification. He may do so even though the meeting was expected to be and is, in fact, a contentious one in which the company's testing methods are at issue. He may not, however, present the company's argument that an advance payment is due the company under the terms of the contract since this would not be a mere incidental reference or remark within the meaning of paragraph (e)(3) of this section.
(5)*Certification for expertise in technical discipline.* A certification issued in accordance with this section shall be effective on the date it is executed (unless a later date is specified), provided that it is transmitted to the **Federal Register** for publication.
(i)*Criteria for issuance.* A certification issued in accordance with this section may not broaden the scope of the exception and may be issued only when:
(A)The former employee has outstanding qualifications in a scientific, technological, or other technical discipline (involving engineering or other natural sciences as distinguished from a nontechnical discipline such as law, economics, or political science);
(B)The matter requires the use of such qualifications; and
(C)The national interest would be served by the former employee's participation.
(ii)*Submission of requests.* The individual wishing to make the communication shall forward a written request to the head of the agency to which the communications would be directed. Any such request shall address the criteria set forth in paragraph (e)(5)(i) of this section.
(iii)*Issuance.* The head of the agency to which the communications would be directed may, upon finding that the criteria specified in paragraph (e)(5)(i) of this section are satisfied, approve the request by executing a certification, which shall be published in the **Federal Register** . A copy of the certification shall be forwarded to the affected individual. The head of the agency shall, prior to execution of the certification, furnish a draft copy of the certification to the Director of the Office of Government Ethics and consider the Director's comments, if any, in relation to the draft. The certification shall specify:
(A)The name of the former employee;
(B)The Government position or positions held by the former employee during his most recent period of Government service;
(C)The identity of the employer or other person on behalf of which the former employee will be acting;
(D)The restriction or restrictions to which the certification shall apply;
(E)Any limitations imposed by the agency head with respect to the scope of the certification; and
(F)The basis for finding that the criteria specified in paragraph (e)(5)(i) of this section are satisfied, specifically including a description of the matter and the communications that will be permissible or, if relevant, a statement that such information is protected from disclosure by statute.
(iv)*Copy to Office of Government Ethics.* Once published, the agency shall provide the Director of the Office of Government Ethics with a copy of the certification as published in the **Federal Register** .
(v)*Revocation* . The agency head may revoke a certification and shall forward a written notice of the revocation to the former employee and to the OGE Director. Revocation of a certification shall be effective on the date specified in the notice revoking the certification.
(f)*Exception for giving testimony under oath or making statements required to be made under penalty of perjury* . Subject to the limitation described in paragraph (f)(2) of this section concerning expert witness testimony, a former employee is not prohibited by any of the prohibitions of 18 U.S.C. 207 from giving testimony under oath or making a statement required to be made under penalty of perjury.
(1)*Testimony under oath* . Testimony under oath is evidence delivered by a witness either orally or in writing, including deposition testimony and written affidavits, in connection with a judicial, quasi-judicial, administrative, or other legally recognized proceeding in which applicable procedural rules require a witness to declare by oath or affirmation that he will testify truthfully.
(2)*Limitation on exception for service as an expert witness* . The exception described in paragraph (f)(1) of this section does not negate the bar of 18 U.S.C. 207(a)(1), or § 2641.201, to a former employee serving as an expert witness; where the bar of section 207(a)(1) applies, a former employee may not serve as an expert witness except:
(i)If he is called as a witness by the United States; or
(ii)By court order. For this purpose, a subpoena is not a court order, nor is an order merely qualifying an individual to testify as an expert witness.
(3)*Statements made under penalty of perjury* . A former employee may make any statement required to be made under penalty of perjury, except that he may not:
(i)Submit a pleading, application, or other document as an attorney or other representative; or
(ii)Serve as an expert witness where the bar of 18 U.S.C. 207(a)(1) applies, except as provided in paragraph (f)(2) of this section. Note to paragraph (f): Whether compensation of a witness is appropriate is not addressed by 18 U.S.C. 207. However, 18 U.S.C. 201 may prohibit individuals from receiving compensation for testifying under oath in certain forums except as authorized by 18 U.S.C. 201(d). Note also that there may be statutory or other bars on the disclosure by a current or former employee of information from the agency's files or acquired in connection with the individual's employment with the Government; a former employee's agency may have promulgated procedures to be followed with respect to the production or disclosure of such information. Example 1 to paragraph (f): A former employee is subpoenaed to testify in a case pending in a United States district court concerning events at the agency she observed while she was performing her official duties with the Government. She is not prohibited by 18 U.S.C. 207 from testifying as a fact witness in the case. Example 2 to paragraph (f): An employee was removed from service by his agency in connection with a series of incidents where the employee was absent without leave or was unable to perform his duties because he appeared to be intoxicated. The employee's supervisor, who had assisted the agency in handling the issues associated with the removal, subsequently left Government. In the ensuing case in Federal court between the employee who had been removed and his agency over whether he had been discriminated against because of his disabling alcoholism, his former supervisor was asked whether on certain occasions the employee had been intoxicated on the job and unable to perform his assigned duties. Opposing counsel objected to the question on the basis that the question required expert testimony and the witness had not been qualified as an expert. The judge overruled the objection on the basis that the witness would not be providing expert testimony but opinions or inferences which are rationally based on his perception and helpful to a clear understanding of his testimony or the determination of a fact in issue. The former employee may provide the requested testimony without violating 18 U.S.C. 207. Example 3 to paragraph (f): A former senior employee of the Environmental Protection Agency
(EPA)is a recognized expert concerning compliance with Clean Air Act requirements. Within one year after terminating Government service, she is retained by a utility company that is the defendant in a lawsuit filed against it by the EPA. While the matter had been pending while she was with the agency, she had not worked on the matter. After the court rules that she is qualified to testify as an expert, the former senior employee may offer her sworn opinion that the utility company's practices are in compliance with Clean Air Act requirements. She may do so although she would otherwise have been barred by 18 U.S.C. 207(c) from making the communication to the EPA. Example 4 to paragraph (f): In the previous example, an EPA scientist served as a member of the EPA investigatory team that compiled a report concerning the utility company's practices during the discovery stage of the lawsuit. She later terminated Government service to join a consulting firm and is hired by the utility company to assist it in its defense. She may not, without a court order, serve as an expert witness for the company in the matter since she is barred by 18 U.S.C. 207(a)(1) from making the communication to the EPA. On application by the utility company for a court order permitting her service as an expert witness, the court found that there were no extraordinary circumstances that would justify overriding the specific statutory bar to such testimony. Such extraordinary circumstances might be where no other equivalent expert testimony can be obtained and an employee's prior involvement in the matter would not cause her testimony to have an undue influence on proceedings. Without such extraordinary circumstances, ordering such expert witness testimony would undermine the bar on such testimony.
(g)*Exception for representing certain candidates or political organizations* . Except as provided in paragraph (g)(2) of this section, a former senior or very senior employee is not prohibited by 18 U.S.C. 207(c) or (d), or §§ 2641.204 or 2641.205, from making a communication or appearance on behalf of a candidate in his capacity as a candidate or an entity specified in paragraphs (g)(1)(ii) through (g)(1)(vi) of this section.
(1)*Specified persons or entities* . For purposes of this paragraph (g), the specified persons or entities are:
(i)A *candidate* . A candidate means any person who seeks nomination for election, or election to, Federal or State office or who has authorized others to explore on his own behalf the possibility of seeking nomination for election, or election to, Federal or State office;
(ii)An *authorized committee* . An authorized committee means any political committee designated in writing by a candidate as authorized to receive contributions or make expenditures to promote the nomination or election of the candidate or to explore the possibility of seeking the nomination or election of the candidate. The term does not include a committee that receives contributions or makes expenditures to promote more than one candidate;
(iii)A *national committee* . A national committee means the organization which, under the bylaws of a political party, is responsible for the day-to-day operation of the political party at the national level;
(iv)A *national Federal campaign committee* . A national Federal campaign committee means an organization which, under the bylaws of a political party, is established primarily to provide assistance at the national level to candidates nominated by the party for election to the office of Senator or Representative in, or Delegate or Resident Commissioner to, the Congress;
(v)A *State committee* . A State committee means the organization which, under the bylaws of a political party, is responsible for the day-to-day operation of the political party at the State level; or
(vi)A *political party* . A political party means an association, committee, or organization that nominates a candidate for election to any Federal or State elected office whose name appears on the election ballot as the candidate of the association, committee, or organization.
(2)*Limitations* . The exception in this paragraph
(g)shall not apply if the communication or appearance:
(i)Is made at a time the former senior or very senior employee is employed by any person or entity other than:
(A)A person or entity specified in paragraph (g)(1) of this section; or
(B)A person or entity who exclusively represents, aids, or advises persons or entities described in paragraph (g)(1) of this section;
(ii)Is made other than solely on behalf of one or more persons or entities specified in paragraph (g)(1) or (g)(2)(i)(B) of this section; or
(iii)Is made to or before the Federal Election Commission by a former senior or very senior employee of the Federal Election Commission. Example 1 to paragraph (g): The former Deputy Director of the Office of Management and Budget becomes the full-time head of the President's re-election committee. The former Deputy Director may, within two years of terminating his very senior employee position, represent the re-election committee to the White House travel office in discussions regarding the appropriate amounts of reimbursements by the committee of political travel costs of the President. Example 2 to paragraph (g): The former U.S. Attorney General is asked by a candidate running for Governor of Alabama to contact the Chairman of the Federal Trade Commission (a position listed in 5 U.S.C. 5314) to seek the dismissal of a pending enforcement action involving the candidate's family business. The former very senior employee's communication to the Chairman would not be made on behalf of the candidate in his capacity as a candidate and, thus, would be barred by 18 U.S.C. 207(d). Example 3 to paragraph (g): In the previous example, the former Attorney General could contact the Commissioner of Internal Revenue (a position listed in 5 U.S.C. 5314) to urge the review of a tax ruling affecting Alabama's Republican Party since the communication would be made on behalf of a State committee. Example 4 to paragraph (g): The former Assistant Secretary for Legislative and Intergovernmental Affairs at the Department of Commerce is hired as a consultant by a company that provides advisory services to political candidates and senior executives in private industry. Her only client is a candidate for the U.S. Senate. The former senior employee may not contact the Deputy Secretary of Commerce within one year of her termination from the Department to request that the Deputy Secretary give an official speech in which he would express support for legislation proposed by the candidate. The communication would be prohibited by 18 U.S.C. 207(c) because it would be made when the former senior employee was employed by an entity that did not exclusively represent, aid, or advise persons or entities specified in paragraph (g)(1) of this section.
(h)*Waiver for acting on behalf of international organization* . The Secretary of State may grant an individual waiver of one or more of the restrictions in 18 U.S.C. 207 where the former employee would appear or communicate on behalf of, or provide aid or advice to, an international organization in which the United States participates. The Secretary of State must certify in advance that the proposed activity is in the interest of the United States. Note to paragraph (h): An employee who is detailed under 5 U.S.C. 3343 to an international organization remains an employee of his agency. In contrast, an employee who transfers under 5 U.S.C. 3581-3584 to an international organization is a former employee of his agency.
(i)*Waiver for re-employment by Government-owned, contractor-operated entity* . The President may grant a waiver of one or more of the restrictions in 18 U.S.C. 207 to eligible employees upon the determination and certification in writing that the waiver is in the public interest and the services of the individual are critically needed for the benefit of the Federal Government. Upon the issuance of a waiver pursuant to this paragraph, the restriction or restrictions waived will not apply to a former employee acting as an employee of the same Government-owned, contractor-operated entity with which he was employed immediately before the period of Government service during which the waiver was granted. If the individual was employed by the Lawrence Livermore National Laboratory, the Los Alamos National Laboratory, or the Sandia National Laboratory immediately before the person's Federal Government employment began, the restriction or restrictions waived shall not apply to a former employee acting as an employee of any one of those three national laboratories after the former employee's Government service has terminated.
(1)*Eligible employees* . Any current civilian employee of the executive branch, other than an employee serving in the Executive Office of the President, who served as an officer or employee at a Government-owned, contractor-operated entity immediately before he became a Government employee. A total of no more than 25 current employees shall hold waivers at any one time.
(2)*Issuance* . The President may not delegate the authority to issue waivers under this paragraph. If the President issues a waiver, a certification shall be published in the **Federal Register** and shall identify:
(i)The employee covered by the waiver by name and position; and
(ii)The reasons for granting the waiver.
(3)*Copy to Office of Government Ethics* . A copy of the certification shall be provided to the Director of the Office of Government Ethics (OGE).
(4)*Effective date* . A waiver issued under this section shall be effective on the date the certification is published in the **Federal Register** .
(5)*Reports* . Each former employee holding a waiver must submit semiannual reports, for a period of two years after terminating Government service, to the President and the OGE Director.
(i)*Submission* . The reports shall be submitted:
(A)Not later than six months and 60 days after the date of the former employee's termination from the period of Government service during which the waiver was granted; and
(B)Not later than 60 days after the end of any successive six-month period.
(ii)*Content* . Each report shall describe all activities undertaken by the former employee during the six-month period that would have been prohibited by 18 U.S.C. 207 but for the waiver.
(iii)*Public availability* . All reports filed with the OGE Director under this paragraph shall be made available for public inspection and copying. Note to paragraph (i)(5): 18 U.S.C. 207(k)(5)(D) specifies that an individual who is granted a waiver as described in this paragraph is ineligible for appointment in the civil service unless all reports required by that section have been filed.
(6)*Revocation* . A waiver shall be revoked when the recipient of the waiver fails to file a report required by paragraph (i)(4) of this section, and the recipient of the waiver shall be notified of such revocation. The revocation shall take effect upon the person's receipt of the notification and shall remain in effect until the report is filed.
(j)*Waiver of restrictions of 18 U.S.C. 207(c) and
(f)for certain positions* . The Director of the Office of Government Ethics may waive application of the restriction of section 18 U.S.C. 207(c) and § 2641.204, with respect to certain positions or categories of positions. When the restriction of 18 U.S.C. 207(c) has been waived by the Director pursuant to this paragraph, the one-year restriction of 18 U.S.C. 207(f) and § 2641.206 also will not be triggered upon an employee's termination from the position.
(1)*Eligible senior employee positions* . A position which could be occupied by a senior employee is eligible for a waiver of the 18 U.S.C. 207(c) restriction except:
(i)The following positions are ineligible:
(A)Positions for which the rate of pay is specified in or fixed according to 5 U.S.C. 5311-5318 (the Executive Schedule);
(B)Positions for which occupants are appointed by the President pursuant to 3 U.S.C. 105(a)(2)(B); or
(C)Positions for which occupants are appointed by the Vice President pursuant to 3 U.S.C. 106(a)(1)(B).
(ii)Regardless of the position occupied, private sector assignees under the Information Technology Exchange Program, within the meaning of paragraph
(6)of the definition of senior employee in section 2641.104, are not eligible to benefit from a waiver. Example 1 to paragraph (j)(1): The head of a department has authority to fix the annual salary for a category of positions administratively at a rate of compensation not in excess of the rate of compensation provided for level IV of the Executive Schedule (5 U.S.C. 5315). He sets a salary level that does not reference any Executive Schedule salary. The level of compensation is not “specified in” or “fixed according to” the Executive Schedule. If the authority pursuant to which compensation for a position is set instead stated that the position is to be paid at the rate of level IV of the Executive Schedule, the salary for the position would be fixed according to the Executive Schedule.
(2)*Criteria for waiver* . A waiver of restrictions for a position or category of positions shall be based on findings that:
(i)The agency has experienced or is experiencing undue hardship in obtaining qualified personnel to fill such position or positions as shown by relevant factors which may include, but are not limited to:
(A)Vacancy rates;
(B)The payment of a special rate of pay to the incumbent of the position pursuant to specific statutory authority; or
(C)The requirement that the incumbent of the position have outstanding qualifications in a scientific, technological, technical, or other specialized discipline;
(ii)Waiver of the restriction with respect to the position or positions is expected to ameliorate the recruiting difficulties; and
(iii)The granting of the waiver would not create the potential for the use of undue influence or unfair advantage based on past Government service, including the potential for use of such influence or advantage for the benefit of a foreign entity.
(3)*Procedures* . A waiver shall be granted in accordance with the following procedures:
(i)*Agency recommendation* . An agency's designated agency ethics official
(DAEO)may, at any time, recommend the waiver of the 18 U.S.C. 207(c) (and section 207(f)) restriction for a position or category of positions by forwarding a written request to the Director addressing the criteria set forth in paragraph (j)(2) of this section. A DAEO may, at any time, request that a current waiver be revoked.
(ii)*Action by Office of Government Ethics* . The Director of the Office of Government Ethics shall promptly provide to the designated agency ethics official a written response to each request for waiver or revocation. The Director shall maintain a listing of positions or categories of positions in appendix A to this part for which the 18 U.S.C. 207(c) restriction has been waived. The Director shall publish notice in the **Federal Register** when revoking a waiver.
(4)*Effective dates* . A waiver shall be effective on the date of the written response to the designated agency ethics official indicating that the request for waiver has been granted. A waiver shall inure to the benefit of the individual who holds the position when the waiver takes effect, as well as to his successors, but shall not benefit individuals who terminated senior service prior to the effective date of the waiver. Revocation of a waiver shall be effective 90 days after the date that the OGE Director publishes notice of the revocation in the **Federal Register** . Individuals who formerly served in a position for which a waiver of restrictions was applicable will not become subject to 18 U.S.C. 207(c) (or section 207(f)) if the waiver is revoked after their termination from the position.
(k)*Miscellaneous statutory exceptions* . Several statutory authorities specifically modify the scope of 18 U.S.C. 207 as it would otherwise apply to a former employee or class of former employees. These authorities include:
(1)22 U.S.C. 3310(c), permitting employees of the American Institute in Taiwan to represent the Institute notwithstanding 18 U.S.C. 207;
(2)22 U.S.C. 3613(d), permitting the individual who was Administrator of the Panama Canal Commission on the date of its termination to act in carrying out official duties as Administrator of the Panama Canal Authority notwithstanding 18 U.S.C. 207;
(3)22 U.S.C. 3622(e), permitting an individual who was an employee of the Panama Canal Commission on the date of its termination to act in carrying out official duties on behalf of the Panama Canal Authority;
(4)25 U.S.C. 450i(j), permitting a former employee who is carrying out official duties as an employee or elected or appointed official of a tribal organization or inter-tribal consortium to act on behalf of the organization or consortium in connection with any matter related to a tribal governmental activity or Federal Indian program or service, if the former employee submits notice of any personal and substantial involvement in the matter during Government service;
(5)38 U.S.C. 5902(d), permitting a former employee who is a retired officer, warrant officer, or enlisted member of the Armed Forces, while not on active duty, to act on behalf of certain claimants notwithstanding 18 U.S.C. 207 if the claim arises under laws administered by the Secretary of Veterans Affairs;
(6)50 U.S.C. 405(b), permitting a former part-time member of an advisory committee appointed by the Federal Emergency Management Agency, the Director of National Intelligence, or the National Security Council to engage in conduct notwithstanding 18 U.S.C. 207 except with respect to any particular matter directly involving an agency the former member advised or in which such agency is directly interested;
(7)50 U.S.C. app. 463, permitting former employees appointed to certain positions under 50 U.S.C. app. 451 *et seq.* (Military Selective Service Act) to engage in conduct notwithstanding 18 U.S.C. 207; and
(8)Public Law 97-241, title I, section 120, August 24, 1982 (18 U.S.C. 203 note), providing that 18 U.S.C. 207 shall not apply under certain circumstances to private sector representatives on United States delegations to international telecommunications meetings and conferences. Note to paragraph (k): Exceptions from 18 U.S.C. 207 may be included in legislation mandating privatization of Governmental entities. *See* , for example, 42 U.S.C. 2297h-3(c), concerning the privatization of the United States Enrichment Corporation.
(l)*Guide to available exceptions and waivers to the prohibitions of 18 U.S.C. 207* . This chart lists the exceptions and waivers set forth in 18 U.S.C. 207 and for each exception and waiver identifies the prohibitions of section 207 excepted or subject to waiver. Detailed guidance on the applicability of the exceptions and waivers is contained in the cross-referenced paragraphs of this section. Exception/waiver Section 207 Prohibitions affected (a)(1) (a)(2)
(1)Acting for the United States, *see* § 2641.301(a) • • • • • • •
(2)Elected State or local government official, *see* § 2641.301(b) • • • • • • •
(3)Acting for specified entities, *see* § 2641.301(c) • •
(4)Special knowledge, *see* § 2641.301(d) • •
(5)Scientific or technological information, *see* § 2641.301(e) • • • •
(6)Testimony, *see* § 2641.301(f) • • • • • • •
(7)Acting for a candidate or political party, *see* § 2641.301(g) • •
(8)Acting for an international organization, *see* § 2641.301(h) • • • • • • •
(9)Employee of a Government-owned, contractor-operated entity, *see* § 2641.301(i) • • • • • • •
(10)Waiver for certain positions, *see* § 2641.301(j) • • § 2641.302 Separate agency components.
(a)*Designation* . For purposes of 18 U.S.C. 207(c) only, and § 2641.204, the Director of the Office of Government Ethics may designate agency “components” that are distinct and separate from the “parent” agency and from each other. Absent such designation, the representational bar of section 207(c) extends to the whole of the agency in which the former senior employee served. An eligible former senior employee who served in the parent agency is not barred by section 207(c) from making communications to or appearances before any employee of any designated component of the parent, but is barred as to any employee of the parent or of any agency or bureau of the parent that has not been designated. An eligible former senior employee who served in a designated component of the parent agency is barred from communicating to or making an appearance before any employee of that designated component, but is not barred as to any employee of the parent, of another designated component, or of any other agency or bureau of the parent that has not been designated. Example 1 to paragraph (a): While employed in the Office of the Secretary of Defense, a former career Senior Executive Service employee was employed in a position for which the rate of basic pay exceeded 86.5 percent of that payable for level II of the Executive Schedule. He is prohibited from contacting the Secretary of Defense and DOD's Inspector General. However, because eligible under paragraph
(b)of this section to benefit from component designation procedures, he is not prohibited by 18 U.S.C. 207(c) from contacting the Secretary of the Army. (The Department of the Army is a designated component of the parent, DOD. The Office of the Secretary of Defense and the Office of the DOD Inspector General are both part of the parent, DOD. *See* the listing of DOD components in appendix B to this part.) Example 2 to paragraph (a): Because eligible under paragraph
(b)of this section to benefit from component designation procedures, a former Navy Admiral who last served as the Vice Chief of Naval Operations is not prohibited by 18 U.S.C. 207(c) from contacting the Secretary of Defense, the Secretary of the Army, or DOD's Inspector General. He is prohibited from contacting the Secretary of the Navy. (The Department of the Navy is a designated component of the parent, DOD. The Office of the Secretary of Defense and the Office of the DOD Inspector General are both part of the parent. *See* the listing of DOD components in appendix B to this part.)
(b)*Eligible former senior employees.* All former senior employees are eligible to benefit from this procedure except those who were senior employees by virtue of having been:
(1)Employed in a position for which the rate of pay is specified in or fixed according to 5 U.S.C. 5311-5318 (the Executive Schedule) ( *see* example 1 to paragraph (j)(1) of § 2641.301);
(2)Appointed by the President to a position under 3 U.S.C. 105(a)(2)(B); or
(3)Appointed by the Vice President to a position under 3 U.S.C. 106(a)(1)(B). Example 1 to paragraph (b): A former senior employee who had served as Deputy Commissioner of the Internal Revenue Service is not eligible to benefit from the designation of components for the Department of the Treasury because the position of Deputy Commissioner is listed in 5 U.S.C. 5316, at a rate of pay payable for level V of the Executive Schedule.
(c)*Criteria for designation.* A component designation must be based on findings that:
(1)The component is an agency or bureau, within a parent agency, that exercises functions which are distinct and separate from the functions of the parent agency and from the functions of other components of that parent as shown by relevant factors which may include, but are not limited to:
(i)The component's creation by statute or a statutory reference indicating that it exercises functions which are distinct and separate;
(ii)The component's exercise of distinct and separate subject matter or geographical jurisdiction;
(iii)The degree of supervision exercised by the parent over the component;
(iv)Whether the component exercises responsibilities that cut across organizational lines within the parent;
(v)The size of the component in absolute terms; and
(vi)The size of the component in relation to other agencies or bureaus within the parent.
(2)There exists no potential for the use of undue influence or unfair advantage based on past Government service.
(d)*Subdivision of components.* The Director will not ordinarily designate agencies that are encompassed by or otherwise supervised by an existing designated component.
(e)*Procedures.* Distinct and separate components shall be designated in accordance with the following procedure:
(1)*Agency recommendation.* A designated agency ethics official may, at any time, recommend the designation of an additional component or the revocation of a current designation by forwarding a written request to the Director of the Office of Government Ethics addressing the criteria set forth in paragraph
(c)of this section.
(2)*Agency update.* Designated agency ethics officials shall, by July 1 of each year, forward to the OGE Director a letter stating whether components currently designated should remain designated in light of the criteria set forth in paragraph
(c)of this section.
(3)*Action by the Office of Government Ethics.* The Director of the Office of Government Ethics shall, by rule, make or revoke a component designation after considering the recommendation of the designated agency ethics official. The Director shall maintain a listing of all designated agency components in appendix B to this part.
(f)*Effective dates.* A component designation shall be effective on the date the rule creating the designation is published in the **Federal Register** and shall be effective as to individuals who terminated senior service either before, on or after that date. Revocation of a component designation shall be effective 90 days after the publication in the **Federal Register** of the rule that revokes the designation, but shall not be effective as to individuals who terminated senior service prior to the expiration of such 90-day period.
(g)*Effect of organizational changes.*
(1)If a former senior employee served in an agency with component designations and the agency or a designated component that employed the former senior employee has been significantly altered by organizational changes, the appropriate designated agency ethics official shall determine whether any successor entity is substantially the same as the agency or a designated component that employed the former senior employee. Section 2641.204(g)(2)(iv)(A) through (g)(2)(iv)(C) should be used for guidance in determining how the 18 U.S.C. 207(c) bar applies when an agency or a designated component has been significantly altered.
(2)*Consultation with Office of Government Ethics.* When counseling individuals concerning the applicability of 18 U.S.C. 207(c) subsequent to significant organizational changes, the appropriate designated agency ethics official
(DAEO)shall consult with the Office of Government Ethics. When it is determined that appendix B to this part no longer reflects the current organization of a parent agency, the DAEO shall promptly forward recommendations for designations or revocations in accordance with paragraph
(e)of this section. Example 1 to paragraph (g): An eligible former senior employee had served as an engineer in the Agency for Transportation Safety, an agency within Department X primarily focusing on safety issues relating to all forms of transportation. The agency had been designated as a distinct and separate component of Department X by the Director of the Office of Government Ethics. Subsequent to his termination from the position, the functions of the agency are distributed among three other designated components with responsibilities relating to air, sea, and land transportation, respectively. The agency's few remaining programs are absorbed by the parent. As the designated component from which the former senior employee terminated is no longer identifiable as substantially the same entity, the 18 U.S.C. 207(c) bar will not affect him. Example 2 to paragraph (g): A scientist served in a senior employee position in the Agency for Medical Research, an agency within Department X primarily focusing on cancer research. The agency had been designated as a distinct and separate component of Department X by the Director of the Office of Government Ethics. Subsequent to her termination from the position, the mission of the Agency for Medical Research is narrowed and it is renamed the Agency for Cancer Research. Approximately 20% of the employees of the former agency are transferred to various other parts of the Department to continue their work on medical research unrelated to cancer. The Agency for Cancer Research is determined to be substantially the same entity as the designated component in which she formerly served, and the 18 U.S.C. 207(c) bar applies with respect to the scientist's contacts with employees of the Agency for Cancer Research. She would not be barred from contacting an employee who was among the 20% of employees who were transferred to other parts of the Department.
(h)*Unauthorized designations.* No agency or bureau within the Executive Office of the President may be designated as a separate agency component. Appendix A to Part 2641—Positions Waived From 18 U.S.C. 207(c) and
(f)Pursuant to the provisions of 18 U.S.C. 207(c)(2)(C) and 5 CFR 2641.301(j), each of the following positions is waived from the provisions of 18 U.S.C. 207(c) and 5 CFR 2641.204, as well as the provisions of 18 U.S.C. 207(f) and 5 CFR 2641.206. All waivers are effective as of the date indicated. Agency: Department of Justice Positions: United States Trustee
(21)(effective June 2, 1994). Agency: Securities and Exchange Commission Positions: Solicitor, Office of General Counsel (effective October 29, 1991). Chief Litigation Counsel, Division of Enforcement (effective October 29, 1991). Deputy Chief Litigation Counsel, Division of Enforcement (effective November 10, 2003). SK-17 positions (effective November 10, 2003). SK-16 and lower-graded SK positions supervised by employees in SK-17 positions (effective November 10, 2003). SK-16 and lower-graded SK positions not supervised by employees in SK-17 positions (effective December 4, 2003). Appendix B to Part 2641—Agency Components for Purposes of 18 U.S.C. 207(c) Pursuant to the provisions of 18 U.S.C. 207(h), each of the following agencies is determined, for purposes of 18 U.S.C. 207(c), and 5 CFR 2641.204, to have within it distinct and separate components as set forth below. Except as otherwise indicated, all designations are effective as of January 1, 1991. Parent: Department of Commerce Components: Bureau of the Census. Bureau of Industry and Security (formerly Bureau of Export Administration) (effective January 28, 1992). Economic Development Administration. International Trade Administration. Minority Business Development Agency (formerly listed as Minority Business Development Administration). National Institute of Standards and Technology (effective March 6, 2008). National Oceanic and Atmospheric Administration. National Technical Information Service (effective March 6, 2008). National Telecommunications and Information Administration. United States Patent and Trademark Office (formerly Patent and Trademark Office). Parent: Department of Defense Components: Department of the Air Force. Department of the Army. Department of the Navy. Defense Information Systems Agency. Defense Intelligence Agency. Defense Logistics Agency. Defense Threat Reduction Agency (effective February 5, 1999). National Geospatial-Intelligence Agency (formerly National Imagery and Mapping Agency) (effective May 16, 1997). National Reconnaissance Office (effective January 30, 2003). National Security Agency. Parent: Department of Energy Component: Federal Energy Regulatory Commission. Parent: Department of Health and Human Services Components: Administration on Aging (effective May 16, 1997). Administration for Children and Families (effective January 28, 1992). Agency for Healthcare Research and Quality (formerly Agency for Health Care Policy and Research) (effective May 16, 1997). Agency for Toxic Substances and Disease Registry (effective May 16, 1997). Centers for Disease Control and Prevention (effective May 16, 1997). Centers for Medicare and Medicaid Services (formerly Health Care Financing Administration). Food and Drug Administration. Health Resources and Services Administration (effective May 16, 1997). Indian Health Service (effective May 16, 1997). National Institutes of Health (effective May 16, 1997). Substance Abuse and Mental Health Services Administration (effective May 16, 1997). Parent: Department of the Interior Components: 1 1 All designated components under the jurisdiction of a particular Assistant Secretary shall be considered a single component for purposes of determining the scope of 18 U.S.C. 207(c) as applied to senior employees serving on the immediate staff of that Assistant Secretary. Bureau of Indian Affairs (effective January 28, 1992). Bureau of Land Management (effective January 28, 1992). Bureau of Reclamation (effective January 28, 1992). Minerals Management Service (effective January 28, 1992). National Park Service (effective January 28, 1992). Office of Surface Mining Reclamation and Enforcement (effective January 28, 1992). U.S. Fish and Wildlife Service (effective January 28, 1992). U.S. Geological Survey (effective January 28, 1992). Parent: Department of Justice Components: Antitrust Division. Bureau of Alcohol, Tobacco, Firearms and Explosives (effective November 23, 2004). Bureau of Prisons (including Federal Prison Industries, Inc.) Civil Division. Civil Rights Division. Community Relations Service. Criminal Division. Drug Enforcement Administration. Environment and Natural Resources Division. Executive Office for United States Attorneys 2 (effective January 28, 1992). 2 The Executive Office for United States Attorneys shall not be considered separate from any Office of the United States Attorney for a judicial district, but only from other designated components of the Department of Justice. Executive Office for United States Trustees 3 (effective January 28, 1992). 3 The Executive Office for United States Trustees shall not be considered separate from any Office of the United States Trustee for a region, but only from other designated components of the Department of Justice. Federal Bureau of Investigation. Foreign Claims Settlement Commission. Independent Counsel appointed by the Attorney General. Office of Justice Programs. Office of the Pardon Attorney (effective January 28, 1992). Offices of the United States Attorney (each of 94 offices). Offices of the United States Trustee (each of 21 offices). Office on Violence Against Women 4 (effective March 8, 2007). 4 The Office on Violence Against Women shall not be considered separate from the Office of Justice Programs, but only from other designated components of the Department of Justice. Tax Division. United States Marshals Service (effective May 16, 1997). United States Parole Commission. Parent: Department of Labor Components: Bureau of Labor Statistics. Employee Benefits Security Administration (formerly Pension and Welfare Benefits Administration) (effective May 16, 1997). Employment and Training Administration. Employment Standards Administration. Mine Safety and Health Administration. Occupational Safety and Health Administration. Office of Disability Employment Policy (effective January 30, 2003). Parent: Department of State Component: Foreign Service Grievance Board. Parent: Department of Transportation Components: Federal Aviation Administration. Federal Highway Administration. Federal Motor Carrier Safety Administration (effective January 30, 2003). Federal Railroad Administration. Federal Transit Administration. Maritime Administration. National Highway Traffic Safety Administration. Saint Lawrence Seaway Development Corporation. Surface Transportation Board (effective May 16, 1997). Parent: Department of the Treasury Components: Alcohol and Tobacco Tax and Trade Bureau (effective November 23, 2004). Bureau of Engraving and Printing. Bureau of the Mint. Bureau of the Public Debt. Comptroller of the Currency. Financial Crimes Enforcement Center (FinCEN) (effective January 30, 2003). Financial Management Service. Internal Revenue Service. Office of Thrift Supervision. [FR Doc. E8-13394 Filed 6-24-08; 8:45 am] BILLING CODE 6345-02-P 73 123 Wednesday, June 25, 2008 Proposed Rules Part III Securities and Exchange Commission 17 CFR Parts 240 and 249b Proposed Rules for Nationally Recognized Statistical Rating Organizations; Proposed Rule SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249b [Release No. 34-57967; File No. S7-13-08] RIN 3235-AK14 Proposed Rules for Nationally Recognized Statistical Rating Organizations AGENCY: Securities and Exchange Commission (“Commission”). ACTION: Proposed rule. SUMMARY: In the first of three related actions the Commission is proposing rule amendments that would impose additional requirements on nationally recognized statistical rating organizations (“NRSROs”) in order to address concerns about the integrity of their credit rating procedures and methodologies in the light of the role they played in determining credit ratings for securities collateralized by or linked to subprime residential mortgages. Second, the Commission also makes a proposal related to structured finance products rating symbology. And third, in the near future, the Commission intends to propose rule amendments that would be intended to reduce undue reliance in the Commission's rules on NRSRO ratings. DATES: Comments should be received on or before July 25, 2008. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/proposed.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number S7-13-08 on the subject line; or • Use the Federal eRulemaking Portal ( *http://www.regulations.gov* ). Follow the instructions for submitting comments. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-13-08. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/proposed.shtml* ). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, at
(202)551-5525; Thomas K. McGowan, Assistant Director, at
(202)551-5521; Randall W. Roy, Branch Chief, at
(202)551-5522; Joseph I. Levinson, Attorney, at
(202)551-5598; Carrie A. O'Brien, Attorney, at
(202)551-5640; Sheila D. Swartz, Special Counsel, at
(202)551-5545; Rose Russo Wells, Special Counsel, at
(202)551-5527; Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-6628 or, with respect to questions involving the proposed amendments as they implicate the Securities Act of 1933, Kathy Hsu, Special Counsel, at
(202)551-3306 or Eduardo Aleman, Special Counsel, at
(202)551-3646; Division of Corporation Finance, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-3628. SUPPLEMENTARY INFORMATION: I. Background A. Introduction Beginning in the early 2000s, originators started to increasingly make residential mortgage loans based on lower underwriting standards (“subprime loans”). 1 For the first few years there did not appear to be any negative repercussions from this lending practice. However, beginning in mid-2006, home values leveled off and soon began to decline, which, in turn, led to a corresponding increase in delinquencies and, ultimately, defaults in subprime loans. 2 This marked increase in subprime loan delinquencies and, ultimately, in defaults has had substantial adverse effects on the markets for, and market values and liquidity of, residential mortgage-backed securities (“RMBS”) backed by subprime loans and on collateralized debt obligations (“CDOs”) linked to such loans (collectively “subprime RMBS and CDOs”). 3 1 There is no standard definition of a subprime loan. However, such a loan can broadly be described as a mortgage loan that does not conform to the underwriting standards required for sale to the government sponsored enterprises (non-conforming loans) *and* are made to borrowers who:
(1)Have weakened credit histories such as payment delinquencies, charge-offs, judgments, and bankruptcies;
(2)have reduced repayment capacity as measured by credit scores ( *e.g.* , FICO), debt-to-income ratios, loan-to-value rations, or other criteria;
(3)have not provided documentation to verify all or some of the information, particularly financial information, in their loan applications; or
(4)have any combination of these factors. Non-conforming loans made to less risky borrowers fall into two other classifications: jumbo and Alt-A. 2 *See e.g.* , Testimony of John C. Dugan, Comptroller of the Currency, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (March 4, 2008) (“Dugan March 4, 2008 Senate Testimony”), pp. 8-12; Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation, before U.S. Senate Committee on Banking, Housing, and Urban Affairs (March 4, 2008) (“Bair March 4, 2008 Senate Statement”), pp. 5-6. 3 *See e.g.* , Dugan March 4, 2008 Senate Testimony, pp. 12-14; Bair March 4, 2008 Senate Statement, pp. 6-7. Moreover, the impacts from the troubles experienced by subprime loans extended beyond subprime RMBS and CDOs to the broader credit markets and the economy as a whole. 4 As a result, the parties that participated in various parts of the process of making subprime loans, packaging them into subprime RMBS and CDOs, and selling these debt instruments, including mortgage brokers, loan originators, securities sponsors and underwriters, and NRSROs have come under intense scrutiny. Today, the Commission is proposing a series of new requirements that are designed to address concerns that have been raised about NRSROs in light of the role they played in this process. Additionally, two weeks from today, the Commission will complete its proposal of this series of rule changes. These changes would be intended to reduce undue reliance in the Commission's rules on NRSRO ratings, thereby promoting increased investor due diligence. 4 *See e.g.* , Statement of Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (February 28, 2008) (“Bernanke February 28, 2008 Senate Statement”), pp. 1-3; Dugan March 4, 2008 Senate Testimony, pp. 12-15. B. The Credit Rating Agency Reform Act of 2006 The purpose of the Credit Rating Agency Reform Act of 2006 (the “Rating Agency Act”), enacted on September 29, 2006, is to “improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating industry.” 5 The operative provisions of the Rating Agency Act became applicable upon the Commission's adoption in June 2007 of a series of rules implementing a registration and oversight program for credit rating agencies that register as NRSROs. 6 5 *Report of the Senate Committee on Banking, Housing, and Urban Affairs to Accompany S. 3850* , Credit Rating Agency Reform Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 2006) (“Senate Report”), p. 1. 6 *See Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations* , Securities Exchange Act of 1934 (“Exchange Act”) Release No. 55857 (June 5, 2007), 72 FR 33564 (June 18, 2007) (“Adopting Release”). The rules adopted by the Commission prescribe: how a credit rating agency must apply to the Commission for registration as an NRSRO (Rule 17g-1 (17 CFR 240.17g-1)); the form of the application and the information that must be provided in the application (Form NRSRO and the Instructions to Form NRSRO (17 CFR 240.249b.300)); the records an NRSRO must make and maintain (Rule 17g-2 (17 CFR 240.17g-2)); the reports an NRSRO must furnish to the Commission annually (Rule 17g-3 (17 CFR 240.17g-3)); the areas that must be addressed in an NRSRO's procedures to prevent the misuse of material nonpublic information (Rule 17g-4 (17 CFR 240.17g-4)); the types of conflicts of interest an NRSRO must disclose and manage or is prohibited from having (Rule 17g-5 (17 CFR 240.17g-5)); and certain unfair, coercive, or abusive practices an NRSRO is prohibited from engaging in (Rule 17g-6 (17 CFR 240.17g-6)). To date, a total of nine credit rating agencies have been granted registration with the Commission as NRSROs pursuant to the Rating Agency Act and the rules thereunder. 7 These registrants include the credit rating agencies most active in rating subprime RMBS and CDOs: Fitch Ratings, Inc. (“Fitch”), Moody's Investors Service (“Moody's”), and Standard and Poor's Rating Services (“S&P”). 8 In the fall of 2007, the Commission, exercising the new authority conferred by the Rating Agency Act, began a staff examination of the NRSROs' activities in rating subprime RMBS and CDOs in order to review whether they adhered to their stated and documented procedures and methodologies for rating these debt instruments and the extent, if any, to which their ratings may have been impaired by conflicts of interest. 9 7 *See* Commission Orders granting registration of A.M. Best Company, Inc. (34-56507, September 24, 2007), DBRS Ltd. (34-56508, September 24, 2007), Fitch, Inc. (34-56509, September 24, 2007), Japan Credit Rating Agency, Ltd, (34-56510, September 24, 2007), Moody's Investor Services, Inc. (34-56511, September 24, 2007), Rating and Investment Information, Inc. (34-56512, September 24, 2007), Standard & Poor's Rating Services (34-56513, September 24, 2007), Egan-Jones Rating Company (34-57031, December 21, 2007) and LACE Financial Corp. (34-57300, February 11, 2008). 8 According to their most recent Annual Certifications on Form NRSRO, S&P rates 197,700 issuers of asset-backed securities, the category that includes RMBS, Moody's rates 110,000 such issuers, and Fitch rates 75,278 such issuers. No other registered NRSRO reports rating more than 1,000 issuers of asset-backed securities. *See* Standard & Poor's 2007 Annual Certification on Form NRSRO, available at *http://www.standardandpoors.com* ; Moody's Investor Services 2007 Annual Certification on Form NRSRO, available at *http://www.moodys.com* ; Fitch, Inc. 2007 Annual Certification on Form NRSRO, available at *http://www.fitchratings.com* . 9 *See* Testimony of Christopher Cox, Chairman, Commission, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (April 22, 2008) (“Cox April 22, 2008 Senate Testimony”), pp. 2-3. In addition to the examination, the Commission has worked closely with other regulators and supervisors of the financial markets in analyzing the credit market turmoil and in developing recommendations and principles for market participants, including NRSROs. 10 For example, the President's Working Group on Financial Markets issued a *Policy Statement on Financial Market Developments* in March 2008. 11 Further, as a member of the International Organization of Securities Commissions (“IOSCO”), the Commission played a substantial role in drafting *The Role of Credit Rating Agencies in Structured Finance Markets* , which was issued for consultation by IOSCO in March 2008. 12 Also, the Commission, as part of its participation in the Financial Stability Forum, worked with its counterparts in the U.S. and abroad on *The Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience* released in April 2008, which discussed credit rating agencies. 13 10 *See Id* , p. 4. 11 A copy of the policy statement is available at: *http://www.ustreas.gov* . 12 A copy of the report is available at: *http://www.iosco.org* . 13 A copy of the report is available at: *http://www.fsforum.org* . These and other efforts have assisted the Commission in identifying a number of areas in which its current NRSRO rules could be augmented to address concerns about the role NRSROs played in the credit market turmoil. 14 As a result, the Commission is proposing amendments to its existing NRSRO rules and a new rule with the goal of improving the quality of credit ratings determined by NRSROs generally and, in particular, for structured finance products such as RMBS and CDOs. 15 These proposals and the proposals to be considered in two weeks are designed to: 14 *See* Cox April 22, 2008 Senate Testimony, pp. 6-8. 15 The term “structured finance product” as used throughout this release refers broadly to any security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction. This broad category of financial instrument includes, but is not limited to, asset-backed securities (“ABS”) such as RMBS and to other types of structured debt instruments such as CDOs, including synthetic and hybrid CDOs. • Enhance the disclosure and comparability of credit ratings performance statistics; • Increase the disclosure of information about structured finance products; • Require more information about the procedures and methodologies used to determine credit ratings for structured finance products; • Strengthen internal control processes through reporting requirements; and • Address conflicts of interest arising from the process of rating structured finance products; and • Reduce undue reliance in the Commission's rules on NRSRO ratings, thereby promoting increased investor due diligence. The Commission believes these proposals would further the purpose of the Rating Agency Act to improve the quality of NRSRO credit ratings by fostering accountability, transparency, and competition in the credit rating industry. 16 16 *See* Senate Report, p. 2. C. The Role of Credit Ratings in the Credit Market Turmoil The growth in the origination of subprime loans began in the early 2000s. 17 For example, Moody's reports that subprime loans amounted to $421 billion of the $3.038 trillion in mortgages originated in 2002 (14%) and $640 billion of the $2.886 trillion in mortgages originated in 2006 (22%). 18 This growth was facilitated by steadily rising home values and a low interest rate environment. 19 In addition, increases in the breadth of the credit risk transfer markets as a result of new investors willing to purchase credit based structured finance products provided an opportunity for lenders to originate subprime loans and then move them off their balance sheets by packaging and selling them through the securitization process to investors as subprime RMBS and CDOs. 20 The investors in subprime RMBS and CDOs included domestic and foreign mutual funds, pension funds, hedge funds, banks, insurance companies, special investment vehicles, and state government operated funds. 17 *See e.g.* , Statement of Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation, before U.S. Senate Committee on Banking, Housing, and Urban Affairs (January 31, 2008) (“Bair January 31, 2008 Senate Statement”), p. 4. 18 According to Moody's, subprime mortgage loans represented $421 billion of $3.038 trillion total mortgage origination in 2002 and $640 billion of $2.886 trillion total mortgage origination in 2006. *See A Short Guide to Subprime* , Moody's, March 25, 2008, p. 1. 19 *See e.g.* , Dugan March 4, 2008 Senate Testimony, pp. 8-11. 20 *Id.* This “originate to distribute” business model created demand for residential mortgage loans, including subprime loans. For example, according to Moody's, of the approximately $2.5 trillion worth of mortgage loans originated in 2006, $1.9 trillion were securitized into RMBS and approximately 25%, or $520 billion worth, of these loans were categorized as subprime. 21 The demands of the loan securitization markets encouraged lenders to lower underwriting standards to maintain a steady volume of loans and to use less traditional products such as adjustable rate, negative amortization, and closed-end second lien mortgages. 22 21 *Subprime Residential Mortgage Securitizations: Frequently Asked Questions* , Moody's, April 19, 2007, p. 1. 22 *See e.g.* , Bernanke February 28, 2008 Senate Testimony, p. 1; Dugan March 4, 2008 Senate Testimony, pp. 8-10. 1. The Creation of Subprime RMBS and CDOs The creation of an RMBS begins by packaging a pool of mortgage loans, usually numbering in the thousands, and transferring them to a bankruptcy remote trust. The trust purchases the loan pool and becomes entitled to the interest and principal payments made by the borrowers. The trust finances the purchase of the loan pool through the issuance of RMBS. The monthly interest and principal payments from the loan pool are used to make monthly interest and principal payments to the investors in the RMBS. The trust typically issues different classes of RMBS (known as “tranches”) offering a sliding scale of coupon rates based on the level of credit protection afforded to the security. Credit protection is designed to shield the tranche securities from loss of interest and principal arising from defaults of the loans backing the RMBS. The degree of credit protection afforded a tranche security is known as its “credit enhancement” and is provided through several means. The primary source of credit enhancement is subordination, which creates a hierarchy of loss absorption among the tranche securities. For example, if a trust issued securities in 10 different tranches of securities, the first (or senior) tranche would have nine subordinate tranches, the next highest tranche would have eight subordinate tranches and so on down the capital structure. Losses of interest and principal experienced by the trust from delinquencies and defaults among loans in the pool are allocated first to the lowest tranche until its principal amount is exhausted and then to the next lowest tranche and so on up the capital structure. Consequently, the senior tranche would not incur any loss until the principal amounts from all the lower tranches have been exhausted through the absorption of losses from the underlying loans. A second form of credit enhancement is over-collateralization, which is the amount that the principal balance of the mortgage pool underlying the trust exceeds the principal balance of the tranche securities issued by the trust. This excess principal creates an additional “equity” tranche below the lowest tranche security to absorb losses. In the example above, the equity tranche would sit below the 10th tranche security and protect it from the first losses experienced as a result of defaulting loans. A third form of credit enhancement is excess spread, which consists of the amount by which the interest derived from the underlying loans in the aggregate exceeds interest payments due to investors in the tranche securities in the aggregate plus the administrative expenses of the trust such as fees due the loan servicer as well as premiums due on derivatives contracts and bond insurance. In other words, the excess spread is the amount that the monthly interest income from the pool of loans exceeds the weighted average interest due to the RMBS bondholders. This excess spread can be used to build up loss reserves or pay off delinquent interest payments due to a tranche security. A fourth form of credit enhancement sometimes employed is bond insurance. When used, bond insurance is typically purchased only for the senior RMBS tranche. The creation of a typical CDO is similar to that of an RMBS. A bankruptcy remote trust is created to hold the CDO's assets and issue its securities. The underlying assets, however, are generally debt securities rather than mortgage loans. The CDO trust uses the interest and principal payments from the approximately 200 underlying debt securities to make interest and principal payments to investors in the securities issued by the trust. The trust is structured to provide differing levels of credit enhancement to the securities it issues. Similar to RMBS, credit enhancement is provided through subordination, over-collateralization, excess spread, and bond insurance. In addition to the underlying assets, one significant difference between a CDO and an RMBS is that the CDO may be actively managed such that its underlying assets change over time, whereas the mortgage loan pool underlying an RMBS remains static for the most part. In recent years, CDOs have been some of the largest purchasers of subprime RMBS and the drivers of demand for those securities. For example, according to Fitch, the average percentage of subprime RMBS in the collateral pools of CDOs it rated grew from 43.3% in 2003 to 71.3% in 2006. 23 Generally, the CDOs holding subprime RMBS issued fell into one of two categories: High grade and mezzanine. High grade CDOs are generally defined as those that hold RMBS tranches with AAA, AA, or A credit ratings, whereas mezzanine CDOs are those that hold RMBS tranches rated predominantly BBB. Securities issued by mezzanine CDOs pay higher yields than those issued by high grade CDOs since the BBB-rated RMBS underlying the mezzanine CDOs pay higher yields than the AAA to A rated RMBS underlying high grade CDOs. In addition to CDOs holding subprime RMBS, a market for CDOs holding other CDOs that held subprime RMBS developed in recent years. These debt instruments are known as “CDOs-squared.” 23 *Rating Stability of Fitch-Rated Global Cash Mezzanine Structured Finance CDOs with Exposure to U.S. Subprime RMBS* , Fitch, April 2, 2007, p. 1. As the market for mortgage related CDOs grew, CDO issuers began to use credit default swaps to replicate the performance of subprime RMBS and CDOs. In this case, rather than purchasing subprime RMBS or CDOs, the CDO entered into credit default swaps referencing subprime RMBS or CDOs, or indexes on RMBS. These CDOs, in some cases, are composed entirely of credit default swaps (“synthetic CDOs”) or a combination of credit default swaps and cash RMBS (“hybrid CDOs”). The use of credit default swaps allowed the CDO securities to be issued more quickly, since the issuer did not have to wait to accumulate actual RMBS for the underlying collateral pool. 2. Determining Credit Ratings for Subprime RMBS and CDOs A key step in the process of creating and ultimately selling a subprime RMBS and CDO is the issuance of a credit rating for each of the tranches issued by the trust (with the exception of the most junior “equity” tranche). The credit rating for each rated tranche indicated the credit rating agency's view as to the creditworthiness of the debt instrument in terms of the likelihood that the issuer would default on its obligations to make interest and principal payments on the debt instrument. 24 To varying degrees, many investors rely on credit ratings in making the decision to purchase subprime RMBS or CDOs, particularly with respect to the senior AAA rated tranches. Some investors use the credit ratings to assess the risk of the debt instruments. In part, this may be due to the large number of debt instruments in the market and their complexity. Other investors use credit ratings to satisfy client investment mandates regarding the types of securities they can invest in or to satisfy regulatory requirements based on certain levels of credit ratings, or a combination of these conditions. Moreover, investors typically only have looked to ratings issued by Fitch, Moody's, and S&P, which causes the arrangers 25 of the subprime RMBS and CDOs to use these three NRSROs to obtain credit ratings for the tranche securities they brought to market. 24 *See, e.g.* , *Inside the Ratings: What Credit Ratings Mean* , Fitch, August 2007 (“Inside the Ratings”), p. 2; Testimony of Michael Kanef, Group Managing Director, Moody's Investors Service, Before the United States Senate Committee on Banking, Housing, and Urban Affairs (September 26, 2007) (“Kanef September 26, 2007 Senate Testimony”), p. 2; *Principles-Based Rating Methodology For Global Structured Finance Securities* , S&P, May 29, 2007, p. 3. Since credit ratings are issued for tranches of RMBS and CDOs individually, rather than for the issuers of those tranches, the NRSRO credit ratings are estimates of the probability of default of each RMBS or CDO tranche as an independent instrument. 25 As bankruptcy remote stand-alone legal entities, RMBS and CDO trusts had no employees. Consequently, they relied on third-parties to create and manage them. The term “arranger” is used herein to refer to the party that oversees the creation of the RMBS and CDO, which would include the process of obtaining credit ratings for the various tranches. Frequently, the arranger also served as the underwriter of the securities. The procedures followed by these three NRSROs in developing ratings for subprime RMBS are generally similar. The arranger of the RMBS initiates the rating process by sending the credit rating agency a range of data on each of the subprime loans to be held by the trust ( *e.g.* , principal amount, geographic location of the property, credit history and FICO score of the borrower, ratio of the loan amount to the value of the property, and type of loan: First lien, second lien, primary residence, secondary residence), the proposed capital structure of the trust, and the proposed levels of credit enhancement to be provided to each RMBS tranche issued by the trust. Upon receipt of the information, the NRSRO assigns a lead analyst who is responsible for analyzing the loan pool, proposed capital structure, and proposed credit enhancement levels and, ultimately, for formulating a ratings recommendation for a rating committee composed of analysts and/or senior-level personnel not involved in the analytic process. The next step in the ratings process is the development of predictions, based on a quantitative expected loss model and other qualitative factors, as to how many of the loans in the collateral pool would default under stresses of varying severity. This analysis also includes assumptions as to how much principal would be recovered after a defaulted loan is foreclosed. Each NRSRO generally uses between 40 and 60 specific credit characteristics to analyze each loan in the collateral pool of an RMBS in order to assess the potential future performance of the loan under various possible scenarios. These characteristics include the loan information described above as well as the amount of equity that the borrowers have in their homes, the amount of documentation provided by borrowers to verify their assets and/or income levels, and whether the borrowers intend to rent or occupy the homes. 26 26 *See, e.g.* , Kanef September 26, 2007, Senate Testimony, p. 7. The purpose of this loss analysis is to determine how much credit enhancement a given tranche security would need for a particular category of credit rating. The severest stress test ( *i.e.* , the one that would result in the greatest number of defaults among the underlying loans) is run to determine the amount of credit enhancement required for an RMBS tranche issued by the trust to receive an AAA rating. For example, this test might result in an output that predicted that under the “worst case” scenario, 40 percent of the loans in the underlying pool would default and that after default the trust would recover only 50 percent of the principal amount of each loan in foreclosure. Consequently, to get an AAA rating, an RMBS tranche security issued by the trust would need credit enhancement sufficient to cover at least 20 percent of the principal amount of all the RMBS tranches issued by the trust. In other words, absent other forms of credit enhancement such as excess spread, at least 20 percent of the principal amount of the RMBS tranches issued by the trust, including the equity tranche, would have to be subordinate to the senior tranche and, therefore, obligated to absorb the losses resulting from 40% of the underlying loans defaulting. 27 The next severest stress test is run to determine the amount of credit enhancement required of the AA tranche and so on down the capital structure. The lowest rated tranche (typically BB or B) is analyzed under a more benign market scenario. Consequently, its required level of credit enhancement—typically provided primarily or exclusively by a subordinate equity tranche—is based on the number of loans expected to default in the normal course given the lowest possible level of macroeconomic stress. 27 To the extent that the RMBS included other forms of credit enhancement besides the subordination and over-collateralization provided in this example, *e.g.* , excess spread, this 20 percent subordination figure would be reduced accordingly. Following the determination of the level of credit enhancement required for each credit rating category, the next step in the ratings process is to check the proposed capital structure of the RMBS against these requirements. For example, if the proposed structure would create a senior RMBS tranche that had 18 percent of the capital structure subordinate to it (the other RMBS tranches, including, as applicable, an equity tranche), the analyst reviewing the transaction might conclude that based on the output of the loss model the senior tranche should be rated AA since it would need 20 percent subordination to receive an AAA credit rating. Additionally, the analyst could take other factors into consideration such as the quality of the loan servicer or the actual performance of similar pools of loans underlying other RMBS trusts to determine that in this case 18 percent subordination would be sufficient to support an AAA rating (to the extent these factors were not covered by the model). Typically, if the analyst concludes that the capital structure of the RMBS did not support the desired ratings—in the example above, if it determined that 18 percent credit enhancement is insufficient for the desired AAA rating—this preliminary conclusion would be conveyed to the arranger. The arranger could accept that determination and have the trust issue the securities with the proposed capital structure and the lower rating or adjust the structure to provide the requisite credit enhancement for the senior tranche to get the desired AAA rating ( *e.g.* , shift 2 percent of the principal amount of the senior tranche to a lower tranche or add or remove certain mortgages from the proposed asset pool). Generally, arrangers aim for the largest possible senior tranche, *i.e.* , to provide the least amount of credit enhancement possible, since the senior tranche—as the highest rated tranche—pays the lowest coupon rate of the RMBS' tranches and, therefore, costs the arranger the least to fund. The next step in the process is a cash flow analysis on the interest and principal expected to be received by the trust from the pool of subprime loans to determine whether it will be sufficient to pay the interest and principal due on each RMBS tranche issued by the trust. The NRSROs use quantitative cash flow models that analyze the amount of principal and interest payments expected to be generated from the loan pool each month over the terms of the RMBS tranche securities under various stress scenarios. The outputs of this model are compared against the priority of payments (the “waterfall”) to the RMBS tranches specified in the trust legal documents. The waterfall documentation could specify over-collateralization and excess spread triggers that, if breached, would reallocate principal and interest payments from lower tranches to higher tranches until the minimum levels of over-collateralization and excess spread were reestablished. Ultimately, the monthly principal and interest payments derived from the loan pool need to be enough to satisfy the monthly payments of principal and interest due by the trust to the investors in the RMBS tranches as well as to cover the administrative expenses of the trust. In addition to expected loss and cash flow analysis, the analysts review the legal documentation of the trust to evaluate whether it is bankruptcy remote, *i.e.* , isolated from the effects of any potential bankruptcy or insolvency of the arranger. They also review operational and administrative risk associated with the trust, using the results of periodic examinations of the principal parties involved in the issuance of the security, including the mortgage originators, the issuer of the security, the servicer of the mortgages in the loan pool, and the trustee. 28 In assessing the servicer, for example, an NRSRO might review its past performance with respect to loan collection, billing, recordkeeping, and the treatment of delinquent loans. 28 Principal parties are not rated *de novo* in each RMBS transaction; rather, each NRSRO has its own procedures and schedules for reviewing those parties on a periodic basis in order to incorporate its assessment of those entities into the rating process. Following these steps, the analyst develops a rating recommendation for each RMBS tranche, which then is presented to a rating committee composed of analysts and/or senior-level personnel not involved in the analytic process. The rating committee votes on the ratings for each tranche and usually approaches the arranger privately to notify it of the ratings decisions. In most cases, an arranger can appeal a rating decision, although the appeal is not always granted (and, if granted, may not necessarily result in any change in the rating decision). Final ratings decisions are published and subsequently monitored through surveillance processes. The NRSRO typically is paid only if the credit rating is issued, though sometimes it receives a breakup fee for the analytic work undertaken even if the credit rating is not issued. The process for assigning ratings to subprime CDOs also involves a review of the creditworthiness of each tranche of the CDO. As with RMBS, the process centers on an examination of the pool of assets held by the trust and analysis of how they would perform individually and in correlation during various stress scenarios. However, this analysis is based primarily on the credit rating of each RMBS or CDO in the underlying pool or referenced through a credit default swap entered into by the CDO. In other words, the credit rating is the primary characteristic of the underlying debt instruments that the NRSROs take into consideration when performing their loss analysis. Hence, this review of the debt instruments in the collateral pool and the potential correlations among those securities does not “look through” those securities to their underlying asset pools. The analysis, consequently, generally only goes one level down to the credit ratings of the underlying instruments or reference securities. CDOs collateralized by RMBS or by other CDOs often are actively managed. Consequently, there can be frequent changes to the composition of the cash assets (RMBS or CDOs), synthetic assets (credit default swaps), or combinations of cash and synthetic assets in the underlying pool. As a result, NRSRO ratings for managed CDOs are based not on the closing date composition of the pool but instead on covenanted limits for each potential type of asset that could be put in the pool. Typically, following a post-closing period in which no adjustments can be made to a CDO's collateral pool, the CDO's manager has a predetermined period of several years in which to adjust that asset pool through various sales and purchases pursuant to covenants set forth in the CDO's indenture. These covenants set limitations and requirements for the collateral pools of CDOs, often by establishing minimum and maximum concentrations for certain types of securities or certain ratings. NRSROs use a CDO's indenture guidelines to run “worst-case” scenarios based on the various permutations of collateral permitted under the indenture. For example, an indenture might specify that a CDO's collateral pool must include between 10 and 20 percent AAA-rated subprime RMBS, with the remaining 80 to 90 percent composed of investment-grade, but not AAA, subprime RMBS. In preparing a rating for that CDO, an NRSRO will run its models based on all possible collateral pools permissible under the indenture guidelines, placing the most weight on the results from the weakest potential pools ( *i.e.* , the minimum permissible amount, 10 percent, of AAA-rated securities and the lowest-rated investment grade securities for the remaining 90 percent). As with RMBS ratings, the model results are then compared against the capital structure of the proposed CDO to confirm that the level of subordination, over-collateralization and excess spread available to each tranche provides the necessary amount of credit enhancement to sustain a particular rating. 3. The Downgrades in Credit Ratings of Subprime RMBS and CDOs As noted above, the development of the credit risk transfer markets gave rise to an “originate to distribute” model whereby mortgage loans are originated with the intent to securitize them. Under this model, arrangers earn fees from originating, structuring, and underwriting RMBS and servicing the loans underlying the RMBS, as well as frequently a third set of fees from structuring, underwriting, and managing CDOs composed of RMBS. Moreover, the yields offered by subprime RMBS and CDO tranches (as compared to other types of similarly rated debt instruments) led to increased investor demand for these debt instruments. The originate to distribute model creates incentives for originating high volumes of mortgage loans while simultaneously reducing the incentives to maintain high underwriting standards for making such loans. The continued growth of the housing market through 2006, which led to increased competition among lenders, also contributed to looser subprime loan underwriting standards. 29 29 *See e.g.* , Dugan March 4, 2008 Senate Testimony, p. 10; Bernanke February 28, 2008 Senate Testimony, p. 1. By mid-2006, however, the steady rise in home prices that had fueled this growth in subprime lending came to an end as prices began to decline. 30 Moreover, widespread areas of the country began to experience declines whereas, in the past, poor housing markets generally had been confined to distinct geographic areas. 31 The downturn in the housing market has been accompanied by a marked increase in delinquencies and defaults of subprime loans. 32 30 *See e.g.* , *Id* ; Bair March 4, 2008 Senate Statement, pp. 5-8; Bair January 31, 2008 Senate Statement, p. 3. 31 *See e.g.* , Bair January 31, 2008 Senate Statement, p. 3. 32 *Id.* The increases in delinquency and default rates have been concentrated in loans made in 2006 and 2007, which indicates that borrowers have been falling behind within months of the loans being made. 33 For example, by the fourth quarter of 2006, the percentage of subprime loans underlying RMBS rated by Moody's that were in default within six months of the loans being made stood at 3.54 percent, nearly four times the average six month default rate of 0.90 percent between the first quarter of 2002 and the second quarter of 2005. Similarly, default rates for subprime loans within 12 months of the loans being made rose to 7.39 percent as compared to 2.00 percent for the period from the first quarter of 2002 through the second quarter of 2005. 34 Figures released by S&P show similar deterioration in the performance of recent subprime loans. 35 According to S&P, the serious delinquency rate 36 for subprime loans underlying RMBS rated by S&P within twelve months of the initial rating was 4.97 percent of the current aggregate pool balance for subprime RMBS issued in 2005, 10.55 percent for subprime RMBS issued in 2006, and 15.19 percent for subprime RMBS issued in 2007. 37 33 *See e.g.* , Bair March 24, 2008 Senate Statement, p. 6 (“Serious delinquency rates on subprime mortgages securitized in 2006 are significantly higher than those for any of the previous three years.”). 34 *Early Defaults Rise in Mortgage Securitizations: Updated Data Show Continued Deterioration,* Moody's, September 19, 2007, pp. 3-4. 35 *U.S. Subprime RMBS Performance Update: January 2008 Distribution Date,* S&P, February 25, 2008, p. 1. 36 Defined as 90-plus day delinquencies, foreclosures, and real estate owned. *Id.* 37 *Id.* Along with the deterioration in the performance of subprime loans, there has been an increase in the losses incurred after the loans are foreclosed. According to S&P, the actual realized losses on loans underlying 2007 subprime RMBS after 12 months of seasoning were 65 percent higher than the losses recorded for RMBS issued in 2006 at the same level of seasoning. 38 38 *Id.* The rising delinquencies and defaults in subprime loans backing the RMBS rated by the NRSROs has exceeded the projections on which they based their initial ratings. Furthermore, the defaults and foreclosures on subprime loans have resulted in realizable losses to the lower RMBS tranches backed by the loans and, correspondingly, to the lower CDO tranches backed by those RMBS. As discussed above, the reduction in the amount of monthly principal and interest payments coming from the underlying pool of subprime loans or, in the case of a CDO, RMBS tranches or other CDO tranches is allocated to the tranches in ascending order. In addition to directly impairing the affected tranche, the losses—by reducing the principal amount of these tranches—decreased the level of subordination protecting the more senior tranches. In other words, losses suffered by the junior tranches of an RMBS or CDO directly reduced the level of credit enhancement—the primary factor considered by NRSROs in rating tranched securities—protecting the senior tranches of the instrument. These factors have caused the NRSROs to reevaluate, and in many cases downgrade, their ratings for these instruments. • As of February 2008, Moody's had downgraded at least one tranche of 94.2 percent of the subprime RMBS deals it rated in 2006 (including 100 percent of 2006 RMBS deals backed by subprime second-lien mortgage loans) and 76.9 percent of all subprime RMBS deals it rated in 2007. Overall, 53.7 percent and 39.2 percent of 2006 and 2007 tranches, respectively, had been downgraded by that time. RMBS tranches backed by first lien loans issued in 2006 were downgraded an average of 6.0 notches from their original ratings, while RMBS tranches backed by second-lien loans issued that year were downgraded 9.7 notches on average. The respective figures for 2007 first- and second-lien backed tranches were 5.6 and 7.8 notches. 39 39 *U.S. Subprime RMBS 2005-2007 Vintage Rating Actions Update: January 2008, Moody's, February 1, 2008,* pp. 2-4. • As of March 2008, S&P had downgraded 44.3 percent of the subprime RMBS tranches it had rated between the first quarter of 2005 and the third quarter of 2007, including 87.2 percent of second-lien backed securities. Downgrades to subprime RMBS issued in 2005 averaged four to six notches, while the average for those issued in 2006 and 2007 was 6.0 to 11 notches. 40 40 *Transition Study: Structured Finance Rating Transition And Default Update as of March 21, 2008,* S&P, March 28, 2008, pp. 2-3. • As of December 7, 2007, Fitch had issued downgrades to 1,229 of the 3,666 tranches of subprime RMBS issued in 2006 and the first quarter of 2007, representing a par value of $23.8 billion out of a total of $193 billion. 41 Subsequently, on February 1, 2008, Fitch placed all subprime first-lien RMBS issued in 2006 and the first half of 2007, representing a total outstanding balance of approximately $139 billion, on Rating Watch Negative. 42 41 *U.S. RMBS Update,* Fitch, February 20, 2008 p. 5. 42 *Update on U.S. Subprime and Alt-A: Performance And Rating Reviews,* Fitch, March 20, 2008, p. 13. The extensive use of subprime RMBS in the collateral pools of CDOs has led to similar levels of downgrade rates for those securities as well. Moreover, the use of subprime RMBS as reference securities for synthetic CDOs magnified the effect of RMBS downgrades on CDO ratings. Surveillance of CDO credit ratings has been complicated by the fact that the methodologies used by the NRSROs to rate them relied heavily on the credit rating of the underlying RMBS or CDOs. Consequently, to adjust the CDO rating, the NRSROs first have needed to complete their reviews of the ratings for the underlying RMBS or adjust their methodologies to sufficiently account for the anticipated poor performance of the RMBS. 43 Ultimately, the NRSROs have downgraded a substantial number of CDO ratings. 43 For example, in November 2007, Fitch announced that in rating CDOs with asset pools which included subprime RMBS, it would adjust all subprime RMBS securities on Rating Watch Negative downwards by three categories—or notches—(six in the case of 2007 subprime RMBS rated BBB+ or lower) before factoring them into a re-assessment of the CDO's rating. *See Global Criteria for the Review of Structured Finance CDOs With Exposure to U.S. Subprime RMBS,* Fitch, November 15, 2007, p. 4. • Over the course of 2007, Moody's issued 1,655 discrete downgrade actions (including multiple rating actions on the same tranche), which constituted roughly ten times the number of downgrade actions in 2006 and twice as many as in 2002, previously the most volatile year for CDOs. Further, the magnitude of the downgrades (number of notches) was striking. The average downgrade was roughly seven notches as compared to a previous average of three to four notches prior to 2007. In the words of a March 2008 report by Moody's, “[T]he scope and degree of CDO downgrades in 2007 was unprecedented.” 44 44 *2008 U.S. CDO Outlook and 2007 Review,* Moody's, March 3, 2008, p. 6. • As of April 1, 2008, S&P had downgraded 3,068 tranches from 705 CDO transactions, totaling $321.9 billion in issuance, and placed 443 ratings from 119 transactions, with a value of $33.8 billion, on CreditWatch negative, “as a result of stress in the U.S. residential mortgage market and credit deterioration of U.S. RMBS.” 45 45 *86 Ratings Lowered On 20 U.S. CDOs Of ABS Deals; $9.107 Billion In Issuance Affected,* S&P, April 1, 2008, p. 1. • By mid-December, 2007, Fitch had issued downgrades to 158 of the 431 CDOs it had rated with exposure to RMBS. 46 Among the 30 CDOs with exposure to the subprime RMBS which “suffered the greatest extent and magnitude of negative rating migration,” all but $82.7 million of the $20.7 billion in balance was downgraded. 47 46 *Summary of Global Structured Finance CDO Rating Actions,* Fitch, December 14, 2007, p. 1. 47 *Id.* , p. 6. The scope and magnitude of these downgrades has caused a loss of confidence among investors in the reliability of RMBS and CDO credit ratings issued by the NRSROs. 48 This lack of confidence in the accuracy of NRSRO ratings has been a factor in the broader dislocation in the credit markets. 49 For example, the complexity of assessing the risk of structured finance products and the lack of commonly accepted methods for measuring the risk has caused investors to leave the market, including the market for AAA instruments, particularly investors that had relied primarily on NRSRO credit ratings in assessing whether to purchase these instruments. 50 This has had a significant impact on the liquidity of the market for these instruments. 51 48 *See, e.g.* , Dugan March 4, 2008 Senate Testimony, p. 13. 49 *Id.* , Bair March 4, 2008 Senate Statement, p. 7. 50 *Id.* , Bernanke February 28, 2008 Senate Testimony, p. 3. 51 *See, e.g.* , Dugan March 4, 2008 Senate Testimony, p. 13; Bair January 31, 2008 Senate Testimony, pp. 3-4. In the wake of these events, the NRSROs that rated subprime RMBS and CDOs have come under intense criticism and scrutiny. It has been suggested that changes may be needed to address the conflicts of interest inherent in the process of rating RMBS and CDOs. 52 The NRSROs that have been the primary ratings providers for subprime RMBS and related CDOs each operate under an “issuer-pays” model in which they are paid by the arranger to rate a proposed RMBS or CDO. The arranger has an economic interest in obtaining the highest credit rating possible for each security issued by the trust and the NRSRO has an economic interest in having the arranger select it to rate the next RMBS or CDO brought by the arranger to market. Observers have questioned whether, given the incentives created by this arrangement, the NRSROs are able to issue unbiased ratings, particularly as the volume of deals brought by certain arrangers increased in the mid-2000s. 53 The above concerns are compounded by the arrangers' ability to “ratings shop.” Ratings shopping is the process by which an arranger will bring its proposed RMBS and CDO transaction to multiple NRSROs and choose, on a deal-wide or tranche-by-tranche basis, which two (or in some cases one) to use based on the preliminary ratings of the NRSROs. 52 *See, e.g.* , Opening Statement of Senator Richard C. Shelby for the Hearing of the U.S. Senate Committee on Banking, Housing, and Urban Affairs (September 26, 2007), pp. 1-2. 53 *See, e.g.* , Testimony of Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law School, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (September 26, 2007), pp. 4-5. In addition, the interaction between the NRSRO and the arranger during the RMBS and CDO rating process has raised concerns that the NRSROs are rating products they designed ( *i.e.* , evaluating their own work). 54 A corporate issuer is more constrained in how it can adjust in response to an NRSRO to improve its creditworthiness in order to obtain a higher rating. In the context of structured finance products, the arranger has much more flexibility to make adjustments to obtain a desired credit rating by, for example, changing the composition of the assets in the pool held by the trust or the subordination levels of the tranche securities issued by the trust. In fact, an arranger frequently will inform the NRSRO of the rating it wishes to obtain for each tranche and will choose an asset pool, trust structure, and credit enhancement levels based on its understanding of the NRSRO's quantitative and qualitative models. The credit analyst will use the expected loss and cash flow models to, in effect, check whether the proposed assets, trust structure and credit enhancement levels are sufficient to support the credit ratings desired by the arranger. 54 *See, e.g.* , Opening Statement of Senator Jack Reed for the Hearing of the U.S. Senate Committee on Banking, Housing, and Urban Affairs (September 26, 2007), pp. 1-2. The NRSRO rules adopted by the Commission in June of 2007 preceded the full emergence of the credit market turmoil. The Commission, in light of its experience since the final rules became effective, is proposing amendments to those rules and a new rule with the goal of further enhancing the utility of NRSRO disclosure to investors, strengthening the integrity of the ratings process, and more effectively addressing the potential for conflicts of interest inherent in the ratings process for structured finance products. II. Proposed Amendments A. Amendments to Rule 17g-5 The Commission adopted Rule 17g-5, in part, pursuant to authority “to prohibit, or require the management and disclosure of, any conflicts of interest relating to the issuance of credit ratings by an [NRSRO].” 55 The rule identifies a series of conflicts arising from the business of determining credit ratings. Under the rule, some of these conflicts must be disclosed and managed, while other specified conflicts are prohibited outright. 55 *See* Section 15E(h)(2) of the Exchange Act (15 U.S.C. 78o-7(h)(2)). Paragraph
(a)of Rule 17g-5 prohibits an NRSRO from having a conflict identified in paragraph
(b)of the rule unless the NRSRO discloses the type of conflict on Form NRSRO and establishes, maintains, and enforces procedures to manage it. 56 Paragraph
(b)identifies eight types of conflicts, which include being paid by issuers or underwriters to determine credit ratings with respect to securities or money market instruments they issue or underwrite 57 or being paid by persons for subscriptions to receive or access credit ratings where such persons also may own investments or have entered into transactions that could be favorably or adversely impacted by a credit rating. 58 56 17 CFR 240.17g-5(a). 57 17 CFR 240.17g-5(b)(1). 58 17 CFR 240.17g-5(b)(5). Paragraph
(c)of Rule 17g-5 prohibits outright four types of conflicts of interest. Consequently, an NRSRO would violate the rule if it has the type of conflict described in paragraph
(c)even if it disclosed the conflict and established procedures to manage it. In the Adopting Release, the Commission explained that these conflicts were prohibited because they would be difficult to manage given their potential to cause undue influence. 59 59 Adopting Release, 72 FR at 33598. The Commission is proposing to amend Rule 17g-5 to require the disclosure and establishment of procedures to manage an additional conflict and to prohibit certain other conflicts outright, as described below. 1. Addressing the Particular Conflict Arising From Rating Structured Finance Products by Enhancing the Disclosure of Information Used in the Rating Process a. The Proposed Amendment The Commission is proposing to amend Rule 17g *-* 5 60 to add to the list of conflicts that must be disclosed and managed the additional conflict of repeatedly being paid by certain arrangers to rate structured finance products. This conflict is a subset of the broader conflict already identified in paragraph (b)(1) of Rule 17g *-* 5; namely, “being paid by issuers and underwriters to determine credit ratings with respect to securities or money market instruments they issue or underwrite.” 61 In the case of structured finance products, the Commission preliminarily believes this “issuer/underwriter-pay” conflict is particularly acute because certain arrangers of structured finance products repeatedly bring ratings business to the NRSROs. 62 As sources of constant deal based revenue, some arrangers have the potential to exert greater undue influence on an NRSRO than, for example, a corporate issuer that may bring far less ratings business to the NRSRO. 63 Consequently, the Commission is proposing amendments to Rule 17g *-* 5 that would require additional measures to address this particular type of “issuer/underwriter-pay” conflict. 60 17 CFR 240.17g *-* 5. 61 17 CFR 240.17g *-* 5(b)(1). As the Commission noted when adopting Rule 17g *-* 5, the concern with conflict identified in paragraph (b)(1) “is that an NRSRO may be influenced to issue a more favorable credit rating than warranted in order to obtain or retain the business of the issuer or underwriter.” Adopting Release, 72 FR at 33595. 62 *See* *e.g.* , Testimony of Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law School, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (April 22, 2008) (“Coffee April 22, 2008 Senate Testimony”), pp. 4-6. 63 *Id.* Specifically, the proposed amendment would re-designate paragraph (b)(9) of Rule 17g *-* 5 as paragraph (b)(10) and in new paragraph (b)(9) identify the following conflict: issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction that was paid for by the issuer, sponsor, or underwriter of the security or money market instrument. To address this conflict, proposed new paragraph (a)(3) would require that as a condition to the NRSRO rating a structured finance product the information provided to the NRSRO and used by the NRSRO in determining the credit rating would need to be disclosed through a means designed to provide reasonably broad dissemination of the information. 64 The intent behind this disclosure is to create the opportunity for other NRSROs to use the information to rate the instrument as well. Any resulting “unsolicited ratings” could be used by market participants to evaluate the ratings issued by the NRSRO hired to rate the product and, in turn, potentially expose an NRSRO whose ratings were influenced by the desire to gain favor with the arranger in order to obtain more business. 65 64 This proposed requirement would be in addition to the current requirements of paragraph
(a)that an NRSRO disclose the type of conflict of interest in Exhibit 6 to Form NRSRO; and establish, maintain and enforce written policies and procedures to address and manage the conflict of interest. 17 CFR 240 17g *-* 5(a)(1) and (2). 65 As used herein, an “unsolicited rating” is one that is determined without the consent and/or payment of the obligor being rated or issuer, underwriter, or arranger of the securities being rated. The proposed amendment would require the disclosure of information provided to an NRSRO by the “issuer, underwriter, sponsor, depositor, or trustee.” The Commission preliminarily believes that, taken together, these are the parties that provide all relevant information to the NRSRO to be used in the initial rating and rating monitoring processes. The Commission is not proposing to specify the party—NRSRO, arranger, issuer, depositor, or trustee—that would need to disclose the information. It may be that the issuer through the arranger and trustee would be in the best positions to disclose the information. In this case, in contracting with these parties to provide a rating for a structured finance product, the NRSRO could require a representation from them that the necessary information would be disclosed as required by the proposed rule. The Commission notes, however, that the proposed rule does not provide a safe harbor for an NRSRO arising from such a representation. Consequently, an NRSRO would violate the proposed rule if it issued a credit rating for a structured finance product where the information is not disclosed notwithstanding any representations from the arranger. The goal of this proposed amendment is to promote the effective management of this conflict of interest, increase the transparency of the process for rating structured finance products, and foster competition by making it feasible for more market participants, in particular NRSROs that are not contracted by the arranger to issue a rating but still wish to do so, to perform credit analysis on the instrument and to monitor the instrument's creditworthiness. As noted above, by providing the opportunity for more NRSROs to determine credit ratings for structured finance products, this proposal is designed to increase the number of ratings extant for a given instrument and, in particular, promote the issuance of ratings by NRSROs that are not hired by the arranger. The goal would be to expose an NRSRO that was unduly influenced by the “arranger-pay” conflict into issuing higher than warranted ratings. 66 An ancillary benefit would be that the proposal could make it easier for users of credit ratings to identify potentially inaccurate credit ratings and incompetent NRSROs. The proposal also is designed to make it more difficult for arrangers to exert influence on the NRSROs that they hire to determine ratings for structured finance products. Specifically, by opening up the rating process to greater scrutiny, the proposal is designed to make it easier for the hired NRSRO to resist pressure from the arranger by increasing the likelihood that any steps taken to inappropriately favor the arranger could be exposed to the market. Further, as noted above, an ancillary benefit of the proposal is that it could operate as a check on inaccuracy and incompetence. 66 The Commission notes that “unsolicited” ratings could be used to obtain business with arrangers by creating a track record of favorable ratings. The Commission believes the potential to expose such conduct would be equal to that of exposing an NRSRO influenced by the “arranger-pay” conflict insomuch as the paid for ratings (usually at least two) would be consistently lower than the “unsolicited” ratings. To further these goals, the proposal would require the disclosure of the following information: • All information provided to the nationally recognized statistical rating organization by the issuer, underwriter, sponsor, depositor, or trustee that is used in determining the initial credit rating for the security or money market instrument, including information about the characteristics of the assets underlying or referenced by the security or money market instrument, and the legal structure of the security or money market instrument; 67 67 *See* proposed paragraph (a)(3)(i)(A) and
(B)of Rule 17g-5. • All information provided to the nationally recognized statistical rating organization by the issuer, underwriter, sponsor, depositor, or trustee that is used by the nationally recognized statistical rating organization in undertaking credit rating surveillance on the security or money market instrument, including information about the characteristics and performance of the assets underlying or referenced by the security or money market instrument. 68 68 *See* proposed paragraph (a)(3)(ii) of Rule 17g-5. For the purposes of the proposed amendment, the Commission would consider only information that is taken into account in generating the credit rating or in performing surveillance to be “used” by the NRSRO in those contexts. This would exclude information about collateral pools ( *i.e.* , “loan tapes”) provided by the arranger containing a mix of assets that is different than the composition of the final collateral pool upon which the credit rating is based. The proposed rule also would exclude from disclosure most, if not all, communications between the NRSRO and the issuer, underwriter, sponsor, depositor, or trustee to the extent the communications do not contain information necessary for the NRSRO to determine an initial credit rating or perform surveillance on an existing credit rating. The Commission recognizes that the NRSRO would define the information that it uses for purposes of generating credit ratings and, likely, would obtain representations from the arranger that the information is being disclosed as required under the rule. There is a potential that an NRSRO that uses relatively little information to generate credit ratings would be favored by arrangers to minimize the amount of information subject to the disclosure requirement. The Commission preliminarily believes that there is some degree of standardization as to the information used by NRSROs to rate structured finance products ( *e.g.* , loan level information, payment priorities among the issued tranched securities, and legal structure of the issuer). An NRSRO that requires less than the standard level of information would need to convince users of credit ratings, most notably investors, that its ratings process was credible. Otherwise, arrangers ultimately would not use the NRSRO since it would be more difficult to sell the structured finance products if they carried ratings that were not accepted by the marketplace. Nonetheless, the Commission, if this proposal is adopted, intends to monitor whether it results in a significant reduction in the information provided to NRSROs. The timing and scope of the disclosures of the first set information described above—information used in determining the initial credit rating—would depend on the nature of the offering: public, private, or offshore. 69 In an offering registered under the Securities Act of 1933 (15 U.S.C. 77a *et seq.* ), the information would need to be disclosed on the date the underwriter and the issuer or depositor set the offering price of the securities being rated (the “pricing date”). 70 In offerings that are not registered under the Securities Act of 1933 (15 U.S.C. 77a *et seq.* ), the information would need to be disclosed to investors in the offering and entities meeting the definition of “credit rating agency” in Section 3(a)(61) of the Exchange Act (which would include credit rating agencies registered, and not registered, as NRSROs) 71 and on the pricing date and disclosed publicly on the first business day after the transaction closes. 69 *See* Sections II.A.1.b.i—iii below for a broader discussion of the scope of the disclosures that would be required under the proposed amendments. 70 *See* proposed paragraph (a)(3)(i)(A) of Rule 17g-5. 71 15 U.S.C. 78c(a)(61). The Commission is proposing the pricing date as the time of the first disclosures because it preliminarily believes that this is the earliest date upon which the asset pool and legal structure of the trust are settled on. Thus, the information that would be disclosed would reflect the actual characteristics of the securities to be issued and not, for example, preliminary assets pools with different compositions of loans. At the same time, the disclosure of the information before the securities are sold is designed to provide the opportunity for other credit rating agencies to use the information to develop “unsolicited ratings” for the tranche securities before they are purchased by investors. To the extent unsolicited ratings are issued, they would provide investors with a greater range of credit assessments and, in particular, assessments from credit rating agencies that are not subject to the “arranger-pay” conflict. The Commission anticipates that the information that would need to be disclosed ( *i.e.* , the information used by the hired NRSRO to determine the initial rating) generally would include the characteristics of the assets in the pool underlying the structured finance product and the legal documentation setting forth the capital structure of the trust, payment priorities with respect to the tranche securities issued by the trust (the waterfall), and all applicable covenants regarding the activities of the trust. For example, for an initial rating for an RMBS, this information generally would include the “loan tape” (frequently a spreadsheet) that identifies each loan in the pool and its characteristics such as type of loan, principal amount, loan-to-value ratio, borrower's FICO score, and geographic location of the property. In addition, the disclosed information also would include a description of the structure of the trust, the credit enhancement levels for the tranche securities to be issued by the trust, and the waterfall cash flow priorities. With respect to the loan pool information, the Commission does not intend that the proposed disclosure would include any personal identifying information on individual borrowers or properties (such as names, phone numbers, addresses or tax identification numbers). After the disclosure of the information used by the NRSRO to perform the initial rating, the proposed amendment would require the disclosure of information about the underlying assets that is provided to, and used by, the NRSRO to perform any ratings surveillance. 72 The Commission anticipates that generally this information would consist of reports from the trustee describing how the assets in the pool underlying the structured finance product are performing. For an RMBS credit rating, this information likely would include the “trustee report” customarily generated to reflect the performance of the loans constituting the collateral pool. For example, an RMBS trustee may generate reports describing the percentage of loans that are 30, 60, and 90 days in arrears, the percentage that have defaulted, the recovery of principal from defaulted loans, and information regarding any modifications to the loans in the asset pool. The disclosure of this information would allow NRSROs that were not hired to rate the deal, including ones that determined unsolicited initial ratings, to monitor on a continuing basis the creditworthiness of the tranche securities issued by the trust. The proposed amendment provides that this information would need to be disclosed at the time it is provided to the NRSRO. This is designed to put other NRSROs and other interested parties on an equal footing with the NRSRO hired by the arranger insomuch as they would all obtain the information at the same time. Consequently, they all could begin any surveillance processes simultaneously. 72 Proposed paragraph (a)(3)(ii) of Rule 17g-5. The goal of this aspect of the proposal again would be to expose an NRSRO that was allowing business considerations to impact its judgment. For example, in order to maintain favor with a particular arranger, an NRSRO may be reluctant to downgrade a credit rating for a structured finance product to its appropriate category even where a downgrade is implied by its surveillance procedures and methodologies. Increasing the number of credit ratings extant for the instrument, including ratings not paid for by the arranger, would make it more difficult to conceal the fact that a particular NRSRO was being unduly influenced by an arranger as to its surveillance process. As discussed below, the manner and breadth of the disclosures, including how widely the information could be disseminated, would depend on the nature of the offering for the rated structured finance product: public, private, or offshore. The proposed amendment's requirement that the information be “disclosed through a means designed to provide reasonably broad dissemination” would be interpreted by the Commission to mean in the manner described in sections II.A.1.b.i—iii below that discuss the proposed amendment in the context of public, private, and offshore offerings. The Commission is proposing these amendments to Rule 17g-5, in part, pursuant to the authority in Section 15E(h)(2) of the Exchange Act. 73 The provisions in this section of the statute provide the Commission with authority to prohibit, or require the management and disclosure of, any potential conflict of interest relating to the issuance of credit ratings by an NRSRO. 74 The Commission preliminarily believes the proposed amendments are necessary and appropriate in the public interest and for the protection of investors because they are designed to address conflicts of interest and improve the quality of credit ratings for structured finance products by:
(1)Increasing the transparency of the ratings process and thereby making it more apparent when an NRSRO may be allowing business considerations to impair its objectivity and
(2)enhancing competition by creating the opportunity for NRSROs that are not hired to rate structured products to nonetheless determine credit ratings and establish track records for rating these products. 73 15 U.S.C. 78o-7(h)(2). 74 *Id.* The Commission preliminarily believes that it is appropriate to require an NRSRO to address and manage the conflict of interest raised by the NRSRO's recurring relationships with structured finance product arrangers by making the rating process more transparent in terms of the information used to determine the ratings. This would create an opportunity for other NRSROs (including subscriber based NRSROs), unregistered credit rating agencies, and other interested parties to assess the creditworthiness of these products and issue their own credit ratings or credit assessments. 75 Market participants and observers would be able to compare the ratings of the NRSROs hired by the arrangers against the ratings of NRSROs and others not hired by the arrangers. As discussed above, the Commission preliminarily believes that this would enhance the integrity of the ratings process by making it easier for users of credit ratings to compare NRSROs and evaluate whether an NRSRO's objectivity had been compromised by the undue influence of an arranger. It also could make it easier for the NRSROs hired to determine credit ratings for structured finance products to resist pressure from arrangers insomuch as the parties would be aware that the potential for exposing a compromised NRSRO had been increased through the proposed amendment's disclosure requirements. 75 As discussed below, for private offerings and offshore offerings, this information would not be disclosed publicly before the offering closes but instead would be provided via a password-protected Internet Web site to credit rating agencies and accredited investors. After the offering closes, the information would be required to be disclosed publicly and, therefore, made available to market observers such as academics. The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following questions related to the proposal. • Would the information proposed to be required to be disclosed sufficient to permit the determination of an unsolicited credit rating? Conversely, would the proposed amendment require the disclosure of more information than would be necessary to permit the determination of an unsolicited credit rating? Commenters believing more information should be disclosed should specifically describe the additional information and the practicality of requiring its disclosure, while commenters believing that less information should be disclosed should specifically describe what information would be unnecessary and explain why it would be unnecessary to disclose. • The proposed amendment would require the disclosure of information provided to an NRSRO by the “issuer, underwriter, sponsor, depositor, or trustee” based on the Commission's preliminary belief that these would be the parties relevant to an NRSRO's performance of the ratings process, *i.e.* , that taken together, these are the parties that would provide all relevant information to the NRSRO. Are there other entities that should be included in this category? • Should the Commission provide a “safe harbor” so that an NRSRO that obtained a representation from one or more parties to a transaction to disclose the required information would not be held in violation of the rule if the party did not fulfill its disclosure obligations under the representation? • Should the Commission also require the disclosure of information about the steps, if any, that were taken by the NRSRO, issuer, underwriter, sponsor, depositor, or trustee to verify information about the assets underlying or referenced by the security or money market instrument, or, if no such steps were taken, a disclosure of that fact? • Would the disclosure of the initial information on the pricing date provide enough time for other NRSROs to determine unsolicited ratings before the securities were sold to investors? If not, would it be appropriate to require that this information be disclosed prior to the pricing date? Alternatively, would it be more appropriate to require NRSROs hired by the arranger to wait a period of calendar or business days ( *e.g.* , 2, 4, 10 days) after the asset pool is settled upon by the arranger before issuing the initial credit rating in order to provide other NRSROs with sufficient time to determine an unsolicited rating? • Should the Commission also require the disclosure of the results of any steps taken by the NRSRO, issuer, underwriter, sponsor, depositor, or trustee to verify information about the assets underlying or referenced by a structured finance product? Alternatively, should the Commission require a general disclosure of whether any steps were taken to verify the information and, if so, a description of those steps? • Do NRSROs obtain information about the underlying assets of structured products—particularly in the surveillance process—from third-parties such as vendors rather than from issuers, underwriters, sponsors, or trustees? If so, would it be necessary to require the disclosure of this information as proposed or can the goals of the proposed amendments in promoting unsolicited ratings be achieved under current practices insomuch as the information necessary for surveillance can be obtained from third-party vendors, albeit for a fee? • Does the information provided to NRSROs by issuers, underwriters, sponsors, depositors, or trustees about assets underlying structured products ( *e.g.* , mortgage loans, home equity loans, consumer loans, credit card receivables) commonly include personal identifying information about individuals such as names, social security numbers, addresses, and telephone numbers? If so, are there practical ways to ensure that this information is not disclosed? • Does any of the information provided to NRSROs by issuers, underwriters, sponsors, depositors, or trustees about assets underlying structured products contain proprietary information? Commenters that believe this is the case should specifically identify any such information. b. Proposed Guidance for Compliance With Provisions of the Securities Act of 1933 As noted above, the proposed amendments to Rule 17g-5 that would require the disclosure of information about the underlying assets of a structured finance product implicate the Securities Act. 76 As explained below, the means by which information would be disclosed for the purposes of the proposed amendments to Rule 17g-5 would be governed by the nature of the offering. The Securities Act restricts the types of offering communications that issuers or other parties subject to the Securities Act's provisions (such as underwriters) may use during a registered public offering and, for private offerings, restricts the methods by which communications may be made so as to avoid general solicitation or general advertising of the private offering to potential purchasers. Communications that may be considered offers 77 are subject to these restrictions. 78 Likewise, with respect to unregistered offshore offerings that are intended to comply with the safe harbor provisions of Regulation S, communications that are deemed to be offers in the United States or directed selling efforts in the United States are prohibited. Information about securities that are the subject of an offering that has been provided to NRSROs and is required to be disclosed pursuant to the proposed rules would be considered offers or directed selling efforts and therefore subject to these restrictions relating to offering communications. 79 76 15 U.S.C. 77a *et seq.* 77 Securities Act Section 2(a)(3) (15 U.S.C. 77b(a)(3)) defines an “offer” as any attempt to offer to dispose of, or solicitation of any offer to buy, a security or interest in a security for value. The term “offer” has been interpreted broadly and goes beyond the common law concept of an offer. *See Diskin* v. *Lomasney* *& Co.* , 452 F. 2d 871 (2d Cir. 1971); *SEC* v. *Cavanaugh* , 1 F. Supp. 2d 337 (S.D.N.Y. 1998). The Commission has explained that “the publication of information and publicity efforts, made in advance of a proposed financing which have the effect of conditioning the public mind or arousing public interest in the issuer in its securities constitutes an offer * * *.” *Guidelines for the Release of Information by Issuers Whose Securities are in Registration* , Securities Act Release No. 5180 (August 16, 1971), 36 FR 16506. 78 Before the registration statement is filed, all offers, in whatever form, are prohibited. *See* Securities Act Section 5(c) (15 U.S.C. 77e(c)). Between the filing of the registration statement and its effectiveness, offers made in writing (including by e-mail or Internet), by radio, or by television are limited to a “statutory prospectus” that conforms to the information requirements of Securities Act Section 10. *See* Securities Act Section 5(b)(1) (15 U.S.C. 77e(b)(1)) and Securities Act Section 10 (15 U.S.C. 77j). After the registration statement is declared effective, offering participants may make written offers only through a statutory prospectus, except that they may use additional offering materials if a final prospectus that meets the requirements of Securities Act Section 10(a) is sent or given prior to or with those materials. *See* Securities Act Section 2(a)(10) (15 U.S.C. 77b(a)(10)) and Section 5(b)(1). 79 This may be the case even if the information relates to pools backing prior issuances. In an offering of securities backed by the same class of assets, the information provided for surveillance and required to be disclosed pursuant to proposed Rule 17g-5(a)(3)(iii) may be static pool data as described in Item 1105 of Regulation AB (17 CFR 229.1105). In the following three sections, the Commission provides guidance on how the information that would be required to be disclosed under proposed new paragraph (a)(3) of Rule 17g-5 (“Paragraph (a)(3) Information”) would need to be disclosed under the proposed amendment and consistent with the Securities Act. As discussed below, the manner and breadth of the disclosures under the proposed amendment would depend on whether the structured finance product was issued under a public, private, or offshore offering. i. Public Offerings With respect to registered offerings at the time the Paragraph (a)(3) Information would be required to be disclosed (the pricing date), the information would be written communications and the issuer, underwriter, or other offering participant also would have to comply with the Securities Act with regard to the disclosure of such written communications. 80 In addition, such written communications would be subject to the civil liability and antifraud provisions of the Securities Act. 81 80 *See Securities Offering Reform,* Securities Act Release 33-8591 (July 19, 2005), 70 FR 44722 (August 3, 2005) (the “Securities Offering Reform Release”) for a discussion of the definition of written communications and rules relating to permitted communications in registered offerings. *See also Asset-Backed Securities* , Securities Act Release No. 8518 (December 22, 2004) 70 FR 1506 (January 7, 2005) (the “Asset-Backed Securities Release”) for rules applicable to offerings of asset-backed securities. 81 Under the Securities Act, purchasers of an issuer's securities in a registered offering have private rights of action for materially deficient disclosure in registration statements under Section 11 and in prospectuses and oral communications under Section 12(a)(2). Under Securities Act Section 12(a)(2) and Securities Act Rule 159, the liability determination as to an oral communication, prospectus, or statement, as the case may be, does not take into account information conveyed to a purchaser only after the time of sale (including the contract of sale), including information contained in a final prospectus, prospectus supplement, or Exchange Act filing that is filed or delivered subsequent to the time of sale (including the contract of sale) where the information is not otherwise conveyed at or prior to that time. The time of sale under the Securities Act includes the time of the contract of sale—the time at which an investor has taken the action the investor must take to become committed to purchase the securities and therefore entered into a contract of sale. As discussed in the Commission's Securities Offering Reform Release adopting several reforms to the securities offering process, 82 issuers of structured finance products have potentially two sets of rules under the Securities Act on which they may rely in using written offering materials. If the offering is registered on Securities Act Form S-3, 83 then the written materials may constitute ABS informational and computational materials, as defined in Item 1101 of Regulation AB, 84 and should be filed on Exchange Act Form 8-K 85 in accordance with Rules 167 and 426 of the Securities Act. 86 The written materials may constitute a free writing prospectus, as defined in Rule 405 of the Securities Act. 87 In that case, the information that is disclosed must be filed in accordance with Rules 164 and 433 of the Securities Act. 88 Given that the Paragraph (a)(3) Information could constitute offering materials, the Commission believes it is important to explain how the rules under the Securities Act may be relied upon when Paragraph (a)(3) Information is made publicly available. 89 82 *See* Section III.D.3.b.iii(C)(3)(a)(iii) of the Securities Offering Reform Release, 70 FR 44722, 44751. 83 17 CFR 239.13. An ABS issuer is eligible to use Form S-3 if the conditions of General Instruction V are met. 84 17 CFR 229.1101. Item 1101 of Regulation AB provides the following definition:
(a)*ABS informational and computational material* means a written communication consisting solely of one or some combination of the following:
(1)Factual information regarding the asset-backed securities being offered and the structure and basic parameters of the securities, such as the number of classes, seniority, payment priorities, terms of payment, the tax, Employment Retirement Income Security Act of 1974, as amended, (29 U.S.C. 1001 *et seq.* ) (“ERISA”) or other legal conclusions of counsel, and descriptive information relating to each class ( *e.g.* , principal amount, coupon, minimum denomination, anticipated price, yield, weighted average life, credit enhancements, anticipated ratings, and other similar information relating to the proposed structure of the offering);
(2)Factual information regarding the pool assets underlying the asset-backed securities, including origination, acquisition and pool selection criteria, information regarding any prefunding or revolving period applicable to the offering, information regarding significant obligors, data regarding the contractual and related characteristics of the underlying pool assets ( *e.g.* , weighted average coupon, weighted average maturity, delinquency and loss information and geographic distribution) and other factual information concerning the parameters of the asset pool appropriate to the nature of the underlying assets, such as the type of assets comprising the pool and the programs under which the loans were originated;
(3)Identification of key parties to the transaction, such as servicers, trustees, depositors, sponsors, originators and providers of credit enhancement or other support, including a brief description of each such party's roles, responsibilities, background and experience;
(4)Static pool data, as referenced in Item 1105 of this Regulation AB, such as for the sponsor's and/or servicer's portfolio, prior transactions or the asset pool itself;
(5)Statistical information displaying for a particular class of asset-backed securities the yield, average life, expected maturity, interest rate sensitivity, cash flow characteristics, total rate of return, option adjusted spread or other financial or statistical information relating to the class or classes under specified prepayment, interest rate, loss or other hypothetical scenarios. Examples of such information under the definition include:
(i)Statistical results of interest rate sensitivity analyses regarding the impact on yield or other financial characteristics of a class of securities from changes in interest rates at one or more assumed prepayment speeds;
(ii)Statistical information showing the cash flows that would be associated with a particular class of asset-backed securities at a specified prepayment speed; and
(iii)Statistical information reflecting the financial impact of losses based on a variety of loss or default experience, prepayment, interest rate and related assumptions.
(6)The names of underwriters participating in the offering of the securities, and their additional roles, if any, within the underwriting syndicate;
(7)The anticipated schedule for the offering (including the approximate date upon which the proposed sale to the public will begin) and a description of marketing events (including the dates, times, locations, and procedures for attending or otherwise accessing them); and
(8)A description of the procedures by which the underwriters will conduct the offering and the procedures for transactions in connection with the offering with an underwriter or participating dealer (including procedures regarding account-opening and submitting indications of interest and conditional offers to buy). The Commission confirmed in the Asset-Backed Securities Release that loan level information could be included in ABS information and computational materials. 85 17 CFR 249.308. 86 17 CFR 230.167 and 17 CFR 230.426. 87 17 CFR 230.405. The contents of free writing prospectuses are not limited to ABS informational and computational materials. 88 17 CFR 230.164 and 17 CFR 230.433. Rule 433 also provides that a free writing prospectus or portion thereof required to be filed under Rule 433 containing only ABS informational and computational materials may be filed under Rule 433 but within the time frame required for satisfaction of the conditions of Rule 426, and that such filing will satisfy the conditions of Rule 433. 89 Depending on whether the materials constitute a free writing prospectus or ABS informational and computational materials, the liability provisions governing the disclosure may differ. Free writing prospectuses are subject to liability under Section 12(a)(2) and Section 17(a) of the Securities Act. 15 U.S.C. 77l(a)(2) and 15 U.S.C. 77q(a). A free writing prospectus will not be part of a registration statement subject to liability under Securities Act Section 11 unless the issuer elects to file it as part of the registration statement. See also Asset-Backed Securities Release at footnote 335. On the other hand, ABS informational and computational materials also are subject to Section 12(a)(2) and Section 17(a) liability, but they must be filed on Form 8-K and therefore, by virtue of incorporation by reference into a registration statement, are subject to Section 11 liability. Most elements of the Paragraph (a)(3) Information would need to be filed in accordance with the rules governing free writing prospectuses or ABS informational and computational materials pursuant to Rules 433 and 426. 90 Currently, the timing or filing requirements under these rules is tied to when the information is provided to specific investors. However, unlike other free writing prospectuses and ABS informational and computational materials that may be provided to specific investors, in a public offering, the Paragraph (a)(3) Information would be required to be disclosed publicly. Therefore, the Commission believes that it is appropriate to clarify when the materials should be filed with the Commission. 90 17 CFR 230.433 and 17 CFR 230.426. Under Rule 426, ABS informational and computational materials are required to be filed by the later of the due date for filing the final prospectus under Rule 424(b) or two days after the date of first use. Under Rule 433, a free writing prospectus must be filed with the Commission no later than the date of first use. However, in order to conform certain asset-backed free writing prospectuses with the filing requirements for ABS informational and computational materials in Rule 426, Rule 433(d)(6) provides that a free writing prospectus containing only ABS information and computational materials may be filed in the time provided by Rule 426(b). Thus, under both rules the information must be filed by the later of the due date for filing the final prospectus under Rule 424(b) or two days after the date of first use. In addition, Rule 433 requires filing by issuers of free writing prospectuses prepared by or on behalf of, or used or referred to by, issuers or, depositors, sponsors, servicers, or affiliated depositors, whether or not the issuer, but not by underwriters or dealers, unless they contain issuer information or are distributed in a manner reasonably designed to lead to its broad dissemination. The Paragraph (a)(3) Information that would be required to be disclosed would not be considered underwriter or dealer information, even if prepared by the underwriter or dealer, given the broad dissemination and thus would need to be filed. Rules 164 and 167 provide the exemption from Section 5(b)(1) of the Securities Act for the use of free writing prospectuses and ABS informational and computational materials, respectively. For the most part, Rule 164 should be available for the use of the Paragraph (a)(3) Information, even where the issuer is an ineligible issuer, 91 given that the rule provides that ineligible issuers that are asset-backed issuers may use a free writing prospectus as long as the free writing prospectus contains only specified information. 92 Much of the Paragraph (a)(3) Information should contain information that can be included in a free writing prospectus used by an asset-backed issuer pursuant to Rule 164. To the extent that Rule 167 is not available because the offering is registered on Form S-1 rather than Form S-3, and Rule 164 is not available, the information should be filed in an amendment to the registration statement. 91 An “ineligible issuer,” as the term is defined in Rule 405 of the Securities Act, includes, in the case of asset-backed issuers, the depositor or any issuing entities previously established, directly or indirectly by the depositor, who are not current in their Exchange Act reports and other materials required to be filed during the prior 12 months (or such shorter period that the issuer was required to file such reports and materials), other than reports on Form 8-K required solely pursuant to an item specified in General Instruction I.A.4 of Form S-3. 92 In asset-backed offerings by ineligible issuers, free writing prospectuses used by ineligible issuers are limited to the following information:
(1)Factual information regarding the asset-backed securities being offered and the structure and basic parameters of the securities, such as the number of classes, seniority, payment priorities, terms of payment, the tax, ERISA or other legal conclusions of counsel, and descriptive information relating to each class ( *e.g.* , principal amount, coupon, minimum denomination, anticipated price, yield, weighted average life, credit enhancements, anticipated ratings, and other similar information relating to the proposed structure of the offering);
(2)factual information regarding the pool assets underlying the asset-backed securities, including origination, acquisition and pool selection criteria, information regarding any prefunding or revolving period applicable to the offering, information regarding significant obligors, data regarding the contractual and related characteristics of the underlying pool assets ( *e.g.* , weighted average coupon, weighted average maturity, delinquency and loss information and geographic distribution) and other factual information concerning the parameters of the asset pool appropriate to the nature of the underlying assets, such as the type of assets comprising the pool and the programs under which the loans were originated;
(3)identification of key parties to the transaction, such as servicers, trustees, depositors, sponsors, originators and providers of credit enhancement or other support, including a brief description of each such party's roles, responsibilities, background and experience;
(4)static pool data;
(5)the names of underwriters participating in the offering of the securities, and their additional roles, if any, within the underwriting syndicate;
(6)the anticipated schedule for the offering (including the approximate date upon which the proposed sale to the public will begin) and a description of marketing events (including the dates, times, locations, and procedures for attending or otherwise accessing them); and
(7)a description of the procedures by which the underwriters will conduct the offering and the procedures for transactions in connection with the offering with an underwriter or participating dealer (including procedures regarding account opening and submitting indications of interest and conditional offers to buy). In addition, the Commission understands that currently at least some of the information that would constitute Paragraph (a)(3) Information, if not included in a free writing prospectus, is often included as a schedule to pooling and servicing agreements. Those agreements, along with their schedules and exhibits, should be filed by the time of the offering of securities. Therefore they should be filed at the time of the takedown as exhibits to a Form 8-K incorporating them by reference into the Form S-3 registration statement. 93 93 *See* Form S-3 (17 CFR 239.13), Form 8-K (17 CFR 249.308) and Item 601(b)(4) of Regulation S-K (17 CFR 229.601). The Commission generally requests comment on all aspects of this proposed guidance. In addition, the Commission requests comment on the following questions related to the proposal. • Do we need to give more guidance on the relationship between the proposed disclosure requirements regarding information about the underlying assets provided to, and used by, the NRSRO to perform ratings surveillance and the requirements of Regulation FD? 94 If commenters believe that the proposed requirements are not consistent with Regulation FD, they should provide a detailed explanation as to why not. 94 17 CFR 243.100 to 103. • The proposed disclosure requirements regarding information about the underlying assets provided to, and used by, the NRSRO to perform ratings surveillance may be the same as the information required to be disclosed on Form 10-D for so long as the issuer has an Exchange Act reporting obligation. Given that the Form 10-D reporting obligation is typically suspended for most asset-backed issuers after the first year of reporting, does the proposed disclosure requirement raise any issues regarding Exchange Act reporting? • ABS informational and computation materials, as defined in Item 1101 of Regulation AB, can include, among other things, factual information regarding the pool assets underlying the asset-backed securities, including origination, acquisition and pool selection criteria, information regarding any prefunding or revolving period applicable to the offering, information regarding significant obligors, data regarding the contractual and related characteristics of the underlying pool assets ( *e.g.* , weighted average coupon, weighted average maturity, delinquency and loss information and geographic distribution) and other factual information concerning the parameters of the asset pool appropriate to the nature of the underlying assets, such as the type of assets comprising the pool and the programs under which the loans were originated. 95 As noted above, the Commission believes that at least some of the proposed Paragraph (a)(3) Information could fall within this category and therefore constitute ABS informational and computational materials. Since there may be a wide variety of information that is provided to an NRSRO, it is not clear that all information provided would fit within the definition of ABS informational and computation materials, or in the various categories of free writing prospectus. Should the Commission provide additional interpretation regarding what types of material that could be provided and would be required to be disclosed to fit within this category? Is there information that is likely to be provided and disclosed that does not appear to fit within these definitions? Should the Commission instead revise the definitions to specifically include the information required to be disclosed? 95 *See* Asset-Backed Securities Release. • Is there any need for the Commission to revise Securities Act Rules 426 or 433 to clarify when the materials need to be filed? • Are there any additional requirements in Regulation AB or under the Securities Act that are implicated by the proposed amendments? Is there any information that would typically need to be disclosed under this proposed amendment that is not already generally disclosed in filings with the Commission? • Should the Commission amend Regulation AB to require that the Paragraph (a)(3) Information be disclosed? ii. Private Offerings The proposed amendments also would implicate the Securities Act restrictions affecting private offerings. Offerings of securities made in reliance on an exemption from registration contained in Securities Act Section 4(2), 96 the rules promulgated thereunder or pursuant to Regulation D, 97 are offerings that are not made to the public. As a result, general solicitation or advertising is prohibited in these offerings under Securities Act Section 4(2) and the applicable Securities Act rules. 98 As a result of the application of the general solicitation and advertising restrictions, public disclosure of offering or security information pursuant to the proposed rules could cause the private offering exemptions to be unavailable to securities offerings to which the proposed rules apply. 96 15 U.S.C. 77d(2). 97 17 CFR 230.501 through 230.508. 98 *See* Securities Act Section 4(2) (15 U.S.C. 77d(2)) and Securities Act Rules 504, 505 and 506 of Regulation D (17 CFR 230.504, 230.505 and 230.506). An exception to the prohibition against general solicitation applies to some limited offerings under Rule 504(b)(1) (17 CFR 230.504(b)(1)) when an issuer has satisfied state securities laws of specified types. *See Revision of Rule 504 of Regulation D, the “Seed Capital” Exemption,* Securities Act Release No. 7644 (February 25, 1999), 64 FR 11090. The restriction on general solicitation or advertising applies to all methods by which the communication can be made, including electronic, paper, mail, radio, television, or in newspapers or magazines. As discussed above, the Commission believes it is likely that much of the information that would need to be disclosed under the proposed amendment would contain extensive loan level data, and thus anticipates that a common medium for disclosure of this information would be an Internet Web site. The Commission has indicated that the placement of private offering materials on an Internet Web site, without sufficient procedures to limit access only to accredited investors, is inconsistent with the prohibition against general solicitation or advertising in Securities Act Rule 502(c). 99 However, as discussed above, the Commission also believes that to address the conflict of interest inherent in the structured finance product arranger-pay business model it would be beneficial to make this information available to investors and entities meeting the definition of “credit rating agency” in Section 3(a)(61) of the Exchange Act (which would include NRSROs) 100 on the date the placement agent and the issuer or depositor set the offering price of the securities being rated, and to the general public on the first business day after the offering closes. The Commission believes, therefore, that in a private offering, Paragraph (a)(3) Information would need to be provided to investors, NRSROs, and credit rating agencies by posting the information on a password-protected Internet Web site. 101 On the first business day after the offering closes, however, the Paragraph (a)(3) Information would need to be disclosed publicly. The Commission believes that removing the password protection from the Internet Web site where the Paragraph (a)(3) Information is posted after the offering closes is consistent with the Securities Act restrictions on private offerings while satisfying the requirements of proposed Rule 17g-5(a)(3). 99 *See Use of Electronic Media,* Securities Act Release No. 7856 (April 28, 2000), 65 FR 25843 (the “Electronic Media Release”). The Commission noted in the Electronic Media Release that the federal securities laws apply equally to information contained on an issuer's Web site as they do to other communications made by or attributed to the issuer. 100 15 U.S.C. 78c(a)(61). 101 A password-protected Web site would meet the requirements of an amended Rule 17g-5 in the context of private offerings. As discussed above, the Commission believes it would be appropriate to allow early access to credit rating agencies other than those hired to issue a rating to provide them with an opportunity to perform independent assessments of the validity of ratings and identify flaws, opportunities for improvement, or compromised procedures in the hired NRSRO's approach. While permitting access to this information to credit rating agencies in addition to accredited investors extends beyond the Commission's previous interpretations on what constitutes a general solicitation or advertising, the Commission believes it balances those issues with the benefits of having other credit rating agencies able to assess the quality of, or provide additional, ratings. 102 This approach is designed to promote competition among NRSROs by providing credit rating agencies that were not paid by the issuer to rate the issuer's products with information they need to issue unsolicited ratings and allowing other market participants to also have access to the information to allow them to evaluate the ratings. In a private offering, disclosure of this information is undertaken in two steps in order to avoid issues of general solicitation. The Commission is providing the above guidance only in the context of the proposed amendments. Moreover, the guidance expressed in this release is applicable only if the proposed amendments are adopted. 102 The Commission noted in *Interpretative Release on Regulation D,* Securities Act Release No. 6455 (March 3, 1983), 17 CFR 231, that Rule 502(c) relates to the nature of the offering, not the nature of the offerees. The Commission generally requests comment on all aspects of this proposed guidance. In addition, the Commission requests comment on the following questions related to the proposal. • Are there other parties besides credit rating agencies and investors that should be eligible to access Paragraph (a)(3) Information in the context of a private offering without raising issues of general solicitation? • Should any of the foregoing guidance regarding the use of Paragraph (a)(3) Information be codified? • Is expanding the categories of parties who can access the information that would be contained in the proposed Paragraph (a)(3) Information consistent with the purposes of the Securities Act? • Is there any Paragraph (a)(3) Information that should remain accessible only to credit rating agencies and investors, rather than, as proposed, disclosed to the public on the business day after the offering has closed? • Should the requirement to publicly disclose the Paragraph (a)(3) Information on the first business day after the offering has closed also permit the NRSRO, depositor, etc. to omit deal-specific information relating to the transaction such that only “generic” information is provided to the public? • Does disclosure of information provided for purposes of credit rating surveillance raise issues of general solicitation in the context of subsequent offerings of the same asset class? If so, does this vary by asset class? iii. Offshore Offerings Similar to private offerings, the proposed amendments would implicate restrictions under Regulation S. Under the General Statement of Regulation S, 103 the provisions of Section 5 of the Securities Act apply to offers and sales of securities that occur in the United States and do not apply to those that occur outside the United States. Regulation S contains various safe harbor procedures that issuers, offering participants and others can follow for unregistered offerings outside the United States. These procedures include restrictions against offers being made to persons in the United States 104 and restrictions against directed selling efforts in the United States by the issuer, distributor, any of their respective affiliates, or persons acting on their behalf. 105 103 Rule 901 of Regulation S, 17 CFR 230.901. 104 Rule 903(a)(1). 105 Rule 903(a)(2). As noted above, the Commission believes that it is likely that much of the information that would be required to be disclosed would contain extensive loan level data and thus anticipates that a common medium for disclosure of this information would be an Internet Web site. The Commission has provided guidance with respect to the use of Internet Web sites for securities offerings outside the United States. 106 This guidance sets out a general approach that when adequate measures are implemented to prevent U.S. persons from participating in an offshore offer, the Commission would not view the offer as occurring in the United States for registration purposes. The Commission believes that this guidance can be equally applied to the proposed disclosure of the proposed Paragraph (a)(3) Information. 106 *See Statement of the Commission Regarding Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions or Advertise Investment Services Offshore,* Securities Act Release No. 7516 (March 23, 1998). Under this guidance, what constitutes adequate measures would depend on all of the facts and circumstances of a particular transaction. As the Commission noted previously: “We generally would not consider an offshore Internet offer made by a non-U.S. offeror as targeted at the United States, however, if:
(1)the Web site contains a prominent disclaimer making it clear that the offer is directed only to countries other than the United States; * * * and
(2)the Web site offeror implements procedures that are reasonably designed to guard against sales to U.S. persons in the offshore offering.” 107 107 *Id.* > These procedures are not exclusive. The Commission's prior guidance distinguishes among foreign issuers and U.S. issuers each conducting offshore offerings under Regulation S and U.S. offerings conducted on an exempt basis. The Commission believes it is appropriate to continue this treatment with respect to the proposed disclosure of the Paragraph (a)(3) Information. Under this guidance, a foreign issuer making an offshore offering with no concurrent U.S. private offering is not required to password-protect Internet-based offering communications so long as adequate measures are put in place. Thus, credit rating agencies and other market participants should be able to have ready access to any Paragraph (a)(3) Information that is posted by a foreign issuer. A foreign issuer making an offshore offering concurrently with private offerings in the United States could implement additional other procedures to prevent its offshore Internet communications from being used to solicit participants for its U.S.-based exempt offering, and U.S. issuers conducting an offshore offering should implement procedures similar to those for private placements, such as password-type procedures, under which only non-U.S. persons can obtain access to the materials. Consistent with the procedures for private offerings, there could be pricing date disclosure to credit rating agencies that are not purchasers in the offering through a password-protected Internet Web site. As a result, when a foreign issuer is conducting a U.S. private offering under Section 4(2), and when a U.S. issuer is conducting an offshore offering under Regulation S or a private offering under Section 4(2), it would follow the procedures outlined in Section II.A.1.b.ii above with respect to private offerings, including procedures calling for public disclosure of Paragraph (a)(3) Information on the business day after the closing date. The Commission generally requests comment on all aspects of this proposed guidance. In addition, the Commission requests comment on the following questions related to the proposal. • Are there other parties besides credit rating agencies that should be eligible to access Paragraph (a)(3) Information in the context of an offshore offering without raising issues of directed selling efforts or offers of securities in the Unites States? • Should any of the foregoing guidance regarding the use of Paragraph (a)(3) Information be codified? • Is expanding the categories of parties who can access the information that would be contained in the proposed Paragraph (a)(3) Information consistent with the purposes of the Securities Act? • Is there any Paragraph (a)(3) Information that should remain accessible only to credit rating agencies and investors, rather than, as proposed, be disclosed to the public on the business day after the offering has closed? • Should the requirement to publicly disclose the Paragraph (a)(3) Information on the first business day after the offering has closed also permit the NRSRO, depositor, etc. to omit deal-specific information relating to the transaction such that only “generic” information is provided to the public? 2. Rule 17g-5 Prohibition on Conflict of Interest Related to Rating an Obligor or Debt Security Where Obligor or Issuer Received Ratings Recommendations From the NRSRO or Person Associated With the NRSRO The Commission is proposing to amend Rule 17g-5(c) to add a new paragraph
(5)that would prohibit an NRSRO from issuing a credit rating with respect to an obligor or security where the NRSRO or a person associated with the NRSRO, as defined in Section 3(a)(63) of the Exchange Act, 108 made recommendations to the obligor or the issuer, underwriter, or sponsor of the security (that is, the parties responsible for structuring the security) about the corporate or legal structure, assets, liabilities, or activities of the obligor or issuer of the security. This proposal would prohibit the NRSRO and, in particular, its credit analysts from making recommendations to obligors, issuers, underwriters, and sponsors such as arrangers of structured finance products about how to obtain a desired credit rating during the rating process. It also would prohibit an NRSRO from issuing a credit rating where a person associated with the NRSRO, such as an affiliate, made such recommendations. 108 15 U.S.C. 78c(a)(63). The Commission is proposing this amendment to Rule 17g-5, in part, pursuant to the authority in Section 15E(h)(2) of the Exchange Act. 109 The provisions of this section of the statute provide the Commission with authority to prohibit, or require the management and disclosure of, any potential conflict of interest relating to the issuance of credit ratings by an NRSRO. 110 The Commission preliminarily believes the proposed amendment is necessary and appropriate in the public interest and for the protection of investors because it would address a potential practice that could impair the objectivity, and, correspondingly, the quality, of a credit rating. It has been suggested that during the process of rating structured finance products the NRSROs have recommended to arrangers how to structure a trust or complete an asset pool to receive a desired credit rating and then rated the securities issued by the trust—in effect, rating their own work. 111 This proposal would prohibit this conduct based on the Commission's preliminary belief that it creates a conflict that cannot be effectively managed insomuch as it would be very difficult for an NRSRO to remain objective when assessing the creditworthiness of an obligor or debt security where the NRSRO or person associated with the NRSRO made recommendations about steps the obligor or issuer of the security could take to obtain a desired credit rating. 109 15 U.S.C. 78o-7(h)(2). 110 *Id.* 111 *See e.g.* , Coffee April 22, 2008 Senate Testimony, pp. 2-3. The proposal is not intended to prohibit all interaction between the NRSRO and the obligor, issuer, underwriter, or sponsor during the rating process. The Commission preliminarily believes that the transparency of an NRSRO's procedures and methodologies for determining credit ratings is enhanced when the NRSRO explains to obligors and issuers the bases, assumptions, and rationales behind rating decisions. For example, the Commission understands that in the structured finance area, NRSROs may provide information to arrangers about the output of expected loss and cash flow models. The information provided by the NRSRO during the rating process allows the arranger to better understand the relationship between model outputs and the NRSRO's decisions with respect to necessary credit enhancement levels to support a particular rating. The arranger then can consider the feedback and determine independently the steps it will take, if any, to adjust the structure, credit enhancement levels, or asset pool. However, if the feedback process turns into recommendations by the NRSRO about changes the arranger could make to the structure or asset pool that would result in a desired credit rating, the NRSRO's role would transition from an objective credit analyst to subjective consultant. In this case, the Commission believes it would be difficult for the NRSRO to remain impartial since the expectation would be that the changes suggested by the NRSRO would result in the credit ratings sought by the arranger. The prohibition would extend to recommendations by persons associated with the NRSRO to address affiliates. For example, an NRSRO's holding company could establish an affiliate to provide consulting services to issuers about how to obtain desired credit ratings from the NRSRO subsidiary. The Commission believes it would be difficult for the NRSRO to remain objective in this situation since the financial success of the affiliate would depend on issuers getting the ratings they desired after taking any steps recommended by the affiliate. This would create undue pressure on the NRSRO's credit analysts to determine credit ratings that favored the affiliate. The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following questions related to the proposal. • Is this type of conflict one that could be addressed through disclosure and procedures to manage it instead of prohibiting it? Should the Commission, rather than prohibiting it, add this type of conflict to the list of conflicts in paragraph
(b)of Rule 17g-5, which, under paragraph
(a)of the rule, must be addressed through disclosure and procedures to manage them? • Would there be practical difficulties for an NRSRO that is part of a large conglomerate in monitoring the business activities of persons associated with the NRSRO such as affiliates located in other countries to comply with the proposed requirement? If so, given the greater separation between the NRSRO and these types of persons associated with the NRSRO, should the Commission require instead that, for these types of persons associated with the NRSRO only, the NRSRO disclose this conflict and manage it through information barriers rather than prohibit it? • The Commission recognizes that the line between providing feedback during the rating process and making recommendations about how to obtain a desired rating may be hard to draw in some cases. Consequently, should the Commission specify the type of interactions between an NRSRO and the person seeking the rating that would and would not constitute recommendations for the purposes of this rule? Commenters that believe the Commission should provide more guidance on this issue should provide suggested definitions. 3. Rule 17g-5 Prohibition on Conflict of Interest Related to the Participation of Certain Personnel in Fee Discussions The Commission is proposing to amend Rule 17g-5 112 by adding a new paragraph (c)(6) of Rule 17g-5 to address the conflict of interest that arises when a fee paid for a rating is discussed or arranged by a person within the NRSRO who has responsibility for participating in determining credit ratings (including analysts and rating committee members) or for developing or approving procedures or methodologies used for determining credit ratings, including qualitative and quantitative models. 112 17 CFR 240.17g-5. The Commission is proposing this amendment to Rule 17g-5, in part, pursuant to the authority in Section 15E(h)(2) of the Exchange Act. 113 The provisions of this section of the statute provide the Commission with authority to prohibit, or require the management and disclosure of, any potential conflict of interest relating to the issuance of credit ratings by an NRSRO. 114 The Commission preliminarily believes the proposed amendment is necessary and appropriate in the public interest or for the protection of investors because it would address a potential practice that could impair the objectivity, and, correspondingly, the quality, of a credit rating. This amendment is designed to effectuate the separation within the NRSRO of persons involved in fee discussions from persons involved in the credit rating analytical process. While the incentives of the persons discussing fees could be based primarily on generating revenues for the NRSRO; the incentives of the persons involved in the analytical process should be based on determining accurate credit ratings. There is a significant potential for these distinct incentive structures to conflict with one another where persons within the NRSRO are engaged in both activities. 113 15 U.S.C. 78o-7(h)(2). 114 *Id.* The potential consequences are that a credit analyst or person responsible for approving credit ratings or credit rating methodologies could, in the context of negotiating fees, let business considerations undermine the objectivity of rating process. For example, an individual involved in a fee negotiation with an issuer might not be impartial when it comes to rating the issuer's securities. In addition, persons involved in approving the methodologies and processes used to determine credit ratings could be reluctant to adjust a model to make it more conservative if doing so would make it more difficult to negotiate fees with issuers. For these reasons, the Commission preliminarily believes that this conflict should be prohibited. The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following items related to the proposal. • Should the proposed prohibition also be extended to cover participation in fee negotiations by NRSRO personnel with supervisory authority over the NRSRO personnel participating in determining credit ratings or developing or approving procedures or methodologies used for determining credit ratings? • Instead of prohibiting this conflict outright, would disclosure and procedures to manage the conflict adequately address the conflict? If so, what specific disclosures should be required? What other measures should be required in addition to disclosures? • Would there be practical difficulties in separating analytic and fee discussions for a small NRSRO, including one that has limited staff, that are significant enough that the Commission should consider a different mechanism to address the conflict? If so, what sort of mechanism and with what conditions? Should the Commission adopt an exemption from the prohibition for small NRSROs and, instead, require them to disclose the conflict and establish procedures to manage it? For example, the exemption could apply to NRSROs that have less than 10, 20, or 50 associated persons. Commenters that endorse an exemption for small NRSROs should provide specific details as to how the Commission should define an NRSRO as “small” for purposes of the exemption. For example, for purposes of the Final Regulatory Flexibility Analysis for the Adopting Release the Commission concluded that an NRSRO with total assets of $5 million or less was a “small” entity for purposes of the Regulatory Flexibility Act. 115 Would that be an appropriate way to define a small NRSRO for purposes of this exemption? 115 *See* Adopting Release, 72 FR at 33618. 4. Rule 17g-5 Prohibition of Conflict of Interest Related to Receipt of Gifts The Commission is proposing to amend Rule 17g-5 116 by adding a new paragraph (c)(7) that would prohibit an NRSRO from having a conflict of interest relating to the issuance or maintenance of a credit rating where a credit analyst who participated in determining or monitoring the credit rating, or a person responsible for approving the credit rating, received gifts, including entertainment, from the obligor being rated, or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities such as meetings that have an aggregate value of no more than $25. Thus, this proposed prohibition would prohibit any gifts to credit analysts and persons on credit rating committees from the obligors, issuers, underwriters, or sponsors with respect to whom they had determined, monitored or approved credit ratings. It also would create an exception for items provided during normal business activities such as meetings to the extent they do not in the aggregate exceed $25 per meeting. For example, the provision of pens, notepads, or minor refreshments, such as soft drinks or coffee, generally are incidental to meetings and other normal course business interactions and not treated as gifts *per se* . The proposed $25 exception is designed to be high enough to permit these types of exchanges without implicating the prohibition. 116 17 CFR 240.17g-5. The Commission is proposing these amendments to Rule 17g-5, in part, pursuant to the authority in Section 15E(h)(2) of the Exchange Act. 117 The provisions in this section of the statute provide the Commission with authority to prohibit, or require the management and disclosure of, any potential conflict of interest relating to the issuance of credit ratings by an NRSRO as the Commission deems necessary or appropriate in the public interest or for the protection of investors. 118 The Commission preliminarily believes the proposed amendment is necessary and appropriate in the public interest or for the protection of investors because it would address a potential practice that could impair the objectivity, and, correspondingly, the quality, of a credit rating. 117 15 U.S.C. 78o-7(h)(2). 118 *Id.* Persons seeking credit ratings for an obligor or debt security could use gifts to gain favor with the analyst responsible for determining the credit ratings and cause the analyst to be less objective during the rating process. In the case of a substantial gift, the potential to impact the analyst's objectivity could be immediate. With smaller gifts, the danger is that over time the cumulative effect of repeated gifts can impact the analyst's objectivity. Therefore, the proposal would establish an absolute prohibition on gifts with the exception of minor incidentals provided in business meetings. The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission request comment on the following questions related to the proposal. • Instead of prohibiting this conflict outright, should the Commission require that NRSROs disclose it and establish procedures to manage it? If so, what specific disclosures should be required? • Instead of prohibiting gifts outright, should the Commission establish a yearly limit on the aggregate value of gifts that would be permitted under the prohibition? For example, the Commission could provide in the rule that the prohibition would not be triggered until the aggregate value of all gifts received from a particular person in a twelve month period exceeded $100, $500 or $1,000 or some other amount. • Is the proposed $25 aggregate value an appropriate threshold for incidentals provided at meetings, or should a higher or lower threshold be applied? • Should the Commission adopt a recordkeeping requirement with respect to the receipt of gifts by analysts and persons responsible for approving credit ratings in addition to the prohibition? For example, the Commission could require an NRSRO to document for each gift the identity of the person providing the gift, the recipient, and the nature of the gift. B. Amendments to Rule 17g-2 The Commission adopted Rule 17g-2, in part, pursuant to authority in Section 17(a)(1) of the Exchange Act requiring NRSROs to make and keep such records, and make and disseminate such reports, as the Commission prescribes by rule as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the Exchange Act. 119 Rule 17g-2 requires an NRSRO to make and retain certain records relating to its business and to retain certain other business records made in the normal course of business operations. The rule also prescribes the time periods and manner in which all these records are required to be retained. The Commission is proposing to amend this rule to require NRSROs to make and retain certain additional records and to require that some of these proposed new records be made publicly available. 119 *See* Section 5 of the Rating Agency Act and 15 U.S.C. 78q(a)(1). 1. A Record of Rating Actions and the Requirement That They Be Made Publicly Available The Commission is proposing to amend Exchange Act Rule 17g-2 120 to add a new paragraph
(8)to Rule 17g-2 that would require a registered NRSRO to make and retain a record showing all rating actions (initial rating, upgrades, downgrades, and placements on watch for upgrade or downgrade) and the date of such actions identified by the name of the security or obligor and, if applicable, the CUSIP for the rated security or the Central Index Key
(CIK)number for the rated obligor. Furthermore, the Commission is proposing to amend Rule 17g-2(d) to require that this record be made publicly available on the NRSRO's corporate Internet Web site in an interactive data file that uses a machine-readable computer code that presents information in eXtensible Business Reporting Language (“XBRL”) in electronic format (“XBRL Interactive Data File”). The purpose of this disclosure is to provide users of credit ratings, investors, and other market participants and observers the raw data with which to compare how the NRSROs initially rated an obligor or security and, subsequently, adjusted those ratings, including the timing of the adjustments. In order to expedite the establishment of a pool of data sufficient to provide a useful basis of comparison, this requirement would apply to all currently rated securities or obligors as well as to all future credit ratings. 120 17 CFR 240.17g-2. The goal of this proposal is to foster greater accountability of the NRSROs with respect to their credit ratings as well as competition among the NRSROs by making it easier for persons to analyze the actual performance of the credit ratings the NRSROs issue in terms of accuracy in assessing creditworthiness. The disclosure of this information on the history of each credit rating would create the opportunity for the marketplace to use the information to develop performance measurement statistics that would supplement those required to be published by the NRSROs themselves in Exhibit 1 to Form NRSRO. The intent is to tap into the expertise and flexibility of credit market observers and participants to create better and more useful means to compare credit ratings. This goal is to make NRSROs more accountable for their ratings by enhancing the transparency of the results of their rating processes for particular securities and obligors and classes of securities and obligors and encourage competition within the industry by making it easier for users of credit ratings to judge the output of the NRSROs. As noted above, the proposed amendments would require that the record be made publicly available on the NRSRO's corporate Internet Web site in an XBRL Interactive Data File that uses a machine-readable computer code that presents information in XBRL. The Commission is proposing to require that an NRSRO use this format to publicly disclose the ratings action data because it would allow users to dynamically search and analyze the information, thereby facilitating the comparison of information across different NRSROs. In addition, an XBRL Interactive Data File would enable investors, analysts, and the Commission staff to capture and analyze the ratings action data more quickly and at less of a cost than is possible using another format. The Commission further believes that the XBRL Interactive Data File would be compatible with a wide range of open source and proprietary XBRL software applications and that as the ratings action data becomes more widely available, advances in interactive data software, online viewers, search engines, and other Web-based tools may further enhance the accessibility and usability of the data. The Commission's experience in having certain issuers use XBRL for EDGAR filings has demonstrated the benefits of this format to investors, filers, and Commission staff. 121 Expanding its use to NRSRO ratings history data would be consistent with Commission policy to utilize this format where practical. 121 *See Extension of Interactive Data Voluntarily Reporting Program in the EDGAR System to Include Mutual Fund Risk/Return Summary Information.* Securities Act Release No. 8823 (August 20, 2007). The proposed amendment to Rule 17g-2(d) also would provide that the records be made publicly available no later than six months after the date of the rating action. The Commission anticipates that the record required under this amendment would need to be updated frequently as new credit ratings are issued and existing credit ratings are upgraded, downgraded and put on ratings watch. For purposes of the internal record, the NRSRO would need to keep the record current to reflect the complete ratings history of each extant credit rating. However, for purposes of the requirement to make the record publicly available, the NRSRO would be permitted to disclose the record on its Internet Web site six months after the record is updated to reflect a new ratings action. The proposed six-month time lag for publicly disclosing the updated record is designed to accommodate NRSROs that operate using the subscriber-pay model because they are paid for access to their current credit ratings. It also is designed to preserve the revenues that NRSROs operating using the issuer-pay model derive from selling download access to their current credit ratings. 122 The Commission preliminarily believes the six-month time lag would not have any negative effect on the goal of this proposed amendment because the information on credit ratings actions that would be disclosed—perhaps many years' worth for some credit ratings—should be sufficient to develop meaningful performance metrics for comparing NRSROs. 122 The accommodation of subscriber-pay models acknowledges the Rating Agency Act's intent to encourage the subscriber-pays model ( *see* Senate Report, p. 7) while simultaneously ensuring equal treatment for NRSROs operating under an issuer-pays model. Finally, the proposed amendments also would amend the instructions to Exhibit 1 to Form NRSRO to require the disclosure of the Web address where the XBRL Interactive Data File could be accessed. This is designed to inform persons who use credit ratings where the ratings histories can be obtained. The Commission is proposing these amendments, in part, under authority to require NRSROs to make and keep for prescribed periods such records as the Commission prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. 123 The Commission preliminarily believes the proposed new recordkeeping and disclosure requirements are necessary and appropriate in the public interest and for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. Specifically, by proposing to require NRSROs to make ratings actions publicly available in an XBRL Interactive Data File, market participants would be able to create their own performance measurement metrics, including default and transition matrices, by which to judge the accuracy of NRSRO ratings. In addition, users of credit ratings would be able to compare side-by-side how each NRSRO initially rated a particular security, when the NRSRO took actions to adjust the rating upward or downward, and the degree of those adjustments. Furthermore, users of credit ratings, academics and information venders could use the raw data to perform analyses comparing how the NRSROs differ in their initial ratings and their monitoring for different types of asset classes. This could identify an NRSRO that is an outlier in terms of issuing high or low credit ratings or consistently reassesses ratings on a delayed basis for some or all asset classes when compared to other NRSROs. It also could help identify NRSROs that are consistently more or less accurate than others. This information also may identify NRSROs whose objectivity may be impaired because of conflicts of interest. 123 *See* Section 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)). The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following questions related to the proposal. • Is the six-month delay before publicly disclosing a rating action sufficiently long to address the business concerns of the subscriber-based NRSROs and the issuer-paid NRSROs? Should the delay be for a longer period such as one or two years or even longer? Alternatively, is six months too long and should it be a shorter period of time such as three months or even shorter? • Should the rule require that a notice be published along with the XBRL Interactive Data File warning that because of the permitted delay in updating the record some of the credit ratings in the record may no longer reflect the NRSRO's current assessment of the creditworthiness of the obligor or debt security? For example, the notice could explain that the information in the record is sixth months old and state that the credit ratings contained in record may not be up-to-date. • Are there ways in which the NRSROs should be required to sort the credit ratings contained on the record such as by asset class or type of ratings? • What mechanisms are appropriate for identifying rated securities? Are there other identifiers in addition, or as an alternative, to CUSIP or CIK number that could be used in the rule? • Should the Commission allow the ratings action data to be provided in a format other than XBRL, such as pipe delimited text data (“PDTD”) or eXtensible Markup Language (“XML”)? Is there another format that is more widely used or would be more appropriate than XBRL for NRSRO data? What are the advantages/disadvantages of requiring the XBRL format? • Should the Commission require that the information on the assets underlying a structured finance products discussed in Section II.A.1.a above be provided in a specific format such as PDTD, XML, or XBRL? Again, is there another format that is more widely used or would be more appropriate for such data? What are the advantages/disadvantages of requiring a specific format? • Should the Commission take the lead in creating the new tags that are needed for the XBRL format or should it allow the tags to be created by another group and then review the tags? How long would it take to create new tags? • The Commission anticipates that the data provided by NRSROs would be simple and repetitive ( *i.e.* , the data would be name, CUSIP, date, rating, date, rating, etc.). Is there a need for more detailed categories of data? • What would be the costs to an NRSRO to provide data in the XBRL format? Would there be a cost burden on smaller NRSROs? Is there another format that would cost less but still allow investors and analysts to easily download and analyze the data? • Should the Commission institute a test phase for providing this information in an XBRL format (such as a voluntary pilot program, similar to what it is currently doing for EDGAR filings)? How long should this test phase last? • Where is the best place to store the data provided by NRSROs? Currently, information that needs to be made publicly available is stored on each NRSRO's Web site. Should the Commission create a central database to store the information? If so, should it use the EDGAR database or should it create a new database? 2. A Record of Material Deviation From Model Output The Commission is proposing to amend paragraph (a)(2) of Rule 17g-2 to add an additional record that would be required to be made for each current credit rating, namely, if a quantitative model is a substantial component in the process of determining the credit rating, a record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued. The NRSRO issuing the rating would be responsible for making the determination of what constituted a “substantial component” of the rating process as well as what constituted a “material” difference between the rating issued and the rating implied by the model. 124 This proposal is designed to enhance the recordkeeping processes of the NRSROs so that Commission examiners (and any internal auditors of the NRSRO) could reconstruct the analytical process by which a credit rating was determined. This would facilitate their review of whether the NRSRO followed its disclosed and internally documented procedures for determining credit ratings. 124 The Commission notes that it would consider the RMBS and CDO rating process described above in Section I.C.2 as using a quantitative model as a substantial component in the ratings process. The requirement to make the record would be triggered in cases where a quantitative model is a substantial component of the credit ratings process for the type of obligor or security being rated and the output of the model would result in a materially different conclusion if the NRSRO relied on it without making an out-of-model adjustment. For example, the Commission preliminarily believes the expected loss and cash flow models used by the NRSROs to rate RMBS and CDOs are substantial components of the rating process. The following hypothetical scenario is intended as an illustrative example of an instance when an out-of-model adjustment would be material to the RMBS rating process thereby triggering the requirement to document the rationale for the adjustment under the proposed rule. A credit analyst uses the NRSRO's expected loss model to analyze a $1 billion (aggregate principal amount) loan pool received from an arranger that is proposed to collateralize an RMBS. The results of the model imply that the senior RMBS tranche would need to have at least 20% subordination in order to receive an AAA rating. However, the NRSRO's methodologies and procedures for rating RMBS allow for the subordination level suggested by the model output to be adjusted based on certain qualitative factors such as the experience and competence of the loan servicer or the recent performance of similar loan pools. Based on the superior competence of the loan servicer, the analyst concludes that the senior tranche only needs 19% subordination and, ultimately, the ratings committee agrees. Consequently, the RMBS is issued with a senior tranche having 19% subordination and receiving an AAA rating from the NRSRO. In this case, under the proposed amendment, the NRSRO would be required to make a record that identified the rationale—the servicer's superior competence—for determining a credit rating that was different from the rating implied by the model. As the above scenario demonstrates, the failure to make such a record could hamper the ability of the Commission to review whether an NRSRO was following its stated procedures for determining credit ratings. In the above scenario, the analyst could adjust the rating requirements implied by the model by applying qualitative factors with respect to the loan servicer or the performance of similar pools. A record indicating which rationale was applied would make it easier for the Commission to review whether the procedures were followed. The Commission is proposing this amendment, in part, under authority to require NRSROs to make and keep for prescribed periods such records as the Commission prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. 125 The Commission preliminarily believes this proposed new recordkeeping requirement is necessary and appropriate in the public interest and for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. Specifically, as explained above, the Commission preliminarily believes that maintaining records identifying the rationale for material divergences from the ratings implied by qualitative models used as a substantial component in the ratings process would assist the Commission in evaluating whether an NRSRO is adhering to its disclosed procedures for determining ratings. Further, as the Commission noted in the Adopting Release, “books and records rules have proven integral to the Commission's investor protection function because the preserved records are the primary means of monitoring compliance with applicable securities laws.” In the absence of such a recordkeeping requirement, there may be no way to determine whether an analyst modified the requirements for obtaining a certain category of credit rating ( *e.g.* AAA) as indicated by the model results by applying appropriate qualitative factors permitted under the NRSRO's documented procedures or because of undue influence from the person seeking the credit rating or other inappropriate reasons such as those prohibited by Rule 17g-6. 126 125 *See* Section 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)). 126 17 CFR 240.17g-6. Rule 17g-6 prohibits an NRSRO from engaging in certain unfair, abusive or coercive practices such as issuing a credit rating that is not determined in accordance with the NRSRO's established procedures and methodologies for determining credit ratings based on whether the rated person will purchase the credit rating. *See* 17 CFR 240.17g-6(a)(2). The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following questions related to the proposal. • Would this proposal have the impermissible effect of regulating the substance of credit ratings in any way? • Should the Commission define in the rule when the use of a model would be a “substantial component” in the process of determining a credit rating? Commenters endorsing the adoption of such a definition should provide specific proposals. • Are there certain types of rated products (e.g., corporate debt, municipal bonds) which generally employ a quantitative model as a substantial component of the ratings process? Commenters should identify the types of bonds and a general description of the models used to rate them. • Should the Commission define in the rule when the divergence from a model would be “material”? Commenters endorsing the adoption of such a definition should provide specific proposals. • Is the hypothetical scenario of the RMBS rating process used to illustrate when a divergence would be material for purposes of the proposed amendment reasonable? For example, is the adjustment of the subordination level from 20% to 19% for a $1 billion loan pool a material divergence? Would a lesser adjustment of the subordination level ( *e.g.* , 20% to 19.5%) also be material? • Are there alternative types of records that may be created or retained by an NRSRO that would allow the Commission to understand when and why an NRSRO's final rating differed materially from the rating implied by the model? • Should the Commission require that the information about material deviations from the rating implied by the model be publicly disclosed by the NRSRO in the presale report or when the rating is issued? 3. Records Concerning Third-Party Analyst Complaints The Commission is proposing an amendment to Exchange Act Rule 17g-2 127 to add a requirement that an NRSRO retain records of any complaints regarding the performance of a credit analyst in determining credit ratings. Specifically, the proposed amendment would add a new paragraph (b)(8) to Rule 17g-2 to require an NRSRO to retain any communications that contain complaints about the performance of a credit analyst in initiating, determining, maintaining, monitoring, changing, or withdrawing a credit rating. 127 17 CFR 240.17g-2. The Commission is proposing these amendments, in part, under authority to require NRSROs to make and keep for prescribed periods such records as the Commission prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in the furtherance of the Exchange Act. 128 The Commission preliminarily believes the proposed new recordkeeping requirements are necessary and appropriate in the public interest and for the protection of investors, or otherwise in furtherance of the Exchange Act, because they would assist the Commission in reviewing how NRSROs address conflicts interest that could impair the integrity of their credit rating processes. For example, an NRSRO might respond to complaints from issuers that an analyst is too conservative by removing the analyst from the responsibility of rating the securities of those issuers and assigning a new analyst that is more willing to determine credit ratings desired by the issuers. As discussed above with respect to the proposed amendments to Rule 17g-5, the potential for this type of response to complaints about analysts is particularly acute in the structured finance area given that certain arrangers of structured finance products repeatedly bring ratings business to the NRSROs. 129 The pressure to maintain the business relationship with these arrangers could cause an NRSRO to remove an analyst responsible for rating the structured finance products these arrangers bring to market if they complained about how the analyst was determining credit ratings and implied that they might take their business to other NRSROs. 128 *See* Section 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)). 129 *See e.g.* , Coffee April 22, 2008 Senate Testimony, pp. 4-6. The records proposed under these amendments would allow the Commission, in evaluating the integrity of the NRSRO's ratings process, to better assess whether analyst reassignments or terminations were for reasons unconnected to a conflict of interest ( *e.g.* , the analyst's poor performance) or as a result of the “arranger-pay” conflict of interest described above. For example, the examiners could review the complaint file that would be established by this proposed amendment and follow-up with the relevant persons within the NRSRO as to how the complaint was addressed. The potential for such a review by Commission examiners could reduce the willingness of an NRSRO to re-assign or terminate a credit analyst for inappropriate business considerations. The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following questions related to the proposal. • In addition to the proposed recordkeeping requirement, should the Commission require the NRSROs to publicly disclose when an analyst has been re-assigned from the responsibility to rate an obligor or the securities of an issuer, underwriter, or sponsor? • Should the Commission require NRSROs to retain any communications containing a request from an obligor, issuer, underwriter, or sponsor that the NRSRO assign a specific analyst to a transaction in addition to the proposed requirement to retain complaints about analysts? 4. Clarifying Amendment to Rule 17g-2(b)(7) Paragraph (b)(7) of Rule 17g-2 currently requires an NRSRO to retain all internal and external communications that relate to “initiating, determining, maintaining, changing, or withdrawing a credit rating.” The Commission is proposing to add the word “monitoring” to this list. The intent is to clarify that NRSRO recordkeeping rules extend to all aspects of the credit rating surveillance process as well as the initial rating process. This was the intent when the Commission originally adopted the rule as indicated by the use of the term “maintaining.” The Commission believes that adding the term “monitoring”—a term of art in the credit rating industry—would better clarify this requirement. The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following question related to the proposal. • Should the Commission delete the term “maintaining” from paragraph (b)(7) and proposed new paragraph (b)(8) of Rule 17g-2 as it has the same meaning as “monitoring?” C. Amendments to the Instructions for Form NRSRO Form NRSRO is the means by which credit rating agencies apply to be registered with the Commission and registered NRSROs update information they must publicly disclose. Much of the information elicited in Form NRSRO is required to be submitted to the Commission pursuant to the statutory requirements of Section 15E(a)(1)(B) of the Exchange Act. 130 The Commission added certain additional information to be submitted in the Form. 131 As discussed below, the Commission, in part, under its authority pursuant to Section 15E(a)(1)(B)(x), is now proposing to amend Form NRSRO to further enhance the quality and usefulness of the information to be furnished and disclosed by registered NRSROs by requiring specified information in addition to that which is statutorily defined in the Section 15E of the Exchange Act. 130 15 U.S.C. 78o-7(a)(1)(B). 131 15 U.S.C. 78o-7(a)(1)(B)(x). 1. Enhanced Ratings Performance Measurement Statistics on Form NRSRO As discussed above, the Commission is proposing to require the disclosure of the historical rating actions relating to each current credit rating of an NRSRO through amendments to Rule 17g-2. The intent is to make available the raw data necessary for the marketplace to develop and apply credit ratings performance metrics. At the same time, the Commission is proposing to amend the instructions to Exhibit 1 to Form NRSRO to enhance the comparability of the performance measurement statistics the NRSROs are required to publicly disclose in the Form. Currently, the instructions require the disclosure of “performance measurement statistics of the credit ratings of the Applicant/NRSRO over short-term, mid-term, and long-term periods (as applicable) through the most recent calendar year-end.” The Commission, in adopting this requirement, did not require disclosure of performance statistics in Form NRSRO beyond those specified in Section 15E(a)(1)(B)(i) of the Exchange Act. 132 In the Adopting Release, the Commission explained that it was not prepared to prescribe standard metrics at that time in light of the varying approaches suggested by some commenters and the opposition of other commenters to having the Commission impose any standards. 133 The Commission also stated that it would continue to consider the issue to determine the feasibility, as well as the potential benefits and limitations, of devising measurements that would allow reliable comparisons of the accuracy of the NRSROs' credit ratings. 134 132 *See* 15 U.S.C. 78o-7(a)(1)(B)(i). 133 *See* Adopting Release, 72 FR at 33574. 134 *Id.* The Commission, with the benefit of further consideration of the issue, now preliminarily believes that the instructions to Exhibit 1 can prescribe greater specificity about how the performance statistics must be generated without intruding into the processes and methodologies by which NRSROs determine credit ratings. For example, through the examination process, the Commission has become more familiar with the procedures and methodologies used by the NRSROs to determine credit ratings. Through this experience, the Commission preliminarily believes it can prescribe generic requirements for the performance statistics that would accommodate the different procedures and methodologies used by the NRSROs. The first proposed amendment would augment the instructions to Exhibit 1 by requiring the disclosure of separate sets of default and transition statistics for each asset class of credit rating for which an applicant is seeking registration as an NRSRO or an NRSRO is registered and any other broad class of credit ratings issued by the NRSRO. This would result in the generation of performance statistics that are specific to each class of credit ratings for which the NRSRO is registered (or an applicant is seeking registration). This proposal is designed to make it easier for users of credit ratings to compare the accuracy of NRSRO credit ratings on a class-by-class basis. The proposed amendment also would require an NRSRO registered in the class of credit ratings described in Section 3(a)(62)(B)(iv) of the Rating Agency Act 135 (or an applicant seeking registration in that class) when generating the performance statistics for that class to include credit ratings of any security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction. This is designed to ensure the inclusion of ratings actions for credit ratings of structured finance products that do not meet the narrower statutory definition of “issuers of asset-backed securities (as that term is defined is section 1101(c) of part 229 of title 17, Code of Federal Regulations).” 136 135 15 U.S.C. 78c(a)(62)(B)(iv). 136 *See Id.* The second proposed amendment would require that these class-by-class disclosures be broken out over 1, 3 and 10-year periods. Section 15E(a)(1)(B)(i) of the Exchange Act requires that the performance statistics be over short, mid, and long-term periods. 137 The proposed amendment would define those statutorily prescribed periods in specific years so that the performance statistics generated by the NRSROs cover comparable time periods. The Commission preliminarily believes that 1, 3, and 10 year periods are reasonable definitions of the terms “short-term, mid-term, and long-term periods” as used in Section 15E(a)(1)(B)(i) of the Exchange Act. 138 For example, the 1 year period would provide users with information about how the credit ratings are currently performing. In effect, it could serve as an early warning mechanism if a problem developed in an NRSRO's rating processes due to flaws or conflicts. Similarly, the 3 year period would provide information about the how the ratings were currently performing but, by including more historical data, smooth out spikes in the 1 year statistics to give a better sense of how the ratings perform over time. The 3 year statistics also would serve as a bridge to the longer term 10 year statistics. The 10 year statistics would show users how the ratings in a particular class of securities perform over the long range. 137 15 U.S.C. 78o-7(a)(1)(B)(i). 138 15 U.S.C. 78o-7(a)(1)(B)(i). The third proposed amendment would modify what ratings actions are required to be included in these performance measurement statistics by replacing the term “down-grade and default rates” with “ratings transition and default rates.” The proposed switch to “ratings transition” rates from “downgrade” rates is designed to clarify that upgrades (as well as downgrades) should be included in the statistics. The fact that an NRSRO upgrades a substantial amount of credit ratings may be just as indicative of a flaw in the initial rating as a large number of downgrades. For example, an NRSRO could try to manipulate its performance statistics by issuing overly conservative ratings. The final proposed amendment would specify that the default statistics required under the exhibit must show defaults relative to the initial rating and incorporate defaults that occur after a credit rating is withdrawn. This amendment is designed to prevent an NRSRO from manipulating the performance statistics by not including defaults when generating statistics for a category of credit ratings ( *e.g.* , AA) because the defaults occur after the rating is downgraded to a lower category ( *e.g.* , CC) or withdrawn. The Commission is proposing these amendments, in part, under authority to require such additional information in the application as it finds necessary or appropriate in the public interest or for the protection of investors. 139 The Commission preliminarily believes the proposed new disclosure requirements for Exhibit 1 are necessary and appropriate and in the public interest or for the protection of investors. Specifically, the information that would be required under the proposed amendments would aid investors by allowing them to evaluate how the credit ratings of an NRSRO perform ( *i.e.* , the percentage of credit ratings that migrate to another category of credit rating and the percentage of rated obligors and securities that default) on a class-by-class basis. This would provide better information on how an NRSRO's ratings have performed within the field of financial products relevant to any given user of credit ratings and investor. For example, an investor contemplating the purchase of a highly-rated subprime RMBS would be able to consider the performance of an NRSRO's ratings of structured finance products, which would be more useful than the NRSRO's general performance statistics across all classes of credit ratings. Specifically, an NRSRO may be much better at assessing the creditworthiness of corporate debt securities than of structured finance products. Consequently, performance statistics of such an NRSRO that incorporate all classes of credit ratings ( *e.g.* , corporate debt and structured finance products) would be less precise in terms of evaluating the performance of the NRSRO's credit ratings for structured finance products. 139 *See* Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C. 78o-7(a)(1)(B)(x)). Furthermore, by defining “short-term, mid-term, and long-term” periods as 1, 3, and 10-year timeframes, the proposed amendment would provide a better basis for comparing the performance of different NRSROs as the statistics for each NRSRO would cover the same periods. Finally, the replacement of the “down-grade” requirement with a “ratings transition” requirement and the clarification of what default statistics would need to be incorporated into the ratings performance statistics would further enhance investor understanding of NRSRO performance by requiring that similar information be captured in the NRSROs' performance rating statistics and eliminating certain ways that could be used to “pad” statistics. The Commission generally requests comment on all aspects of these proposed amendments. In addition, the Commission requests comment on the following questions related to the proposals. • Should the Commission prescribe specific standards for the performance statistics, such as requiring an NRSRO to disclose how its credit ratings performed relative to metrics such as credit spreads? Commenters endorsing such an approach should provide specific details as to how it could be implemented; taking into consideration factors such as the issues related to the difficulty of obtaining timely and consistent pricing information for many debt instruments and the volatility of credit spreads. • Should the Commission require performance statistics in a more granular form than by class of credit ratings? For example, should the Commission require for structured finance products statistics by more narrowly defined asset classes such as CDOs and RMBS or types of asset-backed securities such as those backed by home loans, credit cards, or commercial real estate? Commenters endorsing greater granularity should provide specific details, including definitions of the credit rating classes. • Should the Commission prescribe different time periods for the short, medium, and long term statistics than 1, 3, and 10 years, respectively. For example, should the periods be 6 months, 2 years and 7 years or 2, 5, and 15 years or some other set of time periods? 2. Enhanced Disclosure of Ratings Methodologies The Commission is proposing to amend the instructions for Exhibit 2 to Form NRSRO to require enhanced disclosures about the procedures and methodologies an NRSRO uses to determine credit ratings. Section 15E(a)(1)(B)(ii) of the Exchange Act requires that an application for registration as an NRSRO contain information regarding the procedures and methodologies used by the firm to determine credit ratings. 140 The Commission implemented this requirement by prescribing through the instructions to Form NRSRO that an applicant and NRSRO must provide general descriptions of their procedures and methodologies for determining credit ratings and that the descriptions must be sufficiently detailed to provide users of credit ratings with an understanding of the procedures and methodologies. The instructions also identified various areas that are required to be addressed in Exhibit 2, including, as applicable, descriptions of the NRSRO's policies for determining whether to initiate a credit rating; the public and non-public sources of information used in determining credit ratings, including information and analysis provided by third-party venders; and the quantitative and qualitative models and metrics used to determine credit ratings. 140 15 U.S.C. 78o-7(a)(1)(B)(ii). The Commission is proposing to add three additional areas that an applicant and a registered NRSRO would be required to address in the descriptions of its procedures and methodologies in Exhibit 2. The inclusion of these would serve to better disclose the actions an applicant and NRSRO is, or is not taking, in determining credit ratings. The additional areas required to be addressed in the exhibit would be: • Whether and, if so, how information about verification performed on assets underlying or referenced by a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction is relied on in determining credit ratings; • Whether and, if so, how assessments of the quality of originators of assets underlying or referenced by a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction play a part in the determination of credit ratings; and • How frequently credit ratings are reviewed, whether different models or criteria are used for ratings surveillance than for determining initial ratings, whether changes made to models and criteria for determining initial ratings are applied retroactively to existing ratings, and whether changes made to models and criteria for performing ratings surveillance are incorporated into the models and criteria for determining initial ratings. The Commission is proposing these amendments, in part, under authority to require such additional information in the application as it finds necessary or appropriate in the public interest or for the protection of investors. 141 The Commission preliminarily believes the proposed new disclosure requirements for Exhibit 2 are necessary and appropriate and in the public interest or for the protection of investors. Specifically, they are designed to provide greater clarity around three areas of the NRSROs' rating processes, particularly for structured finance products, where questions have been raised in the context of the credit market turmoil: Namely, the verification performed on information provided in loan documents; the quality of loan originators; and the surveillance of existing ratings and how changes to models are applied to existing ratings. The amendments are designed to enhance the disclosures NRSROs make in these areas and, thereby, allow users of credit ratings to better evaluate the quality of their ratings processes. 141 *See* Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C. 78o-7(a)(1)(B)(x)). The first proposed amendment would require an NRSRO to disclose whether it considers in its rating process for structured finance product steps taken to verify information about the assets in the pool backing the structured finance product. Underwriters and sponsors of structured finance products frequently take some steps to verify information provided by borrowers in loan documentation. Generally, they have been reluctant to provide this information to NRSROs for proprietary reasons. The proposed amendment would not require that the NRSROs incorporate verification (or the lack of verification) into their ratings processes. Rather, it would require an NRSRO to disclose whether and, if so, how information about verification performed on the assets is relied on in determining credit ratings for structured finance products. For example, an NRSRO would need to disclose, as applicable: If it does not consider steps taken to verify the information; if it requires some minimum level of verification to be performed before it will determine a credit rating for a structured finance product; and how it incorporates the level of verification performed into its procedures and methodologies for determining credit ratings ( *e.g.* , if it compensates for the lack of verification by requiring greater levels of credit enhancement for the tranche securities). The Commission preliminarily believes this disclosure would benefit users of credit ratings by providing information about the potential accuracy of an NRSRO's credit ratings. As noted above, the NRSROs determine credit ratings for structured finance products based on assumptions in their models as to how the assets underlying the instruments will perform under varying levels of stress. These assumptions are based on the characteristics of the assets ( *e.g.* , value of the property, income of the borrower) as reported by the arranger of the structured finance product. If this information is inaccurate, the capacity of the model to predict the potential future performance of the assets may be significantly impaired. Consequently, information about whether an NRSRO requires that some level of verification be performed or takes other steps to account for the lack of verification or a low level of verification would be useful to users of credit ratings in assessing the potential for an NRSRO's credit ratings to be adversely impacted by bad information about the assets underlying a rated structured finance product. The second proposed amendment would require an NRSRO to disclose whether it considers qualitative assessments of the originator of assets underlying a structured finance product in the rating process for such products. Certain qualities of an asset originator, such as its experience and underwriting standards, may impact the quality of the loans it originates and the accuracy of the associated loan documentation. This, in turn, could influence how the assets ultimately perform and the ability of the NRSRO's models to predict their performance. Consequently, the failure to perform any assessment of the loan originators could increase the risk that an NRSRO's credit ratings may not be accurate. Therefore, disclosures as to whether the NRSRO performs any qualitative assessments of the originators would be useful in comparing the efficacy of the NRSRO's procedures and methodologies. The third proposed amendment would require an NRSRO to disclose the frequency of its surveillance efforts and how changes to its quantitative and qualitative ratings models are incorporated into the surveillance process. The Commission believes that users of credit ratings would find information about these matters useful in comparing the ratings methodologies of different NRSROs. For example, how often and with what models an NRSRO monitors its credit ratings would be relevant to assessing the accuracy of the ratings insomuch as ratings based on stale information and outdated models may not be as accurate as ratings of like products determined using newer data and models. Moreover, with respect to new types of rated obligors and debt securities, the NRSROs refine their models as more information about the performance of these obligors and debt securities is observed and incorporated into their assumptions. Consequently, as the models evolve based on more robust performance data, credit ratings of obligors or debt securities determined using older models may be at greater risk for being inaccurate than the newer ratings. Therefore, whether the NRSRO verifies the older ratings using the newer methodologies would be useful to users of credit ratings in assessing the accuracy of the credit ratings. The Commission generally requests comment on all aspects of the proposed amendments. In addition, the Commission requests comment on the following question related to the proposals. • Are there other areas of the ratings process where enhanced disclosure on Form NRSRO would benefit investors and other users of credit ratings? Commenters endorsing further disclosures should specifically identify them. D. Amendment to Rule 17g-3 (Report of Credit Rating Actions) The Commission adopted Rule 17g-3 pursuant to authority in Section 15E(k) 142 of the Exchange Act, which requires an NRSRO to furnish to the Commission, on a confidential basis 143 and at intervals determined by the Commission, such financial statements and information concerning its financial condition as the Commission, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors. The statute also provides that the Commission may, by rule, require that the financial statements be certified by an independent public accountant. 144 In addition, Section 17(a)(1) of the Exchange Act 145 requires an NRSRO to make and keep such records, and make and disseminate such reports, as the Commission prescribes by rule as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the Exchange Act. 146 142 15 U.S.C. 78o-7(k). 143 An applicant can request that the Commission keep this information confidential. *See* Section 24 of the Exchange Act (15 U.S.C. 78x), 17 CFR 240.24b-2, 17 CFR 200.80 and 17 CFR 200.83. 144 *Id.* 145 15 U.S.C. 78q(a)(1). 146 *See* Section 5 of the Rating Agency Act and 15 U.S.C. 78q(a)(1). Rule 17g-3 requires an NRSRO to furnish the Commission on an annual basis the following reports: Audited financial statements; unaudited consolidated financial statements of the parent of the NRSRO, if applicable; an unaudited report concerning revenue categories of the NRSRO; an unaudited report concerning compensation of the NRSRO's credit analysts; and an unaudited report listing the largest customers of the NRSRO. The rule further requires an NRSRO to furnish the Commission these reports within 90 days of the end of its fiscal year. The Commission is proposing to amend Rule 17g-3 to require an NRSRO to furnish the Commission with an additional annual report of the number of credit rating actions during the fiscal year in each class of security for which the NRSRO is registered. Specifically, the amendment would add a new paragraph (a)(6) to Rule 17g-3, which would require an NRSRO to provide the Commission with a report of the number of credit rating actions (upgrades, downgrades, and placements on watch for an upgrade or downgrade) during the fiscal year in each class of credit ratings for which the NRSRO is registered with the Commission. A note to paragraph (a)(6) would clarify that for the purposes of reporting credit rating actions in the asset-backed security class of credit ratings described in Section 3(a)(62)(B)(iv) of the Rating Agency Act 147 an NRSRO would need to include credit rating actions on *any* security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction. This is designed to ensure the inclusion of information about ratings actions for credit ratings of structured finance products that do not meet the narrower statutory definition of “issuers of asset-backed securities (as that term is defined in section 1101(c) of part 229 of title 17, Code of Federal Regulations).” 148 147 15 U.S.C. 78c(a)(62)(B)(iv). 148 *See Id.* The Commission is proposing this amendment, in part, under authority to require an NRSRO to “make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of [the Exchange Act].” 149 The Commission preliminarily believes this proposed amendment is necessary and appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act because it would assist the Commission in its examination function of NRSROs. Large spikes in ratings actions within a class of credit ratings could indicate the processes for determining the ratings may be compromised by inappropriate factors. For example, a substantial increase in the number of downgrades in a particular class of credit ratings may be indicative of the fact that the initial ratings were higher than the NRSRO's procedures and methodologies would have implied because the NRSRO sought to gain favor with issuers and underwriters by issuing higher ratings. A substantial increase in upgrades also could be the result of the NRSRO attempting to gain favor with issuers and underwriters. 149 *See* Section 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)). The Commission recognizes that an increase in the number of ratings actions in a particular class of credit ratings may be the result of macroeconomic factors broadly impacting the rated obligors or securities. In this case, the ratings actions would be the result of appropriate credit analysis and not inappropriate extraneous factors. On the other hand, large numbers of actions could be a signal that the process for rating and monitoring ratings in the impacted class has been compromised by improper practices such as failing to adhere to disclosed and internally documented ratings procedures and methodologies, having prohibited conflicts, failing to establish reasonable procedures to manage conflicts, or engaging in unfair, coercive, or abusive conduct. Consequently, the report would be a valuable tool to improve the focus of examination resources. The Commission generally requests comment on all aspects of this proposed amendment. In addition, the Commission requests comment on the following questions related to the proposal. • Could the performance statistics currently required in Exhibit 1 to Form NRSRO, as well as the proposed enhancements to those statistics, be used to target potential problem areas in an NRSRO's credit rating processes in the same manner as this proposed report thereby making the report redundant? • Should the Commission also require NRSROs to furnish an “early warning” report to the Commission when the number of downgrades in a class of credit ratings passes a certain percentage threshold ( *e.g.* , 5%, 10%, 15%, or 20%) within a number of calendar or business days ( *e.g.* , 2, 5, 10, or 15 days) after the threshold is passed, similar to the broker-dealer notification rule ( *See* 17 CFR 240.17a-11)? III. Proposed New Rule 17g-7 (Special Reporting or Use of Symbols to Differentiate Credit Ratings for Structured Finance Products) The Commission is proposing a new rule, Rule 17g-7, to address concerns that certain investors assumed the risk characteristics for structured finance products, particularly highly rated instruments, were the same as for other types of similarly rated instruments. This proposal also is designed to address concerns that some investors may not have performed internal risk analysis on structured finance products before purchasing them, although at least one survey indicates that many institutional investors asserted that this was not a widespread problem. 150 Specifically, under proposed Rule 17g-7, each time an NRSRO published a credit rating for a structured finance product it also would be required to publish a report describing how the credit ratings procedures and methodologies and credit risk characteristics for structured finance products differ from those of other types of rated instruments such as corporate and municipal debt securities. The objective of this proposal is to alert investors that there are different rating methodologies and risk characteristics associated with structured finance products. As an alternative to publishing the report, an NRSRO would be allowed to use ratings symbols for structured finance products that differentiated them from the credit ratings for other types of debt securities. 150 *See Introducing Assumption Volatility Scores and Loss Sensitivities for Structured Finance Securities,* Moody's, May 14, 2007, p. 3. More specifically, paragraph
(a)of proposed Rule 17g-7 would require an NRSRO to publish a report accompanying every credit rating it publishes for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction that describes the rating methodology used to determine the credit rating and how it differs from a rating for any other type of obligor or debt security and how the risks associated with a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction are different from other types of rated obligors and debt securities. A possible risk associated with this approach is that investors would come to view such reports as “boilerplate” and therefore would not review them. However, the Commission preliminarily believes that requiring an NRSRO to publish such a report along with each publication of a credit rating for a structured finance product likely would provide certain investors with useful information about structured finance products. The goal of the proposal is to spur investors to perform more rigorous internal risk analysis on structured finance products so that they do not overly rely on NRSRO credit ratings in making investment decisions. A possible ancillary benefit of such reports is that they could cause certain investors to seek to better understand risks that are not necessarily addressed in credit ratings of structured products, such as market and liquidity risk. Because the goal of the rule is to foster greater independent analysis by investors, the Commission preliminarily believes that permitting an NRSRO to comply with the rule by differentiating its structured finance product rating symbols would be an equally effective alternative. The differentiated symbol would alert investors that a structured product was being rated and, therefore, raise the question of how it differs from other types of debt instruments. The Commission is not proposing to require that specific rating symbols be used to distinguish credit ratings for structured finance products. An NRSRO would be permitted to choose the appropriate symbol. The Commission preliminarily believes that methods for identifying credit ratings for structured finance products could include using a different rating symbol altogether, such as a numerical symbol, or appending identifying characters to existing ratings scales, *e.g.* , “AAA.sf” or “AAA <sup>SF</sup> .” The Commission is proposing these amendments under authority to require an NRSRO to “make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of [the Exchange Act].” 151 The Commission preliminarily believes these proposed amendments are necessary and appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act because they are designed to encourage investors to perform greater levels of internal risk assessment of structured finance products by putting them on notice that these products have different characteristics than other types of rated debt instruments. The Commission does acknowledge the risks related to these proposals as outlined above. 151 *See* Section 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)). The Commission generally requests comment on all aspects of this proposed rule. In addition, the Commission requests comment on the following questions related to the proposal. • Would the use of different rating symbols for structured products impact automated securities trading, routing, settlement, clearance, trade confirmation, reporting, processing, and risk management systems and any other systems that are programmed to use standard credit rating symbols across all product classes? Commenters should describe how these systems may be impacted and associated costs to address the impacts on the firm such as costs to change or update the systems. Commenters also should describe how the impacts to these systems could impact trading activity in the markets for structured finance products. • Is the proposed rule sufficiently clear about the types of securities and money market instruments to which it applies? Are there securities to which the proposal applies that should not be subject to the requirement of a report or a differentiated symbol? • Would the use of different rating symbols have consequences for investment guidelines and covenants in legal documents that use credit ratings to distinguish finance instruments? Commenters should describe the potential consequences and associated costs to market participants and to the finance markets more broadly. • Would the use of different rating symbols or reports dissuade purchases of structured finance products? • Would the reports or differentiated symbols achieve the Commission's stated goal of encouraging investors to perform more internal risk assessments of structured finance products? Could the reports cause investors to ignore other relevant disclosures or lead to confusion? • Should the rule be expanded to require reports or different ratings symbols for each class of credit ratings identified in Section 3(a)(62)(B) of the Exchange Act (15 U.S.C. 78c(a)(62)(B)); namely:
(1)Financial institutions, brokers, or dealers;
(2)insurance companies;
(3)corporate issuers;
(4)issuers of asset-backed securities; and
(5)issuers of government securities, municipal securities or securities issued by a foreign government? Alternatively, should the rule be expanded to require reports or different ratings symbols for only certain of these classes or subclasses such as for municipal securities? • Should the rule prohibit an NRSRO from using a common set of symbols ( *e.g.* , AAA, AA, A, BBB, BB, B, CCC, CC, C) to rate different types of obligors and debt securities ( *e.g.* , corporate debt and municipal debt) where the NRSRO uses different methodologies for determining such ratings? Would such a proposal raise any questions relating to the scope of the Commission's legal authority in this area? • Should the rule allow the use of a common set of symbols only if the NRSRO determines additional types of ratings to distinguish the different risk characteristics of the different types of obligors and debt securities? For example, the rule could require the determination of ratings to distinguish the potential volatility of the credit ratings of different classes of obligors and debt securities or the differing levels of market and liquidity risk associated with different classes of debt securities. Would such disclosures raise any concerns regarding liability if they were found to be deficient? IV. Paperwork Reduction Act Certain provisions of the proposed rule amendments contain a “collection of information” within the meaning of the Paperwork Reduc tion Act of 1995 (“PRA”). 152 The Commission is submitting these proposed amendments and proposed rule to the Office of Management and Budget (“OMB”) for review in accordance with the PRA. An agency may not conduct or sponsor, and a person is not required to comply with, a collection of information unless it displays a currently valid control number. The titles for the collections of information are: 152 44 U.S.C. 3501 *et seq.* ; 5 CFR 1320.11.
(1)Rule 17g-1, Application for registration as a nationally recognized statistical rating agency; Form NRSRO and the Instructions for Form NRSRO (OMB Control Number 3235-0625);
(2)Rule 17g-2, Records to be made and retained by nationally recognized statistical rating organizations (OMB Control Number 3235-0628);
(3)Rule 17g-3, Annual reports to be furnished by nationally recognized statistical rating organizations (OMB Control Number 3235-0626);
(4)Rule 17g-5, Conflicts of interest (a proposed new collection of information); and
(5)Rule 17g-7, Credit rating reports to be furnished by nationally recognized statistical rating organizations (a proposed new collection of information). A. Collections of Information Under the Proposed Amendments The Commission is proposing for comment rule amendments to prescribe additional requirements for NRSROs to address concerns that have arisen with respect to their role in the credit market turmoil. These proposed amendments would modify rules the Commission adopted in 2007 to implement registration, recordkeeping, financial reporting, and oversight rules under the Rating Agency Act. Additionally, the Commission is proposing a new rule under authority provided in the Rating Agency Act. 153 Certain of the proposed amendments and the proposed new rule would contain recordkeeping and disclosure requirements that would be subject to the PRA. The collection of information obligations imposed by the proposed amendments and proposed new rule would be mandatory. The proposed amendments and proposed new rule, however, would apply only to credit rating agencies that are registered with the Commission as NRSROs. Such registration is voluntary. 154 153 Proposed Rule 17g-7. 154 *See* section 15E of the Exchange Act (15 U.S.C. 78o-7). In summary, the proposed rule amendments and proposed new rule would require:
(1)An NRSRO to provide enhanced disclosure of performance measurements statistics and the procedures and methodologies used by the NRSRO in determining credit ratings for structured finance products and other debt securities on Form NRSRO;
(2)an NRSRO to make, keep and preserve additional records under Rule 17g-2; 155
(3)an NRSRO to make its rating actions and the date of such actions from the initial credit rating to the current credit rating publicly available in an XBRL Interactive Data File no later than six months after the date of the rating action; 156
(4)an NRSRO to furnish the Commission with an additional annual report; 157
(5)disclosure of certain information about securities being rated beginning on the date the issuer or depositor sets the offering price of the securities being rated ; 158 and
(6)an NRSRO to attach a report to its credit ratings for structured finance products describing the rating methodology used and how it differs from the determination of ratings for other types of securities or use a symbol that identifies the rated security as a structured finance product. 159 155 17 CFR 240.17g-2. 156 *See* proposed Rule 17g-2(a)(2)(iv) and (d). 157 *See* proposed Rule 17g-3(a)(6). 158 *See* proposed Rule 17g-5(a)(3) and (b)(9). 159 *See* proposed Rule 17g-7. B. Proposed Use of Information The proposed amendments and new rule would enhance the framework for Commission oversight of NRSROs in response to the recent credit market turmoil. 160 The collections of information in the proposed amendments and new rule are designed to assist the Commission in effectively monitoring, through its examination function, whether an NRSRO is conducting its activities in accordance with section 15E of the Exchange Act 161 and the rules thereunder. In addition, these proposed amendments and the new rule are designed to assist users of credit ratings by proposing to require the disclosure of additional information with respect to an NRSRO that could be used to compare the credit ratings quality of different NRSROs, particularly with respect to structured finance products. The Commission believes that the information that NRSROs would have to make public as a result of the proposed amendments would advance one of the primary objectives of the Rating Agency Act, as noted in the accompanying Senate Report, to “facilitate informed decisions by giving investors the opportunity to compare ratings quality of different firms.” 162 160 *See* 17 CFR 17g-1 through 17g-6, and Form NRSRO. 161 15 U.S.C. 78o-7. 162 *See* Senate Report, p. 8. C. Respondents In adopting the final rules under the Rating Agency Act, the Commission estimated that approximately 30 credit rating agencies would be registered as NRSROs. 163 The Commission believes that this estimate continues to be appropriate for identifying the number of respondents for purposes of the proposed amendments and for proposed new Rule 17g-7. Since the initial set of rules under the Rating Agency Act became effective in June 2007, nine credit rating agencies have registered with the Commission as NRSROs. 164 The registration program has been in effect for less than a year; consequently, the Commission expects additional entities will register. While 20 more entities may not ultimately register, the Commission believes the estimate is within reasonable bounds and appropriate given that it adds an element of conservatism as it increases paperwork burden estimates as well as cost estimates. 163 *See* Adopting Release, 72 FR at 33606-33607. 164 A.M. Best Company, Inc.; DBRS Ltd.; Fitch.; Japan Credit Rating Agency, Ltd.; Moody's; Rating and Investment Information, Inc.; S&P; LACE Financial Corp.; and Egan-Jones Rating Company. In addition, proposed Rule 17g-5(a)(3) 165 would require the disclosure of certain information provided to, and used by, an NRSRO in determining an initial rating for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction and for monitoring those ratings. The rule would not specify which party would disclose such information: The NRSRO, sponsor, issuer, depositor, trustee or some other person. The Commission believes that the most likely persons to disclose this information would be structured finance product arrangers, managers, or trustees as they are the entities that generate the information and provide it to the NRSROs. For purposes of the PRA estimate for proposed Rule 17g-5(a)(3), based on staff information gained from the NRSRO examination process, the Commission estimates that there would be approximately 200 respondents. As noted throughout the release, the number of arrangers bringing structured finance products to market is small relative to the number of deals. 165 *See* proposed Rule 17g-5(a)(3)(i) and (iii). The Commission generally requests comment on all aspects of these proposed estimates for the number of respondents. In addition, the Commission requests specific comment on the following items related to these estimates. • Should the Commission use the number of credit rating agencies currently registered as NRSROs rather the estimated number of 30 ultimate registrants? Alternatively, is there a basis to estimate a different number of likely registrants? • Is the Commission correct in believing that structured product arrangers, managers, and trustees would be the entities that disclose the information required under the proposed amendments to Rule 17g-5(a)? • Are there sources that could provide credible information that could be used to determine the number of credit rating agencies and other NRSROs that would be subject to the proposed paperwork burdens? Commenters should identify any such sources and explain how a given source could be used to either support the Commission's estimate or arrive at a different estimate. Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. D. Total Annual Recordkeeping and Reporting Burden As discussed in further detail below, the Commission estimates the total recordkeeping burden resulting from the proposed amendments and proposed new rule would be approximately 1,434,690 hours on an annual basis 166 and 64,500 hours on a one-time basis. 167 166 This total is derived from the total annual hours set forth in the order that the totals appear in the text: 390 + 300 + 4,000 + 150,000 + 1,280,000 = 1,434,690. 167 This total is derived from the total one-time hours set forth in the order that the totals appear in the text: 900 + 900 + 60,000 + 1,500 + 300 + 900 = 64,500. The total annual and one-time hour burden estimates described below are averages across all types of NRSROs expected to be affected by the proposed amendment and new rule. The size and complexity of NRSROs range from small entities to entities that are part of complex global organizations employing thousands of credit analysts. Consequently, the burden hour estimates represent the average time across all NRSROs. The Commission further notes that, given the significant variance in size between the largest NRSROs and the smallest NRSROs, the burden estimates, as averages across all NRSROs, are skewed higher because the largest firms currently predominate in the industry. 1. Amendments to Form NRSRO The proposed amendments to Form NRSRO would change the instructions for the Form to require that NRSROs provide more detailed credit ratings performance statistics in Exhibit 1 and disclose with greater specificity information about the procedures and methodologies used to determine structured finance and other credit ratings in Exhibit 2. 168 The Commission expects these proposed amendments would not have a material effect on the respondents' hour burden. The Commission believes that the total annual burden hours of 2,100 currently approved by OMB would not change for Rule 17g-1 and Form NRSRO materially because the additional disclosures would be included within the overall preparation of the initial Form NRSRO for new applicants. Additionally, the Commission believes that the nine currently registered NRSROs could be required to prepare and furnish an amended Form NRSRO to update their registration applications if the Commission were to adopt the proposed amendments ( *i.e.* , nine amended Form NRSROs). However, the Commission believes these potential nine furnishings of Form NRSRO are accounted for in the currently approved PRA collection for Rule 17g-1, which includes an estimate that each NRSRO would file two amendments to Form NRSRO per year. 169 168 17 CFR 240.17g-1 and Form NRSRO. 169 *See* Adopting Release, 72 FR at 33609. To date, only one of the seven NRSROs that have been registered with the Commission since September 2007 has furnished the Commission with an amended Form NRSRO since registering with the Commission. The Commission generally requests comment on all aspects of these proposed burden estimates for Rule 17g-1 and Form NRSRO, proposed to be amended. In addition, the Commission requests specific comment on the following items related to these estimates: • Would the proposed additional disclosure requirements increase the burden hours from the amount currently budgeted for Rule 17g-1 and Form NRSRO? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 2. Amendments to Rule 17g-2 Rule 17g-2 requires an NRSRO to make and keep current certain records relating to its business and requires an NRSRO to preserve those and other records for certain prescribed time periods. 170 The Commission's current estimate for the average one-time burden of implementing a recordkeeping system to comply with Rule 17g-2 is 300 hours. 171 Additionally, the total annual burden currently approved by OMB for Rule 17g-2 is 7,620 hours, which represents the average annual amount of time an NRSRO will spend to make and maintain these records (254 hours per year) multiplied by 30 respondents. 172 170 17 CFR 240.17g-2. 171 *See* Adopting Release, 72 FR at 33608. 172 *See* Adopting Release, 72 FR at 33610. The proposed amendments to Rule 17g-2 would require an NRSRO to make and retain two additional records and retain a third type of record. The records to be made and retained would be:
(1)A record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued, if a quantitative model is a substantial component in the process of determining a credit rating; 173 and
(2)a record showing the history and dates of all previous rating actions with respect to each current credit rating. 174 The proposed amendments to Rule 17g-2 would require an NRSRO to make the second set of records—rating actions related to current ratings—publicly available in an XBRL Interactive Data File. 175 In addition, the proposed amendments would require an NRSRO to retain communications that contain any complaints by an obligor, issuer, underwriter, or sponsor about the performance of a credit analyst. 176 173 Proposed paragraph (a)(2)(iii) of Rule 17g-2. 174 Proposed paragraph (a)(8) of Rule 17g-2. 175 Proposed amendment to Rule 17g-2(d). 176 Proposed paragraph (b)(8) of Rule 17g-2. With respect to the proposed amendments to Rule 17g-2, the Commission estimates, based on staff information gained from the NRSRO examination process, that the total one-time and annual record recordkeeping burdens would increase approximately 10% and 5%, respectively. 177 Thus, the Commission estimates that the one-time burden that each NRSRO would spend implementing a recordkeeping system to comply with Rule 17g-2 as proposed to be amended would be approximately 330 hours, 178 for a total one-time burden of 9,900 hours for 30 NRSROs. 179 The Commission estimates that an NRSRO would spend an average of 267 hours per year 180 to make and retain records under Rule 17g-2 as proposed to be amended, for a total annual hour burden under Rule 17g-2 of 8,010 hours. 181 This estimate would result in an increase in the currently approved PRA burden under Rule 17g-2 of 390 annual burden hours. 182 As discussed above, the increase in annual burden hours would result from the increase in the number of records an NRSRO would be required to make and retain under the proposed amendments to Rule 17g-2. 177 The Commission believes that the one-time burden to set up and/or modify a recordkeeping system to comply with the proposed amendments would be greater than the ongoing annual burden. Once an NRSRO has set up or modified its recordkeeping system to comply with the proposed amendments, its annual hour burden would be increased only to the extent it would be required to make and retain additional records. 178 300 hours × 1.10 = 330 hours. This would result in an increase of approximately 30 hours per NRSRO for the one-time hour burden. 179 330 hours × 30 respondents = 9,900 hours. The proposed amendments would result in an increase of 900 total one-time burden hours. 180 254 hours × 1.05 = 267 hours. The proposed amendments would result in an increase of approximately 13 annual burden hours per NRSRO for Rule 17g-2. 181 267 hours × 30 respondents = 8,010 hours. 182 8,010 hours − 7,620 hours = 390 hours. In addition, the proposed amendments to Rule 17g-2 would require an NRSRO to make the records of its rating actions publicly available in an XBRL Interactive Data File. 183 183 *See* proposed amendment to Rule 17g-2(d). The Commission believes that an NRSRO would choose to make this information available through its Internet Web site and that each NRSRO already has, or would have, an Internet Web site. Therefore, based on staff information gained from the NRSRO examination process, the Commission estimates that, on average, an NRSRO would spend approximately 30 hours to publicly disclose the history of its rating actions for each credit rating in an XBRL Interactive Data File and, thereafter, 10 hours per year to update this information. 184 Accordingly, the total aggregate one-time burden to the industry to make the history of rating actions publicly available in an XBRL Interactive Data File would be 900 hours, 185 and the total aggregate annual burden hours would be 300 hours. 186 184 The Commission also bases this estimate on the current one-time and annual burden hours for an NRSRO to publicly disclose its Form NRSRO. No alternatives to these estimates as proposed were suggested by commenters. *See* Adopting Release, 72 FR at 33609. 185 30 hours × 30 NRSROs = 900 hours. 186 10 hours × 30 NRSROs = 300 hours. Under the currently approved PRA collection for Rule 17g-2, the Commission estimated that an NRSRO may need to purchase recordkeeping system software to establish a recordkeeping system in conformance with Rule 17g-2. 187 The Commission estimated that the cost of the software would vary based on the size and complexity of the NRSRO. Also, the Commission estimated that some NRSROs would not need such software because they already have adequate recordkeeping systems or, given their small size, such software would not be necessary. Based on these estimates, the Commission estimated that the average cost for recordkeeping software across all NRSROs would be approximately $1,000 per firm, with an aggregate one-time cost to the industry of $30,000. The Commission estimates that the proposed amendments to Rule 17g-2 would not alter this estimate or that any increases in the cost would be *de minimis* . 187 *See* Adopting Release, 72 FR at 33609, 33610. The Commission generally requests comment on all aspects of these proposed burden estimates for Rule 17g-2. In addition, the Commission requests specific comment on the following items related to these burden estimates: • Are there publicly available reports or other data sources the Commission should consider in arriving at these burden estimates? • Are the estimates that these amendments would result in an increase to the current total one-time and annual recordkeeping burdens of approximately 10% and 5% accurate? If not, should they be higher or lower? • Are the estimates that the requirement to make records of rating actions publicly available in an XBRL Interactive Data File would result in an increased one-time burden for each NRSRO of approximately 30 hours to publicly disclose the history of its rating actions for each credit rating in an XBRL Interactive Data File and, thereafter, 10 hours per year to update this information accurate? If not, should they be higher or lower? • Is the estimate that the NRSROs would incur no additional costs (or that any additional costs would be *de minimis* ) to update recordkeeping systems to comply with the proposed new recordkeeping requirements accurate? If not, what would the additional costs be? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 3. Proposed Amendment to Rule 17g-3 Rule 17g-3 requires an NRSRO to furnish certain financial reports to the Commission on an annual basis, including audited financial statements as well as other financial reports. 188 The Commission is proposing to amend Rule 17g-3 to require an NRSRO to furnish the Commission with an additional report: an unaudited report of the number of credit ratings that were changed during the fiscal year in each class of credit ratings for which the NRSRO is registered with the Commission. 189 188 17 CFR 240.17g-3. 189 *See* proposed Rule 17g-3(a)(6). The total annual burden currently approved by OMB for Rule 17g-3 is 6,000 hours, based on the fact that it would take an NRSRO, on average, approximately 200 hours to prepare for and file the annual reports. 190 In addition, the total annual cost burden currently approved by OMB is $450,000 to engage the services of an independent public accountant to conduct the annual audit as part of the preparation of the first report required by Rule 17g-3. 191 This estimate is based on 30 NRSROs hiring an independent public accountant on an annual basis for an average of $15,000. 192 190 200 hours × 30 NRSROs = 6,000 hours. *See* Adopting Release, 72 FR at 33610. 191 Rule 17g-3 currently requires five reports. Only the first report—financial statements—need be audited. The two new reports proposed to be required by the amendments would not need to be audited. 192 $15,000 × 30 NRSROs = $450,000. *See* Adopting Release, 72 FR at 33610. The Commission believes that the proposed amendment to Rule 17g-3 that would require a report on an NRSRO's rating changes during a fiscal year would have a *de minimis* effect on the annual hour burden for the current PRA collection for Rule 17g-3. The Commission preliminarily believes that an NRSRO already would have this information with respect to each class of credit ratings for which it is registered. In addition, the proposed amendment does not prescribe a format for the report. Consequently, the Commission estimates that proposed Rule 17g-3(a)(6) would not have a significant effect on the total annual hour burden currently approved for the PRA for Rule 17g-3. The Commission generally requests comment on all aspects of these proposed burden estimates for Rule 17g-3. In addition, the Commission requests specific comment on the following items related to these burden estimates: • Are there publicly available reports or other data sources the Commission should consider in arriving at these burden estimates? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 4. Amendments to Rule 17g-5 Rules 17g-5 requires an NRSRO to manage and disclose certain conflicts of interest. 193 The rule also prohibits specific types of conflicts of interest. 194 The proposed amendments to Rule 17g-5 would add an additional conflict to paragraph
(b)of Rule 17g-5. This proposed conflict of interest would be issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of an asset-backed or mortgage-backed securities transaction that was paid for by the issuer, sponsor, or underwriter of the security or money market instrument. 195 Under the proposal, an NRSRO would be prohibited from issuing a credit rating for a structured finance product, unless certain information about the transaction and the assets underlying the structured finance product are disclosed. 196 Specifically, the following information would need to be made publicly available beginning on the date the underwriter, issuer or depositor set the offering price of the securities being rated:
(1)All information provided to the NRSRO that is used in determining the initial credit rating, including information about the characteristics of the assets underlying or referenced by the security or money market instrument, and the legal structure; and
(2)all information provided to the NRSRO by the issuer, underwriter, sponsor, depositor or trustee that is used by the NRSRO in undertaking credit rating surveillance on the security or money market instrument. 197 In a private offering, the above information would need to be made available on the date the underwriter and the issuer or depositor set the offering price of the securities being rated only to credit rating agencies and investors; it would need to be made publicly available, however, no later than one business day after the offering closes. 193 17 CFR 240.17g-5. 194 17 CFR 240.17g-5(c). 195 *See* proposed Rule 17g-5(b)(9). The current paragraph (b)(9) would be renumbered as (b)(10). 196 *See* proposed Rule 17g-5(a)(3). 197 *See* proposed Rule 17g-5(a)(3)(i)-(iii). The proposed rule would not specify which party would disclose the information: the NRSRO, sponsor, issuer, depositor or trustee. The Commission preliminarily believes that in order to avoid conflicts with Securities Act prohibitions on general solicitations as well as to avoid making the NRSRO liable for the accuracy of information that would originally be supplied by the arrangers and trustees of structured products, this information would likely be disclosed by those arrangers and trustees. The Commission estimates that there would be approximately 200 such entities. For purposes of this PRA, the Commission estimates that it would take a respondent approximately 300 hours to develop a system, as well as policies and procedures, for the disclosures required by the proposed rule. This estimate is based on the Commission's experience with, and burden estimates for, the recordkeeping requirements for NRSROs. 198 Accordingly, the Commission believes, based on staff experience, that a respondent would take approximately 300 hours on a one-time basis to implement a disclosure system to comply with the proposal in that a respondent would need a set of policies and procedures for disclosing the information, as well as a system for making the information publicly available. This would result in a total one-time hour burden of 60,000 hours for 200 respondents. 199 198 *See* Adopting Release, 72 FR at 33609. 199 300 hours × 200 respondents = 60,000 hours. In addition to the one-time hour burden, disclosure would also be required under the proposed rule on a transaction by transaction basis when an initial rating is determined. Based on staff experience, the Commission estimates that each respondent would disclose information with respect to approximately 20 new transactions per year and that it would take approximately 1 hour per transaction to make the information publicly available. This estimate is based on the Commission's expectation that the respondent will have already implemented the system and policies and procedures for disclosure. The Commission estimates that a large NRSRO would have rated approximately 2,000 new RMBS and CDO transactions in a given year. The Commission is basing this estimate on the number of new RMBS and CDO deals rated in 2006 by two of the largest NRSROs which rated structured finance transactions. The Commission adjusted this number to approximately 4,000 transactions in order to include other types of structured finance products, including commercial MBS and other consumer assets. Therefore, the Commission estimates for purposes of the PRA that each respondent would arrange approximately 20 new transactions per year: 4,000 new transactions/200 arrangers = 20 new transactions. The Commission notes that the number of new transactions arranged per year would vary by the size of arranger and that this estimate would be an average across all respondents. Larger respondents may arrange in excess of 20 new deals per year, while a smaller entity may only arrange one or two new deals on an annual basis. Based on this analysis, the Commission estimates that it would take a respondent approximately 20 hours 200 to disclose this information under the proposed rule, on an annual basis, for a total aggregate annual hour burden of 4,000 hours. 201 200 20 transactions × 1 hour = 20 hours. 201 20 hours × 200 respondents = 4,000 hours. In addition, proposed Rule 17g-5(a)(ii) would require disclosure of information provided to an NRSRO that is used by an NRSRO in undertaking credit rating surveillance on a security or money market instrument. Because surveillance would cover more than just initial ratings, the Commission estimates based on staff information gained from the NRSRO examination process that monthly disclosure would be required with respect to approximately 125 transactions on an ongoing basis. Also based on staff information gained from the NRSRO examination process, the Commission estimates that it would take a respondent approximately 0.5 hours per transaction to disclose the information. Therefore, the Commission estimates that each respondent would spend approximately 750 hours 202 on an annual basis disclosing information under proposed Rule 17g-5, for a total aggregate annual burden hours of 150,000 hours. 203 202 125 transactions × 30 minutes × 12 months = 45,000 minutes/60 minutes = 750 hours. 203 750 hours × 200 respondents = 150,000 hours. The Commission generally requests comment on all aspects of these proposed burden estimates for Rule 17g-5. In addition, the Commission requests specific comment on the following items related to these estimates: • Are there publicly available reports or other data sources the Commission should consider in arriving at these burden estimates? • Are the estimates of the one-time and recurring burdens of the proposed additional disclosures accurate? If not, should they be higher or lower? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 5. Proposed Rule 17g-7 The Commission is proposing a new rule—Rule 17g-7—which would address concerns that investors believe that the risk characteristics for a structured finance product are the same as for other types of obligors or debt securities. Proposed Rule 17g-7 would require an NRSRO to attach a report each time it publishes a credit rating for a structured finance product describing how the ratings procedures and methodologies differ from those for other types of obligors or debt securities. 204 Proposed Rule 17g-7 would include an exemption to this requirement, however, if the NRSRO used credit rating symbols for structured finance products that identify the product as such as distinct from any other type of obligor or debt security. The Commission believes that proposed Rule 17g-7 205 would provide users of credit ratings with useful information either through the report or the differentiated symbol upon which to base their investment decisions. 204 *See* proposed Rule 17g-7. 205 *See* proposed Rule 17g-7. The Commission expects that most NRSROs already have documented their methodologies and procedures in place to determine credit ratings for structured finance products and corporate debt securities, and have disclosed such policies and procedures if they have registered with the Commission as an NRSRO. The Commission expects, however, that an NRSRO would have to compile and/or modify these documents to comply with the specific reporting requirements that would be mandated by the proposed rule. Based on staff information gained from the NRSRO examination process, the Commission estimates that it would take an NRSRO approximately 50 hours 206 to draft the report required under the proposed rule for a total one-time hour burden of 1,500 hours. 207 206 The Commission based this estimate on the estimated number of hours it would take an NRSRO to comply with Rule 17g-4 to develop policies and procedures to prevent the misuse of material nonpublic information. *See* Adopting Release, 72 FR at 33611. 207 50 hours × 30 NRSROs = 1,500 hours. The Commission also estimates that it would take an NRSRO additional time to publish the report each time a credit rating for a structured finance product is published and to monitor the publications of structured finance credit ratings to ensure compliance with the proposed rule. Based on the average number of credit ratings of asset-backed securities outstanding as of the latest fiscal year of the three largest NRSROs, the Commission estimates that an NRSRO would publish approximately 128,000 asset-backed credit ratings per year. 208 The Commission notes that this number may not include all structured finance ratings, since some may not fit within the statutory definition of asset-backed security. However, the Commission also notes that the issuance of RMBS has dropped dramatically off recent highs. Accordingly, the Commission believes the number of asset-backed ratings reported in Form NRSRO is a reasonable proxy for the number of structured finance ratings. The Commission also notes that, as discussed below, the burden estimate identifies 30 respondents. However, most of the structured finance ratings are concentrated in the largest 3 or 4 NRSROs. Accordingly, the average number of structured finance ratings issued per NRSRO each year may be considerably lower than 128,000. For these reasons, the Commission believes the estimate is fairly conservative. 208 This estimate uses the average of the approximate number of credit ratings for asset-based securities as defined in 17 CFR 229.1101(c) that S&P, Moody's and Fitch had outstanding as of the most recent calendar year end as reported in their annual certifications. (S&P: 197,700; Moody's: 110,000; and Fitch: 75,278). The Commission estimates that an NRSRO would publish a rating action with respect to a particular structured finance rating approximately 4 times per year for a total of 512,000 publications. 209 The Commission notes that this estimate would include publication of an initial rating, upgrades, downgrades and any affirmations published in a given year. Based on staff experience, the Commission estimates that an NRSRO would spend approximately 5 minutes ensuring that the required report was published along with the credit rating, for a total of 42,667 annual burden hours 210 per respondent, and a total of 1,280,000 hours 211 across 30 NRSROs. Finally, the Commission estimates, based on staff experience, that it would take an NRSRO approximately 10 hours per year to review and update the report to ensure that the disclosure was accurate and up-to-date for a total aggregate annual hour burden to the industry of 300 hours. 212 The Commission believes, therefore, that the aggregate one-time and annual burden hours under proposed Rule 17g-7(a) would be 1,280,000 and 1,800 hours, 213 respectively. 209 128,000 × 4 = 512,000 ratings publications. 210 512,000 × 5 minutes per report = 2,560,000 minutes/60 minutes per hour = 42,667 hours. 211 42,667 hours × 30 NRSROs = 1,280,000 hours. 212 This estimate is based on the number of hours it would take an NRSRO to complete an annual certification on Form NRSRO. See Adopting Release, 72 FR at 33609. 10 hours × 30 NRSROs = 300 hours. 213 1,500 + 300 hours. The Commission believes, however, that most, if not all, NRSROs would opt to differentiate their ratings under paragraph
(b)of proposed Rule 17g-7, 214 rather than publish a report. The Commission believes that an NRSRO would likely choose to use a specific credit rating symbol to indicate that the particular credit rating relates to structured product as distinct from a credit rating for any other category of security or issuer. The Commission believes that an NRSRO would choose to employ this symbology approach because it would be more efficient and less burdensome than ensuring that the appropriate report was published along with the credit rating. The Commission believes that the implementation of a different rating symbol would entail a one-time burden of approximately 30 hours to develop the symbol for a total aggregate one-time burden to the industry of 900 hours. 215 214 *See* proposed Rule 17g-7(b). 215 30 hours × 30 NRSROs. Because the Commission believes that NRSROs will choose to differentiate their ratings under paragraph
(b)of proposed Rule 17g-7 rather than publish a report under paragraph
(a)of the proposed new rule, the Commission believes that the appropriate estimate for the aggregate one-time burden to the industry under proposed Rule 17g-7 is 900 hours. The Commission generally requests comment on all aspects of these proposed burden estimates for Rule 17g-7. In addition, the Commission requests specific comment on the following items related to these burden estimates: • Is the Commission incorrect in its belief that NRSROs would opt to use a different rating symbol rather than to publish a report with each structured product rating? If so, what percentage of NRSROs would be likely to opt to publish a report? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. E. Collection of Information Is Mandatory The recordkeeping and notice requirements for the proposed amendment and the proposed new rule would be mandatory. F. Confidentiality The disclosures proposed to be required under the amendments to Rule 17g-1 and Form NRSRO would be made publicly available on Form NRSRO. The books and records information proposed to be collected under the proposed amendments to Rule 17g-2 would be stored by the NRSRO and made available to the Commission and its representatives as required in connection with examinations, investigations, and enforcement proceedings. However, an NRSRO would be required to make the record of rating actions under proposed Rule 17g-2(a)(8) publicly available in an XBRL Interactive Data File no later than six months after the date of the rating action. 216 The information proposed to be collected under the proposed amendment to Rule 17g-3 would be generated from the internal records of the NRSRO and would be furnished to the Commission on a confidential basis, to the extent permitted by law. 217 The information under Rule 17g-5(a)(3) would be made publicly available or available to certain permitted persons. The information proposed to be required under proposed new Rule 17g-7 would be made publicly available. 216 *See* proposed Rule 17g-2(a)(8) and (d). 217 15 U.S.C. 78o-7(k). G. Record Retention Period The records required under the proposed amendments to Rule 17g-1 and Form NRSRO, Rule 17g-2, and 17g-3 would need to be retained by the NRSRO for at least three years. 218 218 17 CFR 240.17g-2(c). H. Request for Comment The Commission requests comment on the proposed collections of information in order to:
(1)Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility;
(2)evaluate the accuracy of the Commission's estimates of the burden of the proposed collections of information;
(3)determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected;
(4)evaluate whether there are ways to minimize the burden of the collection of information on those who respond, including through the use of automated collection techniques or other forms of information technology; and
(5)evaluate whether the proposed rules would have any effects on any other collection of information not previously identified in this section. Persons who desire to submit comments on the collection of information requirements should direct their comments to the OMB, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090, and refer to File No. S7-13-08. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this document in the **Federal Register** ; therefore, comments to OMB are best assured of having full effect if OMB receives them within 30 days of this publication. Requests for the materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-13-08, and be submitted to the Securities and Exchange Commission, Records Management Office, 100 F Street, NE., Washington, DC 20549-1110. V. Costs and Benefits of the Proposed Rules The Commission is sensitive to the costs and benefits that result from its rules. The Commission has identified certain costs and benefits of the proposed amendments and the proposed new rule and requests comment on all aspects of this cost-benefit analysis, including identification and assessment of any costs and benefits not discussed in the analysis. 219 The Commission seeks comment and data on the value of the benefits identified. The Commission also welcomes comments on the accuracy of its cost estimates in each section of this cost-benefit analysis, and requests those commenters to provide data so the Commission can improve the cost estimates, including identification of statistics relied on by commenters to reach conclusions on cost estimates. Finally, the Commission seeks estimates and views regarding these costs and benefits for particular types of market participants, as well as any other costs or benefits that may result from the adoption of these proposed rule amendments. 219 For the purposes of this cost/benefit analysis, the Commission is using salary data from the Securities Industry and Financial Markets Association (“SIFMA”) Report on Management and Professional Earnings in the Securities Industry 2007, which provides base salary and bonus information for middle-management and professional positions within the securities industry. The Commission believes that the salaries for these securities industry positions would be comparable to the salaries of similar positions in the credit rating industry. Finally, the salary costs derived from the report and referenced in this cost benefit section, are modified to account for an 1800-hour work year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. The Commission used comparable assumptions in adopting the final rules implementing the Rating Agency Act in 2007, requested comments on such assumptions, and received no comments in response to its request. *See* Adopting Release, 72 FR at 33611, note 576. Hereinafter, references to data derived from the report as modified in the manner described above will be cited as “SIFMA 2007 Report as Modified.” A. Benefits The purposes of the Rating Agency Act, as stated in the accompanying Senate Report, are to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating industry. 220 As the Senate Report states, the Rating Agency Act establishes “fundamental reform and improvement of the designation process” to further the belief that “eliminating the artificial barrier to entry will enhance competition and provide investors with more choices, higher quality ratings, and lower costs. 221 220 Senate Report, p. 2. 221 *Id,* p. 7. The proposed amendments and new rule would be issued pursuant to specific grants of rulemaking authority in the Rating Agency Act as well as the Commission's authority under the Exchange Act. The amendments are designed to further the goals of the Rating Agency Act and to enhance the Commission's oversight of NRSROs, in light of the recent credit market turmoil. Since the adoption of the final rules implementing the Rating Agency Act in 2007, 222 and in response to the recent concerns about the role of credit rating agencies in the credit market turmoil, the Commission has identified a number of areas where it would be appropriate to enhance the current regulatory program for NRSROs. 222 *See* Adopting Release. Consequently, the Commission is proposing amendments and a new rule that are designed to address concerns raised about the role NRSROs played in the credit turmoil by proposing to enhance the disclosure of credit ratings performance measurement statistics; increase the disclosure of information about the assets underlying structured finance products; require more information about the procedures and methodologies used to determine structured finance ratings; and address conflicts of interest arising from the structured finance rating process. As discussed below, the Commission believes that these proposed amendments and proposed new rule would further the purpose of the Rating Agency Act to improve the quality of credit ratings by fostering accountability, transparency, and competition in the credit rating industry, particularly with respect to credit ratings for structured finance products. 223 223 *See* Senate Report, p. 2. Rule 17g-1 prescribes a process for a credit rating agency to register with the Commission as an NRSRO using Form NRSRO, 224 and requires that a credit rating agency provide information required under Section 15E(a)(1)(B) of the Exchange Act and certain additional information. 225 Form NRSRO is also the means by which NRSROs update the information they must publicly disclose. The proposed amendments to the instructions to Exhibit 1 to Form NRSRO would require NRSROs to provide more detailed performance statistics and, thereby, make it easier for users of credit ratings to compare the ratings performance of the NRSROs. 226 In addition, these proposed amendments could make it easier for an NRSRO to demonstrate that it has a superior ratings methodology or competence and, thereby, attract clients. 224 *See* Rule 17g-1. 225 *See* Section 15E(a)(1)(B) of the Exchange Act. 15 U.S.C. 78o-7(a)(1)(B). 226 17 CFR 240.17g-1 and Form NRSRO. The proposed amendments to the instructions to Exhibit 2 of Form NRSRO are designed to provide greater clarity around three areas of the NRSROs' rating processes for structured finance products that have raised concerns in the context of the recent credit market turmoil: the level of verification performed on information provided in loan documents; the quality of loan originators; and the on-going surveillance of existing ratings and how changes made to a model used for initial ratings are applied to existing ratings. The additional information provided by the proposed amendments would assist users of credit ratings in making more informed decisions about the quality of an NRSRO's ratings processes, particularly with regard to structured finance products. The Commission preliminarily believes that these proposed enhanced disclosures in the Exhibits to Form NRSRO could make it easier for market participants to select the NRSROs that are performing best and have the highest quality processes for determining credit ratings. The potential result could be increased competition and the promotion of capital formation through a restoration of confidence in credit ratings. The proposed amendments to Rule 17g-2 are designed to assist the Commission in its examination function and provide greater information to users of credit ratings about the performance of an NRSRO's credit ratings. The additional records would be:
(1)A record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued, if a quantitative model is a substantial component in the process of determining a credit rating; 227
(2)a record showing the history and dates of all previous rating actions with respect to each current credit rating; 228 and
(3)any complaints regarding the performance of a credit analyst in determining credit ratings. 229 These proposed records would assist the Commission in monitoring whether an NRSRO is complying with provisions of Section 15E of the Exchange Act and the rules thereunder. This would include monitoring whether an NRSRO is operating consistently with the methodologies and procedures it establishes (and discloses) to determine credit ratings and its policies and procedures designed to ensure the impartiality of its credit ratings, including its ratings of structured finance products. 227 Proposed paragraph (a)(2)(iii) of Rule 17g-2. 228 Proposed paragraph (a)(8) of Rule 17g-2. 229 Proposed paragraph (b)(8) of Rule 17g-2. In addition, the proposed amendments to Rule 17g-2, which would require an NRSRO to make its rating actions history publicly available in an XBRL Interactive Data File, would allow the marketplace to develop performance measurement statistics that would supplement those already required to be published by NRSROs in Exhibit 1 to Form NRSRO. This proposed amendment is designed to leverage the expertise of the marketplace and, thereby, provide users of credit ratings with innovative and potentially more useful metrics with which to compare NRSROs. This could make NRSROs more accountable for their ratings by enhancing the transparency of their ratings performance. By proposing to require an XBRL Interactive Data File the Commission also believes the proposed amendment would allow investors, analysts, and the Commission staff to capture and analyze the ratings action data more quickly and at less of a cost than is possible using another format. The Commission preliminarily believes that the proposed amendments to Rule 17g-2 would enhance the Commission's oversight of NRSROs and, with respect to the public disclosure of ratings history, provide the marketplace with the raw materials to develop metrics for comparing the ratings performance of NRSROs. This could, in turn, help in restoring confidence in credit ratings and, thereby, promote capital formation. Increased disclosure of ratings history could make the ratings performance of the NRSROs more transparent to the marketplace and, thereby, highlight those firms that do a better job analyzing credit risk. This could benefit smaller NRSROs to the extent they have performed better than others by alerting the market to their superior competence. The proposed amendment to Rule 17g-3 would require an NRSRO to furnish an additional annual report to the Commission: An unaudited report of the number of credit ratings that were changed during the fiscal year in each class of credit ratings for which the NRSRO is registered with the Commission. 230 The proposed new report is designed to enhance the Commission's oversight of NRSROs by providing the Commission with additional information to assist in the monitoring of NRSROs for compliance with their stated policies and procedures. For example, the proposed new report would allow examiners to target potential problem areas in an NRSRO's rating processes by highlighting spikes in rating actions within a particular class of credit rating. 230 *See* proposed Rule 17g-3(a)(6). The proposed amendments to Rule 17g-5 would prohibit an NRSRO from issuing a rating for a structured product unless information about the assets underlying the rated security is made available to certain persons. 231 These proposed rule amendments would prohibit an NRSRO from issuing or maintaining a credit rating where the NRSRO or an affiliate provided recommendations on the structure of the transaction being rated; a credit analyst or person involved in the ratings process participated in fee negotiations; or a credit analyst or a person responsible for approving a credit rating received gifts from the obligor being rated, or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities such as meetings that have an aggregate value of no more than $25. 232 The Commission believes that the proposed amendments to Rule 17g-5 would promote the disclosure and management of conflicts of interest and mitigate potential undue influences on an NRSRO's credit rating process, particularly with respect to credit ratings for structured finance products. 233 This would in turn increase confidence in the integrity of NRSRO ratings and, thereby, promote capital formation. In addition, the proposed disclosure of additional information regarding the assets underlying a structured finance transaction 234 would allow for unsolicited ratings that could help address ratings shopping by exposing an NRSRO whose ratings methodologies are less conservative in order to gain business. It also could mitigate the impact of rating shopping, since NRSROs not hired to rate a deal could nonetheless issue a credit rating. These potential impacts of the rule proposal could help to restore confidence in credit ratings and, thereby, promote capital formation. Also, by creating a mechanism for determining unsolicited ratings, they could increase competition by allowing smaller NRSROs to demonstrate proficiency in rating structured products. 231 *See* proposed Rule 17g-5(a)(3) and (b)(9). 232 *See* proposed Rule 17 CFR 240.17g-5(c)(5)-(7). 233 *See* 15 U.S.C. 78o-7(a)(1)(B)(vi) and (h). 234 *See* proposed Rule 17 CFR 240.17g-5(a)(3). Proposed Rule 17g-7 would address concerns that investors may believe that the risk characteristics for a structured finance product are the same as for other types of obligors or debt securities by requiring an NRSRO to attach a report each time it publishes a credit rating for a structured finance product describing how the ratings procedures and methodologies differ from those ratings for other types of obligors or debt securities. 235 Alternatively, an NRSRO would be permitted to use rating symbols for structured finance products that differentiate them from its other credit ratings. The Commission believes this proposed rule would address potential confusion by investors as to the different characteristics of structured finance products when compared to other types of obligors or debt securities and help them in assessing the risks involved with different types of securities and promote better informed investment decisions. 235 *See* proposed Rule 17g-7. The Commission generally requests comment on all aspects of these proposed benefits. In addition, the Commission requests specific comment on the following items related to these benefits. • Are there metrics available to quantify these benefits and any other benefits the commenter may identify, including the identification of sources of empirical data that could be used for such metrics. Commenters should provide specific data and analysis to support any comments they submit with respect to these benefit estimates. B. Costs The cost of compliance with the proposed amendments and new rule to a given NRSRO would depend on its size and the complexity of its business activities. The size and complexity of NRSROs vary significantly. Therefore, the cost could vary significantly across NRSROs. Instead, the Commission is providing estimates of the average cost per NRSRO, as a result of the proposed amendments, taking into consideration the range in size and complexity of NRSROs and the fact that many already may have established policies, procedures and recordkeeping systems and processes that would comply substantially with the proposed amendments. Additionally, the Commission notes that nine credit rating agencies are currently registered with the Commission as NRSROs and subject to the Act and its implementing regulations. The cost of compliance would also vary depending on which classes of credit ratings an NRSRO issues. NRSROs which issue credit ratings for structured finance products would incur higher compliance costs than those NRSROs which do not issue such credit ratings or issue very few credit ratings in that class. For these reasons, the cost estimates represent the average cost across all NRSROs and take into account that some firms would only need to augment existing policies, procedures and recordkeeping systems and processes to come into compliance with the proposed amendments. 1. Proposed Amendments to Form NRSRO As discussed above, the Commission is proposing to amend the instructions to Exhibit 1 to Form NRSRO to provide more detailed performance statistics. Currently, the instructions require the disclosure of performance measurement statistics of the credit ratings of the “Applicant/NRSRO over the short-term, mid-term and long-term periods (as applicable) through the most recent calendar year end.” The proposed amendments would augment these instructions to require the disclosure of separate sets of default and transition statistics for each class of credit ratings. In addition, the class-by-class disclosures would need to be broken out over 1, 3 and 10 year periods. 236 236 *See* proposed instructions to Exhibit 1, Form NRSRO. The proposed amendments would also amend the instructions to Exhibit 2 to Form NRSRO to require enhanced disclosures about the procedures and methodologies an NRSRO uses to determine credit ratings, including whether and, if so, how information about verification performed on assets underlying a structured finance transaction is relied on in determining credit ratings; whether and, if so, how assessments of the quality of originators of assets underlying a structured finance transaction factor into the determination of credit ratings; and how frequently credit ratings are reviewed, whether different models are used for ratings surveillance than for determining credit ratings, and whether changes made to models and criteria for determining initial ratings are applied retroactively to existing ratings. As discussed above, the Commission estimates that for PRA purposes the total one-time and annual hour burdens and the cost would have a neutral effect, resulting in no overall change in hours or cost for the currently approved PRA collection. The Commission preliminarily believes, however, NRSROs may incur a cost of compliance in updating their performance metric statistics to conform to the new requirements set forth in the proposed rule amendments. Under the current instructions to Exhibit 1 to Form NRSRO, an NRSRO must disclose its performance metrics over short, mid, and long-term periods. Thus, the current Form NRSRO instructions to Exhibit 1 allow an NRSRO to use its own definitions of “short, mid, and long-term periods” and to include all credit ratings, regardless of class of rating, in one set of metrics. Under the proposed amendments, an NRSRO would be required to break out on a class-by-class basis performance statistics over 1, 3 and 10-year periods. The Commission believes that existing NRSROs would incur costs to conform their current performance statistics with the requirements of this proposed amendment to Exhibit 1. The Commission estimates that it would take each NRSRO currently registered with the Commission approximately 50 hours to review its performance measurement statistics and to develop and implement any changes necessary to comply with the proposed amendment. The Commission is basing this estimate on the amount of time the Commission estimated that it would take an NRSRO to establish procedures in conformance with Rule 17g-4 and on information gained from the NRSRO examination process. 237 For these reasons, the Commission estimates that the average one-time cost to an NRSRO would be $12,740 238 and the total aggregate cost to the currently registered NRSROs would be $114,660. 239 237 *See* 17 CFR 240.17g-4; Adopting Release, 72 FR at 33616. 238 The Commission estimates that a Compliance Attorney (40 hours) and a Programmer Analyst (10 hours) would perform these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly rates for a Compliance Attorney and a Programmer Analyst are $270 and $194 per hour, respectively. Therefore, the average one-time cost to an NRSRO would be $12,740 [(40 hours × $270) + (10 hours × $194)]. 239 $12,740 × 9 NRSROs = $114,660. The Commission generally requests comment on all aspects of these proposed cost estimates for the proposed amendments to Form NRSRO. In addition, the Commission requests specific comment on the following items related to these cost estimates: • Would these proposals impose costs on other market participants, including persons who use credit ratings to make investment decisions or for regulatory purposes, and persons who purchase services and products from NRSROs? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 2. Proposed Amendments to Rule 17g-2 Rule 17g-2 requires an NRSRO to make and preserve specified records related to its credit rating business. 240 As discussed above, the proposed amendments to Rule 17g-2 would require an NRSRO to make and retain two additional records and retain a third type of record. The records to be made and retained would be:
(1)A record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued, if a quantitative model is a substantial component in the process of determining a credit rating; 241 and
(2)a record showing the history and dates of all previous rating actions with respect to each current credit rating. 242 The proposed amendments to Rule 17g-2 would require an NRSRO to make the second record-rating actions related to current ratings publicly available in an XBRL Interactive Data File. 243 In addition, the proposed amendments would require an NRSRO to retain communications that contain any complaints by an obligor, issuer, underwriter, or sponsor about the performance of a credit analyst. 244 240 17 CFR 240.17g-2. 241 Proposed paragraph (a)(2)(iii) of Rule 17g-2. 242 Proposed paragraph (a)(8) of Rule 17g-2. 243 Proposed amendment to Rule 17g-2(d). 244 Proposed paragraph (b)(8) of Rule 17g-2. As discussed with respect to the PRA, the Commission estimates that, based on staff experience, the total one-time and annual recordkeeping burdens would increase approximately 10% and 5%, respectively. Thus, the Commission estimates that the one-time hour burden that each NRSRO would spend implementing a recordkeeping system to comply with Rule 17g-2 would be approximately 330 hours (an increase of 30 hours) 245 for a total one-time burden of 9,900 hours (an increase of 900 hours). 246 245 300 hours × 1.10 = 330 hours. 246 330 hours × 30 respondents = 9,900 hours. The Commission estimates that an NRSRO would spend an average of 267 hours per year (an increase of 13 hours) 247 to make and maintain records under Rule 17g-2, for a total annual hour burden of 8,010 hours. 248 This estimate would increase the currently approved PRA burden under Rule 17g-2 by 390 hours. 249 For these reasons, the Commission estimates that an NRSRO would incur an average one-time cost of $7,350 and the average annual cost of $3,185, as a result of the proposed amendments. 250 Consequently, the total aggregate one-time cost attributable to the proposed amendments would be $220,500 251 and the total aggregate annual cost to the industry would be $95,550. 252 247 254 hours × 1.05 = 267 hours. 248 267 hours × 30 respondents = 8,010 hours. 249 8,010 hours−7,620 hours = 390 hours. 250 The Commission estimates that an NRSRO will have a Compliance Manager perform these responsibilities. Based on the average hourly rate for a Compliance Manager of $245, the average one time cost will be $7,350 (30 hours × $245 per hour) and the average annual cost will be $3,185 (13 hours × $245 per hour). 251 $7,350 × 30 NRSROs = $220,500. 252 $3,185 × 30 NRSROs = $95,550. In addition, the proposed amendments to Rule 17g-2 would require an NRSRO to make the records of its rating actions publicly available in an XBRL Interactive Data File. 253 As discussed with respect to the PRA, the Commission estimates that, on average, an NRSRO would spend approximately 30 hours to publicly disclose this ratings history information in an XBRL Interactive Data File and, thereafter, 10 hours per year to update its rating action history. 254 Accordingly, the total aggregate one-time burden to the industry to make the history of its rating actions publicly available in an XBRL Interactive Data File would be 900 hours 255 and the total aggregate annual burden hours would be 300 hours. 256 Furthermore, as discussed in the PRA the Commission estimates there will be 30 NRSROs. For these reasons, the Commission estimates that an NRSRO would incur an average one-time cost of $8,670 and an average annual cost of $2,890, as a result of the proposed amendment. 257 Consequently, the total aggregate one-time cost to the industry would be $260,100 258 and the total aggregate annual cost to the industry would be $86,700. 259 253 *See* proposed amendment to Rule 17g-2(d). 254 The Commission also bases this estimate on the estimated one-time and annual burden hours it would take an NRSRO to publicly disclose its Form NRSRO on its Web site. No comments were received on these estimates in the final rule release. *See* Adopting Release, 72 FR at 33609. 255 30 hours × 30 NRSROs = 900 hours. 256 10 hours × 30 NRSROs = 300 hours. 257 The Commission estimates that an NRSRO would have a Senior Programmer perform these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly cost for a Senior Programmer is $289. Therefore, the average one-time cost would be $8,670 [(30 hours) × ($289 per hour)] and the average annual cost would be $2,890 [(10 hours per year) × ($289 per hour)]. 258 900 hours × $289 per hour. 259 300 hours × $289 per hour. As discussed with respect to the PRA, the Commission estimated that an NRSRO may have to purchase recordkeeping software to establish a recordkeeping system in conformance with Rule 17g-2. The Commission estimated that the cost of the software will vary based on the size and complexity of the NRSRO. Also, the Commission estimated that some NRSROs would not need such software because they already have adequate recordkeeping systems or, given their small size, such software would not be necessary. Based on these estimates, the Commission estimated that the average cost for recordkeeping software across all NRSROs would be approximately $1,000 per firm. Therefore, the estimated one-time cost to the industry would be $30,000. The Commission estimates that the proposed amendments to Rule 17g-2 would not alter this estimate or that any increases in the cost would be *de minimis* . Finally, proposed paragraph (a)(8) to Rule 17g-2 would require an NRSRO to create and maintain a record showing all rating actions and the date of such actions from the initial rating to the current rating identified by the name or rated security or obligor, and, if applicable, the CUSIP of the rated security or the Central Index Key
(CIK)number of the rated obligor. 260 The Commission estimates that an NRSRO could be required to purchase a license from the CUSIP Service Bureau in order to access CUSIP numbers for the securities it rates. The CUSIP Service Bureau's operations are covered by fees paid by issuers and licensees of the CUSIP Service Bureau's data. Issuers pay a one-time fee for each new CUSIP assigned, and licensees pay a renewable subscription or a license fee for access and use of the CUSIP Service Bureau's various database services. The CUSIP Service Bureau's license fees vary based on usage, *i.e.* , how many securities or by type of security or business line. 261 The Commission estimates that the license fees incurred by an NRSRO would vary depending on the size of the NRSRO and the number of credit ratings it issues. For purposes of this cost estimate, the Commission estimates that an NRSRO would incur a fee of $100,000 to obtain access to the CUSIP numbers for the securities it rates. Consequently, the estimated total one-time cost to the industry would be $3,000,000. 262 260 *See* proposed Rule 17g-2(a)(8). The Central Index Key
(CIK)is used on the Commission's computer systems to identify corporations and individual people who have filed disclosure with the Commission. Anyone may search *http://www.edgarcompany.sec.gov* for a company, fund, or individual CIK. There is no fee for this service. CUSIP stands for Committee on Uniform Securities Identification Procedures. A CUSIP number identifies most securities, including: Stocks of all registered U.S. and Canadian companies, U.S. government and municipal bonds, as well as structured finance issuances. The CUSIP system—owned by the American Bankers Association and operated by Standard & Poor's—facilitates the clearing and settlement process of securities. The CUSIP number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security. 261 See *https://www.cusip.com/static/html/webpage/service_fees.html#lic_fees* . 262 $100,000 × 30 NRSROs = $3,000,000. The Commission generally requests comment on all aspects of these cost estimates for the proposed amendments to Rule 17g-2. In addition, the Commission requests specific comment on the following items related to these cost estimates: • Would these proposals impose costs on other market participants, including persons who use credit ratings to make investment decisions or for regulatory purposes, and persons who purchase services and products from NRSROs? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 3. Proposed Amendment to Rule 17g-3 Rule 17g-3 requires an NRSRO to furnish audited annual financial statements to the Commission, including certain specified schedules. 263 The proposed amendment to Rule 17g-3 would require an NRSRO to furnish the Commission with an additional annual report: An unaudited report of the number of credit ratings that were changed during the fiscal year in each class of credit ratings for which the NRSRO is registered with the Commission. The Commission believes that the annual costs to NRSROs to comply with the proposed amendment to Rule 17g-3 would be *de minimis* , as the Commission preliminarily believes that a credit rating agency already would have this information with respect to each class of credit ratings for which it is registered. In addition, the proposed amendment does not prescribe a format for the report. Consequently, the Commission estimates that proposed Rule 17g-3(a)(6) would not have a significant effect on the total average annual cost burden currently estimated for Rule 17g-3. 263 17 CFR 240.17g-3. The Commission generally requests comment on all aspects of these cost estimates for the proposed amendment to Rule 17g-3. In addition, the Commission requests specific comment on the following items related to these cost estimates: • Would this proposal impose costs on other market participants, including persons who use credit ratings to make investment decisions or for regulatory purposes, and persons who purchase services and products from NRSROs? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 4. Proposed Amendments to Rule 17g-5 Rule 17g-5 requires an NRSRO to manage and disclose certain conflicts of interest. 264 The proposed amendments would add an additional conflict to paragraph
(b)of Rule 17g-5. This proposed conflict of interest would be issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of an asset-backed or mortgage-backed securities transaction that was paid for by the issuer, sponsor, or underwriter of the security or money market instrument. 265 Unlike the other conflicts of interest in paragraph
(b)of Rule 17g-5, NRSROs would be prohibited from issuing a rating, unless certain information about the transaction and the assets underlying the structured product being rated were disclosed, pursuant to proposed Rule 17g-5(a)(3)(i) and (ii). 266 264 17 CFR 240.17g-5. 265 *See* proposed Rule 17g-5(b)(9). The current paragraph (b)(9) would be renumbered as (b)(10). 266 *See* proposed Rule 17g-5(a)(3). Specifically, proposed Rule 17g-5(a)(3)(i) and
(ii)would require the disclosure of certain information about the assets underlying a structured product that is provided to an NRSRO and used in determining an initial rating and monitoring the rating. While the proposed rule would require disclosure of certain information, the rule would not specify which party would disclose the information. For purposes of this PRA, the Commission estimates that it would take a respondent approximately 300 hours to develop a system, as well as policies and procedures to disclose the information as required under the proposed rule. This would result in a total one-time hour burden of 60,000 hours for 200 respondents. 267 For these reasons, the Commission estimates that the average one-time cost to each respondent would be $65,850 268 and the total aggregate one-time cost to the industry would be $13,116,000. 269 267 300 hours × 200 respondents = 60,000 hours. 268 The Commission estimates an NRSRO would have a Compliance Manager and a Programmer Analyst perform these responsibilities, and that each would spend 50% of the estimated hours performing these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly cost for a Compliance Manager is $245 and the average hourly cost for a Programmer Analyst is 194. Therefore, the average one-time cost to an NRSRO would be $[150 hours × $245) + (150 hours × $194)] = $65,850. 269 $65,580 × 200 respondents = $13,116,000. As discussed with respect to the PRA, in addition to the one-time hour burden, respondents also would be required to disclose the required information under proposed Rule 17g-5(a)(3)(i) on a transaction by transaction basis. Based on staff information gained from the NRSRO examination process, the Commission estimates that the proposed amendments would require each respondent to disclose information with respect to approximately 20 new transactions per year and that it would take approximately 1 hour per transaction to make the information publicly available. 270 Therefore, as discussed with respect to the PRA, the Commission estimates that it would take a respondent approximately 20 hours 271 to disclose this information under proposed Rule 17g-5(a)(i) and (ii), on an annual basis, for a total aggregate annual hour burden of 4,000. 272 For these reasons, the Commission estimates that the average annual cost to a respondent would be $4,100 273 and the total annual cost to the industry would be $820,000. 274 270 This estimate assumes the respondent has already implemented the system and policies and procedures for disclosure. The Commission cannot estimate the number of initial transactions per year with certainty. The Commission believes that the number of deals that each respondent will disclose information on will vary widely based on the size of the entity. In addition, the Commission preliminarily believes that the number of asset-backed or mortgaged-backed issuances being rated by NRSROs in the next few years would be difficult to predict given the recent credit market turmoil. 271 20 transactions × 1 hour = 20 hours. 272 20 hours × 200 respondents = 4,000 hours. 273 The Commission estimates an NRSRO would have a Webmaster perform these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly cost for a Webmaster is $205. Therefore, the average one-time cost to a respondent would be 20 hours × $205 = $4,100. 274 $4,100 × 200 respondents = $820,000. Proposed Rule 17g-5(a)(ii) would require respondents to disclose information provided to an NRSRO that is used by an NRSRO in undertaking credit rating surveillance on a structured product. Because surveillance would cover more than just initial ratings, the Commission estimates that a respondent would be required to disclose information with respect to approximately 125 transactions on an ongoing basis and that the information would be provided to the NRSRO on a monthly basis. As discussed with respect to the PRA, the Commission estimates that each respondent would spend approximately 750 hours 275 on an annual basis disclosing the information for a total aggregate annual burden hours of 150,000 hours. 276 For these reasons, the Commission estimates that the average annual cost to a respondent would be $153,750 277 and the total annual cost to the industry would be $30,750,000. 278 275 125 transactions × 30 minutes × 12 months = 45,000 minutes/60 minutes = 750 hours. 276 750 hours × 200 respondents = 150,000 hours. 277 The Commission estimates an NRSRO would have a Webmaster perform these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly cost for a Webmaster is $205. Therefore, the average one-time cost to a respondent would be 750 hours × 205 = $153,750. 278 $153,750 × 200 respondents = $30,750,000. The Commission is also proposing to amend paragraph
(c)to Rule 17g-5 to add three additional prohibited conflicts of interest. 279 The Commission estimates that the amendments to paragraph
(c)to Rule 17g-5 generally would impose *de minimis* costs on an NRSRO. However, the Commission recognizes that an NRSRO may incur costs related to training employees about the requirements with respect to these proposed amendments. It also is possible that the proposed amendments could require some NRSROs to restructure their business models or activities, in particular with respect to their consulting services. 279 *See* proposed Rule 17g-5(c)(5)-(7). The Commission generally requests comment on all aspects of these cost estimates for the proposed amendments to Rule 17g-5. In addition, the Commission requests specific comment on the following items related to these cost estimates: • Would the proposals for additional disclosure impose costs on issuers, underwriters, sponsors, depositors, or trustees? • Would these proposals impose costs on other market participants, including persons who use credit ratings to make investment decisions or for regulatory purposes, and persons who purchase services and products from NRSROs? • Would there be costs in addition to those identified above, such as costs arising from systems changes and restructuring business practices to account for the new reporting requirement? • Would the proposed amendments to paragraph
(c)of Rule 17g-5 impose training and restructuring costs? • Would the proposed amendments to paragraph
(c)of Rule 17g-5 impose personnel costs? • Would the proposed amendments to paragraph
(c)of Rule 17g-5 impose any additional costs on an NRSRO that is part of a large conglomerate related to monitoring the business activities of persons associated with the NRSRO, such as affiliates located in other countries, to comply with the proposed requirement? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. 5. Proposed Rule 17g-7 The Commission is proposing a new rule—proposed Rule 17g-7—which would require an NRSRO to attach a report each time it publishes a credit rating for a structured finance product describing how the ratings procedures and methodologies differ from those for corporate debt. 280 Alternatively, an NRSRO would be permitted to use rating symbols for structured finance products that differentiate them from its other credit ratings. The Commission expects that most NRSROs already have methodologies in place to determine credit ratings for structured finance products and corporate debt securities, and disclosed such policies and procedures if they have registered as an NRSRO. The Commission expects, however, that an NRSRO would have to conform these disclosures into a report to comply with the specific requirements in the proposed rule. As discussed above with respect to PRA, the Commission estimates that it would take approximately 50 hours for an NRSRO to compile and write disclosures to comply with the proposed rule and that there would be 30 NRSROs. For these reasons, the Commission estimates that the average one-time cost to an NRSRO would be $12,250 281 and the total aggregate one-time cost to the industry would be $367,500. 282 280 *See* proposed Rule 17g-3A. 281 The Commission estimates an NRSRO would have a Compliance Manager perform these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly cost for a Compliance Manager is $245. Therefore, the average one-time cost to an NRSRO would be $12,250 (50 hours × $245). 282 30 NRSROs × $12,250 = $367,500. As discussed above with respect to the PRA, the Commission also estimates that it would take an NRSRO additional time to attach the report to each credit rating for a structured finance product and to monitor the report on an ongoing basis to ensure that the disclosure was accurate. Based on staff experience staff information gained from the NRSRO examination process, the Commission estimates that an NRSRO would spend approximately 5 minutes to attach each proposed report to the estimated 128,000 asset-backed credit ratings per NRSRO, four times per year, as discussed above, for a total of 42,667 annual burden hours 283 per respondent, and a total of 1,280,010 annual burden hours 284 for 30 NRSROs. For these reasons, the Commission estimates that the average annual cost to an NRSRO would be $4,373,265 285 and the total aggregate annual cost to the industry would be $131,197,950. 286 283 128,000 × 4 = 512,000 reports × 5 minutes per report = 2,560,000 minutes/60 minutes per hour = 42,667 hours. 284 42,667 hours × 30 NRSROs = 1,280,010 hours. 285 The Commission estimates an NRSRO would have a Webmaster perform these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly cost for a Webmaster is $205. Therefore, the average one-time cost to an NRSRO would be $4,373,265 (21,333 hours × $205). 286 $4,373,265 × 30 NRSROs = $131,197,950. Finally, as discussed with respect to the PRA, the Commission estimates, based on staff experience, that it would take an NRSRO approximately 10 hours per year to review and update the report to ensure the disclosure was accurate and up-to-date for a total aggregate annual hour burden to the industry of 300 hours. 287 For these reasons, the Commission estimates that the average annual cost to an NRSRO would be $2,700 288 and the total aggregate annual cost to the industry would be $81,000. 289 287 This estimate is based on the number of hours it would take an NRSRO to complete an annual certification on Form NRSRO. *See* Exchange Act Release No. 55857 (June 5, 2007), 72 FR 33564, 33609 (June 18, 2007). 10 hours × 30 NRSROs = 300 hours. 288 The Commission estimates an NRSRO would have a Compliance Attorney perform these responsibilities. The SIFMA 2007 Report as Modified indicates that the average hourly cost for a Compliance Attorney is $270. Therefore, the average one-time cost to an NRSRO would be $2,700 (10 hours × $270). 289 $2,700 × 30 NRSROs = $81,000. The Commission generally requests comment on all aspects of these cost estimates for the proposed amendments to Rule 17g-7. In addition, the Commission requests specific comment on the following items related to these cost estimates: • Would the use of different rating symbols for structured products impact automated securities trading, routing, settlement, clearance, trade confirmation, reporting, processing, and risk management systems and any other systems that are programmed to use standard credit rating symbols across all product classes? • Would the use of different rating symbols have consequences for investment guidelines and covenants in legal documents that use credit ratings to distinguish finance instruments? • Would these proposals impose costs on other market participants, including persons who use credit ratings to make investment decisions or for regulatory purposes, and persons who purchase services and products from NRSROs? • Would there be costs in addition to those identified above, such as costs arising from systems changes and restructuring business practices to account for the new reporting requirement? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. C. Total Estimated Costs and Benefits of This Rulemaking As discussed above, the proposed amendments and new rules are expected to have both benefits and costs for investors and the credit rating industry as a whole. The Commission believes the benefits to investors and other users of credit ratings, especially with respect to investments in structured finance products would be quite substantial, but are difficult to quantify. Similarly difficult to quantify are the expected benefits to the Commission's oversight over NRSROs due to the enhanced recordkeeping, disclosure and reporting requirements. Moreover, not all the costs the Commission anticipates would result from this rulemaking are quantifiable. Based on the figures discussed above, however, the Commission estimates that the first year quantifiable costs related to this proposed rulemaking would be approximately $180,175,810. 290 290 $17,078,760 (total one-time costs) + $163,097,810 (total annual costs) = $180,175,810. VI. Consideration of Burden on Competition and Promotion of Efficiency, Competition, and Capital Formation Under Section 3(f) of the Exchange Act, 291 the Commission shall, when engaging in rulemaking that requires the Commission to consider or determine if an action is necessary or appropriate in the public interest, consider whether the action will promote efficiency, competition, and capital formation. Section 23(a)(2) of the Exchange Act 292 requires the Commission to consider the anticompetitive effects of any rules the Commission adopts under the Exchange Act. Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. As discussed below, the Commission's preliminary view is that the proposed amendments and new rules should promote efficiency, competition, and capital formation. 291 15 U.S.C. 78c(f). 292 15 U.S.C. 78w(a)(2). The proposed amendments to the Instructions to Exhibit 1 to Form NRSRO would require NRSROs to make more comparable disclosures about the performance of their credit ratings. These could make it easier for an NRSRO to demonstrate that it has a superior ratings methodology or competence and, thereby, attract clients. In addition, the proposed amendments to the instructions to Exhibit 2 are designed to enhance the disclosures NRSROs make with respect to their methodologies for determining credit ratings. The Commission believes these enhanced disclosures would make it easier for users of credit ratings to compare the quality of the NRSRO's procedures and methodologies for determining credit ratings. The greater transparency that would result from all these enhanced disclosures could make it easier for market participants to select the NRSROs that are performing best and have the highest quality processes for determining credit ratings. This could increase competition and promote capital formation by restoring confidence in the credit ratings, which are an integral part of the capital formation process. The proposed amendments to Rule 17g-2 are designed to enhance the Commission's oversight of NRSROs and, with respect to the public disclosure of ratings history, provide the marketplace with the raw materials to develop metrics for comparing the ratings performance of NRSROs. Enhancing the Commission's oversight could help in restoring confidence in credit ratings and, thereby, promote capital formation. Increased disclosure of ratings history could make the ratings performance of the NRSROs more transparent to the marketplace and, thereby, highlight those firms that do a better job analyzing credit risk. This could benefit smaller NRSROs to the extent they have performed better than others by alerting the market to their superior competence. The proposed amendment to Rule 17g-3 is designed to enhance the Commission's oversight of NRSROs. Enhancing the Commission's oversight could help in restoring confidence in credit ratings and, thereby, promote capital formation. The proposed amendments to paragraphs
(a)and
(b)of Rule 17g-5 would enhance the disclosures made about assets underlying structured finance products. The goal of these proposals is to provide a mechanism for NRSROs to determine unsolicited credit ratings and other market participants and observers to independently assess the creditworthiness of structured finance products. This could expose NRSROs whose procedures and methodologies for determining credit ratings are less conservative in order to gain business. It also could mitigate the impact of rating shopping, since NRSROs not hired to rate a deal could nonetheless issue a credit rating. These potential impacts of the rule proposal could help to restore confidence in credit ratings and, thereby, promote capital formation. Also, by creating a mechanism for determining unsolicited ratings, they could increase competition by allowing smaller NRSROs to demonstrate proficiency in rating structured products. The proposed amendments to paragraph
(c)of Rule 17g-5 would prohibit NRSROs and their affiliates from providing consulting or advisory services, prohibit analysts from participating in fee negotiations, and prohibit credit analysts or persons responsible for approving a credit rating receiving gifts from the obligor being rated, or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities such as meetings that have an aggregate value of no more than $25. These proposals could increase confidence in the integrity of NRSROs and the credit ratings they issue. This could help to restore confidence in credit ratings and, thereby, promote capital formation. Proposed new Rule 17g-7 would provide users of credit ratings with useful information about structured product ratings. This could help them in assessing the risk of securities and promote better informed investment decisions. This could increase the efficiency of the capital markets by making structured finance ratings more transparent. The Commission generally requests comment on all aspects of this analysis of the burden on competition and promotion of efficiency, competition, and capital formation. In addition, the Commission requests specific comment on the following items related to this analysis: • Would the proposed amendments have an adverse effect on efficiency, competition, and capital formation that is neither necessary nor appropriate in furtherance of the purposes of the Exchange Act? Commenters should provide specific data and analysis to support any comments they submit with respect to these burden estimates. VII. Consideration of Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, or “SBREFA,” 293 the Commission must advise OMB whether a proposed regulation constitutes a major rule. Under SBREFA, a rule is “major” if it has resulted in, or is likely to result in: 293 Pub. L. 104-121, Title II, 110 Stat. 857
(1996)(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601). • An annual effect on the economy of $100 million or more; • A major increase in costs or prices for consumers or individual industries; or • A significant adverse effect on competition, investment, or innovation. If a rule is “major,” its effectiveness will generally be delayed for 60 days pending Congressional review. The Commission requests comment on the potential impact of each of the proposed amendments on the economy on an annual basis. Commenters are requested to provide empirical data and other factual support for their view to the extent possible. VIII. Initial Regulatory Flexibility Analysis The Commission has prepared the following Initial Regulatory Flexibility Analysis (“IRFA”), in accordance with the provisions of the Regulatory Flexibility Act, 294 regarding proposed amendments to Form NRSRO, Rule 17g-2, Rule 17g-3, and Rule 17g-5 and regarding proposed Rule 17g-7 under the Exchange Act. 294 5 U.S.C. 603. The Commission encourages comments with respect to any aspect of this IRFA, including comments with respect to the number of small entities that may be affected by the proposed amendments. Comments should specify the costs of compliance with the proposed amendments and suggest alternatives that would accomplish the goals of the amendments. Comments will be considered in determining whether a Final Regulatory Flexibility Analysis is required and will be placed in the same public file as comments on the proposed amendments. Comments should be submitted to the Commission at the addresses previously indicated. A. Reasons for the Proposed Action The proposed amendments would prescribe additional requirements for NRSROs to address concerns raised about the role of credit rating agencies in the recent credit market turmoil. The proposed amendments are designed to enhance and strengthen the rules the Commission adopted in 2007 to implement specific provisions of the Rating Agency Act. 295 The Rating Agency Act defines the term “nationally recognized statistical rating organization” as a credit rating agency registered with the Commission, provides authority for the Commission to implement registration, recordkeeping, financial reporting, and oversight rules with respect to registered NRSROs. 295 Pub. L. 109-291 (2006); *see also* Exchange Act Release No. 55857 (June 5, 2007), 72 FR 33564, 33609 (June 18, 2007). B. Objectives The proposed amendments and new rules would enhance and strengthen the rules the Commission adopted in 2007 to implement specific provisions of the Rating Agency Act. The objectives of the Rating Agency Act are “to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating industry.” 296 The proposed amendments and new rules are designed to further enhance these objectives and assist the Commission in monitoring whether an NRSRO complies with the provisions of the Rating Agency Act and rules thereunder, consistent with the Commission's statutory mandate to adopt rules to implement the NRSRO regulatory program, and provide information regarding NRSROs to the public and to users of credit ratings. These proposed amendments would also prescribe additional requirements for NRSROs to address concerns raised about the role of credit rating agencies in the recent credit market turmoil, including concerns with respect to the determination of credit ratings for structured finance products. 296 *See* Senate Report. C. Legal Basis Pursuant to the Sections 3(b), 15E, 17(a), 23(a) and 36 of the Exchange Act. 297 297 15 U.S.C. 78c(b), 78o-7, 78q(a), and 78w. D. Small Entities Subject to the Rule Paragraph
(a)of Rule 0-10 provides that for purposes of the Regulatory Flexibility Act, a small entity “[w]hen used with reference to an `issuer' or a `person' other than an investment company” means “an `issuer' or `person' that, on the last day of its most recent fiscal year, had total assets of $5 million or less.” 298 The Commission believes that an NRSRO with total assets of $5 million or less would qualify as a “small” entity for purposes of the Regulatory Flexibility Act. 298 17 CFR 240.0-10(a). As noted in the Adopting Release, 299 the Commission believes that approximately 30 credit rating agencies ultimately would be registered as an NRSRO. Of the approximately 30 credit rating agencies estimated to be registered with the Commission, the Commission estimates that approximately 20 may be “small” entities for purposes of the Regulatory Flexibility Act. 300 299 Adopting Release, 72 FR at 33618. 300 *See* 17 CFR 240.0-10(a). E. Reporting, Recordkeeping, and Other Compliance Requirements The proposals would amend Form NRSRO to elicit certain additional information regarding the performance data for the credit ratings and the methods used by a credit rating agency for issuing credit ratings. 301 301 *See* proposed amendments to Form NRSRO. The proposals would amend Rule 17g-2 to establish additional recordkeeping requirements. 302 The proposed amendments would require an NRSRO to make and retain two additional records and retain a third type of record. The records would be:
(1)A record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued, if a quantitative model is a substantial component in the process of determining a credit rating; 303
(2)a record showing the history and dates of all previous rating actions with respect to each current credit rating; 304 and
(3)any complaints about the performance of a credit analyst. 305 These records would assist the Commission, through its examination process, in monitoring whether the NRSRO continues to maintain adequate financial and managerial resources to consistently produce credit ratings with integrity (as required under the Rating Agency Act) and whether the NRSRO was complying with the provisions of the Exchange Act including the provisions of the Rating Agency Act, the rules adopted thereunder, and the NRSRO's disclosed policies and procedures. 302 *See* proposed amendments to Rule 17g-2. 303 Proposed paragraph (a)(2)(iii) of Rule 17g-2. 304 Proposed paragraph (a)(8) of Rule 17g-2. 305 Proposed paragraph (b)(8) of Rule 17g-2. The proposals would amend Rule 17g-3 to require an NRSRO to furnish the Commission with an additional annual report: the number of downgrades in each class of credit ratings for which it is registered and the description of the findings from an independent review. 306 This requirement is designed to assist the Commission in its examination function and to require an NRSRO to assess the integrity of its rating process. It also is designed to assist the Commission in monitoring whether the NRSRO is complying with provisions of the Rating Agency Act and the rules adopted thereunder. 306 *See* proposed amendment to Rule 17g-3. The proposals would amend paragraphs
(a)and
(b)of Rule 17g-5 to prohibit an NRSRO from issuing a credit rating for a structured product unless certain information about the assets underlying the product are disclosed. The proposals would amend paragraph
(c)of Rule 17g-5 to prohibit NRSROs and their affiliates from providing consulting or advisory services, prohibit analysts from participating in fee negotiations, and prohibit credit analysts or persons responsible for approving a credit rating received gifts from the obligor being rated, or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities such as meetings that have an aggregate value of no more than $25. 307 307 *See* proposed amendment to Rule 17g-5. The proposals would amend Rule 17g-7 to require an NRSRO to attach a report each time it publishes a credit rating for a structured finance product describing how the ratings procedures and methodologies and credit risk characteristics for structured products differ from those for other types of obligors and debt securities. An NRSRO could avoid having to attach the report if it used ratings symbols for structured products that differentiate them from its other types of credit ratings. 308 308 *See* proposed Rule 17g-7. F. Duplicative, Overlapping, or Conflicting Federal Rules The Commission believes that there are no federal rules that duplicate, overlap, or conflict with the proposed amendments or new rule. G. Significant Alternatives Pursuant to Section 3(a) of the RFA, 309 the Commission must consider certain types of alternatives, including:
(1)The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities;
(2)the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for small entities;
(3)the use of performance rather than design standards; and
(4)an exemption from coverage of the rule, or any part of the rule, for small entities. 309 5 U.S.C. 603(c). The Commission is considering whether it is necessary or appropriate to establish different compliance or reporting requirements or timetables; or clarify, consolidate, or simplify compliance and reporting requirements under the rule for small entities. Because the proposed amendments and proposed new rule are designed to improve the overall quality of ratings and enhance the Commission's oversight, the Commission is not proposing to exempt small entities from coverage of the rule, or any part of the rule. The proposed amendments and new rules allow NRSROs the flexibility to develop procedures tailored to their specific organizational structure and business models. The Commission also does not believe that it is necessary at this time to consider whether small entities should be permitted to use performance rather than design standards to comply with the proposed amendments as the amendments already propose performance standards and do not dictate for entities of any size any particular design standards that must be employed to achieve the Act's objectives. H. Request for Comments The Commission encourages the submission of comments to any aspect of this portion of the IRFA. Comments should specify costs of compliance with the proposed amendments and suggest alternatives that would accomplish the objective of the proposed amendments IX. Statutory Authority The Commission is proposing amendments to Form NRSRO and Rules 17g-2, 17g-3, and 17g-5 and is proposing new rule 17g-7 pursuant to the authority conferred by the Exchange Act, including Sections 3(b), 15E, 17, 23(a) and 36. 310 310 15 U.S.C. 78c(b), 78o-7, 78q, 78w, and 78mm. Text of Proposed Rules List of Subjects in 17 CFR Parts 240 and 249b Brokers, Reporting and recordkeeping requirements, Securities. In accordance with the foregoing, the Commission proposes to amend Title 17, Chapter II of the Code of Federal Regulations as follows. PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The authority citation for part 240 continues to read in part as follows: Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 *l* , 78m, 78n, 78o, 78p, 78q, 78s, 78u5, 78w, 78x, 78 *ll* , 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 *et seq.* ; and 18 U.S.C. 1350, unless otherwise noted. 2. Section 240.17g-2 is amended by: a. Removing paragraph (a)(2)(iv); b. Redesignating paragraph (a)(2)(iii) as paragraph (a)(2)(iv); c. In newly redesignated paragraph (a)(2)(iv), removing “; and” and in its place adding a period; d. Adding new paragraph (a)(2)(iii); e. Adding paragraph (a)(8); f. In paragraph (b)(7), revising the phrase “maintaining, changing,” to read “maintaining, monitoring, changing,”; g. Redesignating paragraphs (b)(8), (b)(9), and (b)(10) as paragraphs (b)(9), (b)(10), and (b)(11), respectively; h. Adding new paragraph (b)(8); and i. In paragraph (d), adding a sentence to the end of the paragraph. The additions read as follows: § 240.17g-2 Records to be made and retained by nationally recognized statistical rating organizations.
(a)* * *
(2)* * *
(iii)If a quantitative model was a substantial component in the process of determining the credit rating, a record of the rationale for any material difference between the credit rating implied by the model and the final credit rating issued; and
(8)A record showing all rating actions and the date of such actions from the initial credit rating to the current credit rating identified by the name of the rated security or obligor and, if applicable, the CUSIP of the rated security or the Central Index Key
(CIK)number of the rated obligor.
(b)* * *
(8)Any communications that contain complaints about the performance of a credit analyst in initiating, determining, maintaining, monitoring, changing, or withdrawing a credit rating.
(d)* * * In addition, the records required to be retained pursuant to paragraph (a)(8) of this section must be made publicly available on the corporate Web site of the NRSRO in an XBRL Interactive Data File that uses a machine-readable computer code that presents information in eXtensible Business Reporting Language in electronic format no later than six months after the date of the rating action. 3. Section 240.17g-3 is amended by: a. Adding paragraph (a)(6); and b. Revising paragraph (b). The additions and revision read as follows: § 240.17g-3 Annual financial reports to be furnished by nationally recognized statistical rating organizations.
(a)* * *
(6)The number of credit ratings actions taken during the fiscal year in each class of credit ratings identified in section 3(a)(62)(B) of the Act (15 U.S.C. 78c(a)(62)(B)) for which the nationally recognized statistical rating organization is registered with the Commission. Note to paragraph (a)(6): A nationally recognized statistical rating organization registered in the class of credit ratings described in section 3(a)(62)(B)(iv) of the Act (15 U.S.C. 78c(a)(62)(B)(iv)) must include credit ratings actions taken on credit ratings of any security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction for purposes of reporting the number of credit ratings actions in this class.
(b)The nationally recognized statistical rating organization must attach to the financial reports furnished pursuant to paragraphs (a)(1) through (a)(6) of this section a signed statement by a duly authorized person associated with the nationally recognized statistical rating organization stating that the person has responsibility for the financial reports and, to the best knowledge of the person, the financial reports fairly present, in all material respects, the financial condition, results of operations, cash flows, revenues, analyst compensation, and credit rating actions of the nationally recognized statistical rating organization for the period presented. 4. Section 240.17g-5 is amended by: a. Removing the word “and” at the end of paragraph (a)(1); b. Removing the period at the end of paragraph (a)(2) and in its place adding “; and”; c. Adding paragraph (a)(3); d. Redesignating paragraph (b)(9) as paragraph (b)(10); e. Adding new paragraph (b)(9); f. Removing the word “or” at the end of paragraph (c)(3); g. Removing the period at the end of paragraph (c)(4) and in its place adding a semi-colon; and h. Adding paragraphs (c)(5), (c)(6), and (c)(7). The additions read as follows: § 240.17g-5 Conflicts of interest.
(a)* * *
(3)In the case of the conflict of interest identified in paragraph (b)(9) of this section, the following information is disclosed through a means designed to provide reasonably broad dissemination:
(A)All information provided to the nationally recognized statistical rating organization by the issuer, underwriter, sponsor, depositor, or trustee that is used in determining the initial credit rating for the security or money market instrument, including information about the characteristics of the assets underlying or referenced by the security or money market instrument, and the legal structure of the security or money market instrument, with such information to disclosed publicly in an offering registered under the Securities Act of 1933 (15 U.S.C. 77a *et seq.* ) on the date the underwriter and the issuer or depositor set the offering price of the securities being rated;
(B)In offerings that are not registered under the Securities Act of 1933 (15 U.S.C. 77a *et seq.* ), the information in paragraph (a)(3)(i)(A) of this section must be disclosed to investors and credit rating agencies on the date the underwriter and the issuer or depositor set the offering price of the securities being rated, and disclosed publicly on the first business day after the transaction closes; and
(ii)All information provided to the nationally recognized statistical rating organization by the issuer, underwriter, sponsor, depositor, or trustee that is used by the nationally recognized statistical rating organization in undertaking credit rating surveillance on the security or money market instrument, including information about the characteristics and performance of the assets underlying or referenced by the security or money market instrument, with such information to be disclosed publicly at the time such information is provided to the nationally recognized statistical rating organization.
(b)* * *
(9)Issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction that was paid for by the issuer, sponsor, or underwriter of the security or money market instrument.
(c)* * *
(5)The nationally recognized statistical rating organization issues or maintains a credit rating with respect to an obligor or security where the nationally recognized statistical rating organization or a person associated with the nationally recognized statistical rating organization made recommendations to the obligor or the issuer, underwriter, or sponsor of the security about the corporate or legal structure, assets, liabilities, or activities of the obligor or issuer of the security;
(6)The nationally recognized statistical rating organization issues or maintains a credit rating where the fee paid for the rating was negotiated, discussed, or arranged by a person within the nationally recognized statistical rating organization who has responsibility for participating in determining credit ratings or for developing or approving procedures or methodologies used for determining credit ratings, including qualitative and quantitative models; or
(7)The nationally recognized statistical rating organization issues or maintains a credit rating where a credit analyst who participated in determining or monitoring the credit rating, or a person responsible for approving the credit rating received gifts, including entertainment, from the obligor being rated, or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business activities such as meetings that have an aggregate value of no more than $25. 5. Section 240.17g-7 is added to read as follows: § 240.17g-7 Credit rating reports to be furnished by nationally recognized statistical rating organizations.
(a)A nationally recognized statistical rating organization must attach a report each time it publishes a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction that describes the rating methodology used to determine such credit rating and how it differs from the determination of ratings for any other type of obligor or debt security and how the credit risk characteristics associated with a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction differ from those of any other type of obligor or debt security.
(b)*Exemption from attaching report.* A nationally recognized statistical rating organization is not required to attach the report each time it publishes a credit rating as prescribed by paragraph
(a)of this section if the credit rating symbol used by the nationally recognized statistical rating organization to indicate the credit rating identifies the credit rating as relating to a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction as distinct from a credit rating for any other type of obligor or debt security. PART 249b—FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934 6. The authority citation for part 249b continues to read in part as follows: Authority: 15 U.S.C. 78a *et seq.* , unless otherwise noted; 7. Form NRSRO (referenced in § 249b.300) is amended by revising Exhibits 1 and 2 in section H, Item 9 of the Form NRSRO Instructions to read as follows: Note: The text of Form NRSRO and this amendment does not appear in the Code of Federal Regulations. Form NRSRO Form NRSRO Instructions H. Instructions for Specific Line Items Item 9. Exhibits. * * * *Exhibit 1.* Provide in this Exhibit performance measurement statistics of the credit ratings of the Applicant/NRSRO, including performance measurement statistics of the credit ratings seperately for each class of credit rating for which the Applicant/NRSRO is seeking registration or is registered (as indicated in Item 6 and/or 7 of Form NRSRO) and any other broad class of credit rating issued by the Applicant/NRSRO. For the purposes of this Exhibit, an Applicant/NRSRO registered in the class of credit ratings described in Section 3(a)(62)(B)(iv) of the Act (15 U.S.C. 78c(a)(62)(B)(iv)) must include credit ratings of any security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction for purposes of reporting the performance measurement statistics for this class. The performance measurement statistics must at a minimum show the performance of credit ratings in each class over 1 year, 3 year, and 10 year periods (as applicable) through the most recent calendar year-end, including, as applicable: historical ratings transition and default rates within each of the credit rating categories, notches, grades, or rankings used by the Applicant/NRSRO as an indicator of the assessment of the creditworthiness of an obligor, security, or money market instrument in each class of credit rating. The default statistics must include defaults relative to the initial rating and must incorporate defaults that occur after a credit rating is withdrawn. As part of this Exhibit, define the credit rating categories, notches, grades, and rankings used by the Applicant/NRSRO and explain the performance measurement statistics, including the inputs, time horizons, and metrics used to determine the statistics. Also provide in this Exhibit the Web site address where the records of credit rating actions required under 17 CFR 240.17g-2(a)(8) are, or will be, made publicly available in an XBRL Interactive Data File pursuant to the requirements of 17 CFR 240.17g-2(d). *Exhibit 2.* Provide in this Exhibit a general description of the procedures and methodologies used by the Applicant/NRSRO to determine credit ratings, including unsolicited credit ratings within the classes of credit ratings for which the Applicant/NRSRO is seeking registration or is registered. The description must be sufficiently detailed to provide users of credit ratings with an understanding of the processes employed by the Applicant/NRSRO in determining credit ratings, including, as applicable, descriptions of: policies for determining whether to initiate a credit rating; a description of the public and non-public sources of information used in determining credit ratings, including information and analysis provided by third-party vendors; whether and, if so, how information about verification performed on assets underlying or referenced by a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction is relied on in determining credit ratings; the quantitative and qualitative models and metrics used to determine credit ratings, including whether and, if so, how assessments of the quality of originators of assets underlying or referenced by a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction factor into the determination of credit ratings; the methodologies by which credit ratings of other credit rating agencies are treated to determine credit ratings for securities or money market instruments issued by an asset pool or as part of any asset-backed or mortgaged-backed securities transaction; the procedures for interacting with the management of a rated obligor or issuer of rated securities or money market instruments; the structure and voting process of committees that review or approve credit ratings; procedures for informing rated obligors or issuers of rated securities or money market instruments about credit rating decisions and for appeals of final or pending credit rating decisions; procedures for monitoring, reviewing, and updating credit ratings, including how frequently credit ratings are reviewed, whether different models or criteria are used for ratings surveillance than for determining initial ratings, whether changes made to models and criteria for determining initial ratings are applied retroactively to existing ratings, and whether changes made to models and criteria for performing ratings surveillance are incorporated into the models and criteria for determining initial ratings; and procedures to withdraw, or suspend the maintenance of, a credit rating. An Applicant/NRSRO may provide in Exhibit 2 the location on its Web site where additional information about the procedures and methodologies is located. Dated: June 16, 2008. By the Commission. Jill M. Peterson, Assistant Secretary. [FR Doc. E8-13887 Filed 6-24-08; 8:45 am] BILLING CODE 8010-01-P 73 123 Wednesday, June 25, 2008 Presidential Documents Part IV The President Notice of June 24, 2008—Continuation of the National Emergency With Respect to the Western Balkans Title 3— The President Notice of June 24, 2008 Continuation of the National Emergency With Respect to the Western Balkans On June 26, 2001, by Executive Order 13219, I declared a national emergency with respect to the Western Balkans pursuant to the International Emergency Economic Powers Act (50 U.S.C. 1701-1706) to deal with the unusual and extraordinary threat to the national security and foreign policy of the United States constituted by the actions of persons engaged in, or assisting, sponsoring, or supporting
(i)extremist violence in the Republic of Macedonia and elsewhere in the Western Balkans region, or
(ii)acts obstructing implementation of the Dayton Accords in Bosnia or United Nations Security Council Resolution 1244 of June 10, 1999, in Kosovo. I subsequently amended that order in Executive Order 13304 of May 28, 2003. Because the actions of persons threatening the peace and international stabilization efforts in the Western Balkans continue to pose an unusual and extraordinary threat to the national security and foreign policy of the United States, the national emergency declared on June 26, 2001, and the measures adopted on that date and thereafter to deal with that emergency, must continue in effect beyond June 26, 2008. Therefore, in accordance with section 202(d) of the National Emergencies Act (50 U.S.C. 1622(d)), I am continuing for 1 year the national emergency with respect to the Western Balkans. This notice shall be published in the **Federal Register** and transmitted to the Congress. GWBOLD.EPS THE WHITE HOUSE, June 24, 2008. [FR Doc. 08-1392 Filed 6-24-08; 1:07 pm]
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  • 79 Stat. 985
  • 49 CFR 195
  • 49 CFR 1.53
  • 12 CFR 544.5
  • Pub. L. 107-347
  • Pub. L. 108-136
  • Pub. L. 110-81
  • 5 CFR 2637.101(b)
  • 494 U.S. 152
  • 202 F.3d 755
  • 878 F.2d 442
  • 333 F. Supp. 2d 789
  • 39 F. Supp. 2d 1333
  • 988 F. Supp. 1223
  • 762 F. Supp. 1019
  • 542 F. Supp. 402
  • Pub. L. 108-458
  • 5 CFR 2635.102(k)
  • 5 USC 554a(h)(2)
  • 5 CFR 550.186(b)
  • 5 CFR 2637.201(b)(4)
  • 930 F.2d 1554
  • 5 CFR 2637.201(c)(1)
  • 5 CFR 2640.102(l)
  • 27 U.S. 253
  • 124 U.S. 190
  • 216 U.S. 167
  • 5 CFR 2637.201(c)(4)
  • 48 CFR 16.500-16
  • 48 CFR 2.101
  • 48 CFR 52.216-18
  • 5 CFR 2637.201(d)(3)
  • 5 CFR 2637.201(c)(5)
  • 5 CFR 2637.202(b)(2)
  • 5 CFR 2637.202(b)(5)
  • 5 USC 5312-5316
  • 5 CFR 2641.301(c)
  • Pub. L. 99-239
  • Pub. L. 104-293
  • Pub. L. 97-241
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Fed. Reg.Notices
Pub. L.Public Law 118-137
U.S.C.§ 6501
U.S.C.§ 3507
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F. App'x202 F.3d 755
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