Divestiture of Stock and Purchase of Government Bonds by an Incoming Secretary of the Treasury

Divestiture of Stock and Purchase of Government Bonds
by an Incoming Secretary of the Treasury
The incoming Secretary of the Treasury may purchase government bonds with the proceeds of a stock
sale pursuant to a certificate of divestiture properly issued under 26 U.S.C. § 1043 and without
violating the prohibition of 31 U.S.C. § 329, provided that he purchases the bonds after his commis-
sion is signed by the President but before he takes the oath of office or enters on his duties as
Secretary of the Treasury.

June 22, 2006

MEMORANDUM OPINION FOR THE GENERAL COUNSEL
OFFICE OF GOVERNMENT ETHICS

You have asked for our opinion on whether and how an incoming Secretary of
the Treasury may buy government bonds with the proceeds of a stock sale
pursuant to a “certificate of divestiture” under 26 U.S.C. § 1043 (2000) consistent
with 31 U.S.C. § 329 (2000), which forbids the Secretary from “be[ing] involved
in buying or disposing of obligations of a State or the United States Government.” 1
We believe that a certificate of divestiture under 26 U.S.C. § 1043 would be
available when the President signs the incoming Secretary’s commission, but that
the incoming Secretary would not become subject to 31 U.S.C. § 329 until he
takes the oath of office or otherwise begins his duties. Accordingly, we conclude
that the incoming Secretary may purchase government bonds pursuant to a
certificate of divestiture properly issued under 26 U.S.C. § 1043 and without
violating the prohibition of 31 U.S.C. § 329, provided that he purchases the bonds
after his commission is signed by the President but before he takes the oath of
office or enters on his duties as Secretary of the Treasury.

I.

The President has nominated Henry M. Paulson, Jr., to be Secretary of the
Treasury: Mr. Paulson is currently the Chairman and Chief Executive Officer of
The Goldman Sachs Group, Inc. (“Goldman Sachs”), and holds a large stake in the
stock of that company. The Office of Government Ethics (“OGE”) has determined
that, to comply with conflict of interest rules and standards, Mr. Paulson will have
to sell this stock if he becomes the Secretary.
Recognizing the extraordinary tax liability that incoming officers and employ-
ees of the government might incur when forced to sell property for such reasons,

1
Letter for Steven G. Bradbury, Acting Assistant Attorney General, Office of Legal Counsel, from
Marilyn L. Glynn, General Counsel, Office of Government Ethics (June 9, 2006). Your question covers
the Secretary of the Treasury and the Treasurer of the United States, both of whom are subject to 31
U.S.C. § 329. In this opinion, we refer to the Secretary, but our analysis would cover both officers.

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Congress has provided a mechanism for deferral of the tax. The President or the
Director of OGE may issue a “certificate of divestiture” to “an eligible person,”
which the statute defines as “an officer or employee of the executive branch of the
Federal Government.” 26 U.S.C. § 1043(a), (b)(1). The issuance of such a
certificate is predicated on a finding that “divestiture of specific property is
reasonably necessary to comply with any Federal conflict of interest statute,
regulation, rule, or executive order (including section 208 of title 18, United States
Code), or requested by a congressional committee as a condition of confirmation.”
26 U.S.C. § 1043(b)(2). The certificate permits deferral of federal tax on the sale
of the property if the proceeds of the sale are invested in “permitted property,”
defined as “any obligation of the United States or any diversified investment fund
approved by regulations issued by the Office of Government Ethics.” Id.
§ 1043(a), (b)(3).
We are informed that the sale of Mr. Paulson’s stock will generate a large sum
of money; that it would be unduly risky to invest the entire sum in equities or
equity funds; and that he therefore would invest a portion in less risky securities,
including government bonds. Such bonds are ordinarily “permitted property”
under a certificate of divestiture. See id. § 1043(b)(3). When Mr. Paulson becomes
Secretary of the Treasury, however, he will be subject to another provision, 31
U.S.C. § 329(a)(1)(D), under which “the Secretary of the Treasury and the
Treasurer may not . . . be involved in buying or disposing of obligations of a State
or the United States Government.” An officer who violates the prohibition in
section 329 “shall be fined $3,000, removed from office, and thereafter may not
hold an office of the Government.” Id. § 329(a)(2).
We understand that before May 2002 the two statutes were reconciled through
interpretations under which the term “officer or employee” in 26 U.S.C. § 1043
was taken to apply when a Secretary or Treasurer was confirmed by the Senate and
commissioned by the President, but the terms “Secretary of the Treasury and the
Treasurer” in 31 U.S.C. § 329 were taken to apply only when those incoming
officials took the oath of office. Thus, under these interpretations, after the
President signed the commission of an incoming Secretary of the Treasury or
Treasurer, the official could receive a certificate of divestiture, sell the conflicting
investments, and purchase government bonds with the proceeds of the sale, as long
as he completed this process before taking the oath of office. In 2002, however, we
issued an opinion concluding that the conflict of interest laws under title 5 and title
18 of the U.S. Code apply to an incoming official when he becomes an “officer or
employee” under the definitions in title 5, see 5 U.S.C. §§ 2104, 2105 (2000), and
that a person becomes an officer or employee as defined in title 5 only when he
begins the duties of the office. Application of Conflict of Interest Rules to Appoint-
ees Who Have Not Begun Service, 26 Op. O.L.C. 32 (2002) (“2002 Opinion”).
Because a certificate of divestiture may be issued when an “officer or employee”
has to sell property to comply with the conflict of interest requirements under
titles 5 and 18, our 2002 Opinion raises the question whether the terms “officer or

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employee” in 26 U.S.C. § 1043 must now be given the same meaning as in titles 5
and 18. If so, a certificate of divestiture could not be issued until the incoming
Secretary had begun his duties, and, as explained below, 31 U.S.C. § 329 at that
time would forbid rolling over the sale proceeds into government bonds.

II.

A.

We believe the term “officer” in 26 U.S.C. § 1043 is best interpreted in light of
the purposes of the law, and consistent with the traditional holding of the Supreme
Court in Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803), to include an
incoming officer whose commission has been signed by the President but who has
not yet taken the oath of office or entered on the duties of the office. 2
The term “officer” is susceptible of different meanings depending on the con-
text in issue. According to the traditional understanding explained by the Supreme
Court in Marbury, a person becomes an “officer” once his appointment to the
office is complete, and the President completes the appointment by signing the
commission. Chief Justice Marshall in Marbury wrote that, when the President
signs the commission, “the officer is appointed,” 5 U.S. at 157 (emphasis added),
and that the appointment “create[s] the officer,” id. at 156. 3 See also Appointment
of Midshipman at Naval Academy—Revocation, 28 Op. Att’y Gen. 180, 187
(1910) (characterizing Marbury as holding that when the appointment was
complete, Marbury “was . . . an officer”). 4 The appointee’s undertaking the duties
of the office is irrelevant to this use of the term “officer.” For that reason, “[w]hen
a person, appointed to any office, refuses to accept that office, the successor is
nominated in the place of the person who has declined to accept, and not in the
place of the person who had been previously in office, and had created the original
vacancy.” Marbury, 5 U.S. at 161–62.
As Justice Joseph Story wrote, “[t]he officer appointed [by the signing of the
commission] has then conferred on him legal rights, which cannot be resumed [by

2
We do not here construe the meaning of “employee” in 26 U.S.C. § 1043.
3
There is a doctrine that, where an appointee would serve at the pleasure of the President, the
President may reconsider his decision to appoint the officer even after the commission is signed and
may still decline to make the appointment by arresting the commission in his office—i.e., before it
leaves the immediate control of the President. See Case of Franklin G. Adams, 12 Op. Att’y Gen. 304,
306 (1867). Once the commission leaves the President’s office, however, this doctrine would not apply.
4
One sentence in the 2002 Opinion stated that appointment “does not ipso facto make the appoint-
ed person an officer or employee” under Marbury, 26 Op. O.L.C. at 36, but the context of the sentence
was a treatment of need for an appointee to accept the office before its duties and powers become his.
The passage cited an Attorney General opinion treating acceptance of an office as “the assumption of
official responsibility.” See Acceptance of a Promotion, 12 Op. Att’y Gen. 229, 230 (1867).

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the President].” Joseph Story, Commentaries on the Constitution of the United
States 573 (Ronald D. Rotunda & John E. Nowak eds., 1987) (1833) (emphasis
added). Thus, relying in part on Marbury, we have concluded that “where two
officers in the same body are commissioned on different dates, the officer
commissioned first is the senior.” Determination of Date of Commencement of
Service of Federal Officers—Renegotiation Board, 1 Op. O.L.C. 121, 121 (1977).
And, although the current rule is different, Marbury states that “the salary of the
officer commences from his appointment” on the date of the commission. 5 U.S. at
161 (emphasis added); but see Term of Judicial Salaries, 7 Op. Att’y Gen. 303,
307 (1855) (the statement in Marbury “is not good law in the broad generality of
the proposition”).
By contrast, someone becomes an “officer or employee” for purposes of titles 5
and 18 of the U.S. Code only when he begins his official duties. See 2002
Opinion, 26 Op. O.L.C. at 32. Under 5 U.S.C. § 2104, an officer is defined as
someone (1) “required by law to be appointed in the civil service by [the Presi-
dent; a court of the United-States, the head of an Executive agency; or the
Secretary of a military department] acting in an official capacity,” (2) “engaged in
the performance of a Federal function under authority of law or an Executive act,”
and (3) “subject to the supervision” of the President or the head of an executive
agency or military department. This special definition leads to the conclusion that,
until someone is actually performing a federal function under the supervision of a
federal official, he is not yet an “officer” within the meaning of section 2104. And
although title 18 does not define the term, we have relied on the title 5 definition
of “officer” and “employee” as “‘the most obvious source of a definition’ for title
18 purposes.” 2002 Opinion, 26 Op. O.L.C. at 32 (quoting Applicability of Execu-
tive Order No. 12674 to Personnel of Regional Fishery Management Councils, 17
Op. O.L.C. 150, 154 (1993) (“Fishery Management Councils”) (quoting Status of
an Informal Presidential Advisor as a “Special Government Employee,” 1 Op.
O.L.C. 20, 20 (1977) (“Informal Presidential Advisor”))).
The 2002 Opinion, which set out this view of the meaning of the terms “of-
ficer” and “employee,” observed that we had applied the title 5 statutory defini-
tions of “officer” and “employee” to the conflict of interest restrictions in Execu-
tive Order 12674, Principles of Ethical Conduct for Government Officers and
Employees, 3 C.F.R. 215 (1989 Comp.), and the Standards of Ethical Conduct for
Employees of the Executive Branch, 5 C.F.R. pt. 2635 (2006). See 2002 Opinion,
26 Op. O.L.C. at 33 (citing Fishery Management Councils, 17 Op. O.L.C. at 150
n.2, 158). We explained our earlier reasoning:

First, we noted that we had turned to the title 5 definitions for guid-
ance in interpreting the criminal conflict of interest laws, and
“[b]ecause the objectives of the Order and its implementing regula-
tions are closely related to those of the conflicts statutes, we
[thought] it reasonable to look to title 5’s definition of ‘employee’

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when elucidating the Order.” Id. at 154 (citation omitted). Second,
the Executive Order adopts the definition of “agency” from title 5,
with certain exceptions, Exec. Order No. 12674, § 503(c); and “[w]e
[thought] it unlikely that the Order was intended to cover personnel
who were employed by ‘agencies’ within the meaning of title 5 but
who were not themselves ‘employees’ within the same title.” 17 Op.
O.L.C. at 154. Third, while the Executive Order states generally that
it is based on the authority vested in the President “by the Constitu-
tion and laws of the United States,” Exec. Order No. 12674, pmbl.,
but does not specify the authorizing statutes, “the most obvious
statutory source of authority” is the President’s power under title 5 to
“prescribe regulations for the conduct of employees in the executive
branch,” 5 U.S.C. § 7301 (2000), and this authority brings into play
the definition of “employee” in title 5. 17 Op. O.L.C. at 154.

2002 Opinion, 26 Op. O.L.C. at 33. In using the three-part test from title 5 to
interpret conflict of interest restrictions found outside that title, we thus relied on
the purposes of, as well as underlying legal authorities for, these other restrictions.
Similarly, in applying the three-part test to the criminal conflict of interest
restrictions in title 18, we underscored the specific nature of criminal prohibitions.
We observed that the rule of lenity weighed in favor of not diluting the test and
thus broadening the application of the criminal sanctions in ways that could have
harsh results. Id. at 34.
Section 1043 of the federal tax code does not regulate the conduct of officials
but offers a means to facilitate their compliance with the ethics laws, including
compliance required as a condition of entering into office. In light of this purpose,
we believe that the term “officer” in section 1043 is best read to have the tradition-
al meaning laid down in Marbury v. Madison. An incoming official must have the
capacity to avoid conflicts from the moment he begins service, where the circum-
stances so demand. He may, for example, own substantial amounts of stock that
would create a financial conflict under 18 U.S.C. § 208(a) (2000) in an area where
he would need to take urgent action immediately upon assuming the duties of his
office. If the official’s holdings would be sufficiently “substantial as to be deemed
likely to affect the integrity of the services which the Government may expect
from such officer,” he would be ineligible for a waiver under 18 U.S.C.
§ 208(b)(1). Foreseeing such a problem, and bearing in mind the obligation of
officers and employees “to avoid any actions creating [even] the appearance that
they are violating the law or the ethical standards promulgated pursuant to” the
President’s direction, see Exec. Order No. 12674, § 101(n), 3 C.F.R. at 216, as
amended by Exec. Order No. 12731, 3 C.F.R. 306, 308 (1990 Comp.), the
incoming official would need to divest himself of his holdings before entering on
his duties. But unless there is some period, before he undertakes the duties of his
office, during which he is an “officer” under 26 U.S.C. § 1043 and thus eligible for

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a certificate of divestiture, he may lack any practical means to divest that property.
Indeed, the unavailability of a certificate of divestiture for such officers would be
“a significant disincentive to the acceptance of high level policy-making positions
in the government because of the financial burdens imposed by reason of the
recognition of gain,” To Serve with Honor: Report of the President’s Commission
on Federal Ethics Law Reform 25 (1989), and might dissuade some officials from
consenting to serve. If, however, a certificate of divestiture may be granted when
the President signs the commission but before the officer begins his duties, such a
consequence—which we cannot believe Congress intended—can be avoided.
The language of section 1043, moreover, reveals that the provision is, in part,
specifically designed to deal with incoming officials. A certificate of divestiture is
available not only if the Director of OGE finds divestiture necessary to avoid
conflicts of interest—a determination that might apply to either incoming or
incumbent officials—but also specifically is available if divestiture is “requested
by a congressional committee as a condition of confirmation.” 26 U.S.C.
§ 1043(b)(2)(A). This specific focus on incoming officials reinforces the conclu-
sion that section 1043 should be read to permit an official to resolve conflicts
before he begins work.
Under 26 U.S.C. § 1043(b)(2), a certificate of divestiture can be issued only if a
sale of property is “reasonably necessary to comply with any Federal conflict of
interest statute, regulation, rule, or executive order (including section 208 of title
18, United States Code), or requested by a congressional committee as a condition
of confirmation.” Given the purposes of section 1043, we believe that this
judgment can be made as of when the incoming official becomes an “officer” in
the traditional sense just outlined. The Director of OGE, at that point, can deter-
mine whether the officer, to achieve compliance with federal conflict of interest
rules upon his beginning the duties of his office, needs to divest himself of any
property holdings. 5
This interpretation, as we understand the facts, accords with existing practice as
to the timing of certificates of divestiture. OGE’s view has long been that the
Director could issue a certificate when the President signed the incoming officer’s
commission. The present issue is, therefore, whether this interpretation should be
overturned because of our 2002 Opinion, which found that the conflict of interest
laws under titles 5 and 18 do not apply to an incoming officer until he begins the
duties of his office. Our interpretation here gives the term “officer” a different
meaning in 26 U.S.C. § 1043 from the meaning that the term has in the conflict of
interest laws in title 5 and title 18. Arguably, given the absence of a statutory

5
Section 1043 also includes a cross-reference to a definition in title 18, but it does so only to say
that a “special Government employee as defined in section 202 of title 18” is not eligible for a
certificate of divestiture. 26 U.S.C. § 1043(b)(1)(A). The cross-reference would not support any
inference that the meanings of terms in title 18 should apply to section 1043.

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definition governing the provision in title 26, the title 5 definition could be “the
most obvious source of a definition,” just as we concluded it was for title 18. A
certificate of divestiture may be issued when an “officer or employee” has to sell
property to comply with the conflict of interest requirements, most of which are in
or pursuant to titles 5 and 18, and it therefore might be argued that section 1043
should incorporate the same meaning of “officer” that applies under those titles
and is ultimately traced to 5 U.S.C. § 2104. We nonetheless conclude that
employing a different interpretation of the term “officer” in the context of section
1043 is fully consistent with the differing purposes of this provision and the
conflict of interest laws of titles 5 and 18. Furthermore, although the 2002 Opinion
reached its conclusion on the basis of the express statutory definition of “officer”
in title 5 and the longstanding interpretation that title 18 should be given the same
meaning, we noted that our interpretation “enable[d] an appointee to wind up his
private affairs in an orderly manner (presumably in consultation with the Admin-
istration) and therefore [could] be critical to recruiting qualified appointees in the
first place.” 26 Op. O.L.C. at 37. The issuance of a certificate of divestiture upon
the President’s signing of the commission, but before the officer’s entering on his
duties, serves the same ends. 6

B.

In keeping with the longstanding interpretation of the Treasury Department, we
believe that, for purposes of 31 U.S.C. § 329, Mr. Paulson will not become “[t]he
Secretary of the Treasury” until he takes the oath of office or enters on the duties
of the office. This understanding of the meaning of “[t]he Secretary of the
Treasury” accords with the purposes of 31 U.S.C. § 329. The provision, in
substantially the same form, was enacted in 1789 as part of the statute creating the
Treasury Department. Act of Sept. 2, 1789, ch. 12, § 8, 1 Stat. 65, 67 (1789). 7 It
was intended to prevent Treasury officials from “speculating in the public funds.”
See 1 Annals of Cong. 611 (1789) (statement of the sponsor, Rep. Aedanus
Burke); see also Treasurer of the United States—Philippine Land Purchase Bonds,

6
We recognize that some agencies of the government do not insist that incoming officials achieve
immediate compliance with provisions that forbid them from holding or trading in particular kinds of
property. On the other hand, the Treasury Department has consistently taken the view, both under 31
U.S.C. § 329 and under the statute on the Comptroller and Deputy Comptroller of the Currency, 12
U.S.C. § 11 (2000), that these statutory bars apply immediately to incoming officials upon their taking
the oaths of office.
7
As originally enacted, the provision stated that officials at the Treasury Department could not “be
concerned in the purchase or disposal of any public securities of any State, or of the United States.”
1 Stat. at 67. This language remained in the statute until 1982, when the current language was
substituted “to eliminate unnecessary words and for consistency in the revised title” 31. 31 U.S.C.
§ 329 note. The 1982 amendment was “not [to] be construed as making a substantive change in the
law[] replaced.” Pub. L. No. 97-258, § 4(a), 96 Stat. 884, 1067 (1982).

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25 Op. Att’y Gen. 98, 99 (1903) (“The obvious purpose of [the] law, as shown
throughout the section, is to prohibit personal interest in such bond issues and
certain other affairs and business, and private emolument or gain in the transaction
of any business in the Treasury Department.”). Perhaps one motive for the
provision was a concern that officials in the Treasury would buy state bonds
whose value would be increased if the United States (as it later did) assumed the
debts incurred by the states in the Revolutionary War. Ideas about assumption
were circulating even before the creation of the Treasury Department, see Stanley
Elkins & Eric McKitrick, The Age of Federalism 112–13, 117–21 (1993); Ron
Chernow, Alexander Hamilton 225 (2004); and the scope of the prohibition, which
reaches trading in bonds but not the mere holding of them, suggests a focus on the
use of inside information. See also William Maclay, The Journal of William
Maclay, United States Senator from Pennsylvania 1789–1791, at 173–74 (Freder-
ick Ungar Publishing 1965) (1890) (protesting against “a system of speculation
for . . . engrossing certificates” of public debt). In any event, if an incoming
Treasury Secretary completes his transactions in government bonds before he
takes the oath or enters on the duties of his office, he cannot “speculat[e] in the
public funds.” He can have no opportunity to take any official action as Secretary,
or use any nonpublic information, to gain any advantage in the trade. 8

III.

It follows, therefore, that if the Director of OGE issues a certificate of divesti-
ture upon the President’s signing of Mr. Paulson’s commission, Mr. Paulson will
be able to sell his Goldman Sachs stock and buy government bonds pursuant to
that certificate, provided he completes these transactions before he takes the oath
of office or enters on his duties as Secretary of the Treasury.

STEVEN G. BRADBURY
Acting Assistant Attorney General
Office of Legal Counsel

8
An OGE regulation, which addresses the use of a certificate of divestiture, includes, as an exam-
ple, the following:
The Secretary of Treasury sells certain stock after receiving a Certificate of Divesti-
ture and is considering reinvesting the proceeds from the sale into U.S. Treasury secu-
rities. However, because the Secretary of Treasury is prohibited by 31 U.S.C. 329
from being involved in buying obligations of the United States Government, the Sec-
retary cannot reinvest the proceeds in such securities. However, she may invest the
proceeds in a diversified mutual fund.
5 C.F.R. § 2634.1006(a), ex. 2 (2006) (citation omitted). By its terms, this example covers “[t]he
Secretary of Treasury” but does not specify when an incoming official assumes that office.

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