employees, (2) by awards made annually to eligible employees under an executive incentive plan, and (3) by purchase under stock options granted to him by the company.

As of December 31, 1964, Mr. Connor held 30,182 shares of common stock of Merck & Co., Inc. Under the provisions of the Merck executive incentive plan, there have been awarded to him 16,087 shares of common stock of that company, which will be payble to him in 9 equal annual installments beginning January 1966, subject to the conditions of the plan. During the 9-year period of such payments, additional shares will be credited to him as compensation for dividends accruing upon shares credited to him under the plan before the termination of his offices in the company.

Mr. Connor holds jointly with his wife 1,800 shares of common stock of Merck & Co., Inc. Mrs. Connor holds 10 shares of such stock as custodian for their daughter, a minor.

Mr. Connor also holds 100 shares of common stock of General Motors Corp., and 100 shares of common stock of General Foods Corp. His son (who is not a minor) holds 70 shares of common stock of Monsanto Chemical Co.

Some 1,200 shares of Merck stock held by Mr. and Mrs. Connor have been pledged to secure certain bank loans.

B. Proposed trust agreement

Mr. Connor proposes to transfer to Morgan Guaranty Trust Co. of New York, as trustee, before his appointment as Secretary of Commerce, all of the securities referred to above held by him and by his wife, with the exceptions noted below, under a proposed trust agreement, a copy of which accompanied his letter to the chairman of the committee.

The trust agreement, to be effective during the period of Mr. Connor's service as Secretary of Commerce, would confer upon the trustee broad powers during the term of the trust to manage, invest, reinvest, and dispose of the assets to be transferred thereunder and the proceeds thereof.

It provides specifically that decisions made by the trustee with respect to such actions shall be made "without any participation" by Mr. or Mrs. Connor, and requires that the trustee "shall not at any time disclose" to them "in any way what assets are for the time being held in the principal of the trust." The trustee would be obligated for years during the term of the trust to prepare required income tax returns on behalf of Mr. and Mrs. Connor, "and to adjust, settle, and pay the income taxes due and payable for the periods caused by such returns." Income tax returns so prepared are not to be disclosed to Mr. or Mrs. Connor.

Subject to the reservation of sums required for the payment of income taxes, net income derived from assets held under the trust would be paid to Mr. and Mrs. Connor in conformity with specific provisions of the agreement. The trustee would be obligated to "make contributions or gifts" on behalf of Mr. Connor "for such charitable or personal purposes" as he may direct from time to time. Disposition of securities for any such purpose would be made without participation by Mr. Connor in the selection thereof. The agreement provides also that Mr. Connor would be entitled to require the payment to him by the trustees, from the trust assets, such sums, in addition to the income from the trust assets, as he might determine to be required by him for "important personal needs.” C. Assets Temporarily Withheld from the Trust

Mr. Connor proposes to withhold from the trust (1) shares of Merck stock pledged to secure the repayment of the bank loans referred to above, and (2) 13,032 shares of Merck common stock purchased by him on December 23, 1964, under options previously granted to him by the company. The shares purchased on that date would be delivered to Morgan Guaranty Trust Co. under a separate custody agreement, a copy of which was furnished with Mr. Connor's letter. Under that agreement, Morgan Guaranty would hold those shares in the name of Mr. Connor until July 15, 1965 (or until his earlier death), at which time they would be transferred to the trust under the agreement referred to above. In his letter to the chairman, Mr. Connor explains that

"These shares are being placed in custody rather than transferred to the trust at once in order that I may satisfy the requirements of the tax law that shares purchased under options not be transferred within 6 months of the date of purchase."

STATUTES CONSIDERED

Sections 208 and 209 of title 18, United States Code, as amended by the act of October 23, 1962 (76 Stat. 1122-1123), now provide in pertinent part: "§ 208. Acts affecting a personal financial interest.

(a) Except as permitted by subsection (b) hereof, whoever, being an officer or employee of the executive branch of the United States Government, of any independent agency of the United States, or of the District of Columbia, including a special Government employee, participates personally and substantially as a Government officer or employee, through decision, approval, disapproval, recommendation, the rendering of advice, investigation, or otherwise, in a judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest, or other particular matter in which, to his knowledge, he, his spouse, minor child, partner, organization in which he is serving as officer, director, trustee, partner or employee, or any person or organization with whom he is negotiating or has any arrangement concerning prospective employment, has a financial interest

"Shall be fined not more than $10,000, or imprisioned not more than two years, or both.

"(b) Subsection (a) hereof shall not apply (1) if the officer or employee first advises the Government official responsible for appointment to his position of the nature and circumstances of the judicial or other proceeding, application, request for a ruling or other determination, contract, claim, controversy, charge, accusation, arrest, or other particular matter and makes full disclosure of the financial interest and receives in advance a written determination made by such official that the interest is not so substantial as to be deemed likely to affect the integrity of the services which the Government may expect from such officer or employee, or (2) if, by general rule or regulation published in the Federal Register, the financial interest has been exempted from the requirements of clause (1) hereof as being too remote or too inconsequential to affect the integrity of Government officers' or employees' services.

"§ 209. Salary of Government officials and employees payable only by United States

"(a) Whoever receives any salary, or any contribution to or supplementation of salary, as compensation for his services as an officer or employee of the execu tive branch of the United States Government, of any independent agency of the United States, or of the District of Columbia, from any source other than the Government of the United States, except as may be contributed out of the treasury of any State, county, or municipality; or

"Whoever, whether an individual, partnership, association, corporation, or other organization pays, or makes any contribution to, or in any way supplements the salary of, any such officer or employee under circumstances which would make its receipt a violation of this subsection

"Shall be fined not more than $5,000 or imprisoned not more than one year, or both.

"(b) Nothing herein prevents an officer or employee of the executive branch of the United States Government, or of any independent agency of the United States, or of the District of Columbia, from continuing to participate in a bona fide pension, retirement, group life, health or accident insurance, profit-sharing, stock bonus, or other employee welfare or benefit plan maintained by a former employer."

Section 208 replaced former section 434 of title 18, relating to financial interests of officers and employees of the United States, and section 209 replaced former section 1914 of title 18, relating to the receipt of salaries of such officers and employees from sources other than the United States. See section 2, act of October 23, 1962 (76 Stat. 1126). Those changes were made as part of a comprehensive revision of existing criminal laws relating to bribery, graft, and conflicts of interest. See House Report No. 748, 87th Congress, 1st session; Senate Report No. 2213, 87th Congress, 2d Session.

The purpose of the revision was stated as follows in the Senate report (p. 4): "This legislation is concerned with two subjects, conflicts of interest and bribery, and would revise the current criminal statutes dealing with these subjects.

"Insofar as the conflict-of-interest laws are concerned, the bill has two purposes. First, it would simplify and strengthen the conflict laws presently in effect. Second, in the interest of facilitating the Government's recruitment of persons with specialized knowledge and skills for service on a part-time basis, it would limit the impact of those laws on the persons so employed without depriving the Government of protection against unethical conduct on their part."

The intended effect of the revisions so made was stated more particularly by the Senate report (pp. 13-14):

"Section 208. Acts affecting a personal financial interest.

"Subsection (a) is modeled on title 18, United States Code, section 434 which disqualifies an employee of the Government who has an interest in the profits or contracts of a business entity from the transaction of business with such entity. However, subsection (a) improves upon the present law by abandoning the limiting concept of the 'transaction of business.' The disqualification of the subsection embraces any participation on behalf of the Government in a matter in which the employee has an outside financial interest, even though his participation does not involve the transaction of business. Section 208 also reaches further than present law by requiring the disqualification of an employee from participation in matters in which has spouse, child, or persons with whom he has business connections have an interest. The bill, as it came before the committee, makes no distinction between minor children and those who have attained a majority. The committee believes that only the interest of a minor child should serve to disqualify the employee and has amended section 208 (a) accordingly.

"Subsection (a) at one point speaks in terms of an employee's disqualifying connection with a 'business organization,' thus leaving open the implication that he would remain eligible to act for the Government in a matter involving a nonprofit organization with which he is connected. A great number of universities, foundations, nonprofit research entities, and other similar organizations today are engaged in work for the Government. Conflicts of interest may arise in relation to them just as in the case of the ordinary business for profit. The committee therefore has deleted the word 'business' from the subsection to make clear that improper dealing by a Government employee in connection with nonprofit organizations is also prescribed [sic].

"Subsection (b) adopts a de minimis rule authorizing an agency waiver of an employee's disqualifying interest of insignificant proportions either on an ad hoc basis or pursuant to a general agency regulation.

"Section 208 establishes maximum penalties for its violation of a $10,000 fine, imprisonment for 2 years, or both.

"Section 209. Salary of Government officials and employees payable only by United States

"Section 209 is similar to title 18, United States Code, section 1914. The latter prohibits a Government employee from receiving any salary in connection with his Government services from a private source. Subsection (a) of section 209 would reenact this prohibition in substance, and, in addition, would make it an offense for anyone to make a payment to a Government employee the receipt of which would violate the section.

"The present statute's ban on the receipt of private payments 'in connection with' an employee's Government services is replaced in section 209 (a) with a ban on the receipt of such payments 'as compensation for' such services. The new language is more precise in expressing what is clearly intended by the present broad phrase.

"Subsection (b) is a declaration that a Government employee covered by subsection (a) is not thereby prevented from continuing to participate in a bona fide pension or other welfare plan maintained by a former employer."

DISCUSSION

The extent, if any, to which Mr. Connor may be required in the course of service as Secretary of Commerce to participate in official action with regard to matters in which he may have some financial

interest is not known. For purposes of this memorandum, it will be assumed that some occasions may arise on which such a requirement would be confronted. It is the purpose of this discussion to consider the probable applicability of the provisions of law quoted above to Mr. Connor's action as Secretary on such occasions.

A. Interest in corporate share capital

As shown above, new section 208 (a) of title 18 in some respects has wider application than former section 434 of that title. However, in the following respects new section 208 by its express terms is of distinctly more narrowly circumscribed applicability:

(1) It applies only to official action taken by an executive officer personally, as distinguished from official action taken by subordinate officers or employees for which the superior officer must bear official responsibility; (2) It applies only to action of a substantial character;

(3) It applies only to action taken with respect to a "particular" matter, as distinguished from action taken for the formulation of general rules or principles for executive or administrative action;

(4) It applies only with respect to a financial interest in a “particular matter," as distinguished from a more general financial interest in the "profits or contracts" of a corporation;

(5) It is not specifically made applicable as to indirect financial interests; (6) It applies only with respect to a financial interest which is known by an executive officer to exist, presumably at the time at which he takes action upon the particular matter in which such interest exists; and

(7) It contains explicit provision for the exemption of executive officers from the prohibitions contained therein.

Clearly, present section 208 (a) does not prohibit (1) the mere possession of any financial interest by an executive officer or by any person having the described family or business relationship to him, or (2) the holding of executive office by any person while he or any other such person possesses a financial interest in a business enterprise. Instead, it is directed at the taking of official action by an executive officer "personally and substantially" with respect to some "particular matter" (including any of the kinds specifically listed) at a time when he knows that he (or his spouse, minor child, or any person of any of the other categories expressly described) has a "financial interest" in that matter.

The statement of facts given above indicates that under the terms of the proposed trust agreement Mr. Connor would hold knowingly at the beginning of his term of office as Secretary of Commerce a beneficial interest in (but not legal title to) a substantial number of shares of Merck common stock, and in a much smaller number of shares of common stock of General Motors Corp. and General Foods Corp., and that he then would be aware of the existence of equitable interests of Mrs. Connor and their daughter in additional shares of Merck common stock. Until July 15, 1965, Mr. Connor also would hold knowingly under the terms of the custody agreement described above legal title to the Merck stock purchased by him in December 1964. Assuming compliance with the terms of the trust agreement by all parties thereto, Mr. Connor's knowledge concerning the identity of the assets constituting the corpus of the trust would diminish thereafter with the passage of time.

The requirement of a showing of financial interest in a "particular matter" as to which a corporation may be concerned, as distinguished from the "profits or contracts" of the corporation, raises the question whether stock ownership in a corporation will ever suffice to establish the existence of the financial interest to which section 208(a) is directed. Almost certainly, additional evidence will be required to show that the executive officer concerned (or a person of one of the described classes) has a financial interest in the "particular matter" in which he takes action. Thus, it may be necessary in each instance to demonstrate that the "particular matter" is of such financial consequence to the cor

poration concerned as to have an obvious and appreciable impact upon the financial condition of the officer who acts upon that matter (or of another person of one of the described classes).

Section 208 (a) does not specify, and the committee reports do not affirmatively indicate, whether the disqualifying financial interest includes (1) equitable as well as legal interests, or (2) indirect as well as direct interests. The absenceof the words "directly or indirectly," which were used in former section 434 to characterize the forbidden financial interest, suggests that new section 208(a) was not intended to reach indirect financial interests. From this it might be urged that the interest of Mr. Connor (or his wife or daughter) in any particular matter involving one of the companies in which he held shares before his appointment as Secretary would be too indirect or remote to preclude his taking of official action with respect to that matter.

For these reasons, no advance determination can be made in general terms, upon the basis of shareholdings alone, as to the probable effect of section 208(a) upon Mr. Connor's future service as Secretary of Commerce. Such a determination can be made only with respect to the circumstances of each "particular matter" which may arise in the course of his service.

Whatever the precise import of section 208(a) may be in that regard, its application is limited by the exceptions made by new subsection 208(b).

Clause (1) of subsection 208(b) prescribes a procedure whereby an executive officer, when confronted with a requirement to participate "personally and substantially" in any "particular matter" in which he (or any person of any of the described classes) has a financial interest, may disclose that interest to "the Government official responsible" for his appointment, and receive from that official an advance determination of the question whether that interest is "so substantial as to be deemed likely to affect the integrity of the services which the Government may expect from such officer."

If an advance determination is given to the effect that his interest is not of a kind likely to impair the integrity of his service, the officer concerned may participate in the particular matter as to which the determination was made without violation of the prohibition contained in section 208(a). Clause (1) contains no specification of any criteria or standards which are to be applied in the making of such determinations. There is no provision for any review of a determination so made, or for any disclosure of the basis upon which any such determination is made. Accordingly, the Congress has conferred upon Government officials who are entitled to make those determinations a broad area of discretion within which such determinations may be made.

Clause (2) of subsection 208(b) provides that the prohibitions of section 208 (a) are not applicable as to financial interests of kinds which have been exempted "by general rule or regulation published in the Federal Register * as being too remote or to inconsequential to affect the integrity of Government officers' or employees' services." No such general rule or regulation pertinent to the present case has been found. However, the terms of that clause demonstrate a congressional intent to disregard “remote” or “inconsequential" financial interest which tends to support the view that the interest of an executive officer (or of a person of any of the other described classes) in shares of a corporation in some cases might be regarded as too remote or insignificant to require the application of the prohibition of section 208(a) to official action taken by the officer as to a particular matter concerning that corporation.

B. Outside Compensation for Services

As noted above, Mr. Connor will be entitled in the future to receive from Merck a retirement annuity based upon services rendered to the company before his appointment as Secretary of Commerce. Quite clearly such an annuity would not be received as "compensation for his services as an officer *** of the executive branch" of the Government within the meaning of section 209(a) of title 18, United States Code, quoted above. Moreover, subsection (b) of section 209 expressly precludes the application of the prohibitions contained in that section to participation in a bona fide retirement plan maintained by a former employer.