The Qualified Trust Program (TXT)


The
Qualified
Trust
Program



U.S. Office of Government Ethics
www.usoge.gov



This booklet provides an overview of the qualified trust program. It contains
answers to some questions frequently asked by employees who are considering
creating a trust because of potential conflicts of interest. This booklet does
not cover every issue that may arise, and it is not a substitute for counseling.
For specific advice about your situation, you should contact your agency’s
Designated Agency Ethics Official (DAEO).


The Qualified Trust Program

Entering Government service may raise issues that you did not have to think
about when you worked in the private sector. For example, certain financial
holdings, like stocks, might create conflicts of interest. Potential conflicts
of interest arise when a Government employee’s official duties would affect his
financial interests or affiliations. There are a number of ways to resolve a
potential conflict of interest. Usually, the conflicting interest can be
divested or the employee can simply avoid becoming involved in the Government
matter that would affect his financial interest. Sometimes, an employee can get
a waiver of the conflict of interest.

Another way to address conflicts of interest is to put your assets in a special
trust that is created according to guidelines established by Congress. This type
of trust is generally known as a qualified trust. When you establish a qualified
trust, you give up the management of your assets to an independent trustee, who
makes investment decisions for your benefit without your knowledge. In this
situation, any potential conflicts of interest are resolved because you are not
involved in managing, or have any knowledge of, your assets.


What are the advantages of establishing a qualified trust?

A qualified trust allows you to avoid conflicts of interest while alleviating
the responsibility of managing your assets during Government service. By turning
over the management of your assets to an independent trustee, a qualified trust
generally will allow you to be fully invested in the market without worrying
about conflicts of interest.

In addition, a qualified trust may help you avoid undue public and media
scrutiny. The qualified trust program has gained wide public acceptance since it
was created almost 30 years ago.


Is establishing a qualified trust always the best option?

A qualified trust might not be appropriate when other less costly and less
complicated solutions, like obtaining a waiver or divesting an asset, are
available. Qualified trusts are generally not good alternatives for employees
with only a few moderate holdings or whose Government duties are narrowly
focused on a specific industry sector. For example, a Government employee who
works for an agency that regulates banks might find it easier and more
cost-effective to divest his holdings in bank stocks rather than create a
qualified trust. Conversely, an employee whose duties may affect a wide variety
of industry sectors, such as an employee of the Department of Defense, may find
that a qualified trust is useful.

A person who is uncomfortable with turning over all investment decisions to
someone else might not find a qualified trust a feasible solution.


Are all types of qualified trusts the same?

There are two different types of qualified trusts. One or the other may be more
appropriate for your financial situation. A blind trust requires you to
relinquish control of your assets to an independent trustee, who manages the
assets in the trust without your knowledge. Any asset initially placed in the
trust continues to pose a potential conflict of interest until it has been sold
or reduced to a value less than $1,000. The new assets purchased by the trustee
will not be disclosed to you, so they will not pose a conflict. This type of
trust works well for an employee who does not have assets that pose an immediate
conflict and has a portfolio that holds a relatively few, large holdings.

A diversified trust holds a portfolio of marketable securities that is so
diversified that it does not pose a conflict of interest because no specific
action can significantly impact the overall value of the portfolio. No single
asset in the trust may be more than 5% of the total portfolio, and no more than
20% of the portfolio may be concentrated in any particular economic geographic
or industrial sector. An asset that poses a significant conflict with your
duties also cannot be put in the initial trust portfolio. A diversified trust
generally is suitable for employees who hold a large number of individual stocks
and bonds.

In the case of either a blind or diversified trust, you may choose to place all
or just some of your assets in the trust. Of course, assets not in the trust
must be monitored for potential conflicts of interest.
In addition, in some cases an employee may create a "hybrid" trust - a single
qualified trust that has both a "blind" portfolio and a "diversified" portfolio.


Who can be the trustee of my qualified trust?

The trustee of your trust must be completely independent and must be approved by
the Director of the Office of Government Ethics (OGE).

An independent trustee cannot be affiliated with, associated with, related to or
subject to the control or influence of anyone who has a beneficial interest in
the trust. The trustee cannot be a current or former investment advisor,
partner, accountant, attorney, relative or any other individual. OGE regulations
require that the trustee be a financial institution, such as a bank or trust
company. Generally, a financial institution will be considered independent if
you or your family has no relationship with it other than savings, checking or
other types of similar accounts.

Once you have decided to establish a trust, you will need to find an institution
to serve as independent trustee. When interviewing a trustee, you may
communicate your overall investment objectives for the portfolio, but you may
not communicate specific directions about how to construct or manage the
portfolio.

Once the trust is certified by OGE, communication between you and the trustee is
very limited. For example, you and the trustee are prohibited from discussing
asset management, trust holdings or trust administration. Of course, you are
permitted to request cash distributions, and you will receive periodic reports
about the overall performance of your trust.


If my current investment advisor can’t serve as my independent trustee, how can
I find an appropriate trustee?

Any trust company or large financial institution with a trust department should
be able to help you create a qualified trust. You may want to contact several of
these organizations to compare portfolio management, costs and other pertinent
information. Also, it is very important that the company you choose be
considered independent. If you need further information about selecting an
appropriate trustee, OGE will be glad to assist you.


How do I establish a blind or diversified trust?

First, you should talk to your DAEO to discuss the appropriate action to resolve
any potential conflict of interest. If a qualified trust is your preferred
method for resolving the conflict, you should then contact OGE. OGE will work
with you or your representative to set up the trust.


Where can I find more information about the qualified trust program?

OGE has detailed information about the qualified trust program on its website
(www.usoge.gov). Included on the website are model trust agreements that will be
used in the administration of the trust.

You also may want to look at OGE’s regulations on qualified trusts at 5 C.F.R. §
2634, Subpart D, which can be reviewed on the OGE website. For further
information, you may contact OGE at 202-482-9300.