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Trust Law/Level VI · Protection/6.3 Fraud, ethics and limits/Lesson 6

Blind trusts for officials and executives

How the US Ethics in Government Act’s qualified blind trust works for federal officials, how it differs from divestiture, and how executives’ trading plans differ again.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. The cheapest conflict fix for most federal employees is holding diversified mutual funds, exempt from §208 disqualification under 5 C.F.R. §2640.201, plus small public holdings within the $15,000 de minimis of §2640.202. Catch: each exemption has conditions; confirm with an ethics official.
  2. Divest under an OGE certificate of divestiture and buy permitted property, such as Treasuries or approved diversified funds, within 60 days to defer capital gains (IRC §1043). Catch: the gain is deferred through lower basis, not forgiven.
  3. A qualified blind trust is the costliest route: OGE certification plus an independent professional trustee (5 U.S.C. §13104(f)). Catch: original assets stay conflicts until sold or under $1,000, and knowing breaches of the wall risk civil penalties up to $10,000.
  4. Executives can trade on a good-faith Rule 10b5-1 plan adopted without material nonpublic information. Catch: directors and officers wait the later of 90 days or two business days after quarterly results, capped at 120 days; most others wait 30 days.

Materials5 U.S.C. §13104(f), on qualified blind trusts, and 5 C.F.R. part 2634 subpart D, free on law.cornell.edu and ecfr.govThe Office of Government Ethics page on qualified trusts and its model trust documents, free on oge.govA public financial disclosure report of a federal official, if you are reading one

Wonder

  1. How can an official avoid conflicts over investments they do not know about?
  2. Why does a qualified blind trust not remove conflicts over the assets first put into it?
  3. Why might an official sell assets instead of using a blind trust?

Explore

  1. Federal conflict of interest law bars executive branch employees from taking part in matters that affect their own financial interests (18 U.S.C. §208). The Ethics in Government Act of 1978 created the ‘qualified blind trust’ as one way to manage this. The rules are now at 5 U.S.C. §13104(f), after a 2022 recodification, and for the executive branch in 5 C.F.R. part 2634 subpart D. The Office of Government Ethics (OGE) must certify such a trust; a trust merely called ‘blind’ does not get the same treatment.
  2. The trustee must be a financial institution, attorney, certified public accountant, broker or investment adviser who is independent of the official and other interested parties, is not their relative and has not been their employee or business partner. The trustee manages the assets without consulting them. Communication is limited: apart from requests for cash distributions, it must be in writing and concern only matters such as the official’s general financial needs, for example an interest in income or long-term growth, not particular holdings.
  3. The official receives no report on holdings, only quarterly figures for total cash value or net income or loss, and information needed for tax returns. Assets the official places in the trust remain a financial interest for conflict of interest purposes until the trustee reports that each has been sold or is worth less than $1,000. New investments the trustee buys are not disclosed, so they do not create conflicts. A related form, the qualified diversified trust, starts with a well-diversified portfolio of readily marketable securities.
  4. The statute sets penalties for breaching the wall. A trustee must not disclose prohibited information, and the official must not seek or receive it. The Attorney General may sue for a civil penalty of up to $10,000 for a knowing and wilful violation or up to $5,000 for a negligent one, as stated in the statute. OGE may also decline to treat a trust as qualified if its terms or administration fall short. Officials must consult OGE before creating one.
  5. Divestiture is the main alternative. An official sells assets that create conflicts, often reinvesting in holdings such as Treasury securities or diversified funds. Under IRC §1043, an official who sells under a certificate of divestiture from OGE (or the President or the Judicial Conference) and buys ‘permitted property’, meaning US government obligations or OGE-approved diversified funds, within 60 days can defer capital gains tax. The gain is deferred, not forgiven: it reduces the basis of the new property.
  6. Private sector executives face a different problem: insider trading law. Many use trading plans under SEC Rule 10b5-1, which the SEC amended in December 2022 to add conditions such as a cooling-off period of 90 to 120 days for directors and officers before trades begin. Blind trusts and divestiture each involve costs and trade-offs, and fees vary by trustee and complexity. This lesson explains how these tools work; it does not suggest using any of them.

Key facts

  • The Ethics in Government Act of 1978 created the qualified blind trust; its rules are now at 5 U.S.C. §13104(f) and, for the executive branch, 5 C.F.R. part 2634 subpart D.
  • A qualified blind trustee must be an independent financial institution, attorney, CPA, broker or investment adviser, not related to or associated with any interested party.
  • Communication between trustee and official is limited to written messages on general financial needs, apart from requests for cash distributions.
  • Assets the official places in the trust remain a financial interest until the trustee reports they were sold or are worth less than $1,000.
  • Under IRC §1043, an official who divests under a certificate of divestiture and buys permitted property within 60 days can defer capital gains tax.
  • SEC Rule 10b5-1 trading plans, amended in December 2022, are a separate securities law tool for executives, not a form of blind trust.

Exercise nine, six, three, one

9CollectList up to 9 requirements or features of a qualified blind trust or a divestiture from this lesson or the statute or OGE materials you are reading (some sources give fewer), such as who may be trustee, what may be communicated and what the official is told.
6ClusterSort them into 6 categories: trustee qualifications, communication limits, reports to the official, treatment of original assets, penalties, and divestiture rules.
3DistillReduce the 6 categories to 3 groups: rules that keep the official uninformed, rules that keep the trustee independent, and rules that deal with assets the official already knows about.
1CrystallizeWrite 1 sentence explaining, in your own words, why a qualified blind trust removes conflicts over new investments but not over the assets first placed in it.

Fact check

Dates, figures and claims checked against the published sources listed below.

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