My spouse works in the financial sector and is subject to compliance restrictions on his investments in the stock market. Recently the company expanded those compliance restrictions to spouses and immediate family members! I own a lot of individual stocks and funds that are subject to the restrictions and would incur capital gains taxes if forced to sell my holdings. Help!
Employees in the financial sector, and in some law firms, have access to confidential, insider information. As a result, they are subject to restrictions on trading in certain market sectors. Some companies are allowing their employees and their spouses to place their assets in what is called a “blind trust.”
A blind trust does not have any set or specific meaning in the private sector. In the public sector, a blind trust — besides alluding to the placement of unquestioned faith in someone without basis or investigation — is “a financial arrangement in which a person in public office gives the administration of private business interests to an independent trust in order to prevent conflict of interest. Under the trust, the owner does not know how the assets are managed.” It has been used in the public sector as a device that serves as a repository to hold investments of a federal government official and even the official’s spouse and dependent children for the purpose of avoiding an actual or potential conflict of interest by virtue of the official’s government position. Previous American presidents including Lyndon Johnson, Jimmy Carter, Ronald Reagan, both George Bushes, Bill Clinton, and Barack Obama, and even presidential nominee Mitt Romney and his wife, Anne, during his 2012 campaign, have all used some form of blind trust or other asset investment vehicle over which they had no control or knowledge.
Legislation from before and since the 2008 financial crisis caused financial firms to make a concerted effort to avoid any appearances of impropriety. As a result of Dodd-Frank and other laws, firms in the financial sector have increasingly tightened their compliance restrictions on employees and their spouses. Many clients who work for investment banks or other financial institutions — and their spouses — have been placed under increasing restrictions on what investments they can and cannot hold, sometimes to the point of being only permitted to hold tax-free municipal bonds and non-sector based mutual funds. Sector-based mutual funds and ETF’s are more commonly placed “off limits” as a global precaution to prevent against any appearance of impropriety, even for employees who do not have access to “inside information” as part of the scope of their job responsibilities. These restrictions are likely to remain regardless of whether Dodd-Frank and other legislation is repealed or remains.
Although not necessarily applicable to the deployment of blind trusts in the private sector, the use of blind trusts in relation to government positions is instructive. The so-called “blind trust” has its origins in the Ethics in Government Act 1978, legislation passed in the wake of the Nixon Watergate scandal and the Saturday Night Massacre (Nixon’s dismissal of independent special prosecutor Archibald Cox). It imposed restrictions on public officials’ ability to lobby for a set period after leaving public office and created the Office of Independent Counsel, which oversees investigating government officials. The Independent Counsel position can be used by Congress or the Attorney General to investigate allegations of any misconduct against government officials and higher-ups in presidential election campaigns.
The act is intended to protect government officials from improprieties or the appearance of impropriety given the official’s access to confidential information from senate hearings and legislation that could impact and benefit their own individual stock and bond prices. Compliance for a government official requires certification approval by a Senate Committee.
Similar to government, there are no hard and fast rules of the exact provisions a blind trust must include in order to receive approval in the private sector, but some of the same criteria or features are advisable. One, there should be an “independent trustee” who will provide a certification of independence, stating that they will adhere to the restrictions in the trust and not disclose the nature or extent of individual investments to the employee, his spouse, or children. There should be a disclosure of the trustee’s relationship to the employee, and ideally the trustee should not be related by blood or marriage to the “Grantor” (the person subject to compliance restrictions who is placing her or his assets in the blind trust). The trust should expressly state that its primary purpose is to entrust to the independent trustee “decisions as to when and to what extent the original assets of the trust are to be sold or disposed of and in what investments the proceeds of sale are to be reinvested, without any participation in, or knowledge of, such decisions by any interested person.” The trust can include provisions that trigger its termination in its entirety, or the automatic termination of the blind trust provisions shielding the grantor from the information about its contents upon cessation of the grantor or his spouse’s employment in the financial sector that precipitated the compliance restrictions in the first place.
If you already are or expect to be subject to compliance restrictions by virtue of your or your spouse’s employment, you should consider getting the company’s approval to transfer your assets to a blind trust as a way to protect your investments.
Alison Arden Besunder is the founding attorney of the law firm of Arden Besunder P.C., Visit her website, www.besun
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