Executive Branch Qualified Trusts, 39143-39150 [2012-15998]

Agencies

• Office of Government Ethics

[Federal Register Volume 77, Number 127 (Monday, July 2, 2012)]
[Rules and Regulations]
[Pages 39143-39150]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15998]



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Federal Register / Vol. 77, No. 127 / Monday, July 2, 2012 / Rules 
and Regulations

[[Page 39143]]



OFFICE OF GOVERNMENT ETHICS

5 CFR Part 2634

RIN 3209-AA00


Executive Branch Qualified Trusts

AGENCY: Office of Government Ethics (OGE).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Office of Government Ethics is issuing a final rule to 
amend the executive branch regulation regarding qualified trusts. These 
final rule amendments make a few minor substantive changes, but 
primarily put the regulation in a more logical order, make it more 
readable, and eliminate redundant provisions.

DATES: Effective Date: August 1, 2012.

FOR FURTHER INFORMATION CONTACT: Deborah J. Bortot, Associate Director 
for Nominee Financial Disclosure, Office of General Counsel and Legal 
Policy, Office of Government Ethics; telephone: 202-482-9300; TYY: 800-
877-8339; FAX: 202-482-9237.

SUPPLEMENTARY INFORMATION:

I. Background: History of the Executive Branch Qualified Trusts Program

    The Ethics in Government Act established standards for the 
creation, composition, and administration of two types of qualified 
trusts for executive branch officials: qualified blind trusts and 
qualified diversified trusts. The purpose of these qualified trusts is 
to reduce the potential for conflicts of interest by generally 
preventing an employee from knowing the identity and nature of his 
financial interests.
    With a qualified blind trust, the independent trustee will, over 
time, sell or dispose of some or all of the initial assets placed in 
the trust. The executive branch employee will be blind with regard to 
the assets added by the independent trustee. The most significant 
objective to be achieved through the use of a qualified blind trust is 
the lack of knowledge, or actual ``blindness,'' by an executive branch 
employee with respect to the holdings in his trust.
    The same goal may be achieved through the use of a diversified 
trust, if that trust holds securities from different issuers in 
different economic sectors, and if the trust's interest in any one 
issuer and sector is limited. Under these conditions, it is unlikely 
that official actions taken by the executive branch employee who holds 
a beneficial interest in the trust would affect individual securities 
or sectors to such a degree that the overall value of the trust's 
portfolio would be materially enhanced. Additionally, as with the blind 
trust, the employee is not told what assets the independent trustee 
adds to the trust.
    OGE has implemented the qualified trusts provisions for the 
executive branch in subparts D and E of 5 CFR part 2634. See 57 FR 
11800-11830, at 11814-11821 (Apr. 7, 1992).

II. Analysis of Comments and Amendments

    The proposed rule provided a 60-day comment period. See 76 FR 
60757-60765, at 60757 (Sept. 30, 2011). OGE received no comments on its 
proposed revisions to 5 CFR part 2634, subparts D and E. After 
consulting with the Office of Personnel Management and the Department 
of Justice in accordance with section 402(b) of the Ethics in 
Government Act, OGE is publishing this final rule with no changes from 
the proposed rule.
    OGE is amending cross-references in Sec. Sec.  2634.310(b)(1), 
2634.702(a)-(b), and 2634.907(i)(2)(i) and Appendices A and B to Part 
2634. These technical cross-reference amendments are included in this 
final rulemaking.

III. Matters of Regulatory Procedure

Regulatory Flexibility Act

    As Acting Director of OGE, I certify under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) that this final rule will not have 
a significant economic impact on a substantial number of small entities 
because it primarily affects Federal executive branch employees.

Paperwork Reduction Act

    No additional clearance is needed under the Paperwork Reduction Act 
(44 U.S.C. chapter 35) for these final rule amendments, because they 
would not affect the qualified trusts information collection 
requirements in the regulation that are currently approved under OMB 
paperwork control number 3209-0007.

Unfunded Mandates Reform Act

    For purposes of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
chapter 25, subchapter II), this final amendatory rule will not 
significantly or uniquely affect small governments and will not result 
in increased expenditures by State, local, and tribal governments, in 
the aggregate, or by the private sector, of $100 million or more (as 
adjusted for inflation) in any one year.

Congressional Review Act

    The Office of Government Ethics has determined that this final 
rulemaking involves a nonmajor rule under the Congressional Review Act 
(5 U.S.C. chapter 8) and will submit a report thereon to the U.S. 
Senate, House of Representatives and Government Accountability Office 
in accordance with that law at the same time this rulemaking document 
is sent to the Office of the Federal Register for publication in the 
Federal Register.

Executive Order 12866

    In promulgating this final rulemaking, OGE has adhered to the 
regulatory philosophy and the applicable principles of regulation set 
forth in section 1 of Executive Order 12866, Regulatory Planning and 
Review. These final amendments have also been reviewed by the Office of 
Management and Budget under that Executive order. Moreover, in 
accordance with section 6(a)(3)(B) of E.O. 12866, the preamble to this 
final rulemaking, which revises 5 CFR part 2634, notes the legal basis 
and benefits of, as well as the need for, the final regulatory action. 
There should be no appreciable increase in costs to OGE or the 
executive branch of the Federal Government in administering this 
amended regulation, since the revisions only make a few minor 
substantive changes as well as reorganize and improve OGE's qualified 
trusts regulatory provisions under the Ethics Act. Finally, this final 
rulemaking is not

[[Page 39144]]

economically significant under the Executive order and will not 
interfere with State, local or tribal governments.

Executive Order 12988

    As Acting Director of the Office of Government Ethics, I have 
reviewed this final amendatory regulation in light of section 3 of 
Executive Order 12988, Civil Justice Reform, and certify that it meets 
the applicable standards provided therein.

List of Subjects in 5 CFR Part 2634

    Certificates of divestiture, Conflicts of interest, Financial 
disclosure, Government employees, Penalties, Privacy, Reporting and 
recordkeeping requirements, Trusts and trustees.

     Approved: June 25, 2012.
Don W. Fox,
Acting Director, Office of Government Ethics.

    Accordingly, for the reasons set forth in the preamble, the Office 
of Government Ethics is amending part 2634 of subchapter B of chapter 
XVI of title 5 of the Code of Federal Regulations, as follows:

PART 2634--EXECUTIVE BRANCH FINANCIAL DISCLOSURE, QUALIFIED TRUSTS, 
AND CERTIFICATES OF DIVESTITURE

0
1. The authority citation for part 2634 continues to read as follows:

    Authority: 5 U.S.C. App. (Ethics in Government Act of 1978); 26 
U.S.C. 1043; Pub. L. 101-410, 104 Stat. 890, 28 U.S.C. 2461 note 
(Federal Civil Penalties Inflation Adjustment Act of 1990), as 
amended by Sec. 31001, Pub. L. 104-134, 110 Stat. 1321 (Debt 
Collection Improvement Act of 1996); E.O. 12674, 54 FR 15159, 3 CFR, 
1989 Comp., p. 215, as modified by E.O. 12731, 55 FR 42547, 3 CFR, 
1990 Comp., p. 306.

Subpart C--Contents of Public Reports


Sec.  2634.310  [Amended]

0
2. Section 2634.310(b)(1) is amended by removing the cross-references 
to ``Sec.  2634.403'' and ``Sec.  2634.404'' in the first sentence and 
replacing both cross-references with ``Sec.  2634.402''.

0
3. Subparts D and E are revised to read as follows:
Subpart D--Qualified Trusts
Sec.
2634.401 Overview.
2634.402 Definitions.
2634.403 General description of trusts.
2634.404 Summary of procedures for creation of a qualified trust.
2634.405 Standards for becoming an independent trustee or other 
fiduciary.
2634.406 Initial portfolio.
2634.407 Certification of qualified trust by the Office of 
Government Ethics.
2634.408 Administration of a qualified trust.
2634.409 Pre-existing trusts.
2634.410 Dissolution.
2634.411 Reporting on financial disclosure reports.
2634.412 Sanctions and enforcement.
2634.413 Public access.
2634.414 OMB control number.
Subpart E--Revocation of Trust Certificates and Trustee Approvals
Sec.
2634.501 Purpose and scope.
2634.502 Definitions.
2634.503 Determinations.

Subpart D--Qualified Trusts


Sec.  2634.401  Overview.

    (a) Purpose. The Ethics in Government Act of 1978 created two types 
of qualified trusts, the qualified blind trust and the qualified 
diversified trust, that may be used by employees to reduce real or 
apparent conflicts of interest. The primary purpose of an executive 
branch qualified trust is to confer on an independent trustee and any 
other designated fiduciary the sole responsibility to administer the 
trust and to manage trust assets without participation by, or the 
knowledge of, any interested party or any representative of an 
interested party. This responsibility includes the duty to decide 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. Because the requirements set forth in the Ethics in 
Government Act and this regulation assure true ``blindness,'' employees 
who have a qualified trust cannot be influenced in the performance of 
their official duties by their financial interests in the trust assets. 
Their official actions, under these circumstances, should be free from 
collateral attack arising out of real or apparent conflicts of 
interest.
    (b) Scope. Two characteristics of the qualified trust assure that 
true ``blindness'' exists: the independence of the trustee and the 
restriction on communications between the independent trustee and the 
interested parties. In order to serve as a trustee for an executive 
branch qualified trust, an entity must meet the strict requirements for 
independence set forth in the Ethics in Government Act and this 
regulation. Restrictions on communications also reinforce the 
independence of the trustee from the interested parties. During both 
the establishment of the trust and the administration of the trust, 
communications are limited to certain reports that are required by the 
Act and to written communications that are pre-screened by the Office 
of Government Ethics. No other communications, even about matters not 
connected to the trust, are permitted between the independent trustee 
and the interested parties.


Sec.  2634.402  Definitions.

    As used in this subpart:
    Director means the Director of the Office of Government Ethics.
    Employee means an officer or employee of the executive branch of 
the United States.
    Independent trustee means a trustee who meets the requirements of 
Sec.  2634.405 of this subpart and who is approved by the Director 
under this subpart.
    Interested party means an employee, the employee's spouse, and any 
minor or dependent child, in any case in which the employee, spouse, or 
minor or dependent child has a beneficial interest in the principal or 
income of a trust proposed for certification under this subpart or 
certified under this subpart.
    Qualified blind trust means a trust in which the employee, his 
spouse, or his minor or dependent child has a beneficial interest and 
which:
    (1) Is certified pursuant to Sec.  2634.407 by the Director;
    (2) Has a portfolio as specified in Sec.  2634.406(a);
    (3) Follows the model trust document prepared by the Office of 
Government Ethics; and
    (4) Has an independent trustee as defined in Sec.  2634.405.
    Qualified diversified trust means a trust in which the employee, 
his spouse, or his minor or dependent child has a beneficial interest 
and which:
    (1) Is certified pursuant to Sec.  2634.407 by the Director;
    (2) Has a portfolio as specified in Sec.  2634.406(b);
    (3) Follows the model trust document prepared by the Office of 
Government Ethics; and
    (4) Has an independent trustee as defined in Sec.  2634.405.
    Qualified trust means a trust described in the Ethics in Government 
Act of 1978 and this regulation and certified by the Director under 
this subpart. There are two types of qualified trusts, the qualified 
blind trust and the qualified diversified trust.


Sec.  2634.403  General description of trusts.

    (a) Qualified blind trust. (1) The qualified blind trust is the 
most universally adaptable qualified trust. An interested party may put 
most types of assets (such as cash, stocks, bonds, mutual funds or real 
estate) into a qualified blind trust.
    (2) In the case of a qualified blind trust, 18 U.S.C. 208 and other 
Federal

[[Page 39145]]

conflict of interest statutes and regulations apply to the assets that 
an interested party transfers to the trust until such time as he or she 
is notified by the independent trustee that such asset has been 
disposed of or has a value of less than $1,000. Because the employee 
knows what assets he or she placed in the trust and there is no 
requirement that these assets be diversified, the possibility still 
exists that the employee could be influenced in the performance of 
official duties by those interests.
    (b) Qualified diversified trust. (1) An interested party may put 
only readily marketable securities into a qualified diversified trust. 
In addition, the portfolio must meet the diversification requirements 
of Sec.  2634.406(b)(2).
    (2) In the case of a qualified diversified trust, the conflict of 
interest laws do not apply to the assets that an interested party 
transfers to the trust. Because the assets that an interested party 
puts into this trust must meet the diversification requirements set 
forth in this regulation, the diversification achieves ``blindness'' 
with regard to the initial assets.
    (3) Special notice for Presidential appointees--(i) In general. In 
any case in which the establishment of a qualified diversified trust is 
contemplated with respect to an individual whose nomination is being 
considered by a Senate committee, that individual shall inform the 
committee of the intention to establish a qualified diversified trust 
at the time of filing a financial disclosure report with the committee. 
There is a section on the public financial disclosure form, the OGE 
Form 278, for the individual to indicate whether he or she intends to 
create a qualified diversified trust.
    (ii) Applicability. Paragraph (b)(3)(i) of this section is not 
applicable to members of the uniformed services or Foreign Service 
officers. The special notice requirement of this section shall not 
preclude an individual from seeking the certification of a qualified 
blind trust or qualified diversified trust after the Senate has given 
its advice and consent to a nomination.
    (c) Conflict of interest laws. In the case of each type of trust, 
the conflict of interest laws do not apply to the assets that the 
independent trustee or any other designated fiduciary adds to the 
trust.


Sec.  2634.404  Summary of procedures for creation of a qualified 
trust.

    (a) Consultation with the Office of Government Ethics. Any 
employee, spouse, or minor or dependent child (or that party's 
representative) who is interested in setting up a qualified blind or 
qualified diversified trust must contact the Office of Government 
Ethics prior to beginning the process of creating the trust. The Office 
of Government Ethics is the only entity that has the authority to 
certify a qualified trust. Because an interested party must propose, 
for the approval of the Office of Government Ethics, an entity to serve 
as the independent trustee, the Office of Government Ethics will 
explain the requirements that an entity must meet in order to qualify 
as an independent trustee. Such information is essential in order for 
the employee to interview entities for the position of independent 
trustee. The Office of Government Ethics will also explain the 
restrictions on the communications between the interested parties and 
the proposed trustee.
    (b) Selecting an independent trustee. After consulting with the 
Office of Government Ethics, the interested party may interview 
entities who meet the requirements of Sec.  2634.405(a) in order to 
find one to serve as an independent trustee. At an interview, the 
interested party may ask general questions about the institution, such 
as how long it has been in business, its policies and philosophy in 
managing assets, the types of clients it serves, its prior performance 
record, and the qualifications of the personnel who would be handling 
the trust. Because the purpose of a qualified trust is to give an 
independent trustee the sole responsibility to manage the trust assets 
without the interested party having any knowledge of the identity of 
the assets in the trust, the interested party may communicate his or 
her general financial interests and needs to any institution which he 
or she interviews. For example, the interested party may communicate a 
preference for maximizing income or long-term capital gain or for 
balancing safety of capital with growth. The interested party may not 
give more specific instructions to the proposed trustee, such as 
instructing it to maintain a specific allocation between stocks and 
bonds, or choosing stocks in a particular industry.
    (c) The proposed independent trustee. (1) The entity selected by an 
interested party as a possible trustee must contact the Office of 
Government Ethics to receive guidance on the qualified trust program. 
The Office of Government Ethics will ask the proposed trustee to submit 
a letter describing its past and current contacts, including banking 
and client relationships, with the employee, spouse, and minor or 
dependent children. The extent of these contacts will determine whether 
the proposed trustee is independent under the Act and this regulation.
    (2) In addition, an interested party may select an investment 
manager or other fiduciary. Other proposed fiduciaries selected by an 
interested party, such as an investment manager, must meet the 
independence requirements.
    (d) Approval of the independent trustee. If the Director determines 
that the proposed trustee meets the requirements of independence, the 
Director will approve, in writing, that entity as the trustee for the 
qualified trust.
    (e) Confidentiality agreement. If any person other than the 
independent trustee or designated fiduciary has access to information 
that must not be shared with an interested party or that party's 
representative, that person must file a Confidentiality Agreement with 
the Office of Government Ethics. Persons filing a Confidentiality 
Agreement must certify that they will not make prohibited contacts with 
an interested party or that party's representative.
    (f) Drafting the trust instrument. The representative of the 
interested party will use the model documents provided by the Office of 
Government Ethics to draft the trust instrument. There are two annexes 
to the model trust document: An annex describing any current, 
permissible banking or client relationships between any interested 
parties and the independent trustee or other fiduciaries and an annex 
listing the initial assets that the interested party transfers to the 
trust. Any deviations from the model trust documents must be approved 
by the Director.
    (g) Certification of the trust. The representative then presents 
the unexecuted trust instrument to the Office of Government Ethics for 
review. If the Director finds that the instrument conforms to one of 
the model documents, the Director will certify the qualified trust. 
After certification, the employee and the independent trustee will sign 
the trust instrument. They will submit a copy of the executed 
instrument to the Office of Government Ethics within 30 days of 
execution. The employee will then transfer the assets to the trust.

    Note to Paragraph (g): Existing qualified trusts approved under 
any State law or by the legislative or judicial branches of the 
Federal Government of the United States will not be recertified by 
the Director. Individuals with existing qualified trusts who are 
required to file a financial disclosure report upon entering the 
executive branch, becoming a nominee for a position appointed by the

[[Page 39146]]

President and subject to confirmation by the Senate, or becoming a 
candidate for President or Vice President must file a complete 
financial disclosure form that includes a full disclosure of items 
in the trust. After filing a complete form, the individual may 
establish a qualified trust under the policies and provisions of 
this rule.

Sec.  2634.405  Standards for becoming an independent trustee or other 
fiduciary.

    (a) Eligible entities. An interested party must select an entity 
that meets the requirements of this regulation to serve as an 
independent trustee or other fiduciary. The type of entity that is 
allowed to serve as an independent trustee is a financial institution, 
not more than 10 percent of which is owned or controlled by a single 
individual, which is:
    (1) A bank, as defined in 12 U.S.C. 1841(c); or
    (2) An investment adviser, as defined in 15 U.S.C. 80b-2(a)(11).

    Note to Paragraph (a): By the terms of paragraph (3)(A)(i) of 
section 102(f) of the Act, an individual who is an attorney, a 
certified public accountant, a broker, or an investment advisor is 
also eligible to serve as an independent trustee. However, 
experience of the Office of Government Ethics over the years 
dictates the necessity of limiting service as a trustee or other 
fiduciary to the financial institutions referred to in this 
paragraph, to maintain effective administration of trust 
arrangements and preserve confidence in the Federal qualified trust 
program. Accordingly, under its authority pursuant to paragraph 
(3)(D) of section 102(f) of the Act, the Office of Government Ethics 
will not approve proposed trustees or other fiduciaries who are not 
financial institutions, except in unusual cases where compelling 
necessity is demonstrated to the Director, in his or her sole 
discretion.

    (b) Orientation. After the interested party selects a proposed 
trustee, that proposed trustee should contact the Office of Government 
Ethics for an orientation about the qualified trust program.
    (c) Independence requirements. The Director shall determine that a 
proposed trustee is independent if:
    (1) The entity is independent of and unassociated with any 
interested party so that it cannot be controlled or influenced in the 
administration of the trust by any interested party;
    (2) The entity is not and has not been affiliated with any 
interested party, and is not a partner of, or involved in any joint 
venture or other investment or business with, any interested party; and
    (3) Any director, officer, or employee of such entity:
    (i) Is independent of and unassociated with any interested party so 
that such director, officer, or employee cannot be controlled or 
influenced in the administration of the trust by any interested party;
    (ii) Is not and has not been employed by any interested party, not 
served as a director, officer, or employee of any organization 
affiliated with any interested party, and is not and has not been a 
partner of, or involved in any joint venture or other investment with, 
any interested party; and
    (iii) Is not a relative of any interested party.
    (d) Required documents. In order to make this determination, the 
proposed trustee must submit the following documentation to the 
Director:
    (1) A letter describing its past and current contacts, including 
banking and client relationships, with the employee, spouse, or minor 
or dependent child; and
    (2) The Certificate of Independence, which must be executed in the 
form prescribed in appendix A to this part.
    (e) Determination. If the Director determines that the current 
relationships, if any, between the interested party and the independent 
trustee do not violate the independence requirements, these 
relationships will be disclosed in an annex to the trust instrument. No 
additional relationships with the independent trustee may be 
established unless they are approved by the Director.
    (f) Approval of the trustee. If the Director determines that the 
proposed trustee meets applicable requirements, the Office of 
Government Ethics will send the interested parties and their 
representatives a letter indicating its approval of a proposed trustee.
    (g) Revocation. The Director may revoke the approval of a trustee 
or any other designated fiduciary pursuant to the rules of subpart E of 
this part.
    (h) Adding fiduciaries. An independent trustee may employ or 
consult other entities, such as investment counsel, investment 
advisers, accountants, and tax preparers, to assist in any capacity to 
administer the trust or to manage and control the trust assets, if all 
of the following conditions are met:
    (1) When any interested party or any representative of an 
interested party learns about such employment or consultation, the 
person must sign the trust instrument as a party, subject to the prior 
approval of the Director;
    (2) Under all the facts and circumstances, the person is determined 
pursuant to the requirements for eligible entities under paragraphs (a) 
through (f) of this section to be independent of an interested party 
with respect to the trust arrangement;
    (3) The person is instructed by the independent trustee or other 
designated fiduciary not to disclose publicly or to any interested 
party information which might specifically identify current trust 
assets or those assets which have been sold or disposed of from trust 
holdings, other than information relating to the sale or disposition of 
original trust assets in the case of the blind trust; and
    (4) The person is instructed by the independent trustee or other 
designated fiduciary to have no direct communication with respect to 
the trust with any interested party or any representative of an 
interested party, and to make all indirect communications with respect 
to the trust only through the independent trustee, pursuant to Sec.  
2634.408(a).


Sec.  2634.406  Initial portfolio.

    (a) Qualified blind trust. (1) None of the assets initially placed 
in the portfolio of the blind trust shall include assets the holding of 
which by any interested party would be prohibited by the Act, by the 
implementing regulations, or by any other applicable Federal law, 
Executive order, or regulation.
    (2) Except as described in paragraph (a)(1) of this section, an 
interested party may put most types of assets (such as cash, stocks, 
bonds, mutual funds or real estate) into a qualified blind trust.
    (b) Qualified diversified trust. (1) The initial portfolio may not 
contain securities of entities having substantial activities in the 
employee's primary area of Federal responsibility. If requested by the 
Director, the designated agency ethics official for the employee's 
agency shall certify whether the proposed portfolio meets this 
standard.
    (2) The initial assets of a diversified trust shall comprise a 
widely diversified portfolio of readily marketable securities.
    (i) A portfolio will be widely diversified if:
    (A) The value of the securities concentrated in any particular or 
limited economic or geographic sector is no more than twenty percent of 
the total; and
    (B) The value of the securities of any single entity (other than 
the United States Government) is no more than five percent of the 
total.
    (ii) A security will be readily marketable if:
    (A) Daily price quotations for the security appear regularly in 
newspapers of general circulation; and
    (B) The trust holds the security in a quantity that does not unduly 
impair liquidity.

[[Page 39147]]

    (iii) The interested party or the party's representative shall 
provide the Director with a detailed list of the securities proposed 
for inclusion in the portfolio, specifying their fair market value and 
demonstrating that these securities meet the requirements of this 
paragraph. The Director will determine whether the initial assets of 
the trust proposed for certification comprise a widely diversified 
portfolio of readily marketable securities.
    (iv) The independent trustee shall not acquire additional 
securities in excess of the diversification standards.
    (c) Hybrid qualified trust. A qualified trust may contain both a 
blind portfolio of assets and a diversified portfolio of assets. The 
Office of Government Ethics refers to this arrangement as a hybrid 
qualified trust.


Sec.  2634.407  Certification of qualified trust by the Office of 
Government Ethics.

    (a) General. After the Director approves the independent trustee, 
the employee or a representative will prepare the trust instrument for 
review by the Director. The representative of the interested party will 
use the model documents provided by the Office of Government Ethics to 
draft the trust instrument. Any deviations from the model trust 
documents must be approved by the Director. No trust will be considered 
qualified for purposes of the Act until the Office of Government Ethics 
certifies the trust prior to execution.
    (b) Certification procedures. (1) After the Director has approved 
the trustee, the interested party or the party's representative must 
submit the following documents to the Office of Government Ethics for 
review:
    (i) A copy of the proposed, unexecuted trust instrument;
    (ii) A list of the assets which the employee, spouse, or minor or 
dependent child proposes to place in the trust; and
    (iii) In the case of a pre-existing trust as described in Sec.  
2634.409 of this subpart which the employee asks the Office of 
Government Ethics to certify, a copy of the pre-existing trust 
instrument and a list of that trust's assets categorized as to value in 
accordance with Sec.  2634.301(d).
    (2) In order to assure timely trust certification, the interested 
parties and their representatives shall be responsible for the 
expeditious submission to the Office of Government Ethics of all 
required documents and responses to requests for information.
    (3) The Director will indicate that he or she has certified the 
trust in a letter to the interested parties or their representatives. 
The interested party and the independent trustee may then execute the 
trust instrument.
    (4) Within thirty days after the trust is certified under this 
section by the Director, the interested party or that party's 
representative must file with the Director a copy of the executed trust 
instrument and all annexed schedules (other than those provisions which 
relate to the testamentary disposition of the trust assets), including 
a list of the assets which were transferred to the trust, categorized 
as to value of each asset in accordance with Sec.  2634.301(d).
    (5) Once a trust is classified as a qualified blind or qualified 
diversified trust in the manner discussed in this section, Sec.  
2634.310(b) applies less inclusive financial disclosure requirements to 
the trust assets.
    (c) Certification standard. A trust will be certified for purposes 
of this subpart only if:
    (1) It is established to the Director's satisfaction that the 
requirements of section 102(f) of the Act and this subpart have been 
met; and
    (2) The Director determines that approval of the trust arrangement 
as a qualified trust is appropriate to assure compliance with 
applicable laws and regulations.
    (d) Revocation. The Director may revoke certification of a trust 
pursuant to the rules of subpart E of this part.


Sec.  2634.408  Administration of a qualified trust.

    (a) General rules on communications between the independent 
fiduciaries and the interested parties. (1) There shall be no direct or 
indirect communications with respect to the qualified trust between an 
interested party or the party's representative and the independent 
trustee or any other designated fiduciary with respect to the trust 
unless:
    (i) In the case of the blind trust, the proposed communication is 
approved in advance by the Director and it relates to:
    (A) A distribution of cash or other unspecified assets of the 
trust;
    (B) The general financial interest and needs of the interested 
party including, but not limited to, a preference for maximizing income 
or long-term capital gain;
    (C) Notification to the independent trustee by the employee that 
the employee is prohibited by a subsequently applicable statute, 
Executive order, or regulation from holding an asset, and to direction 
to the independent trustee that the trust shall not hold that asset; or
    (D) Instructions to the independent trustee to sell all of an asset 
which was initially placed in the trust by an interested party, and 
which in the determination of the employee creates a real or apparent 
conflict due to duties the employee subsequently assumed (but nothing 
herein requires such instructions); or
    (ii) In the case of the diversified trust, the proposed 
communication is approved in advance by the Director and it relates to:
    (A) A distribution of cash or other unspecified assets of the 
trust;
    (B) The general financial interest and needs of the interested 
party including, but not limited to, a preference for maximizing income 
or long-term capital gain; or
    (C) Information, documents, and funds concerning income tax 
obligations arising from sources other than the property held in trust 
that are required by the independent trustee to enable him to file, on 
behalf of an interested party, the personal income tax returns and 
similar tax documents which may contain information relating to the 
trust.
    (2) The person initiating a communication approved under paragraphs 
(a)(1)(i) or (a)(1)(ii) of this section shall file a copy of the 
communication with the Director within five days of the date of its 
transmission.

    Note to Paragraph (a):  By the terms of paragraph (3)(C)(vi) of 
section 102(f) of the Act, communications which solely consist of 
requests for distributions of cash or other unspecified assets of 
the trust are not required to be in writing. Further, there is no 
statutory mechanism for pre-screening of proposed communications. 
However, experience of the Office of Government Ethics over the 
years dictates the necessity of prohibiting any oral communications 
between the trustee and an interested party with respect to the 
trust and pre-screening all proposed written communications, to 
prevent inadvertent prohibited communications and preserve 
confidence in the Federal qualified trust program. Accordingly, 
under its authority pursuant to paragraph (3)(D) of section 102(f) 
of the Act, the Office of Government Ethics will not approve 
proposed trust instruments that do not contain language conforming 
to this policy, except in unusual cases where compelling necessity 
is demonstrated to the Director, in his or her sole discretion.

    (b) Required reports from the independent trustee to the interested 
parties--(1) Quarterly reports. The independent trustee shall, without 
identifying specifically an asset or holding, report quarterly to the 
interested parties and their representatives the aggregate market value 
of the assets representing the interested party's interest in the 
trust. The independent trustee must follow the model document for this 
report and

[[Page 39148]]

shall file a copy of the report, within five days of the date of its 
transmission, with the Director.
    (2) Annual report. In the case of a qualified blind trust, the 
independent trustee shall, without identifying specifically an asset or 
holding, report annually to the interested parties and their 
representatives the aggregate amount of the trust's income attributable 
to the interested party's beneficial interest in the trust, categorized 
in accordance with Sec.  2634.302(b) to enable the employee to complete 
the public financial disclosure form. In the case of a qualified 
diversified trust, the independent trustee shall, without identifying 
specifically an asset or holding, report annually to the interested 
parties and their representatives the aggregate amount actually 
distributed from the trust to the interested party or applied for the 
party's benefit. Additionally, in the case of the blind trust, the 
independent trustee shall report on Schedule K-1 the net income or loss 
of the trust and any other information necessary to enable the 
interested party to complete an individual tax return. The independent 
trustee must follow the model document for each report and shall file a 
copy of the report, within five days of the date of its transmission, 
with the Director.
    (3) Report of sale of asset. In the case of the qualified blind 
trust, the independent trustee shall promptly notify the employee and 
the Director when any particular asset transferred to the trust by an 
interested party has been completely disposed of or when the value of 
that asset is reduced to less than $1,000. The independent trustee 
shall file a copy of the report, within five days of the date of its 
transmission, with the Director.
    (c) Communications regarding trust and beneficiary taxes. The Act 
establishes special tax filing procedures to be used by the independent 
trustee and the trust beneficiaries in order to maintain the 
substantive separation between trust beneficiaries and trust 
administrators.
    (1) Trust taxes. Because a trust is a separate entity distinct from 
its beneficiaries, an independent trustee must file an annual fiduciary 
tax return for the trust (IRS Form 1041). The independent trustee is 
prohibited from providing the interested parties and their 
representatives with a copy of the trust tax return.
    (2) Beneficiary taxes. The trust beneficiaries must report income 
received from the trust on their individual tax returns.
    (i) For beneficiaries of qualified blind trusts, the independent 
trustee sends a modified K-1 summarizing trust income in appropriate 
categories to enable the beneficiaries to file individual tax returns. 
The independent trustee is prohibited from providing the interested 
parties or their representatives with the identity of the assets.
    (ii) For beneficiaries of qualified diversified trusts, the Act 
requires the independent trustee to file the individual tax returns on 
behalf of the trust beneficiaries. The interested parties shall give 
the independent trustee a power of attorney to prepare and file, on 
their behalf, the personal income tax returns and similar tax documents 
which may contain information relating to the trust. Appropriate 
Internal Revenue Service power of attorney forms shall be used for this 
purpose. The beneficiaries must transmit to the trustee materials 
concerning taxable transactions and occurrences outside of the trust, 
pursuant to the requirements in each trust instrument which detail this 
procedure. This communication must be approved in advance by the 
Director in accordance with paragraph (a) of this section.
    (iii) Some qualified trust beneficiaries may pay estimated income 
taxes.
    (A) In order to pay the proper amount of estimated taxes each 
quarter, the beneficiaries of a qualified blind trust will need to 
receive information about the amount of income, if any, generated by 
the trust each quarter. To assist the beneficiaries, the independent 
trustee is permitted to send, on a quarterly basis, information about 
the amount of income generated by the trust in that quarter. This 
communication must be approved in advance by the Director in accordance 
with paragraph (a) of this section.
    (B) In order to pay the proper amount of estimated taxes each 
quarter, the independent trustee of a qualified diversified trust will 
need to receive information about the amount of income, if any, earned 
by the beneficiaries on assets that are not in the trust. To assist the 
independent trustee, the beneficiaries are permitted to send, on a 
quarterly basis, information about the amount of income they earned in 
that quarter on assets that are outside of the trust. This 
communication must be approved in advance by the Director in accordance 
with paragraph (a) of this section.
    (d) Responsibilities of the independent trustee and other 
fiduciaries. (1) Any independent trustee or any other designated 
fiduciary of a qualified trust shall not knowingly and willfully, or 
negligently:
    (i) Disclose any information to an interested party or that party's 
representative with respect to the trust that may not be disclosed 
under title I of the Act, the implementing regulations or the trust 
instrument;
    (ii) Acquire any holding:
    (A) Directly from an interested party or that party's 
representative without the prior written approval of the Director; or
    (B) The ownership of which is prohibited by, or not in accordance 
with, title I of the Act, the implementing regulations, the trust 
instrument, or with other applicable statutes and regulations;
    (iii) Solicit advice from any interested party or any 
representative of that party with respect to such trust, which 
solicitation is prohibited by title I of the Act, the implementing 
regulations, or the trust instrument; or
    (iv) Fail to file any document required by the implementing 
regulations or the trust instrument.
    (2) The independent trustee and any other designated fiduciary, in 
the exercise of their authority and discretion to manage and control 
the assets of the trust, shall not consult or notify any interested 
party or that party's representative.
    (3) The independent trustee shall not acquire by purchase, grant, 
gift, exercise of option, or otherwise, without the prior written 
approval of the Director, securities, cash, or other property from any 
interested party or any representative of an interested party.
    (4) Certificate of Compliance. An independent trustee and any other 
designated fiduciary shall file, with the Director by May 15th 
following any calendar year during which the trust was in existence, a 
properly executed Certificate of Compliance in the form prescribed in 
appendix B to this part. In addition, the independent trustee and such 
fiduciary shall maintain and make available for inspection by the 
Office of Government Ethics, as it may from time to time direct, the 
trust's books of account and other records and copies of the trust's 
tax returns for each taxable year of the trust.
    (e) Responsibilities of the interested parties and their 
representatives. (1) Interested parties to a qualified trust and their 
representatives shall not knowingly and willfully, or negligently:
    (i) Solicit or receive any information about the trust that may not 
be disclosed under title I of the Act, the implementing regulations or 
the trust instrument; or

[[Page 39149]]

    (ii) Fail to file any document required by this subpart or the 
trust instrument.
    (2) The interested parties and their representatives shall not take 
any action to obtain, and shall take reasonable action to avoid 
receiving, information with respect to the holdings and the sources of 
income of the trust, including a copy of any trust tax return filed by 
the independent trustee, or any information relating to that return, 
except for the reports and information specified in paragraphs (b) and 
(c) of this section.
    (3) In the case of any qualified trust, the interested party shall, 
within thirty days of transferring an asset, other than cash, to a 
previously established qualified trust, file a report with the 
Director, which identifies each asset, categorized as to value in 
accordance with Sec.  2634.301(d).
    (4) Any portfolio asset transferred to the trust by an interested 
party shall be free of any restriction with respect to its transfer or 
sale, except as fully described in schedules attached to the trust 
instrument, and as approved by the Director.
    (5) During the term of the trust, the interested parties shall not 
pledge, mortgage, or otherwise encumber their interests in the property 
held by the trust.
    (f) Amendment of the trust. The independent trustee and the 
interested parties may amend the terms of a qualified trust only with 
the prior written approval of the Director and upon a showing of 
necessity and appropriateness.


Sec.  2634.409  Pre-existing trusts.

    An interested party may place a pre-existing irrevocable trust into 
a qualified trust, which may then be certified by the Office of 
Government Ethics. This arrangement should be considered in the case of 
a pre-existing trust whose terms do not permit amendments that are 
necessary to satisfy the rules of this subpart. All of the relevant 
parties (including the employee, any other interested parties, the 
trustee of the pre-existing trust, and all of the other parties and 
beneficiaries of the pre-existing trust) will be required pursuant to 
section 102(f)(7) of the Act to enter into an umbrella trust agreement. 
The umbrella trust agreement will specify that the pre-existing trust 
will be administered in accordance with the provisions of this subpart. 
A parent or guardian may execute the umbrella trust agreement on behalf 
of a required participant who is a minor child. The Office of 
Government Ethics has prepared model umbrella trust agreements that the 
employee can use in this circumstance. The umbrella trust agreement 
will be certified as a qualified trust if all of the requirements of 
this subpart are fulfilled under conditions where required 
confidentiality with respect to the trust can be assured.


Sec.  2634.410  Dissolution.

    Within thirty days of dissolution of a qualified trust, the 
interested party shall file a report of the dissolution with the 
Director and a list of assets of the trust at the time of the 
dissolution, categorized as to value in accordance with Sec.  
2634.301(d).


Sec.  2634.411  Reporting on financial disclosure reports.

    An employee who files a public or confidential financial disclosure 
report shall report the trust on the financial disclosure report.
    (a) Public financial disclosure report. If the employee files a 
public financial disclosure report, the employee shall report the trust 
as an asset, including the overall category of value of the trust. 
Additionally, in the case of a qualified blind trust, the employee 
shall disclose the category of value of income earned by the trust. In 
the case of a qualified diversified trust, the employee shall report 
the category of value of income received from the trust by the 
employee, the employee's spouse, or dependent child, or applied for the 
benefit of any of them.
    (b) Confidential financial disclosure report. In the case of a 
confidential financial disclosure report, the employee shall report the 
trust as an asset.


Sec.  2634.412  Sanctions and enforcement.

    Section 2634.702 sets forth civil sanctions, as provided by 
sections 102(f)(6)(C)(i) and (ii) of the Act and as adjusted in 
accordance with the Federal Civil Penalties Inflation Adjustment Act, 
which apply to any interested party, independent trustee, or other 
trust fiduciary who violates his obligations under the Act, its 
implementing regulations, or the trust instrument. Subpart E of this 
part delineates the procedure which must be followed with respect to 
the revocation of trust certificates and trustee approvals.


Sec.  2634.413  Public access.

    (a) Documents subject to public disclosure requirements. The 
following qualified trust documents filed by a public filer, nominee, 
or candidate are subject to the public disclosure requirements of Sec.  
2634.603:
    (1) The executed trust instrument and any amendments (other than 
those provisions which relate to the testamentary disposition of the 
trust assets), and a list of the assets which were transferred to the 
trust, categorized as to the value of each asset;
    (2) The identity of each additional asset (other than cash) 
transferred to a qualified trust by an interested party during the life 
of the trust, categorized as to the value of each asset;
    (3) The report of the dissolution of the trust and a list of the 
assets of the trust at the time of the dissolution, categorized as to 
the value of each asset;
    (4) In the case of a blind trust, the lists provided by the 
independent trustee of assets placed in the trust by an interested 
party which have been sold; and
    (5) The Certificates of Independence and Compliance.
    (b) Documents exempt from public disclosure requirements. The 
following documents are exempt from the public disclosure requirements 
of Sec.  2634.603 and also shall not be disclosed to any interested 
party:
    (1) Any document (and the information contained therein) filed 
under the requirements of Sec.  2634.408(a) and (c); and
    (2) Any document (and the information contained therein) inspected 
under the requirements of Sec.  2634.408(d)(4) (other than a 
Certificate of Compliance).


Sec.  2634.414  OMB control number.

    The various model trust documents and Certificates of Independence 
and Compliance referenced in this subpart, together with the underlying 
regulatory provisions (and appendices A, B and C to this part for the 
Certificates), are all approved by the Office of Management and Budget 
under control number 3209-0007.

Subpart E--Revocation of Trust Certificates and Trustee Approvals 
[Amended]


Sec.  2634.501  Purpose and scope.

    (a) Purpose. This subpart establishes the procedures of the Office 
of Government Ethics for enforcement of the qualified blind trust, 
qualified diversified trust, and independent trustee provisions of 
title I of the Ethics in Government Act of 1978, as amended, and the 
regulation issued thereunder (subpart D of this part).
    (b) Scope. This subpart applies to all trustee approvals and trust 
certifications pursuant to Sec. Sec.  2634.405 and 2634.407, 
respectively.


Sec.  2634.502  Definitions.

    For purposes of this subpart (unless otherwise indicated), the term 
``trust

[[Page 39150]]

restrictions'' means the applicable provisions of title I of the Ethics 
in Government Act of 1978, subpart D of this part, and the trust 
instrument.


Sec.  2634.503  Determinations.

    (a) Violations. If the Office of Government Ethics learns that 
violations or apparent violations of the trust restrictions exist that 
may warrant revocations of trust certification or trustee approval 
previously granted under Sec.  2634.407 or Sec.  2634.405, the Director 
may, pursuant to the procedure specified in paragraph (b) of this 
section, appoint an attorney on the staff of the Office of Government 
Ethics to review the matter. After completing the review, the attorney 
will submit findings and recommendations to the Director.
    (b) Review procedure. (1) In the review of the matter, the attorney 
shall perform such examination and analysis of violations or apparent 
violations as the attorney deems reasonable.
    (2) The attorney shall provide an independent trustee and, if 
appropriate, the interested parties, with:
    (i) Notice that revocation of trust certification or trustee 
approval is under consideration pursuant to the procedures in this 
subpart;
    (ii) A summary of the violation or apparent violations that shall 
state the preliminary facts and circumstances of the transactions or 
occurrences involved with sufficient particularity to permit the 
recipients to determine the nature of the allegations; and
    (iii) Notice that the recipients may present evidence and submit 
statements on any matter in issue within ten business days of the 
recipient's actual receipt of the notice and summary.
    (c) Determination. (1) In making determinations with respect to the 
violations or apparent violations under this section, the Director 
shall consider the findings and recommendations submitted by the 
attorney, as well as any written statements submitted by the 
independent trustee or interested parties.
    (2) The Director may take one of the following actions upon finding 
a violation or violations of the trust restrictions:
    (i) Issue an order revoking trust certification or trustee 
approval;
    (ii) Resolve the matter through any other remedial action within 
the Director's authority;
    (iii) Order further examination and analysis of the violation or 
apparent violation; or
    (iv) Decline to take further action.
    (3) If the Director issues an order of revocation, parties to the 
trust instrument will receive prompt written notification. The notice 
shall state the basis for the revocation and shall inform the parties 
of the consequence of the revocation, which will be either of the 
following:
    (i) The trust is no longer a qualified blind or qualified 
diversified trust for any purpose under Federal law; or
    (ii) The independent trustee may no longer serve the trust in any 
capacity and must be replaced by a successor, who is subject to the 
prior written approval of the Director.

Subpart G--Penalties


Sec.  2634.702  [Amended]

0
4. Section 2634.702 is amended as follows:
0
a. Paragraph (a) is amended by removing the cross-reference to ``Sec.  
2634.407'' in the first sentence and replacing it with ``Sec.  
2634.408(d)(1) or (e)(1)''.
0
b. Paragraph (b) is amended by removing the cross-reference to ``Sec.  
2634.407'' in the first sentence and replacing it with ``Sec.  
2634.408(d)(1) or (e)(1)''.

Subpart I--Confidential Financial Disclosure Reports


Sec.  2634.907  [Amended]

0
5. Section 2634.907(i)(2)(i) is amended by removing the cross-
references to ``Sec.  2634.403'' and ``Sec.  2634.404'' and replacing 
both with ``Sec.  2634.402''.

APPENDIX A TO PART 2634 [Amended]

0
6. The instruction following the Appendix A heading is amended by 
removing the cross-reference to ``Sec.  2634.406(b)'' and replacing it 
with ``Sec.  2634.405(d)(2)''.

APPENDIX B TO PART 2634 [Amended]

0
7. Appendix B is amended as follows:
0
a. The instruction following the Appendix B heading is amended by 
removing the cross-reference to ``Sec.  2634.408(b)'' and replacing it 
with ``Sec.  2634.408(d)(4)''.
0
b. The first paragraph of the CERTIFICATE OF COMPLIANCE form is amended 
by removing the cross-reference to ``5 CFR 2634.406'' and replacing it 
with ``5 CFR 2634.405''.
0
c. Subparagraph (A) of the CERTIFICATE OF COMPLIANCE form is amended by 
removing ``(including 5 CFR 2634.403(b)(12)(i) for a qualified blind 
trust, and 5 CFR 2634.404(c)(12)(i) for a qualified diversified 
trust)'' and replacing it with ``(including 5 CFR 2634.408(d)(1)(i))''.
0
d. Subparagraph (C) of the CERTIFICATE OF COMPLIANCE form is amended by 
removing ``(including 5 CFR 2634.403(b)(12)(iii) for a qualified blind 
trust and 5 CFR 2634.404(c)(12)(iii), for a qualified diversified 
trust)'' and replacing it with ``(including 5 CFR 
2634.408(d)(1)(iii))''.
0
e. Subparagraph (D) of the CERTIFICATE OF COMPLIANCE form is amended by 
removing ``(5 CFR 2634.408(b) and (c))'' and replacing it with ``(5 CFR 
2634.408)''.

[FR Doc. 2012-15998 Filed 6-29-12; 8:45 am]
BILLING CODE 6345-03-P