• Process for Selecting Asset Managers Pursuant To the Emergency Economic Stabilization Act (EESA) and Interim Guidelines for Conflicts Of Interest Arising With EESA Contractors
  • October 16, 2008 | Author: Eric Foster
  • Law Firm: Patton Boggs LLP - New York Office
  • On October 6, 2008 the U.S. Department of the Treasury (“Treasury”) released procedures regarding the selection of asset managers for the portfolio of troubled assets pursuant to the authority provided to the Treasury in the Emergency Economic Stabilization Act of 2008 (the “EESA” or the “Act”). In addition, Treasury released interim guidelines for addressing actual or potential conflicts of interest among contractors performing services in conjunction with EESA. Later the same day, Treasury also posted three solicitations seeking proposals from firms willing to act as agents for Treasury and provide both asset management and custodial services needed to promptly implement the Troubled Asset Relief Program (“TARP”). Set forth below is a brief summary of the guidance issued earlier today on the third-party agent selection process and the specific requests for proposals (“RFPs”) issued later in the day.

    I. Selection of Asset Managers

    Securities Asset Managers vs. Whole Loan Asset Managers.

    Treasury issued several announcements at midday relating to the Act, including one announcing that it will select managers of securities under TARP separately from managers of mortgage whole loans. According to this announcement, securities asset managers will handle Prime, Alt-A, and Subprime residential mortgage backed securities (“MBS”), commercial MBS, MBS collateralized debt obligations, and possibly other types of securities acquired to promote market stability. Whole loan asset managers may handle a range of products, including residential first mortgages, home equity loans, second liens, commercial mortgage loans, and possibly other types of mortgage loans acquired to promote market stability.

    Eligibility to Serve as a Financial Agent of the United States

    Not surprisingly, only “financial institutions” as defined in the EESA are eligible to be designated as financial agents of the United States for purposes of the Act.[1] Only institutions that: (i) are established and regulated under U.S. law; (ii) have significant operations in the U.S. and are not; (iii) foreign central banks or other types of institution owned by a foreign government can qualify to serve as an asset manager or custody service provider under the Act.

    Applicable Fiduciary Standard

    It is important to note that successful applicants will be financial agents of the United States and not government contractors. As financial agents, asset managers will have a direct fiduciary agent-principal relationship with Treasury with a responsibility for protecting the interests of the United States. Thus, financial agents shall be held to a higher fiduciary standard than government contractors.

    Notice, Responses to Notices, Utilization of Sub-Managers, and Final Selection of Financial Agents

    Treasury’s noontime release also made it clear that prospective financial agents will only be solicited through the issuance of a public notice and a formal RFP. It also indicated that future notices will include minimum qualifications, such as minimum assets under management and a clean audit opinion.

    According to Treasury, it plans to evaluate and respond promptly to the initial responses it receives and then invite certain candidates to continue to the second phase of the selection process, in which candidates are likely to be subject to confidentiality agreements in order to facilitate the free exchange of proprietary information. In the second phase, the prospective financial agents will provide additional information about their expertise, as well as asset management strategies, risk management, and performance measurement.

    After the second phase, Treasury will evaluate whether a candidate will continue to be considered. In this last phase, a financial institution may be required to conduct face-to-face discussions regarding portfolio scenarios, public policy goals, and statutory requirements and to respond to interview questions to assess the capabilities of the individuals to be assigned to manage assets. Institutions selected to be asset managers or custodians will be asked to sign a Financial Agency Agreement with Treasury. This Financial Agency Agreement will contain the established terms and conditions currently applied to existing financial agents of the United States. An Institution’s capacity to comply with these more rigorous standards (including audit and recordkeeping) will be among the factors used in evaluating candidates.

    Treasury Announces Solicitations for Financial Agents under EESA

    True to its word, Treasury did indeed release its first notice seeking RFPs late today. Treasury indicated that it will issue additional notices in the future to identify smaller and minority- and women-owned financial institutions that do not meet the minimum qualifications for assets under management in the initial notices.

    The minimum assets under management requirements specified in today’s RFPs were quite high, requiring $100 billion under management to qualify as an asset manager and $500 billion in assets under custody to qualify as a custodian. While these high asset thresholds will severely limit the number of potentially qualifying bidders, Treasury also indicated that it will seek bids and other proposals for more modest mandates at a later date and successful applicants will be designated as sub-managers for a portfolio, or, presumably, sub-servicer or sub-agents for custodian, account management auction systems operations, and other services.

    The three solicitations posted by Treasury for financial agents to provide services necessary for the effective implementation of the TARP program were for:

    • Custodian, Accounting, Auction Management, and Other Infrastructure Services [2]
    • Securities Asset Management Services[3]
    • Whole Loan Asset Management Services[4]

    Interested and eligible parties that meet the requirements and guidelines required of each service are asked to submit requests to Treasury by 5 p.m. (EDT) on Wednesday October 8, 2008. Treasury expects to publicly announce the results of its initial selections from these three solicitations by next week.

    II. Interim Guidelines For Conflict of Interest Related to EESA Contractors

    Finally, Treasury today issued certain interim guidelines for the management of potential conflicts of interest (“Guidelines”) related to the authorities granted under the Act. The Guidelines outlined a general process for reviewing and addressing actual or potential conflicts of interest (“COIs”) among contractors performing services for Treasury under the Act. The Guidelines announced today are only interim guidelines and, thus, will remain in effect up and until final guidelines are promulgated by Treasury. Below is a brief summary of the key provisions in the Guidelines:

    • Finally, Treasury today issued certain interim guidelines for the management of potential conflicts of interest (“Guidelines”) related to the authorities granted under the Act. The Guidelines outlined a general process for reviewing and addressing actual or potential conflicts of interest (“COIs”) among contractors performing services for Treasury under the Act. The Guidelines announced today are only interim guidelines and, thus, will remain in effect up and until final guidelines are promulgated by Treasury. Below is a brief summary of the key provisions in the Guidelines:
    • Where appropriate, Treasury may obtain non-disclosure agreements and COI agreements in advance of supplying an offeror a solicitation.
    • Treasury’s solicitation will instruct prospective offerors that they must disclose any actual or potential COIs (including those associated with an affiliate, consultant, or subcontractor) which could arise from performance of the contract. The solicitation will also specify that, if any actual or potential COIs are identified, the prospective offeror must submit a mitigation plan as part of its initial proposal.
    • Treasury has the discretion to include provisions requiring that the prospective offeror identify specific personal COIs among employees who would be performing the work, and include measures in its mitigation plan for addressing such personal COIs.
    • Treasury’s solicitations must identify any minimum requirements or standards for the COI mitigation plan.
    • If the contractor will owe a fiduciary duty to Treasury in performing the contract, the solicitation must include a statement to that effect and that duty will be accurately reflected in the terms of the resulting contract.
    • Treasury’s solicitations must include non-disclosure provisions which, at a minimum, apply to the prime contractor. In some situations, Treasury may also desire to include provisions requiring that the prime contractor obtain comparable non-disclosure and/or COI agreements from subcontractors or individual employees.
    • Treasury’s solicitations must state that Treasury will oversee and enforce the proposed mitigation plan as part of the contract.
    • Treasury’s solicitations must require that mitigation plans be submitted with offerors' initial proposals.
    • The contracting officer may negotiate the mitigation plan with the offeror, taking into account the type of procurement being conducted.
    • Notwithstanding the submission of a mitigation plan, it is possible that contractor COIs may exist which cannot be effectively neutralized or mitigated. An offeror with an unacceptable mitigation plan will not be eligible for award unless conflicts are waived by the agency head or designee.
    • It is possible that a COI may be waived by the agency head or a designee.
    • Upon award of the contract, the successful offeror's mitigation plan will be formally incorporated into the contract, making the mitigation plan a contractually binding obligation.

    Conclusion

    We continue to monitor Treasury’s implementation of its authority under the Act on a real-time basis and we will issue additional memoranda as the situation requires, including if the Treasury issues additional RFPs or interpretive guidance.

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    [1] EESA defines the term “financial institution” to mean “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.”

    [2] Available at http://www.treas.gov/initiatives/eesa/docs/notice_custodian-services.pdf.

    [3] Available at http://www.treas.gov/initiatives/eesa/docs/notice_securities-asset-mgr.pdf

    [4] Available at http://www.treas.gov/initiatives/eesa/docs/notice_whole-loan-asset-mgr.pdf