President Signs Legislation Imposing Disclosure and Fiduciary Duties on Treasury Program to Remove Toxic Securities from Financial Institutions
President Obama has signed legislation providing for additional oversight of the Treasury’s Public-Private Investment Program (PPIP), which is designed to remove toxic securities from the balance sheets of financial institutions. The Helping Families Save Their Homes Act, Public Law No.111-22., is bi-partisan legislation crafted to prevent foreclosures and strengthen the housing market. The measure would also provide the Government Accountability Office (GAO) with the authority to investigate the books of companies receiving TARP dollars.
The legislation requires that any program to create a private-public investment fund must have conflict of interest rules, and requires funds to report on 10 largest positions in the fund and investors with greater than 10 percent interest in fund, to retain records by fund, to acknowledge fiduciary duty, and to develop ethics rules and screening. It also allows the Special Inspector General access to books and records of a fund. The legislation requires Treasury to consult with Special Inspector General on the interaction between the Private-Public Investor Program, the Term-asset Backed Securities Loan Facility, and similar programs and to issue conflicts of interest rules, including concerning the potential for excessive leverage as a result of interactions of program. Also makes additional funds of $15 million available to the Special Inspector General.
A House Manager’s Amendment inserted into the legislation near the end of the process clarified that Treasury must write the conflict of interest rules required by the provision. The amendment also clarified that fund managers are to provide Treasury information on any investor that holds an equity interest in a fund of at least 10 percent. It also highlighted that the Special Inspector General must prioritize audits or inspections of any program funded by the Emergency Economic Stabilization Act of 2008.
The oversight provisions were added to the legislation by Senator Barbara Boxer. The provisions would require Treasury to write tough rules to guard against collision and conflicts of interest in the PPIP, require funds to disclose their ten largest positions, and impose a fiduciary duty on fund managers. It would also give the Special Inspector General for TARP additional funding to conduct audits to enforce these rules.
The Boxer amendment requires federal programs creating a public-private investment fund to impose strict conflict of interest rules on managers of public-private investment funds specifically describing the extent to which the managers may conduct transactions involving funds that affect the value of assets that are not part of such funds; and in which managers or significant investors in such funds have a direct or indirect financial interest. Rules must also require each public-private investment fund to make a quarterly report to Treasury disclosing the ten largest positions of such fund. Fund managers must also identify for Treasury each investor whose interest in the fund totals at least ten percent, in the aggregate
In addition, managers of public-private investment funds must report to Treasury any holding or transaction by the manager or a client of the manager in the same type of asset that is held by the fund.
Funds must also allow the Special TARP Inspector General access to all of their books and records, including all records of financial transactions in machine readable form. Similarly, fund managers must retain all books, documents, and records relating to the public-private investment fund, including electronic messages.
Importantly, the legislation requires each manager of a public-private investment fund to acknowledge a fiduciary duty to both the public and private investors in such fund. Similarly, funds must develop a robust ethics policy that includes methods to ensure compliance with the policy. The funds must also implement investor screening procedures, including know your customer requirements that are at least as rigorous as those of a commercial bank or a retail brokerage operation.
According to Senator Boxer, the legislation is saying that the new investment program to take toxic securities off the books of financial institution should have the private sector come in and give a value to those assets so the federal government does not have to do it.
Hypothetically, a bank trying to unload toxic securities wants the most they can get for it. They can go to a private party and say: between us, bid a little bit more for this toxic asset and we will give you a kickback later. Under the Boxer Amendment, that would not be allowed. The Treasury must adopt regulations to make sure it is not allowed, emphasized the senator. The TARP Inspector General would be given $15 million to perform audits of selected recipients so that Congress can follow up and make sure there is no collusion.
The legislation guarantees that there will be access to financial data from the public-private Investment fund that is necessary to perform these audits, noted Senator Boxer, and requires regulations that are very clear so that the private sector cannot use money they have borrowed from other federal programs to pump into the system. They might be able to use some loans, said the senator, but Congress does not want 100 percent of that money being recycled again.