[Code of Federal Regulations]
[Title 5, Volume 3]
[Revised as of January 1, 2005]
From the U.S. Government Printing Office via GPO Access
[CITE: 5CFR2634.404]

[Page 518-521]
 
                    TITLE 5--ADMINISTRATIVE PERSONNEL
 
                CHAPTER XVI--OFFICE OF GOVERNMENT ETHICS
 
PART 2634_EXECUTIVE BRANCH FINANCIAL DISCLOSURE, QUALIFIED TRUSTS, AND 
CERTIFICATES OF DIVESTITURE--Table of Contents
 
                       Subpart D_Qualified Trusts
 
Sec. 2634.404  Qualified diversified trusts.

    (a) Definition. A qualified diversified trust is any trust in which 
the filer, his spouse, or his minor or dependent child has a beneficial 
interest, which is certified pursuant to Sec. 2634.405 of this subpart 
by the Director of the Office of Government Ethics, which has a 
portfolio as specified in paragraph (b) of this section, and which 
includes in the trust instrument the provisions required by paragraph 
(c) of this section and has an independent trustee as defined in Sec. 
2634.406 of this subpart. See section 102(f)(4)(B) of the Act.
    (b) Required portfolio--(1) Standards for initial assets. It must be 
established, to the satisfaction of the Director of the Office of 
Government Ethics, that

[[Page 519]]

the initial assets of the trust proposed for certification comprise a 
widely diversified portfolio of readily marketable securities. The 
reporting individual or other interested party shall provide the 
Director with a detailed list of the securities proposed for inclusion 
in the portfolio, specifying their fair market values and demonstrating 
that these securities meet the requirements of this paragraph. The 
initial trust portfolio may not contain securities of issuers having 
substantial activities in the reporting individual's primary area of 
responsibility. If requested by the Director, the designated agency 
ethics official for the reporting individual's employing agency shall 
certify whether the proposed portfolio meets this standard.
    (2) Diversification standards. For purposes of paragraph (b)(1) of 
this section, a portfolio will be widely diversified if:
    (i) The value of the securities concentrated in any particular or 
limited industrial, economic or geographic sector is no more than twenty 
percent of the total; and
    (ii) The value of the securities of any single issuer (other than 
the United States Government) is no more than five percent of the total.
    (3) Marketability standard. For purposes of paragraph (b)(1) of this 
section, a security will be readily marketable if:
    (i) Daily price quotations for the security appear regularly in 
newspapers of general circulation; and
    (ii) The trust holds the security in a quantity that does not unduly 
impair liquidity.
    (c) Required provisions. The instrument which establishes a 
diversified trust must adhere substantively to model drafts circulated 
by the Office of Government Ethics, and must provide that:
    (1) The primary purpose of the diversified trust is to confer on the 
independent trustee and any other designated fiduciary the sole 
responsibility to administer the trust and to manage trust assets 
without the participation by, or the knowledge of, any interested party. 
This 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;
    (2) The 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;
    (3) The trust's initial assets shall comprise a widely diversified 
portfolio of readily marketable securities, in accordance with the 
principles of paragraph (b) of this section, and the trustee shall not 
acquire additional securities in excess of the diversification 
standards;
    (4) Any portfolio asset transferred to the trust by an interested 
party is 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 of the Office of Government Ethics;
    (5) During the term of the trust, the interested parties shall not 
pledge, mortgage, or otherwise encumber their interests in the property 
held under the trust;
    (6) None of the assets initially placed in the trust's portfolio 
shall consist of securities of issuers having substantial activities in 
the reporting individual's primary area of Federal responsibility;
    (7) The trustee or designee shall prepare the trust's income tax 
return and, on behalf of any interested party, the personal income tax 
returns and similar tax documents which may contain information relating 
to the trust. Under no circumstances shall the trustee or any other 
designated fiduciary disclose publicly or to any interested party, any 
of the returns prepared by the trustee or his designee, any information 
relating to those returns, or any information which might specifically 
identify current trust assets, or those assets which have been sold or 
disposed of from trust holdings;
    (8) An interested party shall not receive any report on trust 
holding and sources of trust income, except that the trustee shall, 
without identifying specifically any asset or holding:
    (i) Report quarterly the aggregate market value of the assets 
representing

[[Page 520]]

the interested party's interest in the trust; and
    (ii) Report annually, for purposes of section 102(a)(1)(B) of the 
Act, the aggregate amount actually distributed from the trust to such 
interested party, or applied for the party's benefit;
    (9) There shall be no direct or indirect communication with respect 
to the trust between an interested party and the independent trustee or 
any other designated fiduciary unless:
    (i) Such communication is in writing, with the prior written 
approval of the Director of the Office of Government Ethics and is filed 
with the Director in accordance with Sec. 2634.408(c) of this subpart; 
and,
    (ii) It relates only:
    (A) To the request for a distribution from the trust, which does not 
specify whether the distribution shall be made in cash or in kind;
    (B) To the general financial interest and needs of the interested 
party including, but not limited to, a preference for maximizing current 
income or long-term capital appreciation; or
    (C) To information, documents, and funds concerning income tax 
obligations arising from sources other than the property held in trust, 
which are required by the 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;
    Note: By the terms of paragraph (3)(C)(vi) of section 102(f) of the 
Act, communications which soley 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 which do 
not contain language conforming to this policy, except in unusual cases 
where compelling necessity is demonstrated to the Director, in his sole 
discretion.
    (10) The interested parties shall not seek to obtain, and shall take 
reasonable action to avoid receiving, information with respect to trust 
holdings and sources of trust income, including a copy of any tax return 
filed by the trustee, or any information relating to that return, except 
for the reports and information specified in paragraph (c)(8) of this 
section;
    (11) An independent trustee and any other designated fiduciary shall 
file, with the Director of the Office of Government Ethics, by May 15 
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 any 
other designated 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;
    (12) Neither the trustee nor any other designated fiduciary shall 
knowingly and willfully, or negligently:
    (i) Disclose to any interested party any information regarding the 
trust that may not be disclosed pursuant to title I of the Act, the 
implementing regulations, or the trust instrument;
    (ii) Acquire any holding the ownership of which is prohibited by, or 
not in accordance with, the terms of the trust instrument;
    (iii) Solicit advice from any interested party with respect to the 
trust, if such 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 title I of the Act or by 
this part;
    (13) An interested party shall not knowingly and willfully, or 
negligently:
    (i) Solicit or receive any information regarding the trust that may 
not be disclosed pursuant to title I of the Act, the implementing 
regulations, or the trust instrument; or
    (ii) Fail to file any document required by title I of the Act or by 
this part;

[[Page 521]]

    (14) No person, including investment counsel, investment advisers, 
accountants, and tax preparers, may be employed or consulted by an 
independent trustee or any other designated fiduciary to assist in any 
capacity to administer the trust or to manage and control the trust 
assets, unless, the following four conditions are met:
    (i) When 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 of the Office of 
Government Ethics;
    (ii) Under all the facts and circumstances, the person is determined 
pursuant to the requirements for eligible entities under Sec. 2634.406 
of this subpart to be independent of any interested party with respect 
to the trust arrangement;
    (iii) 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; 
and
    (iv) The person is instructed by an independent trustee or other 
designated fiduciary to have no direct communication with respect to the 
trust with any interested party, and to make all indirect communications 
with respect to the trust only through the trustee, pursuant to 
paragraph (c)(9) of this section;
    (15) The trustee shall not acquire by purchase, grant, gift, 
exercise of option, or otherwise, without the prior written approval of 
the Director of the Office of Government Ethics, any securities, cash, 
or other property from any interested party;
    (16) The existence of any banking or other client relationship 
between any interested party and an independent trustee or other 
designated fiduciary shall be disclosed in schedules attached to the 
trust instrument, and no other such relationship shall be instituted 
unless that relationship is disclosed to the Director of the Office of 
Government Ethics; and
    (17) The independent trustee and any other designated fiduciary 
shall be compensated in accordance with schedules annexed to the trust 
instrument.
    (d) Personal income tax returns. In the case of a trust to which 
this section applies, the trustee shall be given power of attorney to 
prepare, and shall file, on behalf of any interested party, 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.

[57 FR 11814, Apr. 7, 1992; 57 FR 21854, May 22, 1992]