A blind trust exists when a beneficiary, the party for whom the benefit of a TRUST exists, turns over control of their ASSETS to a trustee, who is an independent third party, typically a professional money manager. The trustee is given broad discretion over the assets. The trust is “blind” because the beneficiary does not know the exact identity, nature, and extent of their financial interests within the trust’s holdings. In other words, the beneficiary will become “blind” to the activity and makeup of the fund. The beneficiary will only receive a report on how the investments are performing, but no details on the actual investments. Blind trusts are typically set up when there is a CONFLICT OF INTEREST involving the beneficiary and the investments held in the trust. The most common individuals to set up blind trusts are government officials, who arrange their assets this way so that no one can claim they are acting in their own selfinterest when performing governmental service. All presidents and first ladies since Jimmy Carter have established blind trusts before taking office, with the exception of Bill and Hillary Clinton, who did not set up theirs until July 1993, and only then because of pressure due to conflict of interest. Without a blind trust, the Clintons were fair game for the media. It was revealed that when Hillary Clinton headed the health reform committee, her personal portfolio held more than $1 million in health stocks, and the portfolio was making money from sales of these health stocks. Soon after the news revelation of this $1 million conflict of interest, the Clintons created a blind trust naming Essex Investment Company, a Boston-based firm, as the trustee. Ever since the Declaration of Independence, citizens have put their trust in government and have held that public officials should perform their duties in the public’s interest and for the public’s good. The ethics program within the executive branch of government helps to support this public trust and ensure that officials perform their duties impartially and free of conflicts of interest. The U.S. OFFICE OF GOVERNMENT ETHICS (OGE) was established by the Ethics in Government Act of 1978. This office oversees six major areas, including financial disclosure. Within the financial-disclosure area the OGE supervises the creation and operation of blind trusts and compliance with the Ethics in Government Act of 1978. The act permits two types of blind trusts: a qualified blind trust (QBT) and a qualified diversified trust (QDT). The difference between these two trusts is the level of restriction of the assets within the trust to the beneficiary’s conflict of interest. In other words, with the QBT the initial assets may cause the beneficiary to be subject to conflict of interest, but these assets would be subsequently disposed of or valued at less than $1,000. In a QBT the beneficiary is then only blind to the subsequent assets purchased by the trustee. In a QDT the initial assets transferred into the blind trust are subject to more restrictions than the QBT. In other words, the initial assets cannot contain securities that may subject the beneficiary to conflict of interest. Both types of trusts are subject to rules of filing by the OGE and approval of both the actual blind trust and the appointed trustee. Another example of when a blind trust is a remedy for a potential conflict of interest can be found within the financial industry. In 2000 the SECURITIES AND EXCHANGE COMMISSION (SEC) issued the Regulation FAIR DISCLOSURE (FD) and two new insider-trading rules. The latter rules (10b5-1 and 10b5-2) create insider-trading liability for anyone who may buy or sell stock in a company based on their knowledge of inside company information that has not been announced publicly. In order to comply with these new rules and protect themselves from insidertrading liability, many investment firms have instructed their traders to transfer their personal portfolios into blind trusts. Individuals such as CHIEF EXECUTIVE OFFICERs, company managers, members of a BOARD OF DIRECTORS, or holders of more than 10 percent of a particular company’s shares would also establish blind trusts in order to avoid conflict-of-interest and insider-trading liability.
See also INSIDER TRADING.