As the Trump administration begins to take shape, a new crop of potential political appointees will consider making the move to Washington to serve the president-elect.
Each potential nominee will be subject to an intense and cumbersome vetting process before entering government service. The lengthy process includes obtaining security clearances, performing background checks, and evaluating potential financial conflicts of interest.
Nominees should be prepared to maneuver a complex obstacle course of background paperwork, extensive financial disclosure forms, and compliance with the federal government’s conflict of interest laws. Many potential nominees may be encountering this process for the first time and there may be some aspects they find surprising.
{mosads}There is often discussion in the press of the use of a “blind trust” to avoid potential government ethics concerns. In our representation of over 100 executive branch nominees through the vetting process in the current and prior administrations, we have almost never seen a situation in which a nominee could avoid conflicts by establishing a blind trust.
When a blind trust is established, the nominee transfers control and management of assets to an independent trustee who may not communicate with the nominee regarding the identity of the holdings in the trust going forward. This is based on the premise that if the nominee has no knowledge of the assets in the trust, the nominee cannot be influenced in the performance of his or her official government duties.
Because the nominee is aware of what assets were initially transferred into the trust, those assets are still subject to conflict of interest restrictions until they are sold.
Second, the conflict of interest rules may stretch further than you think. In addition to the nominee’s own financial holdings, the assets owned by the nominee’s spouse or minor children are also attributed to the nominee.
Further, the assets of certain trusts for which the nominee is the trustee or the nominee (or anyone whose assets are attributable to him or her) is the beneficiary are also attributed to the nominee and subject to the same scrutiny.
Even unpaid volunteers can be subject to these rules. Recently, advising potential appointees to the Puerto Rico oversight board in collaboration with our partner and former Puerto Rican governor Luis Fortuno, we were surprised to learn that they would be subject to the federal conflict of interest laws despite the fact that they were volunteering their service and not technically federal employees.
Third, there is no law prohibiting registered lobbyists from serving in the executive branch. Although President Obama barred lobbyists from working in his administration through executive order, which will remain in force until revoked, no such prohibition exists in statute.
President-elect Trump has not imposed a total ban on lobbyist participating on his transition team, but has required incoming officials to terminate their lobbying registrations. In addition, the Trump transition has announced that anyone joining the transition or the administration must agree not to lobby the administration for five years after leaving the government.
While the Trump post-government restriction is stricter than previous administrations, the pre-government approach provides more flexibility than we have seen in the past. It may be the case that the view of lobbyists is changing.
Fourth, a severance package from a former employer could present a problem. If a nominee receives any item, including cash, exceeding $10,000 in value on the basis of a determination made after it became known to the former employer that the individual was being considered for a government position, known as an “extraordinary payment,” the nominee will be disqualified for two years from participating in any matter involving the former employer.
If the nominee can show that the payment was pursuant to a pre-determined compensation plan, or was consistent with the former employer’s past practice, this provision may not be applicable.
Additionally, any payment from a former employer should be made prior to the nominee entering government service. Care must be exercised in how such payments arise and are structured to prevent triggering the ethical restraints.
Lastly, if a nominee is forced to divest an asset in order to comply with the government ethics rules, the tax code may provide some relief. Under section 1043 of the Internal Revenue Code, the nominee may defer recognition of the taxable gain that otherwise would have been triggered by the forced divestiture.
The conflict property must be sold pursuant to a certificate of divestiture, a document issued by the Office of Government Ethics, and the proceeds from the sale must be reinvested in “permitted property,” such as mutual or index funds, within the 60-day period beginning on the sale date.
This provision is intended to relieve any financial penalty incurred by the nominee for complying with the government ethics laws. Potential nominees should be mindful of this provision and consult counsel regarding its implementation.
Robert Rizzi is a partner in Steptoe & Johnson LLP’s Washington and New York offices and co-chairs the firm’s tax practice. Mr. Rizzi represents prospective political appointees requiring Senate confirmation through the vetting process including Cabinet and sub-Cabinet members, administrators and commissioners of various agencies, and numerous ambassadorial appointees in both Democratic and Republican administrations.
Dianna Mullis is an associate in Steptoe’s Washington office and represents prospective political appointees through the vetting process. She has negotiated the terms of financial disclosures, divestitures and waivers in connection with the federal conflict-of-interest requirements.
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