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Bailout Conflicts - The Treasury Speaks Softly and Carries a Small Stick

<i>Update: Later in the day, according to <a href="http://onthehillblog.blogspot.com/2008/10/pelosi-calls-on-paulson-to-st… report in On the Hill</a>, House Speaker Nancy Pelosi called on the Treasury Secretary to strengthen the conflict of interest requirements discussed below.</i><br>
<br>
The bailout, pursuant to the Emergency Economic
Stabilization Act of 2008, is being contracted out to financial
professionals, who will almost definitely have been deeply involved
with the instruments they will be purchasing on behalf of the
government. This opens the door to serious conflict of interest
problems. They are the same as when a city hires a professional to deal
with developments, for example, only on a more massive scale.<br>
<br>
The Treasury Department has quickly put out <a href="http://www.treas.gov/press/releases/hp1180.htm&quot; target="”_blank”">interim conflict
of interest rules</a>, which place the burden on bidders to come up
with their own conflict mitigation plans. But it seems to me that the
interim rules are unnecessarily weak and vague. They are what-not-to-do guide for local governments dealing with contractors' conflicts. Here are the interim rules:<br>

<br>
<ul>
<li>Where appropriate, Treasury may obtain non-disclosure agreements
and COI agreements in advance of supplying an offeror a solicitation. </li>
<li>The solicitation should 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 indicate that, if
actual or potential COIs are identified, the prospective offeror must
submit a mitigation plan as part of its initial proposal. In some
situations, Treasury may also desire to include provisions requiring
that the prospective offeror identify personal COIs among employees who
would be performing the work, and include measures in its mitigation
plan for addressing such personal COIs. </li>
<li>The solicitation should include an evaluation factor or criteria
whereby Treasury will assess the likely effectiveness of the proposed
COI mitigation plan. </li>
<li>The solicitation will identify any minimum requirements or
standards for the COI mitigation plan. For example, if Treasury
requires that the mitigation plan will address certain specific issues,
offerors should be so advised in the solicitation. </li>
<li>If the contractor will owe a fiduciary duty to Treasury in
performing the contract, the solicitation should include a statement to
that effect. This provision will become part of the resulting contract.
</li>
<li>The solicitation should 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. </li>
<li>The solicitation should state that Treasury will oversee and
enforce the proposed mitigation plan as part of the contract. </li>
<li>The Treasury Senior Procurement Executive will review and approve
all provisions related to COIs prior to issuance of the solicitation. </li>
<li>The solicitation should require that mitigation plans be
submitted with offerors' initial proposals. Treasury's evaluators,
source selection personnel, and legal counsel will examine the proposed
mitigation plans to determine the extent to which those plans provide
sufficient protection against actual or potential COIs. </li>
<li>The severity of a COI is necessarily dependent upon the
circumstances of the case and the nature of the contractual action.
Treasury personnel should not assume that a mitigation plan which is
acceptable under one situation would also be acceptable under different
circumstances. </li>
<li>The contracting officer may negotiate the mitigation plan with
the offeror, taking into account the type of procurement being
conducted. </li>
<li>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. </li>
<li>It is possible that a COI may be waived by the agency head or a
designee. Any request for such a waiver should first be coordinated
with the Treasury Senior Procurement Executive. </li>
<li>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. </li>
</ul>
Questions that arise from these interim rules are:  Why wouldn't
the contractor owe a fiduciary duty to the Treasury, in fact, to the
public? Why shouldn't everyone involved have to sign non-disclosure
statements? Why should bidders have to come up with mitigation plans
overnight (the contractors will be determined on Friday)? How could
this be enough time to come up with anything solid, and how could this
be enough time for the Treasury to determine, in each case, whether a
mitigation plan is acceptable? Why not impose one mitigation plan on
all bidders? It would seem the federal government, with excellent
ethics experts, could come up with a good mitigation plan more quickly
than financial experts.<br>
<br>
When it comes to conflicts that "cannot be effectively neutralized or
mitigated," which will likely include a lot, the interim rules fail to
follow up. All they say is that an unacceptable mitigation plan will
lead to rejection of a bid "unless conflicts are waived by the agency
head or designee." So the really troublesome conflicts can just be
waived, since they can't be mitigated?<br>
<br>
This is an extremely difficult problem with an extremely short time
frame, but it does not seem to me that the Treasury Dept. is handling
it responsibly. There are too many outs, too much discretion for
Treasury officials, and almost no solid requirements. I'm not convinced
that whoever operates the bailout will not look like they are helping
themselves and their business associates, whether or not they actually
are.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
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