While initial contracts are focused on a relatively few large service providers, we expect significant expansion of the use of additional contractors and subcontractors.

Even after enactment of the Emergency Economic Stabilization Act (EESA), developments continue at an unprecedented pace. We will continue to update you as major initiatives occur and are implemented by the Treasury Department. In this Update, we are focusing on efforts by the Treasury Department to manage its new Troubled Assets Relief Program (TARP) by contracting with private companies.

Within the past week, Treasury announced the procurement authorities and procedures it will use for selecting asset managers, advisors, and other contractors, and provided interim guidelines for addressing conflicts of interest that may arise for contractors administering the program on Treasury’s behalf. Simultaneously, it published notices to financial institutions interested in providing whole loan asset management services, securities asset management services, and custodian, accounting, auction management, and other infrastructure services.

Under these procedures, the Treasury Department has announced one selection – Ennis Knupp & Associates – which has been hired under a one year contract to serve as investment adviser for the implementation of the TARP. In announcing the hiring of Ennis Knupp & Associates, Treasury stated that it used a procurement contract under the Federal Acquisition Regulation, and that it competitively solicited offers from six firms (three of which made offers). Treasury continues to evaluate potential asset managers and other vendors to develop and maintain investment policies and guidelines, and assist with the oversight of multiple asset managers.

Notably, Treasury has limited eligibility for asset management services and custodial contracts to financial institutions that will act as “financial agents” and not as traditional government contractors. On October 14, Treasury announced that Bank of New York Mellon Corporation would be its custodian under a financial agency agreement. Treasury contemplates that other entities will be involved as subcontractors, including small, minority and woman-owned firms, to support the scope of work. Additionally, some services will be procured through traditional government contracts, awarded expeditiously through the “urgent and compelling” exception to the Competition in Contracting Act.

The Treasury approach raises a number of questions about both the selection process as well as the implementation phase. For example:

  • Can a company that has the requisite asset management, accounting or other skills, but is not a financial institution, challenge the Treasury Department’s decision to use financial agency agreements instead of more traditional government contracts? 
    • In 1996, the D.C. Circuit struck down the Treasury Department’s decision to limit contracts for administration of certain electronic benefit transfer programs to financial agents, suggesting that there are limits on avoiding the competitive procurement process by resorting to financial agency agreements. 
  • How will asset managers and other service providers and subcontractors protect themselves against potential liability from third party claims for losses associated with management of the assets? 
    • Generally, the government may not provide an open-ended indemnification, but unique defenses may be available to private companies performing governmental functions, and in some cases private parties can benefit from governmental immunities from third party liability. 
  • What standard of performance will asset managers be held to? 
    • Treasury indicates that asset managers (and presumably subcontractors to them) will have fiduciary duties and be audited by external and internal auditors, but does not indicate the specific performance standards against which the managers will be evaluated. 
  • How will actual or potential conflicts of interest under the financial agency agreements be handled? 
    • Asset managers are required to take steps to avoid or mitigate conflicts, but it is not clear whether those who sell assets into the program will have any recourse if they believe they have been harmed by a conflict. 
    • A prominent government contractor was recently held liable for millions of dollars in damages under the Civil False Claims Act for failing to disclose conflicts of interest in connection with its contract. 
    • Congressional leadership has expressed particular interest in ensuring that taxpayer interests are not jeopardized by biased decision-making.

Undoubtedly many other implementation issues will come up as the program develops. Additionally, intense Congressional interest in the program will overlay the regulatory and contractual initiatives. These issues cut across a number of legal disciplines, including financial institution regulation, corporate, government contracts, bankruptcy, real estate, and litigation.