WEEK OF NOVEMBER 10, 2008 • VOL. XXXI, NO. 45
These Agents Act for the Treasury Department
Treasury’s use of its ‘financial agent’ authority raises issues beyond the usual scope of contracting challenges.
W
By James J. McCullough
and William S. Speros
hen most federal agencies need outside assistance, they contract for the work using the
federal procurement rules. But the Treasury
Department, preparing to implement the Troubled
Asset Relief Program under the Emergency Eco­nomic
Stabilization Act, has a less restrictive option at hand.
Under the National Bank Act of 1864, Treasury has the
authority to designate private entities as the department’s
“financial agents” to perform all such reasonable duties as
may be required. Indeed, on Oct. 6 and Nov. 7, Treas­ury
issued notices for the selection of financial agents to assist
with TARP.
Already existing regulations did not require competition
in the choice of financial agents. Any financial institution
with the authority to perform certain functions under its
charter—such as accepting deposits for credit, furnishing
bank drafts in exchange for collections, and maintaining
official Treasury accounts—could simply be named as a
financial agent by Treasury.
The bailout legislation has broadened that regulatory definition of “financial institution” to include “any institution,
including, but not limited to, any bank, savings association,
credit union, security broker or dealer, or insurance company.” It also appears to significantly expand financial-agent
authority by permitting Treasury to designate financial
agents for any duty reasonably related to the implementation
of TARP. As a result, Treasury now has statutory authority
to assign a broad spectrum of duties to a wider variety of
private entities.
Departing from its own past practice, Treas­ury is using
a competitive process to select its new asset managers.
But the TARP process does not look like the competition
typically seen in government contracting. For example, a
procuring agency must usually identify all criteria to be
considered and then closely adhere to those criteria when
evaluating bids. The TARP notices expressly state that they
list some, but not necessarily all, of the factors that Treasury
will consider when selecting financial agents.
The department maintains that neither the TARP
acquisition notices nor the services they seek are subject
to the Federal Acquisition Reg­u­la­tion and that financial institutions selected pursuant to the notices are not
“contractors.”
It’s a good prediction that broad authority with less oversight will lead to challenges down the road.
Treasury Agents
In the past, some federal courts have broadly interpreted
the scope of Treas­ury’s financial agent procedures. Most
notably, in United States v. Citizens & Southern National
Bank (1989), the U.S. Court of Appeals for the Federal
Circuit held that Treasury’s designation of financial agents
is “akin to appointment of public employees, which is not
a matter of contract even when terms and conditions guide
the employment relationship.” Accord­ing to Citizens, the
designation of a financial agent creates an agency relationship, with Treasury delegating to the financial agent some
of the sovereign functions that the government itself would
otherwise perform.
The Citizens opinion has been followed in several administrative and judicial decisions. In National Loan Servicenter
Inc. v. Department of Hous­ing and Urban Development
(1993), the General Services Administration Board of
Contract Appeals held that HUD’s designation of agents
under the Housing Act of 1964 created the same type of
agency relationship that Treasury formed under the National
Bank Act. The board concluded that designation of an agent,
financial or otherwise, could not be treated as a procurement
and was not subject to its bid protest jurisdiction.
The following year, the U.S. District Court for the District
of Columbia held in Grigsby Brandford & Co. Inc. v. United
States that the secretary of education’s selection of a bonding authority pursuant to statute was not a procurement of
goods or services, but rather the appointment of a private
entity as an agent.
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And in Marketing & Management Infor­mation Inc. v.
United States (2003), the U.S. Court of Federal Claims cited
Citizens in holding that the analysis of when the FAR was
applicable must begin with a determination of whether an
acquisition is a “procurement.” The court held that the transaction at issue was not a procurement, and thus not subject to
the FAR, because it did not involve the acquisition of goods
or services for a federal agency through the use of appropriated funds.
On the other hand, the D.C. Cir­cuit’s decision in
Transactive Corp. v. United States (1996) suggests there may
be limits on the types of services that qualify as financial
agent functions. Specifically, the court rejected Treasury’s
argument that its decision to designate a financial agent
(rather than conduct a procurement under the Competition in
Con­tract­ing Act) for the administration of electronic benefits
transfers was necessary because only a financial agent of the
United States could provide the required services.
Distinguishing Citizens, the D.C. Cir­cuit held that Treas­
ury’s power to appoint financial agents necessarily involved
Treasury, in its sovereign capacity, delegating to the financial agent inherently governmental functions that Treasury
would otherwise perform. The court concluded that administering electronic benefits transfers did not constitute the
sovereign functions of collecting or disbursing funds on
behalf of Treasury, and therefore the administrator did not
have to be a financial agent.
With Some Limits
To pass muster under these precedents, Treasury’s use
of financial agents for TARP must, arguably, involve both
the assignment of inherently governmental functions to
the financial agents and the funding of such agents from
nonappro­pri­ated funds. How­ever, Treasury’s three pending notices for financial agents solicit proposals for “whole
loan” asset management, “securities” asset management,
and asset management services for the Capital Purchase
Program, none of which is an inherently governmental function. Historically, federal agencies have outsourced such
services through procurement contracts, such as HUD’s
contracts with real estate asset managers and financial
advisers. Moreover, Treasury will pay the financial agents
with appropriated funds.
That means Treasury’s current use of financial agent procedures could be challenged at the Government Accounta­
bil­ity Office or the Court of Federal Claims. The GAO will
review a timely protest that an agency is improperly using a
nonprocurement agreement where a procurement contract is
required, especially when the protest alleges that the agreement was used to avoid the procedural requirements of procurement law. Furthermore, both the GAO and the Court of
Federal Claims have the power to hear protests challenging
an agency’s procedures even if the acquisition in question is
not subject to the FAR or the Competition in Contracting Act.
Finally, Treasury’s financial-agent notices expressly state
that the selected agent will have a fiduciary relationship with
Treasury. The agent will enter into an agreement similar
to the one Treasury has already awarded for custodial and
infrastructure services, which provides that the agent owes
fiduciary duties of loyalty and fair dealing to Treasury. Such
duties include, but are not limited to, (1) performing services
with care, competence, and diligence; (2) construing all of
Treasury’s instructions in a reasonable manner to best serve
U.S. purposes; (3) utilizing confidential information or U.S.
assets solely for implementation of TARP and not for the
agent’s own commercial interests; and (4) acting only within
the scope of the financial-agent authority. In addition, as
mandated by the Emergency Economic Stabilization Act,
Treasury has imposed very strict interim conflict-of-interest
guidelines on its TARP financial agents.
Failure to meet any of these obligations could lead to legal
disputes similar to those alleging breach of fiduciary duties
brought by the federal government against individuals and
institutions that provided serv­ices to the Resolution Trust
Corp. in cleaning up the savings-and-loan crisis through the
sale of assets of failed thrifts in the early 1990s.
Private businesses entering into today’s TARP-related
agreements with Treasury should be mindful of the scope
of fiduciary obligations and the potential pitfalls associated
with acting as a financial agent of the federal government.
James J. McCullough is a partner in the D.C. office of
Fried, Frank, Harris, Shriver & Jacobson, where he heads
the government contracts practice. William S. Speros is an
associate in the D.C. office. McCullough may be contacted
at [email protected].
Reprinted with permission from Legal Times. © 2008 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.
For information, call (800) 933-4317 or [email protected]. ALM is now Incisive Media, www.incisivemedia.com.