Treasury to Hire Financial Agents for Management of Troubled Assets Alert - October 10, 2008
Department of Treasury to Hire Financial Agents Instead of Contractors for Management of Troubled Assets
October 10, 2008
Joseph Hornyak - Northern Virginia
The Emergency Economic Stabilization Act of 2008 (EESA or Act), i.e., the “bailout” bill, contains explicit provisions for the use of government contractors to support the Department of Treasury’s management of troubled assets. Only days after the bill was signed into law, however, Treasury announced that it will not use contractors for most of the asset management services and will completely bypass existing procurement statutes and regulations, including the Federal Acquisition Regulation (FAR). Instead, Treasury intends to award non FAR-covered “financial agency agreements” exclusively to large financial institutions for asset management services. It appears that government contractors with experience in asset management services will, at least for now, be able to pursue only subcontracts with or act as sub-managers to these financial institutions.
The EESA’s Government Contract-Related Provisions
Although the EESA is an extremely lengthy statute, only a few provisions directly address government contracting. Section 101(c) of the Act authorizes the Secretary to take all actions deemed necessary to carry out the Act, including the following three options for obtaining the necessary resources:
1) direct hiring of employees
2) entering into contracts
3) designating financial institutions as “financial agents” of the government
Section 107 of the Act is entitled “Contracting Procedures” but does not actually contain any formal procedures for awarding contracts. Rather, this section grants the Secretary the authority to waive specific FAR provisions in any procurement “upon a determination that urgent and compelling circumstances make compliance with such provisions contrary to the public interest.” Presumably, this authority would permit Treasury to award contracts without full and open or even limited competition as required by FAR Part 61 and without the degree of small or disadvantaged business participation required by FAR Part 19, to give two examples. To address this latter concern, the Act states that, where the Secretary waives any FAR provisions relating to minority contracting with respect to any solicitation or contract, the Secretary must create standards to “ensure, to the maximum extent practicable, the inclusion and utilization of minorities and women, and minority- and women-owned businesses in that solicitation or contract, including contracts to asset managers, servicers, property managers, and other service providers or expert consultants.”2
Section 108 briefly discusses conflicts of interest that might arise in carrying out the Act. The Secretary is directed to create regulations or guidelines to “manage or to prohibit conflicts of interest ... .”3 Areas where conflicts might arise include “the selection or hiring of contractors or advisors, including asset managers[,]” as well as the purchase and management of troubled assets, “post-employment restrictions on employees[,]” and any other conflicts identified by the Secretary.4 Such regulations and guidelines are to be issued “as soon as practicable after ... enactment” of EESA.5 On October 6, Treasury released Interim Guidelines for Conflicts of Interest applicable to the current round of solicitations, fleshing out the structure of EESA section 108.
Section 119 addresses judicial review of the Secretary’s actions under the Act. With certain exceptions, all actions by the Secretary under the EESA are subject to judicial review under the Administrative Procedure Act’s “arbitrary and capricious” standard. However, for any actions under sections 101, 102, 106 and 109 of the EESA, injunctive relief is not available unless necessary to remedy a violation of the U.S. Constitution. This means that injunctive relief would not be available with regard to Treasury’s selection of “financial agents” to support its implementation of the Act, as permitted in section 101. In contrast, injunctive relief would be available with regard to Treasury’s selection of government contractors under section 107.
In addition to authorizing injunctive relief in certain instances, section 119 requires that any request for a temporary restraining order (TRO) must be considered and decided within three days of the request. In other words, the Act imposes a time limit on federal courts presented with a motion for a TRO.
Treasury’s Decision to Solicit Financial Agents Instead of Contractors
On the morning of October 6, Treasury announced that it will not hire contractors for asset management services, as contemplated by section 107 of the EESA, but instead will award multiple “financial agency agreements” pursuant to section 101. Later that day, Treasury issued solicitations for three types of asset management services:
1) “Custodian, Accounting, Auction Management and Other Infrastructure Services”
2) “Securities Asset Management Services”
3) “Whole Loan Asset Management Services”
Responses were due two days later, on October 8.
The three solicitations have several organizational eligibility requirements in common. Each prospective financial agent must be a “financial institution” as defined in the Act. Financial institutions are defined as “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States [or any state] ... .”6 Depending on the solicitation, the prospective agent must currently have or manage a portfolio of assets ranging from at least $25 billion (whole loan services) to at least $500 billion (custodian and other infrastructure services). The prospective agent cannot be on the Federal Debarment and/or Suspension List; “delinquent on any debts to the Government”; “subject to any pending or current enforcement actions or regulatory investigations”; or in a probationary status with Treasury or any other federal agency if currently conducting business with that agency.
Although the solicitations are not covered by the FAR or the Competition in Contract Act (CICA), in at least a few instances, they include provisions similar to those found in a typical FAR-covered solicitation or contract. For example, each of Treasury’s solicitations requires the prospective agent to disclose all conflicts of interest and mitigate personal and organizational conflicts of interest. In addition, each solicitation requires the prospective agent to identify an approach to utilizing small, minority-owned and women-owned businesses as subcontractors or sub-managers. And, each of the solicitations includes evaluation criteria for selecting the winners.
Because the financial agency agreements are not covered by the CICA or the FAR, offerors not selected for an agreement will not be entitled to a debriefing. To the extent there was any doubt about this, the solicitations themselves make clear that “Treasury shall have no requirement to discuss the reasons, in either general or specific terms, or at any stage in the selection process, that the Financial Institution’s response was not accepted or that the selection process may have been terminated.”
Existing Law Relating to “Financial Agents”
The authority for the use of financial agents dates back to 1864 when Congress passed the National Bank Act authorizing Treasury to designate national banks as depositaries and employ them as financial agents of the government for particular purposes. Similar language to that employed in the EESA is codified at 12 U.S.C. § 90, which states that “[a]ll national banking associations ... may also be employed as financial agents of the Government; and they shall perform all such reasonable duties, as ... financial agents of the Government, as may be required of them.” Moreover, this statute states that “the Secretary may select associations as financial agents in accordance with any process the Secretary deems appropriate ... .” It appears that Section 101 of the EESA adopts this language when it authorizes the Secretary to “[d]esignat[e] financial institutions as financial agents of the Federal Government, and such institutions shall perform all such reasonable duties related to this Act as financial agents of the Federal Government as may be required.”7
Treasury’s existing regulations do not include procedures for the selection of financial agents in a competitive solicitation process, as contemplated by the solicitations issued by Treasury on October 6. Instead, Treasury’s regulations automatically designate certain classes of financial institution as “Depositaries and Financial Agents” of the government.8 Such financial institutions include those insured by the FDIC, credit unions insured by the National Credit Union Administration, and a variety of state banks, savings banks, savings and loans (S&Ls) and other institutions insured by a state. These financial agents are authorized “to accept deposits of public money and to perform other services as may be required of them.”9 There does not appear to be much precedent for hiring financial agents to perform services that could otherwise be performed by contractors.
In 1989, the U.S. Court of Appeals for the Federal Circuit held that agreements between Treasury and financial agents are not considered to be “procurement contracts” and, therefore, not subject to the Federal Property and Administrative Services Act of 1940 or the FAR.10 The Federal Circuit reversed a decision of the General Services Board of Contract Appeals (GSBCA) sustaining a bid protest by a competing financial agent, holding that the GSBCA had no jurisdiction over Treasury’s selection of a financial agent. Treasury would likely argue that a financial institution bidding for one of the contemplated financial agency agreements under the EESA will have no right to protest or otherwise challenge Treasury’s decision not to select that institution for award. Nor, arguably, will numerous other statutes and regulations addressing ethics and procurement integrity, competitive bidding, bid protests and other matters apply to the solicitations or resulting agreements.
One significant distinction between the typical Treasury financial agency relationship under existing law and those contemplated by the solicitations issued on October 6 is that, in the latter cases, the agents will be paid out of appropriated funds. Indeed, the solicitations state that the selection of a financial agent under the solicitations “shall be contingent upon and subject to availability of funding.” The typical financial agent of Treasury is not paid out of appropriated funds.
In short, the EESA and existing law regarding financial agents give Treasury broad discretion in the selection of such agents with little opportunity for an aggrieved party to seek administrative or judicial review akin to a bid protest. This is highly unusual given that the agents will be paid using appropriated funds, more like a contractor than the typical financial agency relationship.
Subcontracting Opportunities for Small and Disadvantaged Businesses
Financial institutions with hundreds of billions in assets are not the only entities capable of managing portfolios of troubled or defaulted mortgage loans. Several other federal agencies employ contractors for these services, including the Department of Housing and Urban Development (HUD), the General Services Administration (GSA), the Department of Veterans Affairs, and the Small Business Administration (SBA). Indeed, the GSA’s Federal Supply Schedules program has an entire Special Item Number (SIN) devoted to “Loan Servicing and Asset Management” (SIN 520-5). Treasury’s October 6 solicitations seem to contemplate that such contractors will be limited to acting as subcontractors to the selected financial agents, although Treasury reserved the right to hire such contractors directly in the future.
As discussed, each of Treasury’s October 6 solicitations requires the financial agent to describe its approach to using “small and minority- and women-owned businesses” as subcontractors. The solicitations do not state how an entity qualifies as small, minority-owned or women-owned. This raises the question of whether the existing statutory and regulatory framework of the Small Business Administration will apply to the selection of these types of subcontractors. It is not clear, for example, whether a firm must be certified by the SBA as an “8(a)” or small disadvantaged business (SDB) concern to qualify as “minority-owned” or whether the firm can self-certify as such. Similarly, it is not clear what size standards would apply to determine whether a firm qualifies as “small” under the solicitations.
Another open question is whether and to what extent a party can challenge a subcontract award by a financial agent. The U.S. Government Accountability Office (GAO) and the U.S. Court of Federal Claims (COFC) generally do not have jurisdiction to decide bid protests involving federal subcontract awards. One exception applied by GAO in years past, however, is when the prime contractor was acting by or on behalf (i.e., as an agent) of the federal government.11 Logically, that exception would apply to subcontract awards by financial “agents” hired pursuant to the EESA, but whether GAO or the COFC will agree remains to be seen. On the other hand, the SBA’s regulations expressly authorize “size protests” by competing subcontractors when a prime contractor awards a subcontract pursuant to the SBA’s Subcontracting Program.12
Regardless of how or whether these questions are answered, given the “emergency” label on the EESA and the limitations therein on injunctive relief, it seems unlikely that a bidder who feels that it was unfairly treated in the selection process will be able to challenge that process in any meaningful way. We will keep you apprised of any new developments on this topic.
For more information, contact:
Joseph P. Hornyak
703.720.8052
joe.hornyak@hklaw.com
Jacob W. Scott
703.720.8655
jacob.scott@hklaw.com
toll free: 1.888.688.8500
1 Existing regulations would permit Treasury to award contracts without full and open competition upon a finding of “unusual and compelling urgency that the Government would be seriously injured unless the agency is permitted to limit the number of sources from which it solicits bids or proposals … .” FAR 6.302-2(a)(2).
2 The Act also permits Treasury to select FDIC as an asset manager for residential mortgages and residential mortgage-backed securities.
3 EESA, § 108(a).
4 EESA, § 108(a)(1)-(5).
5 EESA, § 108(b).
6 EESA, § 3(5).
7 EESA, § 101(c)(3).
8 31 C.F.R. § 202.
9 31 C.F.R. § 202.1.
10 United States v. Citizens & Southern National Bank, 889 F.2d 1067 (Fed. Cir. 1989).
11 St. Mary’s Hospital and Medical Center of San Francisco, California,
B-243061, June 24, 1991, 91-1 CPD ¶ 597.
12 13 C.F.R. § 121.1001(a)(3)(iii).
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