A client serving as an officer or director of a public company is exposed to additional risks and should consider the use of a Blind Trust as a component of his or her asset protection plan. A Blind Trust is a trust whereby an independent (usually corporate) trustee manages and invests the trust assets without the client’s knowledge, influence, or participation.

I. BENEFITS OF BLIND TRUSTS.

Given the current regulatory environment and the intensified spotlight on corporate governance, Blind Trusts are gaining popularity among corporate executives as a practical solution to protect them from insider trading claims, while providing a means for the executive to diversify and manage his investment portfolio risk.

Blind Trusts provide a vehicle for executives to sell and diversify their holdings in a corporation without violating insider trading rules and without being subject to the time constraints of trading window periods. For example, the independent trustee may trade assets within a blackout period in which the client would be precluded from doing so because of the client’s insider trader status.

II. PURPOSE OF A BLIND TRUST.

Aside from the desire to diversify one’s holdings without violating the insider trading rules, there are other practical reasons for establishing a Blind Trust. Blind Trusts may be used as a source of income to support an executive and the executive’s family. In addition, the independent trustee’s ability to diversify the trust assets allows the Blind Trust’s assets to serve as a source of liquidity for the executive since he or she is not constrained by insider trading windows.

III. OPERATION OF A BLIND TRUST.

Blind Trusts require an independent trustee, independent management of trust assets, and “mutual blindness.” In other words, the executive cannot attempt to influence the independent trustee’s investment activities and the trustee and executive cannot communicate any information in advance of or contemporaneously with the trust investment activities. All officers and directors have a fiduciary duty to their organization, and a Blind Trust acts as a barrier that prevents the client from seeing or knowing what the trustee is doing. Thus, “mutual blindness” acts as a safeguard to prevent any sale of trust assets based on material, non-public information and thus prevents any violation of the insider trading rules. Although disclosure is not required, many executives disclose that they have established a Blind Trust. The market generally views these trusts as an ethical and practical technique for wealth and tax planning purposes.