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Un-Blind Trust

We’ll leave it to the Justice Department and the Securities and Exchange Commission to decide whether Senate Majority Leader Bill Frist (R-Tenn.) engaged in insider trading when he sold off stock in HCA Inc., the company his family founded, just before its value declined. It’s up to the Senate, though, to stop allowing trusts that aren’t really blind.

In a true blind trust, the owner knows nothing about what the trustee is doing with his or her financial assets. It’s the customary means for wealthy office-holders to avoid even the appearance of conflicts of interest.

But as the Frist case has revealed, the Senate allows a different system. Senate ethics rules provide for a “qualified blind trust.” In addition to knowing what he or she has put into a trust when it’s established — as is the case with a standard blind trust — a Senator may be informed when any of these initial holdings are added to, as happened in 2001 and 2002, when three Frist trusts received more than $1 million in HCA stock in a family distribution.

On top of that, Senators are informed when the trustee liquidates an asset, as happened in November 2002 with one of the three trusts in Frist’s name and seven more in the names of his wife and children. Using common sense, it would not have been hard for Frist to guess that he had a substantial amount of HCA stock in his possession, even if he did not know the exact amount.

And third, under Senate rules, Frist had the ability to order his trustee to sell off stock, and he did exactly that. Frist says he made the order to avoid the appearance of a conflict of interest, thus getting past an issue that had been raised for his entire political career. Instead, it has brought him intense scrutiny, with critics wondering whether Frist avoided losses with the help of inside information.

In the end, this may all be a case of no good deed going unpunished (though the Majority Leader will still need to explain why he claimed on various occasions that he had no idea whether he owned any stock in HCA).

On the other hand, even without an inside tip, Frist easily could have known from public sources that HCA stock was at a yearly high at the time he ordered it sold and that various HCA executives had been selling their stock.

What’s called for here is major reform of the ethics rules on Senators’ financial holdings — either to make blind trusts truly blind, or (arguably better) to make Senators’ holdings utterly transparent.

Most Senators report their holdings within 11 wide ranges that make it difficult to tell just how much of any asset a Senator has. A few Senators, including Daniel Akaka (D-Hawaii), Norm Coleman (R-Minn.), Dick Durbin (D-Ill.) and John McCain (R-Ariz.), annually disclose all their holdings in detail. The public knows exactly where their money is and whether they could have a conflict of interest.

Semi-blind trusts actually offer the worst of both worlds — limited disclosure to the public, yet with the ability for Senators to undertake actions that run counter to the theory of a genuine blind trust. So, to restore confidence, we think the Senate should either go blind or go naked, in the best sense of both concepts.