Loading...
HomeMy WebLinkAbout16-552 Schwartz ADVICE OF COUNSEL August 12, 2016 Robert M. Schwartz, CRPC Schwartz Wealth Management th 308 10 Street Honesdale, PA 18431 16-552 Dear Mr. Schwartz: This responds to your letter dated June 29, 2016, by which you requested an advisory from the Pennsylvania State Ethics Commission (“Commission”). Issue: Whether the Public Official and Employee Ethics Act (“Ethics Act”), 65 Pa.C.S. § 1101 et seq., would impose prohibitions or restrictions upon an individual serving as a school director, who in a private capacity is a financial advisor with his own independent financial services practice, with regard to the individual/the financial services practice being approved by the school district as an advisor/product provider for the 403(b) plans of teachers employed by the school district. Facts: As a School Director for the Wallenpaupack Area School District (“School District”), you request an advisory from the Commission based upon submitted facts that may be fairly summarized as follows. In a private capacity, you are a financial advisor. In 2011, you opened your own independent financial services practice named “Schwartz Wealth Management” (the “Practice”), which is registered with LPL Financial. Teachers employed by the School District can elect to participate in a 403(b) plan. A 403(b) plan is a voluntary retirement savings plan administered by a third-party administrator. A 403(b) plan is not sponsored or funded by the School District, and it is not connected to the Public School Employees’ Retirement System. A firm seeking to be a provider of products for the 403(b) plans of School District teachers will request approval from the School District, citing interest from teachers, and the School District will approve the firm as a product provider as long as the firm is properly licensed or registered. The School District offers a choice of ten firms as approved product providers (“Approved Providers”) for 403(b) plans. The Approved Providers are represented by twenty-three advisors. Although the School District does not typically endorse any of the Approved Providers, the union representing the School District teachers has endorsed one of the Approved Providers. You state that the union-endorsed Approved Provider is the only Approved Provider that is permitted to Schwartz, 16-552 August 12, 2016 Page 2 make presentations to staff at orientation and school in-service meetings and distribute materials throughout the School District. If a teacher elects to participate in a 403(b) plan with an Approved Provider, the School District will withhold funds from the teacher’s compensation and forward those funds for investment by the Approved Provider. The School District does not provide matching funds for a teacher’s contributions to a 403(b) plan. The Approved Provider performs all investing and recordkeeping for a teacher’s 403(b) plan. Funds contributed to a teacher’s 403(b) plan are typically invested in mutual funds. Compensation paid to an advisor for handling a teacher’s 403(b) plan is derived from 12b-1 fees built into the mutual funds. You state that although teachers in the School District and other school districts have in the past asked you to handle their 403(b) plans, you have not become involved in such activity. You state that if you would be approved by the School District as an advisor/product provider for the 403(b) plans of School District teachers, your clients would be teachers participating in 403(b) plans, and you would not be doing any business with the School District. You further state that you would not charge your 403(b) plan clients any fees for your service or advice and that your compensation would be derived from 12b-1 fees built into the mutual funds. You additionally state that you would not be asking for an endorsement from or marketing by the School District. Based upon the above submitted facts, you ask whether the Ethics Act would impose prohibitions or restrictions upon you/the Practice with regard to being approved by the School District as an advisor/product provider for the 403(b) plans of School District teachers. Discussion: It is initially noted that pursuant to Sections 1107(10) and 1107(11) of the Ethics Act, 65 Pa.C.S. §§ 1107(10), (11), advisories are issued to the requester based upon the facts that the requester has submitted. In issuing the advisory based upon the facts that the requester has submitted, the Commission does not engage in an independent investigation of the facts, nor does it speculate as to facts that have not been submitted. It is the burden of the requester to truthfully disclose all of the material facts relevant to the inquiry. 65 Pa.C.S. §§ 1107(10), (11). An advisory only affords a defense to the extent the requester has truthfully disclosed all of the material facts. As a School Director for the School District, you are a public official subject to the provisions of the Ethics Act. Sections 1103(a) and 1103(j) of the Ethics Act provide: § 1103. Restricted activities (a)Conflict of interest.-- No public official or public employee shall engage in conduct that constitutes a conflict of interest. (j)Voting conflict.-- Where voting conflicts are not otherwise addressed by the Constitution of Pennsylvania or by any law, rule, regulation, order or ordinance, the following procedure shall be employed. Any public official or public employee who in the discharge of his official duties would be required to vote on a matter that would result in a conflict of interest shall abstain from voting and, prior to the vote being taken, publicly announce and disclose the nature of his interest as a public record in a written memorandum filed with the person responsible for recording the minutes of the meeting at which the vote is taken, provided that whenever a Schwartz, 16-552 August 12, 2016 Page 3 governing body would be unable to take any action on a matter before it because the number of members of the body required to abstain from voting under the provisions of this section makes the majority or other legally required vote of approval unattainable, then such members shall be permitted to vote if disclosures are made as otherwise provided herein. In the case of a three-member governing body of a political subdivision, where one member has abstained from voting as a result of a conflict of interest and the remaining two members of the governing body have cast opposing votes, the member who has abstained shall be permitted to vote to break the tie vote if disclosure is made as otherwise provided herein. 65 Pa.C.S. §§ 1103(a), (j). The following terms related to Section 1103(a) are defined in the Ethics Act as follows: § 1102. Definitions "Conflict" or "conflict of interest." Use by a public official or public employee of the authority of his office or employment or any confidential information received through his holding public office or employment for the private pecuniary benefit of himself, a member of his immediate family or a business with which he or a member of his immediate family is associated. The term does not include an action having a de minimis economic impact or which affects to the same degree a class consisting of the general public or a subclass consisting of an industry, occupation or other group which includes the public official or public employee, a member of his immediate family or a business with which he or a member of his immediate family is associated. "Authority of office or employment." The actual power provided by law, the exercise of which is necessary to the performance of duties and responsibilities unique to a particular public office or position of public employment. "Business." Any corporation, partnership, sole proprietorship, firm, enterprise, franchise, association, organization, self-employed individual, holding company, joint stock company, receivership, trust or any legal entity organized for profit. "Business with which he is associated." Any business in which the person or a member of the person's immediate family is a director, officer, owner, employee or has a financial interest. "Financial interest." Any financial interest in a legal entity engaged in business for profit which comprises more than 5% of the equity of the business or more than 5% of the assets of the economic interest in indebtedness. Schwartz, 16-552 August 12, 2016 Page 4 "De minimis economic impact." An economic consequence which has an insignificant effect. 65 Pa.C.S. § 1102. Subject to the statutory exclusions to the Ethics Act’s definition of the term “conflict” or “conflict of interest,” 65 Pa.C.S. § 1102, a public official/public employee is prohibited from using the authority of public office/employment or confidential information received by holding such a public position for the private pecuniary benefit of the public official/public employee himself, any member of his immediate family, or a business with which he or a member of his immediate family is associated. In each instance of a conflict of interest, the public official/public employee would be required to abstain from participation. The abstention requirement would not be limited merely to voting, but would extend to any use of authority of office including, but not limited to, discussing, conferring with others, and lobbying for a particular result. Juliante, Order 809. Subject to certain statutory exceptions, in each instance of a voting conflict, Section 1103(j) of the Ethics Act would require the public official/public employee to abstain and to publicly disclose the abstention and reasons for same, both orally and by filing a written memorandum to that effect with the person recording the minutes. Per the Pennsylvania Supreme Court’s decision in Kistler v. State Ethics Commission, 610 Pa. 516, 22 A.3d 223 (2011), in order to violate Section 1103(a) of the Ethics Act, a public official/public employee: … must act in such a way as to put his \[office/public position\] to the purpose of obtaining for himself a private pecuniary benefit. Such directed action implies awareness on the part of the \[public official/public employee\] of the potential pecuniary benefit as well as the motivation to obtain that benefit for himself. Kistler, supra, 610 Pa. at 523, 22 A.3d at 227. To violate Section 1103(a) of the Ethics Act, a public official/public employee “must be consciously aware of a private pecuniary benefit for himself, his family, or his business, and then must take action in the form of one or more specific steps to attain that benefit.” Id., 610 Pa. at 528, 22 A.3d at 231. A conflict of interest would not exist to the extent the “de minimis exclusion” and/or the “class/subclass exclusion” set forth within the Ethics Act’s definition of the term "conflict" or "conflict of interest," 65 Pa.C.S. § 1102, would be applicable. The de minimis exclusion precludes a finding of conflict of interest as to an action having a de minimis (insignificant) economic impact. Thus, when a matter that would otherwise constitute a conflict of interest under the Ethics Act would have an insignificant economic impact, a conflict would not exist and Section 1103(a) of the Ethics Act would not be implicated. See, Kolb, Order 1322; Schweinsburg, Order 900. The Commission has determined the applicability of the de minimis exclusion on a case-by-case basis, considering all relevant circumstances. In the past, the Commission has found amounts up to approximately $1,200 to be de minimis. In order for the class/subclass exclusion to apply, two criteria must be met: (1) the affected public official/public employee, immediate family member, or business with which the public official/public employee or immediate family member is associated must be a member of a class consisting of the general public or a true subclass consisting of more than one member; and (2) the public official/public employee, immediate family member, or business with which the public official/public employee or immediate family member is associated must be affected "to the same degree" (in no Schwartz, 16-552 August 12, 2016 Page 5 way differently) than the other members of the class/subclass. 65 Pa.C.S. § 1102; see, Kablack, Opinion 02-003; Rubenstein, Opinion 01-007. The first criterion of the exclusion is satisfied where the members of the proposed subclass are similarly situated as the result of relevant shared characteristics. The second criterion of the exclusion is satisfied where the individual/business in question and the other members of the class/subclass are reasonably affected to the same degree by the proposed action. Kablack, supra. Having established the above general principles, you are advised as follows. The Practice is a business with which you are associated in your capacity as the owner. Section 1103(a) of the Ethics Act would not prohibit you/the Practice from being approved by the School District as an advisor/product provider for the 403(b) plans of School District teachers. However, in your public capacity as a School Director, you would have a conflict of interest under Section 1103(a) of the Ethics Act in matter(s) pertaining to the School District’s approval of you/the Practice as an advisor/product provider for the 403(b) plans of School District teachers. You would also be prohibited from using the authority of your public position as a School Director, or confidential information obtained by being a School Director, to effectuate a private pecuniary benefit to yourself/the Practice through a detriment to a business competitor. See, Pepper, Opinion 87-008. At such times as you/the Practice would have a business relationship with or would have a reasonable expectation of developing a business relationship with particular School District teacher(s), you would have a conflict of interest and would violate Section 1103(a) of the Ethics Act by participating in your official capacity as a School Director in matter(s) involving such School District teacher(s) if: (1) you would be consciously aware of a private pecuniary benefit for you or the Practice; (2) your action(s) would constitute one or more specific steps to attain that benefit; and (3) neither of the statutory exclusions to the definition of "conflict" or "conflict of interest" as set forth in the Ethics Act, 65 Pa.C.S. § 1102, would be applicable. As noted above, in each instance of a conflict of interest, you would be required to abstain from participation, which would include voting unless one of the statutory exceptions of Section 1103(j) of the Ethics Act would be applicable. Additionally, the disclosure requirements of Section 1103(j) of the Ethics Act would have to be satisfied in the event of a voting conflict. The propriety of the proposed conduct has only been addressed under the Ethics Act; the applicability of any other statute, code, ordinance, regulation or other code of conduct other than the Ethics Act has not been considered in that they do not involve an interpretation of the Ethics Act. Specifically not addressed herein is the applicability of the Public School Code. Conclusion: As a School Director for the Wallenpaupack Area School District (“School District”), you are a public official subject to the provisions of the Public Official and Employee Ethics Act (“Ethics Act”), 65 Pa.C.S. § 1101 et seq. Based upon the submitted facts that: (1) in a private capacity, you are a financial advisor; (2) in 2011, you opened your own independent financial services practice named “Schwartz Wealth Management” (the “Practice”), which is registered with LPL Financial; (3) teachers employed by the School District can elect to participate in a 403(b) plan; (4) a 403(b) plan is a voluntary retirement savings plan administered by a third-party administrator; (5) a 403(b) plan is not sponsored or funded by the School District, and it is not connected to the Public School Employees’ Retirement System; (6) a firm seeking to be a provider of products for the 403(b) plans of School District teachers will request approval from the School District, citing interest from teachers, and the School District will approve the firm as a product provider as long as the firm is properly licensed or Schwartz, 16-552 August 12, 2016 Page 6 registered; (7) the School District offers a choice of ten firms as approved product providers (“Approved Providers”) for 403(b) plans; (8) the Approved Providers are represented by twenty-three advisors; (9) although the School District does not typically endorse any of the Approved Providers, the union representing the School District teachers has endorsed one of the Approved Providers; (10) the union-endorsed Approved Provider is the only Approved Provider that is permitted to make presentations to staff at orientation and school in-service meetings and distribute materials throughout the School District; (11) if a teacher elects to participate in a 403(b) plan with an Approved Provider, the School District will withhold funds from the teacher’s compensation and forward those funds for investment by the Approved Provider; (12) the School District does not provide matching funds for a teacher’s contributions to a 403(b) plan; (13) the Approved Provider performs all investing and recordkeeping for a teacher’s 403(b) plan; (14) funds contributed to a teacher’s 403(b) plan are typically invested in mutual funds; (15) compensation paid to an advisor for handling a teacher’s 403(b) plan is derived from 12b-1 fees built into the mutual funds; (16) although teachers in the School District and other school districts have in the past asked you to handle their 403(b) plans, you have not become involved in such activity; (17) if you would be approved by the School District as an advisor/product provider for the 403(b) plans of School District teachers, your clients would be teachers participating in 403(b) plans, and you would not be doing any business with the School District; (18) you would not charge your 403(b) plan clients any fees for your service or advice, and your compensation would be derived from 12b-1 fees built into the mutual funds; and (19), you would not be asking for an endorsement from or marketing by the School District, you are advised as follows. The Practice is a business with which you are associated in your capacity as the owner. Section 1103(a) of the Ethics Act would not prohibit you/the Practice from being approved by the School District as an advisor/product provider for the 403(b) plans of School District teachers. However, in your public capacity as a School Director, you would have a conflict of interest under Section 1103(a) of the Ethics Act in matter(s) pertaining to the School District’s approval of you/the Practice as an advisor/product provider for the 403(b) plans of School District teachers. You would also be prohibited from using the authority of your public position as a School Director, or confidential information obtained by being a School Director, to effectuate a private pecuniary benefit to yourself/the Practice through a detriment to a business competitor. At such times as you/the Practice would have a business relationship with or would have a reasonable expectation of developing a business relationship with particular School District teacher(s), you would have a conflict of interest and would violate Section 1103(a) of the Ethics Act by participating in your official capacity as a School Director in matter(s) involving such School District teacher(s) if: (1) you would be consciously aware of a private pecuniary benefit for you or the Practice; (2) your action(s) would constitute one or more specific steps to attain that benefit; and (3) neither of the statutory exclusions to the definition of "conflict" or "conflict of interest" as set forth in the Ethics Act, 65 Pa.C.S. § 1102, would be applicable. In each instance of a conflict of interest, you would be required to abstain from participation, which would include voting unless one of the statutory exceptions of Section 1103(j) of the Ethics Act would be applicable. Additionally, the disclosure requirements of Section 1103(j) of the Ethics Act would have to be satisfied in the event of a voting conflict. Lastly, the propriety of the proposed conduct has only been addressed under the Ethics Act. Pursuant to Section 1107(11) of the Ethics Act, an Advice is a complete defense in any enforcement proceeding initiated by the Commission, and evidence of good faith conduct in any other civil or criminal proceeding, provided the requester has disclosed truthfully all the material facts and committed the acts complained of in reliance on the Advice given. Schwartz, 16-552 August 12, 2016 Page 7 This letter is a public record and will be made available as such . Finally, if you disagree with this Advice or if you have any reason to challenge same, you may appeal the Advice to the full Commission. A personal appearance before the Commission will be scheduled and a formal Opinion will be issued by the Commission. Any such appeal must be in writing and must be actually received at the Commission within thirty (30) days of the date of this Advice pursuant to 51 Pa. Code § 13.2(h). The appeal may be received at the Commission by hand delivery, United States mail, delivery service, or by FAX transmission (717-787-0806). Failure to file such an appeal at the Commission within thirty (30) days may result in the dismissal of the appeal. Sincerely, Robin M. Hittie Chief Counsel