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HomeMy WebLinkAbout82-012 WellingtonJohn S. Wellington, thief Counsel Treasury Department 129 Finance Building Harrisburg, PA 17120 II. Factual Basis for Determination: STATE ETHICS COMMISSION 308 FINANCE BUILDING HARRISBURG, PENNSYLVANIA 17120 December 23, 1982 OPINION OF THE COMMISSION 82 -012 RE: Pennsylvania Mortgage Corporation; State Treasurer; Directorship Dear Mr. Wellington: I. Issue: You request advice on behalf of the State Treasurer as to whether or not the Ethics Act places any restrictions upon his proposed service as a director of a corporation known as Pennsylvania Mortgage Corporation, hereinafter PMC. The State Treasurer has been asked to serve as a director of a corporation to be formed and to be known as PMC. This corporation, as currently contemplated, would serve as a vehicle for providing a source of mortgage funding for residential mortgages. The corporation would be composed of a board of directors of 20 members, 18 of whom would consist of three representatives from associations from the following groups: mutual savings banks, commercial banks, savings and loan establishments, mortgage bankers, realtors, and builders. The other two members of the board of directors of PMC would be: (a) a representative satisfactory to the Governor and (b) the State Treasurer. Shareholders in the coporation would be the six industry groups. The directors would receive no salary or renumeration from the corporation nor would they be shareholders of the coporation. PMC would operate as a vehicle to utilize a mortgage- backed security instrument for the purpose of providing mortgages from public pension funds and institutional investors. This mortgage- backed security contemplated by PMC would be a debt instrument collateralized by a pool of mortgages. PMC would establish criteria for the mortgage - backed security and would then seek so- called conduit companies such as MGIC (Mortgage Guarantee Insurance Corporation), Verex (a subsidiary of Greyhound Corporation) and the like, who would offer such mortgage- backed securities for investment by the public and private institutional investors. PMC would then present the investment opportunity to institutional investors, including the public pension and retirement funds. John S. Wellington, Chief Counsel December 23, 1982 Page 2 In this venture there would be no actual contract between PMC and the retirement funds and none of PMC's income would come from the retirement funds or other institutional investors. Any income to PMC would be generated from the fee income paid by or through the conduit companies (fees and service charges, etc.) which would also be paid by the mortgagors whose individual mortgages make up the pool which collateralizes the debt instrument or security that would be utilized or issued by PMC. The primary purpose of PMC is to increase investment by public pension funds and institutional investors in residential mortgages. This endeavor would benefit the economy in general on a state and national basis by stimulating home building and sales and providing employment in these areas in Pennsylvania. The pension funds to whom this proposal will be presented include the State Employees Retirement Board, the Public School Employees Retirement Board and the Pennsylvania Municipal Retirement Board hereinafter, the Pension Retirement Funds or Pension Boards. The State Treasurer is, by law, an ex officio member of the State Employees Retirement Board. This Board consist of 11 members: the State Treasurer, two Senators, two members of the House of Representatives, and six members who are designated by the Governor. See 71 Pa. C.S.A. 5901. Likewise, the State Treasurer, the Secretary of Education, and the Executive Secretary of the Pennsylvania School Boards Association serve as ex officio members of the Public School Employees Retirement Board. The remaining 12 members of this 15- member Board consist of two Senators and two members of the House of Representatives, two members appointed by the Governor, three members elected by the active professional members of the Retirement System from among their membership, one member elected by the annuitants of the system from their membership, one member elected by the active non - professional members of the retirement system from among their membership, and one member elected to represent the Public School Boards from among their membership. See 24 Pa. C.S.A. 8501(a). As to the Pennsylvania Municipal Retirement Board, the State Treasurer and the Secretary of the Commonwealth are ex officio members of this Board. Eight other members of the Board are appointed by the Governor. See 53 P.S. 881.02. All formal action by these Retirement Boards, with respect to investments, is taken at open and public meetings. Notably, in the letter dated November 15, 1982, which solicited the participation as a director by the State Treasurer, the person soliciting the Treasurer's participation indicated that independent "pitches" had been made by groups of realtors and others to the Retirement Funds to provide a mortgage- backed security program and to enlist the support of such funds in providing mortgage funding in Pennsylvania. This letter notes that such individual efforts have met with little success. Consequently, the attempt was made to develop the vehicle to be known as PMC in the hope that this corporation would have greater success in utilizing the mortgage- backed John S. Wellington, Chief Counsel December 23, 1982 Page 3 security instruments as a vehicle for securing greater investment by the Retirement Funds. This letter indicates that "we believe that this corporation will have great success in utilizing a mortgage- backed security instrument if we might have the wisdom and support of the State Treasurer's Office" and solicits the consent of the Treasurer to serve on the board of directors. The information provided also indicates that this program is patterned after the program of a similar nature established and operating in the State of Colorado. In the Colorado program the State Treasurer is a member of the analogous mortgage corporation's board of directors. III. Applicable Law: The law to be applied to this situation is as follows: Section 1. Purpose. The Legislature hereby declares that public office is a public trust and that any effort to realize personal financial gain through public office other than compensation provided by law is a violation of that trust. In order to strengthen the faith and confidence of the people of the State in their government, the Legislature further declares that the people have a right to be assured that the financial interests of holders of or candidates for public office present neither a conflict nor the appearance of a conflict with the public trust. Because public confidence in government can best be sustained by assuring the people of the impartiality and honesty of public officials, this act shall be liberally construed to promote complete disclosure. 65 P.S. 401. Section 3. Prohibited Activities. (a) No public official or public employee shall use his public office or any confidential information received through his holding public office to obtain financial gain other than compensation provided by law for himself, a member of his immediate family, or a business with which he is associated. 65 P.S. 403(a). John S. Wellington, Chief Counsel December 23, 1982 Page 4 V. Discussion: (c) No public official or public employee or a member of his immediate family or any business in which the person or a member of the person's immediate family is a director, officer, owner or holder of stock exceeding 5% of the equity at fair market value of the business shall enter into any contract valued at $500 or more with a governmental body unless the contract has been awarded through an open and public process, including prior public notice and subsequent public disclosure of all proposals considered and contracts awarded. Any contract made in violation of this subsection shall be voidable by a court of competent jurisdiction if the suit is commenced within 90 days of making of the contract. 65 P.S. 403(c). Of course, the State Treasurer is a public official as defined in the Ethics Act, and, accordingly, his conduct must conform to the requirements of the Ethics Act. The requirements of the Ethics Act are sometimes unclear as they may be applicable to a particular situation and the complexity of the situation presented here will, hopefully, in this discussion, be reduced to fairly basic concepts for purposes of comprehension. In this discussion, we will assume that the State Employees Retirement Board, the Public School Employees Retirement Board and the Pennsylvania Municipal Retirement Board, hereinafter referred to collectively as the Retirement Funds or Pension Funds, are legally authorized to make the type of investment proposed by PMC. Likewise, we will assume that such an investment is within the sound discretion of those Boards and would constitute a competitive and appropriate investment opportunity for those Pension Funds. In addition, we also recognize that the proposal of PMC is designed to gain access to non - conventional sources of home loan money and to make that money available to realtors, home - builders, and home - buyers in Pennsylvania to an extent that such monies may not have been available without the intervention of or the proposal of PMC. It is clear that such a proposal, if adopted by any private or public investor would, in general, benefit home - building and home - buying groups within the Commonwealth. This investment opportunity, whether ultimately selected by private or public investors, if successful, would have the salutory effect of addressing and meeting the urgent need for conventional single - family mortgage funds in the Commonwealth and would spur home - building and home - buying opportunities in Pennsylvania. John S. Wellington, Chief Counsel December 23, 1982 Page 5 Recognizing the salutory and generally beneficial results, however, we must still address the question of the propriety of the State Teasurer participating as a director of PMC. As expressed in Section 1 of the Ethics Act the public has a right to be assured that the financial interests of an office holder present neither a conflict nor an appearance of a conflict with the public trust. Section 3(a) admonishes a public officer against using his public office to secure financial gain for himself or a business with which he is associated, in addition to the compensation provided to that official by law. Notably, the definition of a "business with which he is associated" includes a business on which the public official serves as a director. Thus, we begin with the assumption that PMC would be a "business with which the official (the Treasurer) would be associated" if the Treasurer were to accept appointment as director on the board of this corporation. Likewise, the fact that the Treasurer would be a director in PMC would implicate the provisions of Section 3(c) of the Ethics Act to the extent that a contract between the governmental body with which an official is associated and a business with which he is associated could be made only after an open and public process as required by this provision of the Ethics Act. The State Treasurer is deemed to be associated with the Pennsylvania Funds by virtue of this ex officio membership on these Boards. See Geesey, 80 -057 and Seltzer, 80 -044. Addressing this last consideration first, you have indicated that there would be no contract between PMC and any of the Pension Funds. Therefore, upon this representation, there would be no requirement under the Ethics A(;t, . that an open and public process be undertaken by PMC in relation to these Pension Funds. We next consider whether there is any actual or potential financial gain that would be prohibited by Section 3(a) of the Ethics Act in this proposed transaction. Given the fact that the Treasurer will not be compensated as a director of PMC and that he will not participate in any of the profits of PMC as a shareholder or otherwise, the potential from acquisition for personal financial gain for the use of the office of Treasurer or as ex officio member of these Boards is not sufficiently apparent warrant to barring his acceptance of the position as director in PMC. Accordingly, we conclude that there is no per se prohibition under Section 3(a) against accepting this position in PMC. However, in light of Section 1 of the Ethics Act and in order to assure the public that the Treasurer's personal financial interests do not create even an appearance of a conflict with the public trust which he is to serve as a member of these Pension Boards, we must review the question of whether the Treasurer's mere participation in PMC as a director may be inappropriate. It is clear that the invitation to become a director in PMC is an attempt to secure for PMC the support of the office of the State Treasurer so that with John S. Wellington, Chief Counsel December 23, 1982 Page 6 this support, PMC would be better able to secure investment committments from the public Pension Boards upon which the Treasurer serves. As such, the power and prestige of the Treasurer's Office would be used by the private corporation, PMC, to sway the decision of a public Pension Board(s). This usurpation of the power and prestige of the Office of the State Treasurer should not be permitted and the Treasurer would be best advised to decline to participate in anything that appears to have this purpose or result. We make this decision mindful of the pressing need for mortgage funds that PMC's proposal might meet and the beneficial effect such a proposal, if fully funded, might have on Pennsylvania's home - building and home - buying populations. We make this decision mindful also, however, of the high -level nature of the Office of the State Treasurer and the clearly commercial and profit- making nature of the corporation and proposals with which he would be associated. We are convinced that if the proposals of PMC are so obviously meritorious they can succeed without the benefit of or use of the weight and prestige of the Office of the State Treasurer. Thus, the Commonwealth may still reap the social and economic benefits of this program without using or sacrificing the prestige of such an important office and officer to secure funding for this project. V. Conclusion: Given the facts as presented, Section 3(c) of the Ethics Act is not applicable and does not require that the proposals of PMC made to the Pension Funds meet the open and public process requirements contained in that Section of the Ethics Act. Likewise, there is no per se prohibition under the Ethics Act against accepting the offered directorship in PMC. However, lending the power and prestige of the Office of State Treasurer to PMC's endeavors to secure public Pension Fund(s) monies for PMC's projects would give rise to an appearance that the Treasurer's interests and the public's interests which he is to serve on the Pension Boards conflict. The Treasurer would be best advised to refrain from lending the power and prestige of his office to this private, profit- making corporation and to decline to serve PMC as a director. Pursuant to Section 7(9)(i), this opinion is a complete defense in any enforcement proceeding initiated by the Commission, and evidence of good faith conduct in any civil or criminal proceeding, providing the requestor has disclosed truthfully all the material facts and committed the acts complained of in reliance of the advice given. John S. Wellington, Chief Counsel December 23, 1982 Page 7 Finally, any person may request within 15 days of service of the opinion that the Commission reconsider its opinion. The person requesting reconside- ration should present a detailed explanation setting forth the reasons why the opinion requires reconsideration. SSC /rdp This letter is a public record and will be made available as such. cc: Budd R. Dwyer, State Treasurer By the Commission, PAUL J.USMITH Chairman