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HomeMy WebLinkAbout91-011 SpiegelmanI. Issue: STATE ETHICS COMMISSION 308 FINANCE BUILDING HARRISBURG, PENNSYLVANIA 17120 OPINION OF TICE COMMISSION Before: Dennis C. Harrington, Chair Daneen E. Reese Roy W. Wilt James P. Gallagher DATE DECIDED: December 5, 1991 DATE MAILED: December 10,1991 Mr. Richard D. Spiegelman 91 -011 Executive Deputy General Counsel Commonwealth of Pennsylvania Office of General Counsel P.O. Box 11775 Harrisburg, PA 17108 Re: Conflict, Public Official /Employee, Public School Employees' Retirement System, Investment of Retirement Fund, Business with which Associated. Dear Mr. Spiegelman: This Opinion is issued in response to your letter of request dated September 12, 1991. Whether the Public Official and Employee Ethics Law imposes any prohibitions or restrictions upon a Member of the Board of the Public School Employees' Retirement System in matters regarding direct or indirect investments in non - public companies in which he has personally financially invested or for which he is a Board Director. II. Factual Basis for Determination: As Executive Deputy General Counsel for the Office of General Counsel, you seek an Opinion of this Commission on behalf of Winston J. Churchill, who was appointed by the Governor to the Board of the Public School Employees' Retirement System ( "PSERS "). The Members of the PSERS Board are the trustees of the Public School Employees' Retirement Fund ( "Fund "). The Board Members' responsibilities include managing and investing monies held by the Fund. The PSERS Board routinely authorizes equity investments in various non - public companies. PSERS may invest in a company directly, or indirectly by investing in a venture capital group or fund which in turn invests in a company. Mr. Churchill maintains personal financial investments in various non - public companies and in some instances, serves on the Boards of Directors of these companies. In certain instances, PSERS has either directly or indirectly invested in companies which Mr. Churchill serves as a Board Director or in which he has personal financial investments. You state that in the past, Mr. Churchill has disclosed publicly to the PSERS Board his relationship with any non - public companies in which PSERS was contemplating making investments, and he has publicly recused himself from any actions or deliberations of the PSERS Board with respect to such investments. Mr. Churchill would intend to follow this same course of action should similar situations arise in the future. You specifically inquire as to whether Mr. Churchill's recusal in such situations is proper, sufficient, and in conformance with the Ethics Law. Noting the similarities between the circumstances surrounding your inquiry and those involved in this Commission's Opinion in Scheiner, Opinion 87- 006, you nevertheless seek confirmation that Mr. Churchill's actions conform to the requirements of the Ethics Law. To clarify your request, you describe a recent situation in which Mr. Churchill was an investor and also a member of the Board of Directors of a start -up, non - public company. A venture capital group had also invested in that same company. Before Mr. Churchill's tenure with PSERS began, the PSERS Board decided to invest in the venture capital group, thus indirectly investing in the start -up company with which Mr. Churchill was associated. When the venture capital group approached PSERS for additional funding recently, Mr. Churchill recused himself entirely from the investment decision made by the PSERS Board so as to avoid even the appearance of a possible conflict of interest. Additionally, Mr. Churchill publicly announced his recusal from that situation at a PSERS Board meeting. You request an advisory opinion from this Commission concerning the propriety and sufficiency under the Ethics Law of Mr. Churchill's recusal from investment decisions made by the PSERS Board in situations such as the one you have described, set forth above. III. Discussion: As a Board Member of PSERS, Mr. Winston J. Churchill is a "public official" as that term is defined under the Ethics Law, and hence he is subject to the provisions of that law. This is established by a review of the Public School Employees' Retirement' Code, 24 Pa. C.S. §8101, et seer.,, as well as the facts submitted in your letter of inquiry. Members of the PSERS Board are trustees of the Fund and have exclusive control and management of the Fund with full power to invest it. 24 Pa. C.S. 58521(a). That authority includes certain discretion to invest up to ten percent of the book value of the assets of the Fund in investments which are not otherwise specifically authorized, with some restrictions on venture capital investments. See, 24 Pa. C.S. §8521 (1), (o). The statutory interest charges payable, the maintenance of reserves in the Fund, and the payment of all annuities and other benefits granted by the PSERS Board under the provisions of the Public School Employees' Retirement Code constitute obligations of the Commonwealth, which the Commonwealth specifically guarantees. 24 Pa. C.S. 58531. The PSERS Board exercises the power of the State so as to bring Mr. Churchill, as an appointed Board Member, within the definition of "public official" as set forth in the Ethics Law. Section 3(a) of the Ethics Law provides: Section 3. Restricted Activities. (a) No public official or public employee shall engage in conduct that constitutes a conflict of interest. The following terms are defined in the Ethics Law as follows: Section 2. 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. "Conflict" or "conflict of interest" 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 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. In addition, Sections 3(b) and 3(c) of the Ethics Law provide in part that no person shall offer to a public official /employee anything of monetary value and no public official /employee shall solicit or accept any thing of monetary value based upon the understanding that the vote, official action, or judgement of the public official /employee would be influenced thereby. Reference is made to these provisions of the law not to imply that there has or will be any transgression thereof but merely to provide a complete response to the question presented. Before addressing your specific inquiry, we must initially bring to your attention the following provision set forth in the Public School Employees' Retirement Code: S8521. Management of fund and accounts (e) Fiduciary status of board. - The members of the board, employees of the board, and agents thereof shall stand in a fiduciary relationship to the members of the system regarding the investments and disbursements of any of the moneys of the fund and shall not profit either directly or indirectly with respect thereto. 24 Pa. C.S. S8521(e)(Emphasis added). Although this Commission does not have the specific statutory jurisdiction to interpret the above provision, we note our concern as to whether Mr. Churchill would transgress his fiduciary obligation as a PSERS Board Member through investments by PSERS in companies in which he has personally invested and /or serves as a Board Director, even if he recused himself from those particular matters. We suggest to Mr. Churchill that he consider eliciting advice from his counsel regarding his duties under the Public School Employees' Retirement Code. The main prohibition under the Ethics Law and the Opinions of this Commission is that a public official /employee may not serve other interests which are inherently adverse to the interests he serves as a public official /employee. This Commission must observe the stated purpose of the Ethics Law which is to strengthen the faith and confidence of people in their government by assuring the public that the financial interests of the holders of or nominees or candidates for public office do not conflict with the public trust. See, S1 of the Ethics Law, 65 P.S. 5401. Section 3(a) of the Ethics Law prohibits conduct by a public official /employee that constitutes a conflict of interest. Pursuant to Section 3(a), Mr. Churchill may not use the authority of his office or confidential information obtained by holding his position to secure a private pecuniary benefit for himself, a member of his immediate family, or a business with which he or a member of his immediate family is associated. We focus upon the term "business with which he is associated," to clarify the circumstances under which a particular entity would be deemed to be a business with which Mr. Churchill is associated. Any company which Mr. Churchill serves as a member of the board of directors is clearly a business with which he is associated, within the definition set forth above. Companies in which Mr. Churchill has invested but for which neither he nor any member of his immediate family serves as a director, officer, owner, or employee would only meet that definition if Mr. Churchill or a member of his immediate family has a "financial interest" in the business. A "financial interest" by definition comprises more than five percent of the equity or more than five percent of the assets of the economic interest in indebtedness of a legal entity engaged in business for profit. If PSERS were to consider directly investing in a business with which Mr. Churchill is associated, Mr. Churchill's use of the authority of his office and /or confidential information received by holding his position could result in a prohibited private pecuniary benefit. Such circumstances would present a conflict of interest for Mr. Churchill. Likewise, matters involving investments in a venture capital group or fund which itself has investments in a business with which Mr. Churchill is associated would clearly present a conflict of interest for Mr. Churchill. This Commission reached similar conclusions in Scheiner, Opinion 87 -006, under former Act 170 of 1978. Although Scheiner was decided under the former Ethics Act, and therefore would not be controlling, its reasoning which recognized a conflict of interest for a public official /employee under such circumstances continues to be valid under present Act 9 of 1989. Where a venture capital group has never invested or no longer has investments in a business with which Mr. Churchill is associated, there would not be a conflict of interest for Mr. Churchill unless the venture capital group could "reasonably and legitimately" be anticipated to so invest. See, Amato, Opinion 89 -002. For example, if the venture capital group or fund disclosed anticipated investments which included a business or businesses with which Mr. Churchill is associated, there would be a conflict of interest for Mr. Churchill. Other factors which could create a "reasonable and legitimate" anticipation of a venture capital group's investment in such a business would include, but not be limited to, the amount, duration and /or frequency of past investment(s) in that business. In each instance of a conflict of interest, Mr. Churchill would be required to abstain from any participation in the matter, including but not limited to participating in discussions and voting. Additionally, the disclosure requirements of Section 3(j) of the Ethics Law would have to be observed. Mr. Churchill would be required to publicly announce as well as disclose in a written memorandum filed with the secretary recording the minutes, his abstention and the reasons for same. The example which you have provided of Mr. Churchill's recent recusal is past conduct, and thus it may not be specifically addressed in this Opinion. However, Mr. Churchill must apply the above guidelines to any such circumstances arising in the future. If further advice is needed as to specific instances which arise, Mr. Churchill may seek further advice from this Commission. Lastly, the propriety of the proposed conduct has only been addressed under the Ethics Law. A concern has been noted as to whether the proposed conduct would be in conformity with the Public School Employees' Retirement Code. IV. Conclusion: Mr. Winston J. Churchill, as a Member of the Board of the Public School Employees' Retirement System ( "PSERS ") is a "public official" as that term is defined in the Ethics Law. Accordingly, Mr. Churchill is subject to the provisions of the Ethics Law and the restrictions therein are applicable to Mr. Churchill. Section 3(a) would prohibit the use of authority of office or confidential information received through holding public office for a private pecuniary benefit for Mr. Churchill, any member of his immediate family or any business with which he or a member of his immediate family is associated. Any company for which Mr. Churchill or any member of his immediate family is a director, officer, owner, or employee, or in which Mr. Churchill or a member of his immediate family has a "financial interest" as defined in the Ethics Law would be a business with which Mr. Churchill is associated. Mr. Churchill would have a conflict of interest in any matter before the PSERS Board involving a business with which he is associated. Such matters would include direct investments in such businesses or indirect investments through venture capital groups or funds which have investments or can reasonably and legitimately be anticipated to invest in such businesses. In each instance of a conflict of interest, Mr. Churchill would be required to abstain from any participation or vote and the disclosure requirements of Section 3(j) of the Ethics Law, set forth above, would have to be observed. Lastly, the propriety of the proposed conduct is only addressed under the Ethics Law. Pursuant to Section 7(10), the person who acts in good faith on this opinion issued to him shall not be subject to criminal or civil penalties for so acting provided the material facts are as stated in the request. such. This letter is a public record and will be made available as Finally, any person may request the Commission to reconsider its Opinion. The reconsideration request must be received at this Commission within fifteen days of the mailing date of this Opinion. The person requesting reconsideration should present a detailed explanation setting forth the reasons why the Opinion requires reconsideration. By the Commission, Dennis C. Harrington Chair