82.38

OPINION NO. 82-38

An inquiry has been received concerning whether a conflict of interest results when the Chairman of the Maryland Small Business Development Financing Authority (MSBDFA or the Authority) is employed by an accounting firm whose clients include banks that are involved in an agency interest subsidy and loan guarantee program.

This request is presented by the Chief Counsel of the Department of Economic and Community Development (DECD) on the behalf of the Chairman of the MSBDFA. The Authority is established in the Financial Institutions Article, §13-205, Annotated Code of Maryland. It is generally charged with managing a Small Business Development Financing Fund and making loans, loan guarantees, and equity guarantees to entities or persons unable to procure financing due to certain social, economic and physical handicaps. Its program was recently expanded (Laws of 1982, Ch. 734, eff. July 1, 1982) to improve the availability of long-term financing for socially or economically disadvantaged persons. Though the program is still in its formative stages, the general outline of how it will work is known. It is to rely on substantial involvement by private sector financial institutions, who would make loans to qualifying applicants at the prevailing Federal discount rate. The MSBDFA would be able to subsidize the interest rate up to 4 percentage points, however, and could guarantee up to 80% of the loan.

There are currently six banks in the program, which will apparently operate with a privately-managed clearinghouse and review committee. The clearinghouse will provide management advice and assist applicants in developing their loan requests. The committee will be composed of representatives of each bank, and will have the responsibility of reviewing each application. It is not clear yet how these groups will work. For example, it is not known how a particular bank will be selected for a particular loan. The Authority's role is to review the application after these first two, private, steps, and determine what, if any, subsidies or guarantees are appropriate under the program. The Chairman indicates that the development of regulations for management of the program is in process, and that many details of the procedures have yet to be resolved.

The question presented in this request arises as a result of the Chairman's employment and partnership relationship with a CPA firm that provides accounting services to three or four of the six banking institutions involved in the MSBDFA's new program. He states that the firm provides auditing services, tax advice, management consulting and other general accounting services to these institutions. The subject indicates that he is one of eleven partners, and does not participate in any of the firm's activities regarding these entities, though some of the payment would inure to him as a partner. He states that revenues from these clients represent a very small percentage of the firm's total business. He does not believe that the firm's accounting services would deal with the banks' activities under the MSBDFA program, given the limited size of the loans and small amount of risk involved.

The primary issue raised in this request is application of the outside employment and interest prohibitions of §3-103(a) of the Public Ethics Law (Article 40A, §3-103(a), Annotated Code of Maryland, the Ethics Law). This section prohibits an official or employee from being employed by or having an interest in an entity that is subject to the authority of or has contractual dealings with his agency (subsection 3-103(a)(1)(i)). It also bars "any other employment" that would impair an individual's impartiality or independence of judgment in carrying out his official responsibilities (subsection 3-103(a)(1)(ii)). We have considered the facts presented in this request in view of the prohibitions set forth in §3-103(a). While we are inclined to believe that the authority and contractual relationships here would not result in a violation of the technical restrictions of subsection (a)(1)(i), we think that application of the inconsistent employment provision of subsection (a)(1)(ii) is less clear. This is particularly so since the role to be played by the MSBDFA itself in the guaranty and subsidy program is not yet defined with any precision. Conceivably, the management of the program could result in an involvement by the Chairman with interests of the banks that would render his relationship with the banks' CPA firm "inconsistent" for purposes of §3-103(a)(1)(ii) of the Ethics Law.

Thus, in our view, a definitive opinion regarding application of this provision would have to await a more definite description of the Authority's role in this process. However, a final determination as to this issue does not appear to be required to respond to this request, as we believe that the Chairman's concerns can be resolved by application of the exemption to the §3-103(a)(1) prohibition set forth in §3-103(a)(2)(iii). This section provides that the prohibition does not apply to a board or commission member "in regard to a financial interest or employment held at the time of appointment, provided it is publicly disclosed to the appointing authority, the Commission, and, in instances where confirmation is not required, to the Senate prior to confirmation." The Subject's reappointment, which is made by the Governor without Senate confirmation, is in process. He has been provided a copy of the Ethics Commission Appointee Exemption Form, which he may submit in connection with his appointment.

Under the provisions of §3-103(a)(2)(iii), this disclosure is all that is required to ensure exemption from the §3-103(a)(1) prohibitions. In our earlier consideration of this exemption (Opinions No. 81-38 and No. 81-39) we concluded that it should apply, where there is proper disclosure, "to conflicting transactions that are similar to or related to a situation that results in an appointee's private employment being a conflict at the time of appointment." Thus, the Chairman would be exempted based on disclosure of his employment and partnership interests and his consequent relationship to the participating banks. Under this exemption conflicting interests and employment are exempted as to the situation that is disclosed or as to subsequent identical or similar transactions. Where dealings existed in the past and these are likely in the future, then these also can be exempted under this provision. The exemption does not apply to entirely new types of activities which arise out of the disclosed interests or employment.

Also, the Chairman should be aware that the other provisions of the Ethics Law continue to apply to him even though he may be exempt from the absolute prohibitions of §3-103(a). In particular, §3-101(a)(4) prohibits the non-ministerial participation by an official in a matter that involves as a party an entity with which he has a contractual relationship. As a partner of the CPA firm, he would be a party to service contracts between it and the banks, and would thus be required to disqualify himself from participation in matters where any of the client banks is involved as a party.1 The Chairman should also be aware that 3-104 and 3-107 of the Law prohibit the intentional use of the prestige of one's office, and the misuse of confidential information for one's own personal benefit or that of another.

Herbert J. Belgrad, Chairman
    Jervis S. Finney
    Reverend John Wesley Holland
    Betty B. Nelson
    Barbara M. Steckel

Date: August 25, 1982

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1 See Commission Opinions No. 82-24, No. 81-5, and No. 80-17 for a discussion of the concepts of "participation," "party" and "matter" in connection with application of §3-101 of the Ethics Law.