An advisory opinion has been requested concerning whether the Assistant Commissioner for Railroad Safety and Health (the Assistant Commissioner or the Requestor) may have financial interests and other affiliations with his former employer, a major railroad system (Chessie Systems Railroads, or Chessie).
This request is presented by the Assistant Commissioner, whose office (the Railroad Safety Office) is part of the Division of Labor and Industry in the Department of Licensing and Regulation (DLR). The Railroad Safety Office implements the Maryland Railroad Safety and Health Law (Article 89, §82 et seq., Annotated Code of Maryland, the Railroad Safety Law), enacted by the General Assembly in 1980. The agency's responsibilities under the Railroad Safety Law are: 1) to promulgate standards, rules and regulations relating to areas of railroad safety and health; and 2) to conduct inspections and investigations, issue citations, permit variances and impose civil penalties for violation of safety and health standards. The agency has subpoena and other enforcement authority and has a cooperative program with the Federal Railroad Administration for implementing the Federal Railroad Safety Act of 1970.
According to the recent Annual Report of the Division of Labor and Industry, the Railroad Safety program emphasizes three areas, track safety, equipment safety, and industrial health; it is managed by the Assistant Commissioner based on a delegation of authority issued at the time of his appointment. In addition to supervisory, coordination, and training responsibilities as to his staff of eight inspectors, the Assistant Commissioner is assigned significant substantive responsibilities, including, among other things: the granting of written approval for advance notice of inspections, the issuance of citations, the assessment of proposed penalties, and the granting of abatement periods and extensions. The jurisdiction of the agency under the Railroad Safety Act extends to the Chessie Systems' Baltimore & Ohio and Western Maryland units, as well as Amtrak, Conrail, Norfolk & Western, Delaware & Hudson, and seven smaller rail companies having units operating in Maryland.
The Assistant Commissioner is a retiree of Chessie, and has two kinds of economic relationships with the company. First, he and his spouse own a substantial amount of stock in the company, purchased over the years through employee stock options, one as recently as October, 1982. Both the stock and the options were disclosed on the Requestor's financial disclosure statement. Second, the Assistant Commissioner also receives a pension from Chessie.1 The pension plan is a defined benefit plan, where the amount of a participant's pension is determined by use of a specific formula and is fixed at a given level. The pension fund is financed by contributions from the company, the amount of which are determined by an independent actuary retained by the Plan. A Trustee appointed by the company holds the assets to the fund, though the company appoints the investment committee and retains the right to change or terminate the Plan.
The Requestor's ownership of Chessie stock raises questions under §3-103(a)(1)(i) of the Public Ethics Law (Article 40A, §3-103(a)(1)(i), Annotated Code of Maryland, the Ethics Law). This section prohibits an employee or official from holding a financial interest in an entity that is subject to the authority of or has contractual dealings with his agency. Section 1-201(m) defines "financial interest" to include the "ownership of any interest as the result of which the owner has received, within the past 3 years, or is presently receiving, or in the future is entitled to receive, more than $1,000 per year...." While we have not been informed as to the annual income received by the Assistant Commissioner from his Chessie stock, we have consistently held that the ability to sell an interest for in excess of $1,000 brings the interest within this definition.2 The Assistant Commissioner's Chessie stock exceeds this value and would thus be considered as a financial interest, and, given the substantial regulatory authority of the agency over the Chessie System, the holding of these interests would be prohibited under 3-103(a)(1)(i), unless an exception can be applied.
Authority for exception from the financial interest prohibition is set forth in the introduction to §3-103(a), which provides that the prohibition applies "except as permitted by regulation of the Commission where such interest is disclosed or where such employment does not create a conflict of interest or appearance of conflict." This exception provision was added to the Ethics Law in 1981 partly based on our recommendation that flexibility be added to the absolute prohibitions in §3-103(a). The purpose was to avoid situations where a violation would result from purely technical application of the elements of §3-103(a), even where there is no conflict or appearance of conflict between the private interest or employment and agency activities. In developing exception criteria implementing this provision (COMAR 19A.02.01 and 19A.02.02), we sought to define circumstances where the relationship between an employee's agency's activities and the private employment or financial interest is so remote that the possibility of a conflict of interest or the appearance of conflict is unlikely.
If the interest is disclosed and all of these regulatory standards of remoteness are met then the interest could be retained, despite the existence of authority or contractual links between an individual's State employer and the private entity. The criteria include findings that:
A) The State duties do not significantly impact on the private entity or a contract between the entity and the agency.
B) The employee is not directly supervised by a person whose duties significantly impact on the private entity or a contract between the entity and the agency.
C) The employee does not supervise a person whose duties significantly impact on the private entity or a contract between the entity and the agency.
D) The employee is not affiliated with the specific unit in the agency that exercises authority over or contracts with the entity.
E) The employee has complied with other relevant sections of the Ethics Law.
F) The financial interest involves no non-ministerial duties significantly relating to the agency's authority over the entity.
G) The financial interest does not involve negotiating or carrying out a contract between the agency and the entity (except for broad fixed reimbursement contracts).
H) State contracts with the entity do not exceed: 20% of the entity's calendar year gross income, 1/3 of the entity's capitalized value, or a calendar year value of $5,000.
I) The specific circumstances of the situation do not otherwise create a conflict of interest or the appearance of a conflict.
We have evaluated the circumstances of this request in view of these criteria, and conclude that an exception would not be appropriate here. The Assistant Commissioner holds a highly responsible position in a sensitive regulatory program involving the health and safety of Maryland citizens. He has been formally delegated substantial authority and in turn supervises inspectors in implementing the program. This program is directed at railroads operating in Maryland and plainly could have significant economic impact on the Chessie System, in which he would have a not insignificant financial interest. Also, the company is one of only twelve companies operating in the State, and we are unable to conclude that disqualification would be either a possible or satisfactory resolution of potential conflicts of interest here.3
The circumstances presented here thus raise questions under several specific criteria items and make it impossible for us to conclude that the relationship between the Assistant Commissioner's agency and the private entity is so remote as to warrant application of the exception set forth in §3-103(a) and our implementing regulations. Based on our informal advice subsequent to our consideration of this request, and prior to issuance of this Opinion, the Assistant Commissioner has indicated an intention to divest himself of this financial interest in his former employer. In order to avoid harsh economic consequences that would result from immediate sale of all of the stock, he has proposed a disposition schedule. We have reviewed this schedule and accept it, based on the assumption that this is necessary to avoid unreasonable tax and economic consequences.4
We have also considered whether the Assistant Commissioner's receipt of a pension from Chessie constitutes the holding of a financial interest prohibited by §3-103(a)(1)(i), or would require his disqualification from matters affecting the company under §3-101. Sections 1-201(m) and (n) of the Ethics Law define the term "financial interest" as "the ownership of any interest," and the term "interest" as "any legal or equitable economic interest..., which was owned or held, in whole or in part, jointly or severally, directly or indirectly." Section 1-201(n), however, further specifically excludes from "interest": A common trust fund or a trust which forms part of a pension or profit sharing plan which has more than 25 participants and which has been determined by the Internal Revenue Service to be a qualified trust under §§401 and 501 of the Internal Revenue Code of 1954.
The Summary Plan Description of Chessie's pension plan provided to us by the Assistant Commissioner describes the Plan as a "tax-qualified one," and personnel in the company's Employment Benefit Department indicate that the Plan is a common trust fund qualified under the Internal Revenue Code. We therefore believe that this official's relationship with his former employer through his pension is in the category of interests specifically excluded from that term as it is intended to be used in the conflict of interest provisions of the Law.
Further, we do not believe that, under the circumstances described to us, the Assistant Commissioner's receipt of a pension from the Chessie Systems would necessarily require his disqualification from matters involving the company. Section 3-101 of the Law bars non-ministerial participation in matters in which an individual has an "interest," or which involve as a party an entity with which the individual has certain relationships. These relationships include, among others, having a financial interest in the entity (§3-101(a)(1)), and having a contract with the entity, where the contract could be expected to result in a conflict of interest between the individual's private interests and official duties (§3-101(a)(4)).
As we have indicated, we do not believe that the pension is an "interest" or "financial interest". Moreover, while the Assistant Commissioner's pension benefits may be defined in a contractual relationship, we are unable to find any basis for concluding that this relationship would create a conflict with his official duties. This individual is one of many hundreds receiving benefits under the Plan, and his benefits are fixed based on an established formula that apparently does not vary based on the day-to-day economic fortunes of the company. Under these circumstances, we believe that the likelihood of his receipt of pension benefits having an impact on the Assistant Commissioner's official actions would be remote, and that after he disposes of his stock his participation in matters involving the company would not, as a general matter, be barred by §3-101(a) of the Law.
Herbert J. Belgrad, Chairman
Jervis E. Finney
Reverend John Wesley Holland
Betty B. Nelson
Barbara M. Steckel
Date: October 25, 1983
1 He also indicates that he is eligible for retiree insurance and health benefits, but has not participated in these benefits because he is using State plans.
2 See Opinions No. 83-19, No. 81-21 and No. 79-1. Unless otherwise specifically cited to the Maryland Register, citations are to Commission Opinions published in COMAR Title 19A.
2 See our Opinions No. 83-34 and No. 83-1 for a full discussion of our reasons for not accepting disqualification as a "cure" for violations under §3-103(a)(1)(i).
4 We accept this proposal on the assumption, of course, that the Assistant Commissioner will comply with the non-participation provisions of §3-101 as long as he holds an interest in the company.