86.13

OPINION NO. 86-13

The Maryland Industrial Development Financing Authority (MIDFA or the Authority) has requested an opinion as to whether and how the employment provisions of the Public Ethics Law (Article 40A, Annotated Code of Maryland, the Ethics Law) apply to the service of a commercial lawyer (the Member) on the Authority, and certain of his proposed or actual private activities and relationships. The Member was appointed in September 1984 to serve on the Authority, which is established pursuant to the Financial Institutions Article, §13-107, et seq., Annotated Code of Maryland. The Authority was established in 1965 as part of the Department of Economic and Community Development (DECD), and it functions as one piece of the State's program to attract and retain environmentally safe and economically beneficial industry to the State. It consists of nine members, including the Secretary and the State Treasurer and seven citizen appointees. The citizen members need not represent any particular industry or professional category; they are appointed by the Secretary with the concurrence of the Governor, and serve, without compensation, for 5-year terms. The Authority is provided support by a staff employed under DECD's Assistant Secretary for Economic Development. Policy and decision authority is vested in MIDFA itself, except that the Secretary has veto power over Authority actions.

The Authority has a variety of programs involving the issuance and insurance of industrial revenue bonds (IRB's). An IRB is a bond issued under the authority of the federal Internal Revenue Code (§103) and Article 41, 266A to 266-I, Annotated Code of Maryland, and involves financing, through bond issuance by public bodies, of the acquisition, construction and furnishing of economic development facilities by private entities. If the project meets the criteria set forth in the federal and State tax provisions then the interest earned on the issued bonds is tax exempt. Because this interest is tax exempt to the holder of the bond, and issuer is able to make it available to borrower/developers at interest rates that are substantially more favorable than those otherwise available. Funds financed through an IRB also tend to be more attractive than conventional financing because they are for a longer loan period and because a larger percentage of the project can be financed.

The Authority's program also has traditionally involved provision of insurance, through a bond insurance fund, under which it insures payments of principle and interest on IRB's issued by subdivisions, industrial development authorities and other public bodies, as well as by private lenders. MIDFA also issues bonds on its own under its "umbrella" program. This involves issuance of a single MIDFA bond in the public bond market, and use of the proceeds to make loans to specific companies for specific facilities. This program makes the benefits of long-term tax-exempt financing available to smaller companies that would otherwise not have access to the bond market. Bonds may also be directly issued by MIDFA where an applicant is seeking to finance one or more projects that involve more than one Maryland jurisdiction.

At the time of the Member's appointment he was affiliated with a Montgomery County law firm. He was appointed by the then-Secretary of Economic and Community Development. In connection with his appointment he filed a time of appointment form (pursuant to §3-103(a)(2)(iii) of the Ethics Law) disclosing his employment as follows:

As a principal in the above-listed law firm, from time to time clients of our law firm, including financial institutions, may have an interest in the actions of the Maryland Industrial Development Financing Authority.

The Member has since established his own firm, also in Montgomery County. He states that his expertise is in commercial law--commercial lending, document preparation and loan closing. He also states that he has a substantial employee benefits practice.

In September 1985 the Member also established an "Of Counsel" relationship with another large law firm (the Firm). This relationship is described by both the Member and the Firm as a special contractual arrangement. According to the Firm, the Member is not a partner, associate or employee of the Firm, and does not in any way share in its profits or participate in its management, He is paid a fixed amount of $1,000 per month for the one-year duration of the agreement. His primary role under the agreement is to be a representative of the Firm in the Washington suburban area, assisting in the establishment and marketing of the Firm's office in the D.C. metropolitan area.

This request grows out of two situations at MIDFA that arose in the Fall of 1985, and relates to both the Member's affiliation with the Firm and the possible relationship of his own firm to the Authority. The Member participated in both of these situations, and his involvement was necessary to make a quorum. The Firm is a large one that has a sizeable commercial practice. It has in the past represented clients in matters involving MIDFA, though the Firm's representative does not describe this as a significant part of the Firm's work. At the Authority's meeting in October 1985, it was considering a matter involving MIDFA insurance of a private development loan. The transaction is one of the largest in MIDFA's experience, involving some amount of controversy and a large potential liability. The borrower had been experiencing some problems, though the lender had been trying to accommodate, given the size and public significance of the project.

According to the Authority's former counsel, the original transaction had included collateral, which for some reason was no longer available. The Firm with which the Member is affiliated was (and continues to be) counsel for the lender. After a substantial discussion, in which the Member actively participated, the Authority instructed staff to notify the lender that the failure to maintain the collateral was a default under the MIDFA insurance agreement, and that the amount would be deducted from any MIDFA liability. It was apparently at this same meeting that the Member indicated to counsel that he had recently affiliated with the Firm. Counsel expressed some concern about a possible conflict of interest, given the Firm's involvement with MIDFA matters, and suggested that he consider the situation in view of Ethics Law considerations.

The second situation came up initially at the same meeting, and arose in connection with a MIDFA loan guarantee involving an Employee Stock Option Plan (ESOP) transaction. In this transaction the employees of a company buy the company by forming a stock group. The company's assets are pledged to acquire a loan to finance the transaction. The loan is made by a private bank, but with MIDFA insurance the rate and stability of the transaction is enhanced. Apparently this is a very complicated transaction involving many detailed requirements and substantial financial risk from higher interest rates if the statutory ESOP requirements are not met. For various reasons, including the number of other pending actions and the lack of ESOP expertise in the Attorney General's Office, it was recommended that the Authority acquire private counsel by contract to assist it in completing this transaction. Because he had had some experience in the ESOP field, the Member expressed an interest at that meeting in being considered for the contract to serve as MIDFA counsel on the ESOP matter. This was not followed through on by the Attorney General or Authority staff, and another law firm was ultimately selected to do the work.

There was a series of correspondence between the Member and the Attorney General's Office regarding the possibility of a conflict of interest arising from his "Of Counsel" relationship with the Firm, either based on its current activity with MIDFA or if it were to be selected as the agency's bond counsel, and also as to the Member's serving as counsel to MIDFA or himself representing private clients in MIDFA matters. The Member has not in the past done MIDFA work, but he states that he discussed his commercial practice with the former Secretary in connection with his appointment and was assured that representing financial institutions was not precluded if it was properly disclosed. He has stated that "as a lawyer, I believe that the potential for conflict to exist was implicit in my appointment. By disclosing the potential for conflict, I believe that I may now act without concern for employment related conflicts." The Authority considered the issue, and according to the Chairman, some concern was expressed. The Authority determined to request an opinion from the Ethics Commission.

This request raises, primarily, employment and interest issues under §3-103(a) of the Ethics Law. As a preliminary matter, we note that the Member has a private law practice with which he has both an employment and interest relationship.1 It is through this entity that he proposes:

1) to contract directly with his agency to serve as counsel to it;

2) to appear before his agency as counsel to others involved in agency transactions; and

3) to contract with another law firm that appears before MIDFA, and is counsel to a lender in one of the agency's most significant and controversial loan guarantees.

In our view, all of these activities come within the prohibition of §3-103(a)(1). Consistent with our prior Opinions, items 1 and 2 would involve direct relationships covered by subsection (a)(1)(i)'s strict prohibition against having an employment or interest relationship with an entity that contracts with or is under his agency's authority. For example, in No. 82-16 we held that a Trustee of the Maryland Environmental Trust could not be the principal investigator on a contract with the Trust. Opinion No. 80-3 involved MIDFA itself, and a conclusion that a MIDFA member could not be affiliated with a law firm that represented clients in MIDFA matters.

As to item 3, whether or not the member is employed directly by the Firm, we believe that his affiliation with it through his own firm constitutes inconsistent employment as contemplated by §3-103(a)(1)(ii). This provision bars employment that would impair an official's impartiality or independence of judgment. We have viewed it as a complement to the strict limitations of subsection (a)(1)(i), designed to address situations where contractual or regulatory relationships are not present, but where there are relationships between the private affiliation and State responsibilities that raise clear and serious concerns about the individual's ability to carry out his State duties impartially. In applying this provision, we have looked to the individual's expected responsibilities in his State position in considering how the private activity could be expected to impact on them. We have viewed this employment limitation as an inconsistent employment provision, taking into account the Law's concern to avoid the appearance of as well as actual conflict, and our mandate to construe the Law liberally to accomplish its purposes.

The Member here has a regular and continuing affiliation with the Firm; he appears on its letterhead and is compensated at a fixed and regular rate. This Firm, in turn, is counsel to a party involved in one of the agency's most significant, continuing and potentially expensive transactions, one that MIDFA'S Chairman indicates is on the agenda of just about every meeting. Though the Authority and the lender (the Firm's client) may have similar interests at various points in the process, where there are problems in a transaction (as is evidenced by the events regarding the collateral), the interests of the lender and the Authority may be opposed. If a loan is defaulted by a developer, this is even more likely. Moreover, this agency is a small one, with only seven citizen members, all of whom would be expected to participate in a transaction of this magnitude, and who, collectively, are the final decision-makers as to all issues raised regarding the transaction. We therefore conclude that the Member's affiliation with the Firm, resulting from an employment relationship with his own firm, raises the kinds of employment concerns addressed in and intended to be prohibited by §3-103(a)(1)(ii) of the Ethics Law.2

Since the Member's proposed activities and existing affiliations with the Firm would come within the prohibition of §3-103(a)(1), the next question is whether an exception could be applied to overcome the prohibition. There are two potentially relevant exceptions in §3-103(a). The first is the appointee disclosure exemption in subsection (a)(2)(iii). This exemption provision allows private employment held at the time of appointment which would otherwise be a conflict under §3-103(a), if the employment is "publicly disclosed to the appointing authority, the Commission, and, in instances where confirmation is required, to the Senate prior to confirmation." In prior Opinions interpreting application of this exemption (Opinions No. 81-39 and No. 81-38), we concluded that it would 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 actually being a conflict at the time of appointment.

Instructions included with the Appointee Exemption Disclosure Form reflect this approach, which is also referenced in letters from Commission staff acknowledging receipt. In reviewing the Member's disclosure and the nature of his activities and affiliations at the time of his appointment, we do not believe that either of his proposed direct activities with MIDFA, or his affiliation with the Firm, would be covered by this exemption. Neither he nor his law firm at the time of his appointment had been directly involved with MIDFA either as counsel to the agency or as a representative of private clients in MIDFA transactions. In our view the general disclosure of clients or private business that could also be involved in MIDFA matters was not sufficient to have put an appointing authority or the public on notice that the Member would have conflicts involving such direct involvement in MIDFA business. Additionally, in our view this exception serves to allow recruitment of persons having actual existing conflicts, but not to allow the acquisition or expansion of conflicting activity.

The other possible §3-103(a) exception would be based on regulatory exception criteria developed by us pursuant to introductory language in §3-103(a) of the Law. This language provides that the prohibitions apply "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." Our regulations (at COMAR 19A.02.01) define guidelines for determining whether the relationship between the private activity and the agency programs and responsibilities is sufficiently remote that a conflict or appearance of conflict is unlikely. They include consideration of the ability of the official to impact on the private employer, as well as his supervisory relationships with other officials who impact on the employer. The regulations also consider whether the person's private duties are directly related to his agency activities or involve agency compensation, and further provide for evaluation of the potential for conflict presented generally by the total circumstances of the situation.

In applying these criteria to the Member's proposed activities and his affiliation with the Firm, we cannot conclude that any of them are sufficiently remote from his MIDFA duties to warrant an exception under our regulations. Serving as MIDFA counsel would involve directly entering into a contract with his agency, being paid directly by it and being accountable for his performance to his fellow members. His activities representing private clients in MIDFA matters would put him in a position of economic interest as to decisions being made by his agency, and could create appearance concerns if private clients were seen to be seeking his services to do MIDFA work because of a perceived advantage flowing from his position on the Authority.

As to his affiliation with the Firm, we recognize that this involves a less direct relationship then is presented in the other two situations. Nevertheless, it is a regular, continuing and compensated relationship, and one which is important enough that he is unwilling to give it up. The entity involved is counsel for a party to a MIDFA transaction involving some continuing controversy and substantial potential liability, a transaction of sufficient concern that it appears regularly on the Authority's agenda. The Member is one of seven individuals having final decision authority, and would be expected to and has in the past participated in these decisions. Even if disqualification were possible here (and we are not at all sure that it is, given the size of this agency and the significance of this transaction), we have consistently held that disqualification cannot be a cure for a §3-103(a) violation. (See, for example, Opinions No. 85-13, No. 85-12, No. 85-11, No. 84-18, and 83-1.)

Under all of these circumstances, we are unable to conclude that any of these relationships are sufficiently remote to allow the proposed or current activities or affiliation. We therefore advise the Member that his service as counsel to MIDFA and as counsel to entities that are parties to MIDFA transaction, as well as his affiliation with the Firm, would be inconsistent with the §3-103(a) outside employment prohibition and that the regulatory exception in §3-103(a) cannot be applied to overcome this bar.

Thomas D. Washburne, Chairman
   Reverend John Wesley Holland
   Betty B. Nelson
   Barbara M. Steckel

Date: July 8, 1986

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1 See our Opinions No. 85-22, No. 85-4, No. 84-22, No. 84-14 and No. 83-20, where we have consistently found that private professional practices are business entities with which the individuals have employment and interest relationships.

2 Because we believe that this request is resolved by application of §3-103(a)(1)(ii) to his affiliations through his own firm, we do not resolve the nature of his "of counsel" relationship with the Firm.