86.21

OPINION NO. 86-21

The Secretary of the Department of Licensing and Regulation (DLR) has requested advice as to whether a conflict of interest arises under the Public Ethics Law (Article 40A, Annotated Code of Maryland, the Ethics Law) if individuals appointed to savings and loan boards by the Secretary are compensated by the savings and loan. These appointments result from action taken by the First Special Session of the General Assembly in 1985 enacting legislation providing for the issuance of net worth certificates to savings and loan associations. (Financial Institutions Article, §9-224, Annotated Code of Maryland.) The legislation was part of a series of actions taken to assist troubled savings and loans in acquiring federal insurance from the Federal Savings and Loan Insurance Corporation (FSLIC). This entity, as one of its criteria for insurance, requires that the savings and loan have a certain ratio of capital to net worth.

The State's net worth certificate represents an investment by the State in the savings institution that is accepted by FSLIC as a capital asset in calculating this ratio. The net worth certificate is described as a transaction involving an exchange of debt instruments, in this case a State bond anticipation note in return for the entity's promise to pay. It reflects the State's promise to go to the bond market and sell bonds to acquire cash in the amount of the note, if the Association's net worth drops below a certain amount. The entity's obligation to pay the State is subordinated to the rights of the depositors, so the transaction is basically a way of protecting the depositors with the State's promise to pay should the savings and loan fail.

The net worth certificate enabling legislation establishes significant authority in the State, through the Secretary of DLR. In addition to other statutory conditions and requirements, §9-224 provides that:

During any period in which a savings and loan association has any net worth certificate outstanding, the Secretary of Licensing and Regulation may:

(i) Increase the number of directors of the savings and loan association by any number and appoint directors to fill any newly created directorship;
(ii) Fix the compensation of and remove, without cause, any and all directors, officers, or employees of the savings and loan association and appoint successors to fill any vacancy that exists; and
(iii) Subject to prior approval by the Governor and without obtaining the recommendation of the board of directors or the approval of the stockholders or members of the association, sell, transfer, or assign all or substantially all of the assets of the association with or into any other association or corporation on such terms as the Secretary directs....

There is a master net worth agreement between the DLR and each association which sets forth the various restrictions and limitations on association actions that are permitted or required by the law. The State, at the insistence of the Board of Public Works, has generally exercised its authority to appoint a person to the association's Board of Directors. The State's view is apparently that the other authority in the quoted portion of §9-224 will not be exercised as long as the entity complies with the law and is not in default.

There are currently five individuals serving on savings and loan boards pursuant to these statutory provisions. They include three former employees and two current employees. The two current employees were both recommended by the Secretary of the Department of Budget and Fiscal Planning (DBFP). One is the current Deputy Secretary of DBFP, and the other is formerly a DBFP employee and currently Assistant Secretary of the Department of Employment and Training. The Secretary of DLR indicates that the relationship and status of these individuals is not clearly defined in the statute or the implementing documents. The appointment letter is from him, thanking the person serving and officially appointing them. A copy of the letter is sent to the savings and loan President.

The individuals are appointed as agents of the State to represent its interests in associations where it has net worth certificates. They are generally viewed as sources of information and as a way for the State to have a person on the scene looking out for the State's interest and having a voice in the management of the savings and loan. The Secretary says he may occasionally contact one of the individuals, or they may call him to discuss the State reaction to a planned action by the institution. Where approval of an association action is needed or some other DLR action is required under the terms of the net worth certificate agreement, these matters are brought directly to the Secretary by the savings and loan management, though the State's representative receives copies of all resulting correspondence.

The question of whether State representatives may be compensated by the savings and loan on the same basis as other directors was raised when one of the entities proposed to provide compensation to an individual on the same basis as other directors of that board. Apparently they have in fact issued checks to him along with the other directors (in the amount of $100 per meeting), but he has not cashed them. It is also possible that other appointees have been offered and accepted compensation from associations on the same basis as other directors. The issue was not addressed in the savings and loan legislation and no directions or reviews regarding compensation were undertaken when the individuals were appointed. None have been compensated by the State.

In our view all of these individuals were appointed by the State to serve as representatives of the State on the respective savings and loan boards. They were appointed pursuant to a statute designed to deal with a serious and specific public issue and their specific role and obligation to the State, rather than the institution, must be viewed by us within the context and goals of that statute and the Ethics Law. As agents of the State in this situation, these appointees must be bound by the concerns expressed in §1-102(b) of the Ethics Law that the public confidence is eroded when the conduct of the State's business is subject to improper influence or even the appearance of improper influence.

Taking this principle into account, as well as the mandate of §1-102(d) of the Ethics Law that we construe the Law liberally to accomplish its purpose, we have generally viewed the prestige provisions of §3-104 of the Ethics Law as establishing a prohibition against persons receiving fees and compensation from private entities for activities that flow directly and immediately from their State duties. Particularly, we have said that it is inconsistent with this provision of the Law for individuals to be compensated by private entities for the duties they perform for the State. In our view, this principle is especially applicable to the situation of the State representatives on the savings and loan boards, given the unique circumstances under which this statute was enacted, the reasons the individuals were appointed, and the representative role they are intended to play. We therefore advise the Secretary that the State appointees to these boards should not in the future accept any compensation from their respective boards for their services as directors on behalf of the State.1

Herbert J. Belgrad, Chairman
   Reverend John Wesley Holland
   Betty B. Nelson

Date: August 20, 1986

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1 Since this is an issue that was not raised or addressed in the initial appointment process, we do not believe that anyone who accepted otherwise lawful compensation in a good faith belief that it was allowable should be penalized. Our ruling is therefore a prospective one, barring any future or continued private compensation (including the cashing of checks already received).