A request has been presented by the Insurance Commissioner concerning whether and to what extent the Ethics Law would apply to her continued holding of various investments made in connection with her former employment with an insurance company (the Company) while she was an employee with it. We advise the Commissioner that her holdings are not flatly barred by the financial interest provisions of the Public Ethics Law, but that she must, in order to avoid problems under the participation provision of the Law, move her investment to a plan that does not depend on the profitability of the Company and would not otherwise raise participation issues under the Law.
The Commissioner was appointed beginning in July 1988 to head the Insurance Division, a unit within the Department of Licensing and Regulation (DLR). The Insurance Commissioner is appointed by the Secretary of DLR with the approval of the Governor and the advice and consent of the Senate. The Insurance Division is responsible to implement the laws of Maryland regarding insurance companies and the business of insurance in the State. It issues licenses for companies, agents, brokers and others involved in the marketing of all kinds of insurance and annuities. The Commissioner also approves insurance policies and approves or disapproves rates for most types of insurance, conducts examinations of insurance companies, and resolves consumer complaints against insurance companies doing business in the State. The Company is an insurance company very active in doing business in the State and therefore subject to this significant regulatory authority.
Prior to her State appointment the Commissioner served with the Company as Director of personal insurance and of the women's research group, and prior to filling this position she was an insurance sales representative. She worked for the Company for five years, and during that time participated in several of its employee investment programs. The primary issues presented by her relate to this participation in the Company's 401k savings program and in her ownership of mutual funds managed by a wholly-owned subsidiary of the Company. Section 401k of the U. S. Internal Revenue Code allows for favorable tax treatment of funds invested in qualifying plans by providing for investment from payroll before taxes. The investor has the benefit of reducing current tax liability by in effect deferring taxation on the invested amount to a later point in time. The program is designed to encourage long-term savings toward retirement, when (assuming a reduced income) the funds will be taxed at a lower rate than if they were subject to taxation now. Withdrawals from the savings plan prior to age 59 1/2 are taxable as ordinary income and can be subject to other penalties.
The Company's Savings Investment Plan (SIP) is a 401k plan that includes three investment options. The Commissioner participated in the Fixed Income Fund, which provides for a fixed rate of return guaranteed by the Company. Under this plan contributions are paid to the Company's General Account. The guaranteed interest rate is determined at the end of each year for the following twelve months. The rate is determined by the Company's total anticipated profitability and investment performance, and its payment depends on the Company's continued performance within those expectations. Under this option, the investor's relationship is directly with the Company and the promise to pay in accordance with the terms of the plan is the Company's.
The Commissioner also has invested and is currently investing in mutual funds managed by a Boston, Massachusetts money management firm that operates as a wholly-owned subsidiary of the Company. It in turn has a wholly-owned subsidiary which functions as an investment advisor to manage mutual funds. The funds are sold to the general public through brokers and dealers, and include growth funds as well as fixed return funds. The firm apparently holds no insurance funds. The firm is separate from the Company. It has a separate Board of Directors and officers and operates under separate financial management. It is regulated by the Securities and Exchange Commission and the National Association of Securities Dealers. It performs no insurance functions and is not subject to the jurisdiction of the Insurance Division. The Commissioner's current investment in these funds is under $2500 and she would anticipate continuing to invest at a rate of under $1000 per year.
The issue here is whether § 3-103(a) of the Public Ethics Law (Article 40A, § 3-103(a), Annotated Code of Maryland, the Ethics Law) would apply to bar the Commissioner from continuing either or both of these economic relationships, and if she can, whether there is any application of the §3-101 disqualification provision.1 Section 3-103(a) prohibits an official from having a financial interest in an entity that is subject to the individual's authority or that of her agency. Since the Company is an insurance company within the jurisdiction of the Division, the Commissioner's continuance of these holdings would be prohibited if they are viewed as financial interests in the Company.
We conclude, however, that the Commissioner's SIP investment is not absolutely barred by this provision, as we believe that none of her holdings as described to us constitute financial interests as that term is defined in §1-201(n) of the Ethics Law. In this section interest is defined as any legal or equitable economic interest, whether or not subject to an encumbrance or a condition, which is owned or held in whole or in part, jointly or severally, directly or indirectly. The definition specifically excludes interests held as agent, in a time or demand deposit with a financial institution, an insurance or endowment policy, or in a common trust fund that is part of a profit-sharing plan determined to be a qualified trust under § 401 and 501 of the Internal Revenue Code. Though the first three of these exceptions would seem not to apply here, we believe that the plan's qualification under § 401k clearly brings it within the exception language of the definition of interest.
In our view the Commissioner's SIP holdings therefore do not constitute an interest in the Company for purposes of §3-103(a) and her holding of them would not be flatly barred by this section. We are concerned, however, that if her affiliation with the Company's Savings Investment Plan continues as it currently exists there could be issues under §3-101 of the Law. This section bars nonministerial participation by an official in any matter that involves as a party an entity with which the official has a variety of economic relationships. These include being a party to an existing contract with the entity, if the contract could reasonably be expected to result in a conflict between the private interests of the official or employee and her official State duties. The Commissioner's continuing relationships with the Company would involve contractual arrangements with it. Moreover, her current involvement with the Fixed Income Fund results in her having an investment the return on which is directly related to the profitability of a company over which she as Insurance Commissioner has significant authority, and as to which she takes official actions on a regular basis. The Commissioner does not believe these duties can be assigned to another person.
Under these circumstances, we do not think it would be appropriate for the Commissioner to continue her involvement with the Company's Fixed Income Fund. We understand, however, that the Company's SIP also offers options in an Equity Fund and a Common Stock Index Fund, whose returns relate to the value of the stock invested by the plan or to Standard & Poor's 500 Composite Index. To the extent that these aspects of the Company's SIP are independent of the Company's own economic health and profitability, the Commissioner's transfer of her savings plan to one of them would appear to be allowable without giving rise to the nonparticipation issues under §3-101 of the Ethics Law.
As to the Commissioner's mutual fund holdings, we believe, consistent with our prior interpretations in the financial disclosure area, that these would be an interest in the fund itself, but not in the entity that manages the fund. We believe, moreover, that this is not the same entity as the Company that is subject to the jurisdiction of the Insurance Division. Rather, it is a remote subsidiary whose management is completely separate, and which apparently does not carry out any functions that bring it within the purview of the Insurance Commissioner. Under these circumstances, we advise the Commissioner that her mutual fund holdings as described would not present issues under the financial interest or other provisions of the Ethics Law.
M. Peter Moser, Chairman
William J. Evans
Rev. C. Anthony Muse
*Betty B. Nelson
Barbara M. Steckel
* Ms. Nelson was a member of the Commission when this request was considered and decided. Her resignation from the Commission was effective prior to issuance of the written Opinion.
Date: December 15, 1988
1 1 The Insurance Law at Article 48A, §19, Annotated Code of Maryland, also prohibits the Commissioner of Insurance from having certain kinds of economic interests in an insurance company. Consideration of the application of this Insurance Code provision, however, is not addressed in this opinion review.