95.04

Opinion No. 95-4

A question has arisen regarding application of the Public Ethics Law where the Assistant Bank Commissioner for Credit Unions (the Employee) is married to the President of the Credit Union Insurance Corporation (CUIC), a private State-established entity responsible for insuring and providing a variety of support services to credit unions. We advise that various steps must be taken by the Employee's agency to ensure that he does not violate the Ethics Law by participating in any matters in which the Credit Union Insurance Corporation is involved, or by taking other actions inconsistent with the statute.

Pursuant to the Financial Institutions Article, Title 6, Annotated Code of Maryland, the Bank Commissioner plays a substantial role in the supervision and operation of State-chartered credit unions in the State. In connection with establishment of such organizations, for example, the Commissioner receives the articles of incorporation, investigates the submission and approves or refuses approval of the establishment. Insurance either with CUIC or the National Credit Union Administration is required for approval, and the Commissioner certifies that a credit union qualifies for CUIC membership. Also, the Bank Commissioner has approval authority as to a variety of operational activities, which has been carried out through development of guidelines within which the entities must function. Credit unions are examined at least annually and under certain other defined circumstances, and copies of these examination reports are provided to CUIC. Based on examination reports and other information, the Bank Commissioner may take action to correct problems, including taking possession of the credit union or directing CUIC to take possession. The Bank Commissioner may also issue cease and desist orders, send warning letters and make reports of deficiencies or violations, and remove any officer of the credit union. The Bank Commissioner also has an approval role in closing a credit union, either by dissolution or merger or conversion to a federal entity.

The Credit Union Insurance Corporation is established pursuant to Title 7 of the Financial Institutions Article, Annotated Code of Maryland. It is a nonprofit nonstock membership corporation whose members are the credit unions insured by it. Its purposes are to insure and guarantee share and deposit accounts of its members, improve its members ability to provide low cost consumer loans, promote elasticity and flexibility, discount notes and make loans, help rehabilitate and stabilize credit unions and liquidate where necessary, and cooperate with the Bank Commissioner in improving the general welfare of the people. CUIC refers applications for membership to the Bank Commissioner and may approve or deny such applications, or revoke the membership of a member credit union with Bank Commissioner approval.

Management of CUIC is by a Board of Directors consisting of 11 directors elected by the membership and compensated as approved by the Bank Commissioner. It operates under Bylaws adopted by the Board and also approved by the Bank Commissioner. It has only two employees, one the full-time President who is the Employee's spouse. Currently of the 17 Maryland credit unions, 11 are CUIC-insured. The Corporation has the general powers and duties of an entity incorporated in the State, which, however, are exercised "subject to the authority of the Bank Commissioner." It is directed to exchange information with the Bank Commissioner and in the interest of stabilization of the industry, may assist in the merger, stabilization, consolidation or liquidation of a credit union, and take possession of and operate a credit union if directed by the Bank Commissioner.

The Employee is one of two Assistant Bank Commissioners, filling a position as Chief Examiner-Credit Unions and Licensing. His position description reflects the "delegation of comprehensive administrative responsibilities in the day-to-day operations of the agency including, but not limited to the supervision and examination of ... State chartered credit unions... ." His duties include directly working with the credit unions, reviewing consumer complaints with a credit union, and providing administrative assistance to institutions experiencing financial or managerial problems. He also directs the examination process, planning, scheduling and assigning appropriate personnel to examinations, providing them with technical support, and reviewing and editing field examination reports. He provides a copy of the report to CUIC, and works directly with the credit union to discuss the examination and ensure that any necessary corrective action is taken. He indicates that he has direct involvement in developing recommendations for any other action such as cease and desist orders, or a decision to direct a CUIC takeover, and also is involved in working with an institution as to mergers or dissolutions.

From the review of CUIC and the Bank Commissioner authority, it appears that there are certain aspects of the relationship in which the Bank Commissioner exercises direct authority over CUIC. The Corporation's own bylaws (and any amendments) must be approved by the Commissioner, board member salaries are subject to Bank Commissioner approval, and applications for membership and revocation of membership must be approved by the Commissioner (with membership based on the Commissioner's certification of qualification). CUIC receives a copy of reports of examinations as to its members and may be directed by the Commissioner to take over and operate an institution. The Corporation also has more general interests in the viability of the credit union institutions that are subject to the Bank Commissioner's authority, and to this end it receives examination reports and also notices of any intention to merge or dissolve an institution. The Corporation also has a general role in working with an institution to provide support and assistance in carrying out its functions.

In view of the Employee's marriage to the President of CUIC, the Bank Commissioner determined in February 1994 to assign primary responsibility for future direct CUIC-related matters to another Assistant Commissioner who would be assisted by a member of his staff and would report directly to the Bank Commissioner or the Deputy Commissioner. Thus, duties involving the Bank Commissioner's direct regulation of his spouse's employer were to be removed from the Employee's responsibility. He therefore describes his direct interaction with CUIC as minimal. It is clear, however, that he continues to engage in significant substantive duties regarding credit unions that are also members of CUIC, and thus whose affairs are of direct interest to CUIC and his spouse in her role as the primary staff resource of CUIC. For example, though CUIC is not directly involved in the Bank Commissioner's audits or examinations of a credit union, it may follow up on reports and actions proposed to resolve issues. Also, CUIC or its staff may be jointly involved with the Department in discussions of a liquidation or merger. Where a credit union has problems and cannot continue to operate, the agency would issue a cease and desist order and would take over an institution in order to protect its assets. The Employee apparently personally participates in developing any recommendations for such actions by the agency and participates with CUIC and its staff in meetings relating to such actions.

This situation primarily presents direct issues under §3-101 of the Public Ethics Law (Article 40A, §3-101), Annotated Code of Maryland, the Ethics Law), which prohibits participation by an employee in any matter in which the employee or certain relatives (including the spouse) have an interest, or any other matter which involves as a party a business entity with which the employee or a relative has an employment relationship.1 Commission Opinion No. 80-17 is an early opinion that addresses issues similar to those presented here, where an official's spouse was employed in an industry having significant interactions with the official's agency. The opinion involved an official of the State Retirement System (an agency substantially involved in stock and investment decisions) whose spouse was in the process of becoming a stock broker and accepting employment with a local brokerage firm. The concern was to define the scope of the disqualification requirements as applied to the official in view of the fact that the spouse's private employer would be one of a general population of businesses likely to be interested in stock and investment transactions of the Retirement System. In advising the official in Opinion No. 80-17, the Commission concluded that:

1) the official did not have an employment or interest relationship with his spouse's employer;

2) the term "matter" would be viewed as having the same meaning as followed by the Commission's predecessor agency as "any proceeding, application, submission, request for ruling, or other determination, contract, claim, case or other such particular matter...";

3) "participation" involves participation through advice, recommendation, supervision, evaluation, or review"; and

4) "involved as a party" entails more than having a general interest in a matter or transaction; that is, it means having some specified and clearly defined role, being identified as a party to a transaction and likely to be impacted by the transaction in the usual legal sense of that term.

The official was advised that the disqualification requirement did not apply solely because the spouse's brokerage firm employer was one of a relatively large universe of firms that could potentially receive agency business. Disqualification would apply, however, in matters where the spouse's firm was a particular party to a brokerage contract, or identified and actively considered as one of several specific potential firms in the context of a particular agency decision.

In applying these concepts to the Employee's situation, it is our view that §3-101 of the Law requires that the area of disqualification also cover, in addition to situations of direct agency regulation of CUIC, the Employee's involvement in matters relating to credit unions in which CUIC is directly involved. Certainly, since the Employee's spouse is employed by CUIC, it would appear to be clear that he cannot participate in any matter which directly involves CUIC as the regulated party. This would entail, for example, approval of CUIC's own Bylaws, the agency's annual examination/audit of CUIC, and approval of CUIC compensation rates. Apparently, action has been taken by the agency to assign these types of direct interactions to an agency employee other than the Employee. This reassignment must, of course, continue.

We recognize that the Employee has substantial general operational dealings with credit unions in which CUIC may have an indirect interest, but which do not entail active participation or interaction with the Bank Commissioner. For example, transmitting a copy of an examiner's report to the Corporation would not involve CUIC as a party to a transaction, as long as it has no role or involvement either in the examination or in Bank Commissioner follow up with the credit union. Nor would the Employee's operational functions relating to mortgage loans, investments, and similar transactions as to credit unions or his role in the examination process generally seem to be viewed as matters in which CUIC would be involved as a party merely by virtue of its general interest in the welfare and activities of its members. This may not be true, however, if there are specific problems occurring at a credit union requiring specific interest or involvement by CUIC.

A dissolution, merger, or liquidation would, we believe, qualify as a matter as that term has been interpreted by this Commission and its predecessor. Also, CUIC has a specific statutory responsibility to be involved in these types of transactions and a clear role as the insurer of the deposits and as the entity mandated to protect depositors in these transactions. Also, apparently, CUIC may participate in follow up actions taken as a result of issues that arise in a credit union examination. Under these circumstances, we believe that the §3-101 disqualification requirement must be applied to limit the Employee's involvement in these matters. In addition to the nonparticipation guidelines already put in place by the agency, we therefore advise that the Employee should not be participating in meetings, developing recommendations or engaging in telephone or other discussions with his spouse, her supervisors or her staff to the extent that there are any situations where the Bank Commissioner has or is considering actions regarding a particular credit union.

We acknowledge the Employee's and the Department's view that this is a stable industry and that his actions relating to CUIC and its members could be described to some extent as ministerial. We also note the agency's expressed view that the credit union movement is cooperative and interaction between CUIC and the agency tends to reflect this approach. The fact is, however, that both the Employee and his spouse are highly paid professionals with important positions. Neither can be viewed as a general matter as a ministerial participant in matters of substance regarding their respective programs. Moreover, notwithstanding the generally cooperative approach to this industry outlined by the Departmental representatives, the agency is a regulator and the Corporation is an insurer in the finance and banking industry, an area which has been of substantial public concern and problems involving regulators and insurers in recent years. We therefore believe that the Ethics Law's mandate to avoid the appearance of conflict as well as actual conflicts of interest requires strict and thorough disqualification in this situation, including the Employee's avoidance of any personal contact with his spouse in connection with credit union matters as set forth above, and so advise the Employee and the Department.2

Michael L. May, Acting Chairman
   Charles O. Monk, II
   April E. Sepulveda

Date: May 17, 1995

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1 There are several previous Commission opinions involving spousal relationships (for example, No. 80-17, No. 89-15 and No. 92-9; published in COMAR Title 19A), generally advising that a State employee will not be viewed as having a financial interest relationship or an employment relationship with a spouse's employer, in the absence of some indication of employee investment in the private employer or other direct personal involvement in the spouse's employment activity. These situations have thus not been viewed as presenting employment and interest issues under the strict prohibitions of §3-103(a) of the Ethics Law, but have been evaluated under the disqualification provisions of §3-101, and also considered under the prestige and information provisions of §§3-104 and 3-107.

2 The Employee and the agency should also be aware of and take care to comply with the prestige provisions of §3-104 and the information provision of §3-107 of the Law. These also are not viewed as requiring strict prohibition of a relationship, but as the basis for definition of constraints regarding conduct. For example, Opinion No. 89-15 involved a Racing Commission veterinarian whose spouse was an attorney presenting cases before the Racing Commission. Though recognizing that there were appearance and potential issues in this situation, the Ethics Commission advised that there were no absolute prohibitions but that these provisions did "establish constraints, and require both the Requestor and her spouse to exercise particular care to ensure that her spouse does not in any way have the opportunity to use information or otherwise acquire any advantage for himself or his clients from his spouse's position with the agency."