98.07

OPINION NO. 98-07

Ethics Commission advice has been requested as to whether and how the provisions of the Ethics Law apply to a project manager in the Maryland Department of the Environment (MDE) whose father owns a variety of different stock, including stocks in water companies, and who intends to name the employee as a successor trustee of a trust being created for these holdings. We advise that this arrangement is allowable as long as the trust instrument ensures that the Requestor has no equitable interest in the trust or its contents, and provided that any holdings in entities subject to the authority of the Requestor's program unit are identified with agency managers and the Requestor's nonparticipation in matters involving them is clearly documented.

The Requestor is a Public Health Engineer IV who works as a project manager in the Water Quality Infrastructure Program. This is a unit of MDE's Water Management Administration that is responsible for all of the Administration's funding programs, including the drinking water revolving loan program, the storm water pollution control cost-share program, the water supply financial assistance program, the small creeks and estuaries water quality restoration cost-share program, the biological nutrient removal cost-share program, the water quality revolving loan fund program, and the sewerage facilities supplemental assistance programs. These programs are all federally funded and administered by the State, generally available to local governments and communities in the State. One of the Requestor's duties is to serve as the project manager for grants or loans made under these programs, working with the locality to approve detailed plans, monitoring completion of the work, and granting final approval when the work is completed. Subsequent monitoring of operation of projects is handled by the Program's Compliance Division, a unit of the Administration that is parallel to the Infrastructure Program.

Fund program monitoring duties apparently constitute about 75 percent of the Requestor's workload. The remainder of his duties include processing construction permits for water and sewerage construction projects. This might include, for example, a pumping station or a large interceptor pipe that is part of a sewer system. The Requestor indicates that a construction permit issued by MDE is required for any expansion of a sewerage or water supply plant, except for individual residence septic and well water systems. (These are also permitted according to State rules, but the permitting is done by local health departments.) He says that the applicant, usually a local government, completes and submits the permit application. He says that he then reviews the permit for consistency with technical requirements and the water/sewerage regulations. He then writes it up and is the initial signer of the permit. It is subsequently reviewed and signed off by the head of the agency's water and waste water technical office, and the final permit is actually signed by the Administrator of the Water Management Administration.

Apparently this activity has in the past been almost entirely with local governments, though the Requestor notes that in some instances where a developer was creating a water system for a community a private developer or water company might be involved. Program managers also indicate that the vast majority of the agency's work is with municipal and county government agencies, and confirm that the Requestor is assigned to Anne Arundel and Prince George's Counties and would be unlikely to have any work relating to an entity functioning outside of these geographical areas.

This request is presented as a result of plans by the Requestor's father regarding stock holdings held by him. Currently valued at about $100,000, the portfolio includes 116 stocks, generally in small amounts, and includes large banks and utilities, as well as smaller companies. The Requestor's father indicates that he became interested in water companies through a magazine article and has done some research and bought shares in some companies where possible, usually by directly contacting the company. Some of his water company stock is in companies in New York, California and Connecticut that have no activities in Maryland. Currently there are also very small holdings in American Waterworks, a Bel Air company that treats and dispenses water, Chesapeake Utilities, a company that operates on the Eastern Shore, and United Water Resources, a New Jersey company that supplies water in Cecil County. He also holds 57 shares of a larger company that the Requestor indicates has had activities in his unit.

The Requestor's father is in the process of establishing a trust that will hold all of these interests. He plans a living revocable trust with himself as beneficiary and trustee, and anticipates that he will continue to have complete control and beneficial interest in the properties during his lifetime. His intention, however, is to name the Requestor, his only son, as the successor trustee and his only grandchild, the Requestor's daughter (currently a minor child) as the successor beneficiary. It is therefore planned that the Requestor, the MDE employee, will not at any time be a beneficiary of the trust, but will be bound as trustee to manage and use the trust assets solely for the benefit of his daughter and any other children he may have.

This request presents issues primarily under the nonparticipation and financial disclosure requirements of the Ethics Law.1 In particular, §15-501 of the Law bars participation by officials and employees in matters in which they or certain qualifying relatives have an interest, or in any matter that involves as a party an entity in which they or a qualifying relative has a financial interest (defined in §15-102(n) and interpreted by the Commission to include an interest having a value of $1,000). Parents and children are included as qualifying relatives. This limitation applies to the Requestor now even during his father's lifetime, and without his having any direct involvement with the stock as trustee or otherwise. It also applies to any of the holdings, even those that are not water companies. We therefore advise the Requestor that he needs to be aware of the larger holdings that would meet the financial interest threshold and therefore come within the nonparticipation requirements.

We also believe that the Requestor should adopt a clear rule of disqualifying himself from any matter involving Maryland companies in which his father has any interest. This would avoid possible inadvertent problems arising from fluctuating stock prices and increases in amounts of stock in a company by his father's purchase or dividend reinvestment. Also, since these companies would be smaller local entities his clear recusal would avoid any appearance issues. We are advised by the Requestor's supervisor that this kind of recusal would not be a matter of concern for the agency or unit. The Requestor's duties are limited to Anne Arundel and Prince George's Counties, there are few entities at issue, and apparently the program's focus continues to be largely on government projects rather than many private company undertakings.

As the plan currently stands, at the time of his father's death (assuming the trust is not revoked during his father's lifetime) the Requestor would become the successor trustee and have a more direct involvement in the stock. He will have a legal interest and control over any stocks held by the trust, but, according to the current plan, will be a trustee only, with no equitable interest in the trust or its income. He will be a trustee only of a trust originally established by another person, bound to manage and hold the trust solely for the benefit of his daughter or any other children he may have. As long as this is the case, as set forth in footnote 1 above, then he would not be viewed as having an interest in any of the trust stock, and he would be subject to the nonparticipation requirements discussed above, rather than the strict financial interest prohibitions of §15-502(b)(1) of the Law. As the trust is currently planned, the Requestor's daughter will be the beneficiary and therefore have an equitable interest in the holdings of the trust. As she is a qualifying relative under §15-501, the nonparticipation provisions of that section would continue to apply as discussed above.

Also, the attribution requirements of §15-608 of the financial disclosure subtitle of the Law provide for attribution to a financial disclosure filer of interests held by a spouse or child of the filer, if the interest was directly or indirectly controlled by the filer at any time during a financial disclosure reporting period. Thus, once the Requestor becomes the trustee and has control over the holdings of a trust where his child is the beneficiary, the contents of the trust would have to be disclosed on Schedule B of his annual financial disclosure statement as if they were held by him, even if he does not have an equitable interest in them.

Charles O. Monk, II, Chairman,
   Michael L. May
   Mark C. Medairy, Jr.
   April E. Sepulveda

Date: October 23, 1998

——————

1 Section 15-102(t) of the Law defines interest as a legal or equitable economic interest owned or held by an individual, but excludes in subsection (t)(2)(i) "an interest held in the capacity of agent, custodian, fiduciary, personal representative, or trustee, unless the holder has an equitable interest in the subject matter." As long as the trust is created and operated so as to ensure that the Requestor is not a beneficiary and does not as a matter of the Maryland trust law have an equitable interest in the trust or its holdings, then he would not himself be viewed as having an interest (or financial interest) in the holdings of the trust for purposes of the interest prohibitions of §15-502 of the Law. If the trust instrument cannot be drafted with these assurances, then the Requestor would be viewed as having a prohibited interest in trust holdings in entities subject to MDE authority of contracting with it. In this situation, exception under §15-502 would have to be requested, another person would need to be trustee, or arrangements made for converting the trust to a blind trust in accordance with Commission blind trust regulations at COMAR 19A.06.