CONFLICT OF INTEREST
APPLICATION OF CONFLICT OF INTEREST LAW TO GOVERNOR'S INVESTMENTS
Under the circumstances presented, no prohibited conflict of interest exists where the Governor has invested in companies and investment funds that indirectly own Florida-based or Florida-regulated entities. In addition, no prohibited conflict of interest would be created were the Governor to place his investment assets in a blind trust, with the trust placing most of its investment assets into discretionary accounts that will be managed by licensed and regulated investment advisers who will have the discretion to invest, divest, and reinvest assets, even if an adviser were to invest in a Florida company in which the Governor would be prohibited from directly owning an interest. CEO 86-12, CEO 91-24, CEO 94-5, CEO 99-13, CEO 03-1, and CEO 05-8 are referenced.QUESTION 1:
Does a prohibited conflict of interest exist where the Governor has invested in the companies and investment funds described below?
This question is answered in the negative.
In your letter of inquiry you advise that Governor Richard L. Scott requests an advisory opinion as to whether certain passive investments in companies that have business activities in the Florida would create a conflicting relationship for the Governor under Section 112.313(7)(a), Florida Statutes. You advise that, to avoid an appearance of a conflict, the Governor has taken steps to dispose of certain holdings1. For his other investments, the Governor has created a blind trust, modeled on the model blind trust published by the Federal Office of Government Ethics and on current legislative proposals that would recognize such trusts under Florida law. He is in the process of transferring all of his other investments to the trustee of that blind trust, to be held in accordance with the terms of the trust. The trustee of the blind trust is itself a qualified financial adviser, and the Governor's investments will be managed by the trustee or by other third party professional investment advisors. However, since Florida has not yet enacted a "blind trust" statute, the Governor wishes to request this opinion as an additional step in his effort to satisfy all applicable ethical obligations.
You advise that most of the investments transferred to the trust consist of stock holdings in large public companies or other investment entities not known to have any business operations within Florida, so as to not create any concerns with the conflict rules of Section 112.313(7)(a). Therefore, your request for an advisory opinion deals only with those investments (current or anticipated) that may involve indirectly Florida-based or Florida-regulated entities. The request consists of two questions – the first addresses the Governor's current investments, and the second addresses possible investments that may be made in the future by investment advisors acting under the terms of the blind trust.
With respect to his current investments, you advise that the Governor has a small number of passive investments in publicly traded investment partnerships and publicly traded corporations that have one or more operating entities or subsidiaries doing business in Florida.2 Similarly, the Governor is a limited partner or passive member of diversified investment funds (such as a private equity investment fund or a hedge fund) that are managed by an independent investment manager and may be either privately held or publicly traded. These investment funds may invest at one time or another in an operating entity or subsidiary doing business in Florida, and these subsidiary operations may be subject to some degree of oversight or regulation by, or could have some business relationship with, a State administrative agency. For each of these investments, the Governor or the blind trust is a passive investor, with relatively small holdings of stock or other equity interests in the parent companies or investment funds, and neither the Governor nor the trustee of the blind trust is or would be an officer, director, or employee of the parent company, the investment fund or the Florida-related subsidiary or entity.
Currently, you advise, there are four situations in which a parent company (in which the Governor is an investor) is a national operating company with diverse operating subsidiaries, including one or more subsidiaries in Florida. In a fifth current situation, the Governor holds an interest in New York-based investment fund that, among its other investments, owns the stock of a Florida-based corporation. In each of these investments, the Governor is a passive investor, with no control over the operations or investment activities of the enterprise. You describe them as follows:
1) Energy Transfer Equity, L.P. The Governor owns 13,278 units3 of Energy Transfer Equity, L.P. ("ETE"), currently valued at approximately $593,272. ETE is a publicly traded (NYSE) limited partnership, with approximately 193 million common units outstanding, according to the company's most recent Annual Report to Securities Holders on Form 10-K. ETE, headquartered in Dallas, Texas, is the parent company of various operating limited partnerships and subsidiaries engaged in natural gas operations. Its business consists of natural gas midstream and intrastate transportation and storage, interstate natural gas transportation through various pipeline companies, and retail propane operations through other operating subsidiaries. The consolidated companies had income of approximately $5.9 billion during 2010, of which about 22% came from retail propane operations.
ETE owns the general partner of another publicly traded partnership in the energy sector, Energy Transfer Partners, L.P. (NYSE: "ETP"). ETP has pipeline operations in Arkansas, Arizona, Colorado, Texas, and several other states, not including Florida. It also has storage and other assets in Texas. ETP is also one of the largest propane marketers in the United States, with more than one million customers served through a nationwide distribution network of approximately 440 customer service locations in approximately 40 states. According to its website. it has about 35 service locations in the state of Florida, operating under a subsidiary, Heritage Propane Partners, L.P. To your knowledge, this is the extent of its Florida operations. This business activity is potentially subject to regulation by the Department of Agriculture & Consumer Services (Chapter 527, Florida Statutes).
2) Enterprise Products Partners, L.P. The Governor owns 3,015 units, valued at approximately $130,468, of Enterprise Products Partners, L.P. ("EPP"), a publicly traded limited partnership (NYSE). According to its website, EPP, headquartered in Houston, is the largest publicly traded energy partnership in the country, with approximately 843 million common units outstanding, valued at approximately $15.7 billion.
EPP's business is described in its 2010 Form 10-K as a "midstream energy company providing a wide range of services to producers and consumers of natural gas, natural gas liquids, or NGLs, crude oil, refined products and certain petrochemicals." Its principal activity is the transportation of natural gas and other products through 49,100 miles of onshore and offshore pipelines. Its services also include natural gas gathering, processing and storage; crude oil and refined products storage, transportation, and terminaling; offshore platform services; and marine transportation services.
To your knowledge, the company's sole business operation in Florida is in providing marine transportation services. According to its most recent Form 10-K, it engages in marine transportation business using tow boats and barges through the intracoastal waterways, including Texas and Florida, and provides marine vessel fueling services for cruise liners and cargo ships and other ship-assist services in Miami, Florida. EPP operates through numerous subsidiaries, and it is believed that these Florida-related activities are conducted through subsidiary corporations. This business activity is potentially subject to regulation by the Department of Transportation (Chapter 311, Florida Statutes) and the Department. of Business and Professional Regulation (Board of Pilot Commissioners, Chapter 310, Florida Statutes).
3) Inergy, L.P. The Governor has 2,198 units of Inergy, L.P., valued at approximately $88,000. Inergy, L.P. is a publicly traded Delaware limited partnership (NYSE), headquartered in Kansas City, Mo., which operates retail and wholesale propane supply and marketing distribution businesses. It also owns natural gas storage facilities, liquefied petroleum gas storage facilities, and other petroleum related services. According to its most recent Form 10-K, it has approximately 120.9 million common and class B units outstanding, with an aggregate market value held by non-affiliates of around $3.1 billion.
According to its Form 10-K, Inergy is believed to be the fourth largest propane retailer in the United States, marketed under various regional brand names, serving over 700,000 retail customers in 33 states from 356 customer service centers. It appears from its 10-K that these are all operated under a subsidiary enterprise, Inergy Propane LLC. According to its Form 10-K, its Florida operations consist of 19 customer service centers. You are unaware of any other Florida operations. This business activity is potentially subject to regulation by the Department of Agriculture & Consumer Services (Chapter 57, Florida Statutes).
4) Repub1ic Services, Inc. The Governor owns 8,485 shares of Republic Services, Inc., a publicly-traded Delaware corporation (NYSE) with its headquarters in Phoenix, Arizona, which are valued at approximately $253,941. According to its Quarterly Report Form 10-K for 2010, Republic had 384.1 million shares of common stock outstanding on February 10, 2011, valued at approximately $11.4 billion.
According to Republic's Form 10-K, it is the second largest service provider in the domestic non-hazardous solid waste industry, operating 358 solid waste collection companies in 40 states and Puerto Rico. Its 2010 annual revenues were over $8 billion. According to its website, it has several solid waste disposal divisions operating in Florida. Also according to its website, and its Form 10-K, Republic operates through subsidiaries, including regional corporate subsidiaries. Thus, you believe that all Florida operations would he conducted through one or more subsidiary corporations. This business activity is potentially subject to regulation by the Department of Environmental Protection (Part IV, Chapter 403. Florida Statutes).
5) Vestar Capital Partners The Governor indirectly owns, through limited partnerships, interests in private investment partnerships in New York operated by Vestar Capital Partners. Vestar Capital Partners manages a series of partnerships that have provided over $7 billion of equity to fund investments in more than 65 transactions. The Governor owns a 1% or less limited partnership interest in one Investment Fund, Vestar Capital Partners V, that has approximately $43 million in equity capital. As with the other investments described above, the Governor is strictly a passive investor in the fund; all management and investment decisions are made by the fund managers. Among its other investments, in 2008 this Investment Fund acquired a controlling interest in Radiation Therapy Services, Inc. The stock of this corporation is owned by the Investment Fund. This corporation, based in Fort Myers, Florida, operates more than 90 radiation therapy centers in over 15 states, including Florida, under the name "21st Century Oncology." This business activity is potentially subject to regulation by the Department of Health (Chapter 404, Florida Statutes), and the Agency for Health Care Administration (Chapter 400, Florida Statutes).
While you advise that you are unaware of any specific Florida regulatory matters involving the above entities or any of their Florida operations, you ask us to assume for purposes of this opinion request that their Florida operations are potentially subject to some degree of regulation by Florida executive branch regulatory agencies. Thus, solely for the purposes of this opinion request, we will assume that, in addition to applicable Federal laws and regulations, there are Florida rules and regulations specifically governing solid waste disposal, propane gas distributions, marine transportation of petrochemicals, and other Florida-based activities of these five entities. In addition, we can assume that one or more of the Florida entities may contract with a State agency for the provision of goods or services.
The Code of Ethics for Public Officers and Employees provides in relevant part:
CONFLICTING EMPLOYMENT OR CONTRACTUAL RELATIONSHIP.— No public officer or employee of an agency shall have or hold any employment or contractual relationship with any business entity or any agency which is subject to the regulation of, or is doing business with, an agency of which he or she is an officer or employee . . .; nor shall an officer or employee of an agency have or hold any employment or contractual relationship that will create a continuing or frequently recurring conflict between his or her private interests and the performance of his or her public duties or that would impede the full and faithful discharge of his or her public duties.
The first part of this prohibition prohibits a public officer from having a contractual relationship with a business entity that is either subject to the regulation of his agency or is doing business with his agency. The second portion prohibits a public officer from having a contractual relationship that will create a continuing or frequently recurring conflict of interest or that would impede the full and faithful discharge of his public duties.
We previously have found that ownership of share of stock constitutes a contractual relationship (see, e.g., CEO 99-13), so for the purposes of this opinion we will take the position that the Governor's ownership of these various interests each entails a contractual relationship that potentially could fall within the scope of this statute. We also have found that, given the language used by the Legislature in this statute, parent corporations and subsidiary corporations are separate business entities (see, e.g., CEO 86-12 and CEO 05-8), with the exception of situations involving holding companies or subsidiaries where the parent owned only the asset of the subsidiary (see CEO 94-5, CEO 99-13, and CEO 03-1). Consistent with these prior decisions, we find that in each of the five investments you have described above the Governor does not have a contractual relationship with a business entity that is subject to the regulation of or doing business with his agency, so as to be prohibited by the first part of Section 112.313(7)(a).
The prohibitions established in the second part of Section 112.313(7)(a) are grounded in the principle that one cannot serve two masters whose interests conflict. The statute does not require that the public officer fail to perform his responsibilities or act corruptly; it is entirely preventative in nature, directed at preventing situations in which private economic considerations would tend to override the faithful discharge of public responsibilities. See Zerweck v. Commission on Ethics, 409 So. 2d 57 (Fla. 4th DCA 1982), holding that the second part of Section 112.313(7)(a) "establishes an objective standard which requires an examination of the nature and extent of the public officer's duties together with a review of his private employment to determine whether the two are compatible, separate and distinct or whether they coincide to create a situation which 'tempts dishonor".
Under the circumstances presented, we conclude that the Governor's passive investments in these large national corporations and investment funds do not create a continuing or frequently recurring conflict of interest with his public duties and do not impede the full and faithful discharge of his public duties, so as to be prohibited by the second part of Section 112.313(7)(a). In each of these situations, the business operation that exists in Florida is a small portion of the entire business activities of the (ultimate) parent organization, which is the organization in which the Governor has invested. In addition, we believe that, given the scope of the Governor's investment portfolio, none of these investments are so proportionately large as to provide a particular "temptation to dishonor." Finally, we are aware of no public duties of the Governor that would give him either direct, or recurring, authority over the Florida operations of these entities.
Accordingly, we find that no prohibited conflict of interest has been created by the Governor's investments in the corporations and investment funds described above.
Would a prohibited conflict of interest be created were the Governor to place his investment assets in a blind trust, with the trust placing most of its investment assets into discretionary accounts that will be managed by licensed and regulated investment advisers who will have the discretion to invest, divest, and reinvest assets, even if an adviser were to invest in a Florida company in which the Governor would be prohibited from directly owning an interest?
Under the circumstances presented, this question is answered in the negative.
Your second question concerns prospective investments, rather than current investments of the Governor. You advise that the Governor is placing his investment assets 4in his blind trust and also has decided that the trust will place most of its investment assets into discretionary accounts that will be managed by licensed and regulated investment advisers who will have the discretion5 to invest, divest, and reinvest assets.
It is contemplated that substantial portions of the assets of the blind trust will be placed in fully discretionary accounts with one or more independent financial advisers, licensed and regulated under the Investment Advisers Act of 1940, 15 U.S.C. §§ 80(b) et seq. These discretionary accounts will be operated so that the Governor will have no control over or foreknowledge of any decisions regarding investments, sales or reinvestments occurring in these accounts. Given the provisions of the blind trust, you advise, the Governor will not know even after the fact what transactions have occurred in these discretionary accounts. The assets that are going into the blind trust, with the exceptions described above in the first question, are not Florida situs businesses. As these assets mature and new investments are made by the investment advisors, the question here is whether a prohibited conflict of interest would arise if an investment advisor, in the exercise of its independent discretion, decides to invest directly in a Florida company.
You advise that the financial institution serving as trustee of the blind trust either may itself manage certain of the investments of the blind trust or may place portions of the balance of the blind trust’s investments with outside investment advisers. Those advisers (including the trustee when acting in such capacity) will, without the Governor’s advance notice or approval, make new investments of funds under their control in public or private enterprises or assets. Some of these enterprises could be Florida-related companies, potentially subject to regulation by, or doing business with, a Florida executive branch agency. In contrast to the first fact situation, it is possible that the Governor's blind trust could hold a direct beneficial ownership interest in a Florida-related entity. However, you advise, because of the discretionary nature of these investment accounts, at no time would the Governor have advance knowledge of or control over any such investment decisions by any investment advisor, including the trustee of the blind trust. Nor, under the terms of the blind trust, would the Governor acquire this information after the fact.
Under these circumstances, you advise, the only relationship of the Governor (through the trustee of the blind trust) will be with the various investment advisers who are managing his investments, all of whom conduct their investment advisory business on a national basis. It is your understanding that all, or nearly all, of the investments will be titled in "street name."6 The Governor will have no contractual relationship with any of the business entities in which such independent investment advisers will be making investments; he will never know that such investments are being made -- either before or after the fact.
We have had only one occasion to consider how the creation of a "blind trust" would affect the application of Florida's ethics laws. In CEO 91-24, we concluded that the State Comptroller's inheritance of stocks in companies which, through subsidiary corporations, were engaged in operations in the State regulated by the Department of Banking and Finance, constituted a conflicting contractual relationship pursuant to Section 112.313(7)(a), given the Comptroller's direct regulatory authority over the subsidiary banks. We also concluded that the prohibited conflict would persist even if the Comptroller were to put the stocks into a "blind trust" similar to the provision for "qualified blind trusts" allowed under federal ethics laws, as no such provision existed under Florida's ethics laws which would exempt an apparent violation of Section 112.313(7)(a).
In contrast, here the Governor does not contemplate placing investments into the blind trust that otherwise would create a prohibited conflict of interest, thereby attempting to avoid the potential for conflicts with his public duties despite knowing the existence of conflicting interests. (We note that, under the Federal regulations governing the use of blind trusts by executive branch officials, the official cannot place into the trust an asset which he or she would be prohibited from owning outright.)7 Rather, the question is whether the trust, through the various independent investment advisors, may acquire an interest in an asset which, if directly held by the Governor, would be prohibited under Section 112.313(7)(a). We conclude that such would not be prohibited, under the circumstances presented.
As with your first question, we find that the Governor would not have a contractual relationship with a business entity that is doing business with or subject to the regulation of his agency, when his contractual relationship does not constitute his ownership of stock in the business entity, but rather is with the trust and the trustee. Nor could we conclude that the Governor's relationship with the trust and trustee would create a continuing or frequently recurring conflict of interest, or impede the full and faithful discharge of public duties, if he is prohibited from learning what the trust's advisors have invested in and has no control over those individual investments. In this respect, we agree with your observation that an investment in a Florida-related company by an investment adviser acting in a discretionary capacity, with neither foreknowledge or control of that decision by the Governor, cannot be said to impede the faithful discharge of the Governor's public duties.
Accordingly, under the circumstances presented we find that no prohibited conflict of interest would be created were the Governor to place his investment assets in a blind trust, with the trust placing most of its investment assets into discretionary accounts that will be managed by licensed and regulated investment advisers who will have the discretion to invest, divest, and reinvest assets, even if an adviser were to invest in a Florida company in which the Governor would be prohibited from directly owning an interest.
ORDERED by the State of Florida Commission on Ethics meeting in public session on May 13, 2011 and RENDERED this 18th day of May, 2011.
You state that the Governor held through an investment LLC, the controlling interest in Solantic Corporation, which operates several medical urgent care centers throughout the state. In the interest in avoiding an appearance issue, the Governor has transferred ownership from his hands, with the expectation that his family's holdings in the enterprise will be sold shortly, and a contract for the sale of such entity has recently been signed. Therefore, your request does not address the situation of Solantic. Nor does your request address the Governor's holding. though a family investment LLC, a controlling interest in an Illinois manufacturer of certain industrial equipment, Drives, LLC, which has a small amount of inventory (less than $100,000) located in Florida and has only modest annual sales here (less than $350,000 in Florida out of over $91,000,000 in total sales), with all Florida sales to equipment producers or distributors and no sales to State agencies.
These investments are typically held by the Governor indirectly through his revocable trust or through a family partnership.
Consisting of his 25% share of the ownership of a family trust and his full ownership of his revocable trust.
Including the Drives LLC investment, but not including the Solantic investment, as described above in footnote 1.
Within certain broad, preset investment parameters that reflect both the advisers' respective areas of particular expertise and the risk/reward parameters of the Governor as conveyed to the trustee of the blind trust, you advise.
According to the U.S. Securities and Exchange Commission, "street name" means that the brokerage firm holds one's securities in its name or in that of another nominee, and not in one's own name, but the firm keeps records showing the real or "beneficial owner;" although the purchaser does not get a certificate, the firm provides an account statement showing the purchaser's holdings. http://www.sec.gov/answers/street.htm.
See Code of Federal Regulations § 2634.403, which provides:
Qualified blind trusts.
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(b) Required provisions. The instrument which establishes a blind trust must adhere substantively to model drafts circulated by the Office of Government Ethics, and must provide that:
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(3) None of the assets initially placed in the trust's portfolio shall include assets the holding of which by any interested party would be prohibited by the Act, by the implementing regulations, or by any other applicable Federal law, Executive order, or regulation; . . . .