CEO 80-71 -- September 19, 1980
CONFLICT OF INTEREST
EXECUTIVE DIRECTOR OF STATE BOARD OF ADMINISTRATION PRIVATELY SERVING AS DIRECTOR OF MUTUAL FUND COMPANY
To: (Name withheld at the person's request.)
Prepared by: Phil Claypool
There would be no violation of the Code of Ethics were the State Board of Administration to employ as its executive director an applicant who is a member of the board of directors of a mutual fund company which neither is regulated by nor does business with the state board. Such directorship would not impede the full and faithful discharge of the applicant's public duties as executive director of the state board because that board is precluded by law from investing in mutual funds; because the mutual fund company's investment program is directed toward non-United States markets, and the state board and the company therefore are not competing purchasers in the domestic investment market; and because it is highly unlikely that the mutual fund would purchase bonds issued from this state, the debt service on which might be administered by the state board. Reference is made to s. 112.311(2) of the Code of Ethics, in which the Legislature declared that it was not its intent in passing the code to "impede unreasonably or unnecessarily the recruitment and retention by government" of well-qualified persons. Thus, interpretation of the code should aim toward prohibiting those relationships which pose substantial conflict with the proper discharge of public duty, not toward prohibiting the most remote possibilities of conflicts. No such substantial conflict is evident in this situation, although attention is directed to s. 112.313(8), F. S., prohibiting the disclosure or use of "inside" information, due to the sensitive and responsible nature of the duties of the executive director.
Would a prohibited conflict of interest be created were a member of the board of directors of a mutual fund company to serve as executive director of the State Board of Administration when the state board neither regulates nor is doing business with the mutual fund company?
Your question is answered in the negative.
In your letter of inquiry you advise that the State Board of Administration is considering applicants for the position of executive director. You also advise that one of the persons under consideration is ____, who is a member of the board of directors of a mutual fund company. In that capacity, you advise, he is paid a director's fee by the fund company. The additional information referenced in this opinion was provided to our staff by the subject applicant, by the acting Executive Director of the State Board of Administration, and by a staff member of your general counsel's office.
The particular company which the subject applicant serves as director recently was organized and registered with the U.S. Securities and Exchange Commission as a mutual fund company under the federal Investment Company Act of 1940. According to the company's prospectus, its objective is "to seek to obtain a total return on its assets from long-term growth of capital and from income principally through a diversified portfolio of marketable securities of established non-United States issuers." Although the company emphasizes investments outside of the United States, the fund's reserves may be invested in domestic short-term, money-market instruments and, under exceptional economic or market conditions abroad, the fund temporarily may invest all or a major portion of its assets in U.S. government obligations or debt obligations of domestic companies. Thus, the fund has not invested in bonds issued by the State of Florida or its political subdivisions. Nor is it likely to do so, according to the subject applicant, because of the low interest rates offered by such securities. Even though low interest rates on such bonds are made more attractive by their tax-exempt status, he advised, the bonds would not be purchased by the mutual fund because most of its investors will be pension funds, which already enjoy tax exemption.
The subject applicant is one of three "noninterested" directors (of a total of five directors) of the fund, meaning that he is not an officer, director, or employee of the fund's investment adviser, which is a separate company formed to provide investment advisory services to clients in this country seeking long-term capital appreciation of investment in stock markets abroad. The board of directors of the fund, which meets four to five times per year, generally reviews the investment plans, strategies, and results of the fund's investment adviser, which is responsible for the actual buying, selling, and managing of the fund's assets. In addition, sales of stock in the fund are handled by the investment adviser, rather than by the board of directors.
The State Board of Administration, composed of the Governor, the State Treasurer, and the State Comptroller, is charged by law with numerous responsibilities which may be grouped into three general classifications for our purposes. First, the state board acts as an agent to administer debt service funds for bonds issued by the State Division of Bond Finance under the State Bond Act, as well as for various other bonds, such as bridge and highway bonds and bonds issued by the State Board of Education. Sections 215.69, 236.601, and 344.26, F. S. Secondly, although the state board has no authority to issue bonds, in certain circumstances it serves as a check upon the issuance of bonds. For example, before the state or a political subdivision may issue bonds at a higher interest rate than that provided by law, approval of the state board must be granted. Chapter 80-318, Laws of Florida. The state board also must approve all bonds to be issued by the Division of Bond Finance as to fiscal sufficiency.
Finally, the state board has been authorized to invest all trust funds and all agency funds of each state agency, certain retirement system funds, and surplus local government funds. Sections 121.151, 215.44, and 218.409(2), F. S. However, the types of investments which can be made by the state board are limited to only those particular investments authorized by s. 215.47, F. S. Among other restrictions, that section prohibits the state board from investing more than 25 percent of any fund in common stock of corporations listed for less than 36 months on a national stock exchange. As mutual fund companies are not listed on the stock exchanges, and as no other category of authorized investment would allow the purchase of stock in a mutual fund company, the state board is precluded by law from investing in mutual fund companies.
The Executive Director of the State Board of Administration serves as the chief investment officer for the board. That is, although general policies and investment strategies are set by the board, the executive director makes independent decisions with the aid of his staff as to what and when particular investments should be made.
The Code of Ethics for Public Officers and Employees provides in part:
DOING BUSINESS WITH ONE'S AGENCY. -- No employee of an agency acting in his official capacity as a purchasing agent, or public officer acting in his official capacity, shall either directly or indirectly purchase, rent, or lease any realty, goods, or services for his own agency from any business entity of which he or his spouse or child is an officer, partner, director, or proprietor or in which such officer or employee or his spouse or child, or any combination of them, has a material interest. Nor shall a public officer or employee, acting in a private capacity, rent, lease, or sell any realty, goods, or services to his own agency, if he is a state officer or employee, or to any political subdivision or any agency thereof, if he is serving as an officer or employee of that political subdivision. The foregoing shall not apply to district offices maintained by legislators when such offices are located in the legislator's place of business. This subsection shall not affect or be construed to prohibit contracts entered into prior to:
(a) October 1, 1975.
(b) Qualification for elective office.
(c) Appointment to public office.
(d) Beginning public employment.
[Section 112.313(3), F. S.]
This provision prohibits a public employee from acting in an official capacity as purchasing agent to purchase any goods or services for his agency from a business entity of which he is a director. However, as we have been advised that the state board neither has purchased an interest in the mutual fund company nor has any other economic relationship with the company, we find this provision to be inapplicable.
The Code of Ethics also provides:
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 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 private interests and the performance of his public duties or that would impede the full and faithful discharge of his public duties. [Section 112.313(7)(a), F. S.]
The first portion of this provision prohibits a public employee from having an employment or contractual relationship with a business entity which either is doing business with, or is subject to the regulation of, his agency. While we find that the subject applicant would have "employment," in the most general sense of that word, and a contractual relationship with the mutual fund company by virtue of his compensated service on its board of directors, we also find that this provision is inapplicable. As described earlier in this opinion, the state board is not doing business with the mutual fund company. Moreover, the state board is precluded by law from investing in the company. Nor can the mutual fund company be considered to be subject to the regulation of the state board, since the board's authority as described above does not include any regulatory power over mutual fund companies.
The second portion of s. 112.313(7)(a), above, prohibits a public employee from having any employment or contractual relationship that will create a continuing or frequently recurring conflict between his private interests and the performance of his public duties or that would impede the full and faithful discharge of his public duties. Under the circumstances presented in this opinion, we find that this provision also would not prohibit the subject applicant from serving as Executive Director of the State Board of Administration. Because of the legal limitations on investments which can be made by the state board and because the mutual fund company's investment program is directed toward non-United States markets, the state board and the company are not competing purchasers in the domestic investment market; and it is unlikely that they will become competitors in the future. Equally remote is the possibility that the mutual fund might purchase bonds issued from this state, the debt service on which might be administered by the state board. We perceive a potential conflict of interest should the state board become involved in legal proceedings following a default on bonds purchased by the mutual fund company. However, the remoteness of this possibility at the present time persuades us that the subject applicant's responsibilities as a director of the company would not present a frequently recurring conflict and would not impede the full and faithful discharge of the duties of executive director of the state board. In the event that such a possibility becomes imminent, we suggest that another advisory opinion be sought to enable us to give explicit guidance in a more specific context. Similarly, we would advise the subject applicant to seek another advisory opinion if he is considered for service on the board of directors of other mutual fund companies, so that we may have the benefit of more specific factual circumstances in giving our advice at that time.
In creating the Code of Ethics for Public Officers and Employees, the Legislature recognized that:
It is also essential that government attract those citizens best qualified to serve. Thus, the law against conflict of interest must be so designed as not to impede unreasonably or unnecessarily the recruitment and retention by government of those best qualified to serve. Public officials should not be denied the opportunity, available to all other citizens, to acquire and retain private economic interests except when conflicts with the responsibility of such officials to the public cannot be avoided. [Section 112.311(2), F. S.]
Thus, we do not believe that the Code of Ethics should be interpreted to prohibit the most remote possibilities of conflicts of interest, but rather to prohibit those relationships which are in substantial conflict with the proper discharge of duties in the public interest. We find no such substantial conflict of interest here.
Accordingly, under the circumstances presented in this opinion, we find that no prohibited conflict of interest would be created were a member of the board of directors of the particular mutual fund company involved here to serve as Executive Director of the State Board of Administration. In addition, because of the sensitive and responsible nature of the duties of the executive director, we suggest that whoever is selected to serve in that position be made aware particularly of the following provision of the Code of Ethics:
DISCLOSURE OR USE OF CERTAIN INFORMATION. -- No public officer or employee of an agency shall disclose or use information not available to members of the general public and gained by reason of his official position for his personal gain or benefit or for the personal gain or benefit of any other person or business entity. [Section 112.313(8), F. S.]