New York State
ETHICS COMMISSION


Advisory Opinion No. 92-17: Application of the Commission's regulations on Outside Activities, 19 NYCRR Part 932, pertaining to restricting policymakers from holding positions as officers or members of certain for-profit corporations.



INTRODUCTION

The following advisory opinion is issued in response to an Outside Activity Request submitted by [head of a State facility] to the State Ethics Commission ("Commission") pursuant to the Commission's regulations, set forth at 19 New York Code of Rules and Regulations ("NYCRR") Part 932. The requestor seeks approval to serve as director of a for-profit corporation which is the sole shareholder/parent of a corporation which controls a corporation that conducts considerable business with the [State facility].

Pursuant to the authority vested in it by Executive Law §94(15), the Commission hereby renders its opinion that such service violates the Code of Ethics contained in Public Officers Law §74 and the request is denied.


BACKGROUND

The written Policy [of the State agency overseeing the State facility], provides that the [head of each State facility] shall have the following responsibilities:

[S]hall administer the [facility] for which he or she serves, and shall promote its development and effectiveness. . . . shall supervise the members of the professional and non-academic staff of such [facility]. . . . shall prepare and recommend the annual budget requests of [the] [facility] and shall report and make recommendations [facility] concerning the operation, plans and development of the [facility]. . . . shall make all appointments of employees to positions at the [facility] in the classified service of the civil service of the State.

According to the information provided to the Commission, [the association] is a not-for-profit association representing the interests of over 130 [ ] facilities, [ ], in the metropolitan New York area. [The association] is an advocacy group that provides public policy analysis, data analysis and communications for its members. The requestor serves as the chair of [the association].(1) He receives no compensation for his service as chair.

The requestor has requested approval to serve as director of [the corporation], a for-profit corporation recently formed by [the association] pursuant to New York Business Corporation Law §402.(2) [The Corporation] contracts with [the association] to "provide the resources necessary to carry out the work of [the association]." The requestor states that he will not receive any compensation for his services as director.

[The corporation] in turn is the sole shareholder of a for-profit subsidiary, [the subsidiary], which is the sole shareholder of two other corporations, [Company A] and [Company B].(3) Both of the latter two corporations provide a variety of group purchasing and shared services programs for [the association members], to realize group cost economies and to enhance revenues. The requestor does not sit on the board of directors of [the subsidiary], [Company A or Company B].

The [State facility] has the following business contacts with [Company A]:

  1. Group purchasing plan.

    The [State facility] participates in [Company A's] group purchasing plan. Through the input of its members such as the [State facility], [Company A] submits requests for proposals ("RFPs") to vendors. In this manner, [the association] attempts to use group purchasing to obtain discounted prices from vendors and to pass the savings on to individual members. Committees from [Company A] award contracts to selected vendors based upon price and other identified criteria. Participating members purchase directly from the selected vendors and are charged the price resulting from the vendors' winning bids with [Company A]. [Company A] receives an administrative fee from the vendors which is usually an average of 1.25% of gross purchases. In 1991, the [State facility] purchased $2,428,932 worth of goods through [Company A's] group purchasing program.

  2. Collection services.

    [Company A] also operates a collection agency, [the agency]. The [State facility] awarded contract #C390007 to [Company A] in 1990 as a result of [the association's] successfully responding to RFP [#259]. The initial contract between the [State facility] and [Company A] was subsequently twice renewed for 1991 and 1992. In 1991, the [State facility] referred $276,456 in cases to [Company A] which in turn received $19,963 in fees.


APPLICABLE REGULATION AND STATUTE

Part 932.

Executive Law §94(16)(a), directs the Commission to "promulgate rules concerning restrictions on outside activities . . . by persons subject to its jurisdiction." In furtherance of this duty, the Commission adopted regulations on Outside Activities which are codified at 19 NYCRR Part 932.(4) The relevant section of Part 932 is as follows:

932.3 Restriction on holding other Public Office or Private Employment in other Outside Activities.

. . . .

(e) No individual who serves in a policy-making position on other than a non-paid or per diem basis . . . shall serve as a director or officer of a for-profit corporation or institution without, in each case, obtaining prior approval from the State Ethics Commission.

Public Officers Law §74.

Section 74 (the State's Code of Ethics) is concerned with both actual conflicts of interest and their appearance. The rule with respect to conflicts of interest, contained in §74(2), provides:

No officer or employee of a state agency . . . should have any interest, financial or otherwise, direct or indirect, or engage in any business or transaction or professional activity or incur any obligation of any nature, which is in substantial conflict with the proper discharge of his duties in the public interest.

Standards set forth in §74(3) which further explain and define the above-mentioned rule and which pertain to the present circumstances, include:

. . . .

d. No officer or employee of a state agency . . . should use or attempt to use his official position to secure unwarranted privileges or exemptions for himself or others.

e. No officer or employee of a state agency . . . should engage in any transaction as representative or agent of the state with any business entity in which he has a direct or indirect financial interest that might reasonably tend to conflict with the proper discharge of his official duties.

. . . .

h. An officer or employee of a state agency . . . should endeavor to pursue a course of conduct which will not raise suspicion among the public that he is likely to engage in acts that are in violation of his trust.


DISCUSSION

Pursuant to Part 932.4(c), the Commission makes its determination to approve or disapprove a policymaker's outside activity request based upon whether the proposed outside activity interferes with or is in conflict with the proper and effective discharge of such policymaker's duties on behalf of the State or would raise an appearance of such a conflict. In making such determination, the Commission considers the provisions of Public Officers Law §§73 and 74.(5)

In Advisory Opinion No. 90-6, this Commission considered whether Public Officers Law §74 precludes a State officer or employee from serving as an uncompensated member and officer of the board of directors of a not-for-profit development corporation and its wholly owned for-profit subsidiary both of which conducted business with other State agencies and potentially with the State officer's employing agency. The Commission concluded:

The presence of a State employee on the board of such a corporation may raise questions as to the knowledge the corporation has about available State business and the matter in which it was received, as well as the influence the requesting party may exert to gain the State business. . . . No State employee should place, or appear to place himself or herself in a position of disclosing confidential information which he or she has received in a State position. Nor should he or she disclose such information or attempt to obtain unwarranted privileges for others. [at p. 10.]

The Commission found it significant that one of the entities on which the employee served as a director was a for-profit corporation, stating:

The potential for conflict is more of a problem with the private, for-profit corporation. For, in the case of [such a corporation], the profits that may be received from doing business with the State may appear to have been the direct result of involvement of the requesting individual [State employee], a voting board member [of the for-profit corporation]. . . . We [the Commission] express greater concern about the involvement of public servants in profit making corporations. [at pp. 10-11.]

Clearly, the [State facility head] may not serve as an officer or on the board of directors of [Company A] because of the corporation's business contacts with the [State facility]. The present matter is distinguishable from Advisory Opinion No. 90-6 only to the extent that it is a subsidiary for-profit corporation [Company A] of the subsidiary [the subsidiary] of a for-profit corporation [the corporation] which is conducting business with the State rather than the parent for-profit corporation itself on whose board of directors the State officer wishes to serve. The fact remains that the for-profit parent corporation [the subsidiary] will benefit from its control over [Company A] which contracts with the [State facility], and that benefit, in turn, will accrue to [the subsidiary's] parent, [the corporation]. It is the potential for gain that may cause the public to perceive that the requestor could (or appear to be able to) use his official position as [ ] to sway [State facility] business to the for-profit subsidiary or take positions, in his capacity as [ ] of the [State facility], favorable to these outside entities, in violation of Public Officers Law §74(d), (e) and (h).(6)

The Commission is mindful of the relationship between parent and subsidiary corporations.(7) While legally they may be separate entities, the public may not be able to distinguish this distinction when assessing whether there is the appearance of a conflict of interest for purposes of Public Officers Law §74. Likewise, vendors may perceive that when they have a contract with a subsidiary corporation, they are really doing business with the parent corporation.

As in most cases concerning application of Public Officers Law §74, the Commission must weigh all the relevant factors to determine whether an act entails an appearance of a conflict of interest. In the present case, the Commission notes that [the corporation] is a for-profit corporation, that the requestor is the [head of a State facility[ that conducts substantial business with a subsidiary for-profit corporation, [Company A]. While the Commission recognizes [Company A] is a subsidiary of another subsidiary corporation, any parent corporation could easily create such entities to circumvent the conflict of interest provisions of Public Officers Law §74. Considering all of the circumstances, the Commission denies the [ ] request.


CONCLUSION

The Commission denies the outside activity request. An appearance of a conflict of interest, in violation of Public Officers Law §74, exists for the [ ] to serve as a director of a for-profit corporation whose subsidiary conducts business with the Center.

This opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the requesting individual who acted in good faith, unless material facts were omitted or misstated by the persons in the request for opinion.

All concur:

Joseph M. Bress, Chair

Barbara A. Black
Angelo A. Costanza
Donald A. Odell, Members

Dated: October 8, 1992


Endnotes

1. Part 932 does not apply to the requestor's service as chair because he receives no compensation and [the association] is a not-for-profit corporation. See discussion of Part 932, infra.

2. The New York State Department of State approved [the corporation's] Certificate of Incorporation on [ ]; a copy of which has been provided by the requestor.

3. Eleven of the twenty-three members of [the subsidiary's] board serve on [the association's] board of directors.

4. The regulations generally apply only to State officers and employees who have been designated as serving in policy-making positions by their appointing authority. [ ] have been designated policymakers by their appointing authority.

5. Public Officers Law §73 is not an issue in this case as the requestor asserts that he does not intend to receive any compensation for his service as director of [the corporation]. For example, Public Officers Law §73(7)(a) prohibits State officers and employees from receiving compensation for appearing or rendering services before any State agency relative to certain matters, such as the obtaining of grants of money or loans, sale of goods and services or licensing, as defined.

6. It is of no consequence that the [State facility] benefits from [the association's] group purchasing plan. It is the presence of the [head of the State facility] on the board of directors of the for-profit parent that creates the appearance of a conflict of interest and not the contractual relationship between the [State facility] and [Company A] alone.

7. For example, see Advisory Opinion No. 90-13.


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