New York State
Ethics Commission


Advisory Opinion No. 98-5: Whether Public Officers Law §74 prohibits a State employee from participating in the audit of a corporation when he owns stock in the corporation or where a fund he holds has such stock in its portfolio.

INTRODUCTION

The following advisory opinion is issued in response to a request by [ ], an employee of the New York State Department of Taxation and Finance ("Department"), who asks whether his ownership of stock in a publicly traded corporation and his holdings in certain funds which, in turn, own securities issued by corporations, require him to recuse himself from supervising Department audits of those corporations.

Pursuant to the authority vested in it by Executive Law §94(15), the New York State Ethics Commission ("Commission") hereby renders its opinion that [the requesting individual] need not recuse himself from audits involving the corporations held by funds in which he has an interest. With respect to the corporation in which he is a shareholder, he should recuse himself from the auditing procedures if he believes that an audit is likely to affect the value of his holdings or be of significance to the financial community or the investing public.

BACKGROUND

[The requesting individual], who is employed by the Department as an [job title], was recently reassigned to a program that audits a large number of publicly held corporations, including many Fortune 500 companies. His staff conducts the audits, relying on taxpayer submitted proof of claimed overpayments, such as invoices showing tax paid. They also determine whether the use or other disposition of a product was exempt from tax. The overwhelming majority of audits involve refund claims. Others are initiated as a result of discrepancies between the amounts reported on returns and the amounts reported to the Department by suppliers, transporters or customers.

[The requesting individual] does not perform the audits; rather, he reviews the results. His duties include not only supervision of the audit process, but also approval of refunds that exceed certain dollar amounts.

[The requesting individual] and his wife jointly own stock in one large corporation that is included in the Dow Jones 30 industrials. He states that this investment is a substantial part of his assets, although it comprises only .00006% of the outstanding shares of the corporation. In the past, he has recused himself from matters involving this company. Given its size, [the requesting individual] does not believe that anything except an extraordinarily large refund or tax assessment would affect its share value.

[The requesting individual] and his wife also indirectly own shares in many other publicly traded corporations through mutual funds that comprise his IRA and Deferred Compensation Plan accounts, and through the New York State Employees' Retirement System. These indirect holdings are generally in medium to large publicly traded corporations that are subject to audits conducted by his unit.

His holdings in mutual funds represent a substantial portion of his assets. However, the shares of any individual corporation held by any of the funds represent only an insubstantial portion of the funds' total assets. The purchase and sale of the funds' holdings are conducted by fund managers. As the funds purchase and sell stock of various companies at different times, it is difficult, if not impossible, for [the requesting individual] to determine what companies they own on any particular date. He, again, notes that only an extraordinarily large refund or tax bill would affect the share value of any of the funds' holdings.

[The requesting individual] recently added a Standards & Poors 500 Index Fund to his Deferred Compensation holdings. This fund holds only shares of companies that are included in that Index. Unlike the mutual funds, the holdings of this fund are readily available to him and are relatively stable.

With respect to his interest in the New York State Employees' Retirement System, [the requesting individual] notes that the retirement fund has holdings in many corporations audited by his unit. However, his interest is fixed by law and not dependent upon the performance of either the fund or the securities held by the fund.

Based on the above facts, [the requesting individual] inquires about the need for his recusal from audits conducted by his unit involving the corporation in which he owns stock and the corporations which stock is held by the mutual funds he holds and the Retirement System.

APPLICABLE STATUTE

Public Officers Law §74(2), the code of ethics for State officers and employees, includes the rule with respect to conflicts of interest as follows:

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.

Following the rule with respect to conflicts of interest, Public Officers Law §74(3) provides standards of conduct which address actual as well as apparent conflicts of interest:

. . . .

(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 official duties.

(f) An officer or employee of a state agency . . . should not by his conduct give reasonable basis for the impression that any person can improperly influence him or unduly enjoy his favor in the performance of his official duties, or that he is affected by the kinship, rank, position or influence of any party or person.

(g) An officer of a state agency should abstain from making personal investments in enterprises which he has reason to believe may be directly involved in decisions to be made by him which will otherwise create substantial conflict between his duty in the public interest and his private interest.

(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 be engaged in acts in violation of his trust.

. . . .

DISCUSSION

Section 74 is concerned with both actual and apparent conflicts of interest. It provides minimum standards against which State officers and employees are expected to gauge their behavior, addressing the conflict between an employee's obligation in public service and his or her private, often personal, financial interests. As the Attorney General stated in a 1979 opinion applying Public Officers Law §74(1):

A public official must not only be innocent of any wrongdoing, but he must be alert at all times so that his acts and conduct give the public no cause for suspicion. He must give no appearance of a potential conflict between his duties and personal activities even though an actual conflict is not present. . . .

The Commission has not previously considered when an investment triggers a possible conflict of interest or the appearance of a conflict under Public Officers Law §74. Thus, this a matter of first impression.

Lacking precedent, the Commission takes note of the law applicable to federal employees. Section 208 of Title 18 of the United States Code prohibits a federal employee from participating "personally and substantially" in the decisionmaking regarding any matter in which he or she has a financial interest. However, this restriction does not apply where the interest is "too remote or too inconsequential to affect the integrity of the services . . ." of the government official. The Office of Government Ethics has said that in determining when the exception is applicable, "the agency(2) should consider the nature and value of the financial interest, as well as the type and nature of services which the employee is required to perform." (OGE Informal Advisory Letter 92x12).

The Commission believes that the federal approach is reasonable; that is, not every financial interest, no matter how remote, represents a conflict of interest or the appearance of a conflict. This approach is also consistent with the language of Public Officers Law §74(2), which prohibits activity "in substantial conflict with the proper discharge of [an employee's] duties in the public interest." Similarly, §74(3)(g) prohibits investments that "create substantial conflict" between public duties and private interests.

To present a conflict requiring recusal, there must be a rational relationship between the act to be performed by the State employee and the value of his or her holdings. The question is whether it is reasonably foreseeable that the employee's personal interests arising from his or her investments will be affected by an action taken in a governmental capacity. As the Office of Government Ethics has recognized, this depends upon the act to be performed and the nature and value of the personal holdings. Given the variety of potential situations, no definitive rule is capable of application in every situation. A case by case approach is required.

With regard to [the requesting individual's] investments, the easier issue is presented by his holdings in the funds. His interest in each of the securities held by each fund is truly minimal. Since the basic purpose of a mutual fund is to permit an investor to achieve diversity through one investment, these funds will almost always hold securities in many corporations. Thus, the value of any one security generally has little impact on the value of a fund. In addition, [the requesting individual], as an investor, does not have any role in deciding whether a particular security will be bought, sold or held by the fund. This is a decision for fund managers.

With regard to [the requesting individual's] State duties, his role gives him, at most, the authority to determine the State tax liability of a corporation. Since some tax liability is always assumed in valuing the stock of a corporation, the increase or decrease in that liability is seldom significant enough to affect that value. As [the requesting individual] points out, only an extraordinarily large refund or assessment could affect the value of the stock of a publicly traded company. Based on all of the above, the Commission finds that [the requesting individual's] fund holdings do not require his recusal from the supervision of audits.

A more difficult question arises with respect to the corporation in which [the requesting individual] holds the stock directly. Critically, the value of his holdings is infinitesimal in terms of the value of all outstanding shares. His interest may, therefore, be considered remote. In this circumstance, recusal is not required. Most audits in which he would be involved would not affect the value of his holdings. However, if the amount involved in any specific audit is likely to affect the value of the stock or be of significance to the financial community or the investing public, he must then recuse himself.

Finally, even though recusal is not required by this opinion, [the requesting individual] should disclose his holdings to his supervisor. The Department, as a matter of agency policy, must be given the opportunity to direct him to recuse.

CONCLUSION

The Commission concludes that [the requesting individual] may participate in audits of corporations which stock is held by funds in which he has an interest. He need not recuse himself from audits involving the corporation in which he holds stock unless he believes that a specific audit is likely to affect the value of his holdings or be of significance to the financial community or the investing public. Before participating in any audit of the corporation, he should disclose his holdings to his supervisor.

This opinion, until and unless amended or revoked, is binding on the Commission in any subsequent proceeding concerning the person who requested it and who acted in good faith, unless material facts were omitted or misstated by the person in the request for opinion or related supporting documentation.

All concur:

Evans V. Brewster
Henry G. Gossel
Paul L. Shechtman
O. Peter Sherwood Members

Dated: March 25, 1998


Endnotes

1. 1979 Op. Atty. Gen. 66.

2. In the federal system, agencies may make recusal decisions.



URL: http://www.nysl.nysed.gov/edocs/ethics/98-05.htm