Advisory Opinion No. 2003-40

Re: Michael McMahon

QUESTIONS PRESENTED

The petitioner, the Executive Director of the Rhode Island Economic Development Corporation, a state appointed position, requests an advisory opinion regarding whether he may take an active role in shaping a bill currently pending in the Rhode Island legislature, and in negotiating with a business entity interested in the passage of the bill, given the petitioner's private business interests.

RESPONSE

It is the opinion of the Rhode Island Ethics Commission that the petitioner, the Executive Director of the Rhode Island Economic Development Corporation, a state appointed position, may take an active role in shaping a bill currently pending in the Rhode Island legislature, and in negotiating with a business entity interested in the passage of the bill, notwithstanding the petitioner's private business interests represented herein.

There are currently bills pending in the Rhode Island legislature that would create the "Rhode Island Certified Capital Company Act," ("the Act") an economic development program designed to increase the amount of venture capital investments made in Rhode Island. Under the Act, a qualified venture capital firm may create a business entity known as a certified capital company ("CAPCO"), with the permission of the State through the Economic Development Corporation. Qualified insurance companies doing business in Rhode Island are permitted to invest in the CAPCO, and in return will receive an equivalent amount of insurance premium tax credits from the State to be used over a period of years. The CAPCO is then required to use this capital invested by insurance companies to make investments in small businesses located within Rhode Island. Those small businesses will then, ideally, create new jobs that will in turn increase Rhode Island's tax base. Once the CAPCO has invested its managed funds, it is entitled to take a percentage of the CAPCO's investment income as a profit. Similar programs have been established in several other states.

The petitioner represents that the CAPCO bill was introduced at the request of a Louisiana based company that has experience managing certified capital companies in other states. Should the Act become law in Rhode Island, it is foreseeable that this company may apply and be certified by the EDC as a Rhode Island CAPCO. The petitioner advises that the largest single investor in this Louisiana based company is an investment firm known as Reservoir Capital ("Reservoir"). Accordingly, Reservoir has an indirect financial interest in the passage of the CAPCO Act in Rhode Island. It is this interest of Reservoir's that causes the petitioner to seek the advice of the Ethics Commission.

Reservoir has many unrelated investments in many other areas. Relevant to this opinion is an investment of approximately five million ($5,000,000) dollars in RockPort Capital Partners, LP ("RockPort"), a Small Business Investment Corporation ("SBIC") that manages approximately $100 million in venture capital, which is primarily invested in early to mid-stage companies. By virtue of its large limited partnership interest in RockPort, Reservoir has been granted "observer status" on RockPort's Investment Committee, but has no voting rights.

The petitioner represents that prior to accepting his appointment as the Executive Director of the EDC, he was a founder, a limited and general partner of RockPort. The petitioner had an active management role in RockPort, including sourcing and monitoring deals, and serving on the investment committee. He received a salary and a share of the so-called "carried interest," which is an interest in the profits of RockPort which is made available to the managing partners as compensation based upon the success of the investments. The petitioner represents that upon accepting his position as the Executive Director of the EDC, he reduced his investment as a limited partner in RockPort, ceased receiving a salary and ceased having any active management role or participation in investment decisions. The petitioner states that he has no direct or indirect economic interest in Reservoir, but is associated with Reservoir only as a fellow limited partner in RockPort.

Based upon these representations, the petitioner seeks guidance from the Ethics Commission as to whether the Code of Ethics limits or prohibits the petitioner's active participation in the legislative process relating to the CAPCO bill, to his having negotiations with the Louisiana company that is supporting the bill, to his participation in the EDC's review of the Louisiana company's likely application to become a certified CAPCO should the bill pass, and in the EDC's oversight of the Louisiana company's CAPCO should it be certified.

Under the Code of Ethics, a public official may not participate in any matter in which he has an interest, financial or otherwise, that is in substantial conflict with the proper discharge of his duties or employment in the public interest. R.I. Gen. Laws § 36-14-5(a). An official will have an interest in substantial conflict with his official duties if it is reasonably foreseeable that a "direct monetary gain" or a "direct monetary loss" will accrue, by reason of his official activity, to the official, a family member, a business associate, an employer or any business which the public official represents. R.I. Gen. Laws § 36-14-7(a); Commission Regulation 36-14-6001. Furthermore, a public official may not use his or her public office to obtain financial gain, other than that provided by law, for himself or for any business associate. R.I. Gen. Laws § 36-14-5(d). Applying these provisions of the Code to the facts as represented, a determination must first be made as to whether the petitioner and either the Louisiana company or Reservoir are "business associates" as defined by the Code, and if so whether the petitioner's official action will result in a direct financial gain to such business associates.

As to the first question, the petitioner and Reservoir are considered to be business associates as defined by the Code of Ethics. The Code defines “business associate” as a “person joined together with another person to achieve a common financial objective[.]” R.I. Gen. Laws § 36-14-2(3). The term “person” is defined in the Code as “an individual or business entity[.]” R.I. Gen. Laws § 36-14-2(7). Under these definitions, the petitioner and Reservoir are considered to be business associates because they are joined together as limited partners of RockPort to achieve a common financial objective. See A.O. 2002-71 (petitioner and his business partner in a real estate development project are business associates as defined by the Code of Ethics as they are joined together to achieve a common financial objective).

On the other hand, the petitioner is not a business associate of the Louisiana company, given his representations that his only relationship to the company is through his relationship with one of its investors, Reservoir. See A.O. 2002-76 (mere fact that petitioner is considered a "business associate" of a corporation does not automatically make petitioner a business associate of the corporation's other business associates, because petitioner is not joined together with the corporation's other business associates to achieve a common financial objective).

Having determined that the petitioner and Reservoir are business associates, section 5(a) of the Code would prohibit the petitioner from taking any official action as the Executive Director of the EDC that is likely to cause a direct financial benefit or detriment to Reservoir. The petitioner represents that the official action he foresees taking as the Executive Director of EDC is testifying before legislative subcommittees, negotiating a consensus in bill language with the Louisiana company that is supporting the bill, reviewing the Louisiana company's application to become a certified CAPCO should the bill pass, and participating in EDC's oversight of the CAPCO and its activities. Assuming the passage of the CAPCO Act, while these official actions will likely have a direct financial impact on the Louisiana company, any impact upon Reservoir as an investor in the Louisiana company is indirect. Furthermore, it must be noted that at this stage it is purely hypothetical that the bill will pass, and that if passed that the Louisiana company will apply for certification as a CAPCO. Although financial impact resulting from official activity need not be certain to occur for the Code's prohibitions to apply, the probability of such impact "must be greater than 'conceivably[.]'" Regulation 36-14-7001.

In summary, the official action contemplated by the petitioner will have no economic impact upon him personally. While it may be reasonably foreseeable that such activity will have a direct financial impact upon the Louisiana company, there is no business association between the company and the petitioner. While there is a business association between the petitioner and Reservoir, any financial benefit or detriment flowing to Reservoir as a result of the petitioner's official activity is too remote and in some instances too hypothetical to trigger the prohibitions of the Code. Accordingly, the Code does not prohibit the petitioner from taking an active role in the legislative process relating to the CAPCO bill, from negotiating with the Louisiana company that is supporting the bill, from participating in the EDC's review of the Louisiana company's application to become a certified CAPCO should the bill pass, or from participating in the EDC's oversight of the Louisiana company's CAPCO. Of course, the petitioner is not permitted to use any confidential information received through his public office to obtain financial gain for his business associate, Reservoir, whether directly or indirectly through its investment in the Louisiana company. R.I. Gen. Laws § 36-14-5(d).

Code Citations:

36-14-2(3)

36-14-2(7)

36-14-5(a)

36-14-5(d)

36-14-7(a)

36-14-7001

Related Advisory Opinions:

2002-76

2002-71

Keywords:

Business associate