Advisory Opinion No. 96-58

Re: James M. Seed

A. QUESTION PRESENTED

A member of the Rhode Island Investment Commission requests an advisory opinion as to whether he may participate in reapproval of an investment advisory arrangement with Fleet Investment Advisors while simultaneously serving as a "disinterested trustee" for investment companies also advised by Fleet.

B. SUMMARY

The petitioner, a member of the Rhode Island Investment Commission, is prohibited from participating in matters relating to Fleet Investment Advisors, Inc. given that the petitioner is also a trustee of an investment company utilizing Fleet as its investment advisor. This decision is based not only on the appearance of impropriety, but also on the fact that Fleet is a business associate of the petitioner (see R.I. Gen. Laws § 36-14-2(8)) which requires the petitioner to recuse himself when the associate appears before him at the Investment Commission. (See R.I. Gen. Laws § 36-14-5(f))

C. DISCUSSION

1. Facts

The petitioner, James M. Seed, is a member of the Rhode Island Investment Commission. As part of the duties of the Commission, the Commission members vote on the investment advisory arrangement. Fleet Investment Advisors, Inc. has previously served as investment advisors to the Commission. This arrangement is now subject to reapproval before the Commission.

Mr. Seed is also a trustee of The Galaxy Fund, the Galaxy VIP Fund and Galaxy Fund II, each of which is a registered investment company advised by Fleet. Mr. Seed advises the Commission that he is a "disinterested trustee" as that term is defined by the Investment Company Act of 1940. As a "disinterested trustee", the petitioner cannot "knowingly ha(ve) any direct or indirect beneficial interest in, or...(be) designated as trustee, executor, or guardian of any legal interest in, any security issued either by an investment adviser ...(to the Fund) or by a controlling person of the investment adviser..." The petitioner notes that his duties as a disinterested trustee include the review of Galaxy's investment advisors contract.

Mr. Seed requests advice on whether he may participate in the selection of Fleet as an investment advisor in his role as Investment Commissioner given that he also serves as a Trustee of an investment company with Fleet as its advisor.

2. Analysis

At issue in this advisory opinion request is whether the Code of Ethics prohibits a member of the Investment Commission from participating in the selection of Fleet as an investment advisor given his relationship with Fleet as a "disinterested trustee" of the Galaxy Funds. R.I. Gen. Laws § 36-14-5(a) and R.I. Gen. Laws § 36-14-7(a) of the Code of Ethics provide that the petitioner, as a member of the Rhode Island Investment Commission, may not participate in any matter in which he has an interest, financial or otherwise, which is in substantial conflict with the proper discharge of his duties in the public interest. A substantial conflict occurs when the public official has reason to believe or expect that he or any business associate will derive a direct monetary gain or suffer a direct monetary loss by reason of his official activity. Pursuant to R.I. Gen. Laws § 36-14-5(d), the petitioner shall not use his public office or confidential information received through his holding public office to obtain financial gain, for himself, a member of his family or business associate or any business which the person represents. Additionally, the Code of Ethics provides that a business associate may not appear before the petitioner unless the associate first advises the Commission of the nature of his business relationship with the petitioner and the petitioner recuses himself from voting on or otherwise participating in the Commission's consideration or disposition of the matter at issue. R.I. Gen. Laws § 36-14-5(f).

It is the opinion of the Rhode Island Ethics Commission that the petitioner must recuse himself from participating as a member of the Investment Commission whenever matters concerning Fleet Investment Advisors should come before him. The Commission bases its ruling on the fact that petitioner is a "business associate" of Fleet Investment Advisors.

A "business associate" is defined as "a person joined together with another to achieve a common financial objective." R.I. Gen. Laws § 36-14-2(8). A public official's participation in matters involving a "business associate" is a violation not only of R.I. Gen. Laws § 36-14-5(f), but also of R.I. Gen. Laws § 36-14-5(a) and R.I. Gen. Laws § 36-14-7 given the substantial conflict with the proper discharge of his duties in the public interest by virtue of the fact that he can expect his business associate to receive a monetary gain. Further, R.I. Gen. Laws § 36-14-5(d) could be violated if the public official used his position to obtain financial gain for a business associate.

In this matter, the petitioner is a "disinterested trustee" of the Galaxy Fund. Although petitioner is considered "disinterested" under the Investment Act (not receiving any beneficial interest in a security issued from Fleet to the Fund), such a relationship is similar to those of the Board of Directors of non-profit organizations. Those Board members have been covered by the Code of Ethics when also a public official. The Commission has previously required recusal by the public officials when their non-profit organization appeared before the public official's agency. See A.O. 89-103, A.O. 92-67, A.O. 92-31, A.O. 91-07. See also A.O. 95-92 (American with Disabilities Act Coordinator employed by Department of Administration who is also on the Board of Director of the PARI Independent Living Center, a member of a American with Disabilities Act Coalition, and mediator with the Governor's Commission on the Handicapped must recuse himself from participating in decisions when they appear before him at the Department of Administration.) And A.O. 91-86 (Director of Economic Development for State of Rhode Island must recuse himself from participating in matters relating to donating land to a college where the Director is also a trustee of that college).

Additionally, the petitioner's relationship with Fleet is that of "business associate" given that Fleet Investment Advisors, Inc. seeks to achieve a common financial objective with the Galaxy Funds. Further, Fleet has a financial stake in being reappointed as an investment advisor for the Rhode Island Investment Commission.

These circumstances are far different than those considered by the Commission in A.O. 89-65. In that matter, the Director of Administration and the General Treasurer served as ex-officio members of the State Investment Commission and the Rhode Island Housing and Mortgage Finance Corporation ("RIHMFC"). The State Investment Commission sought to purchase bonds from RIHMFC. Given that those members were serving on the Investment Commission and RIHMFC because of their positions in state government and could not expect to receive a financial gain, the Commission found that those members could participate in RIHMFC matters as State Investment Commissioners so long as they identify the duality of their status on the public record prior to voting. Additionally, it should be noted that RIHMFC did not constitute a business as it was a state agency and, as such, neither member was considered a business associate. This finding is inapplicable to the current matter given that Galaxy Funds and Fleet clearly qualify as a business and that the petitioner was not placed on the Rhode Island Investment Commission by virtue of another State government position.

Similarly, the Conflicts of Interest Commission did not find a prohibition against a member of Tucker, Anthony from serving on the Employee Retirement Board where the Board utilized two management advisors who then employed 12 New York Stock Exchange firms including Tucker. This opinion was also based on the fact that the Board was not involved with selection of those firms. A.O. 85-100. Again, this fact pattern can be distinguished based on the petitioner's involvement with the selection of Fleet Investment Advisors as the Galaxy Funds' investment advisor and the proposed selection of Fleet as the Rhode Island Investment Commission investment advisor.

The Commission has held in numerous opinions that a public official could not participate in a matter involving a business associate. See A.O. 93-77 (member of the Fleet Advisory Board was advised to refrain from participating on Fleet matters when they came before him as a member of the Rhode Island Health and Educational Building Corporation). Additionally, a City Councilor could not participate in zoning matters where the applicant was either a co-employee or a major stockholder of his employer as they were both business associates. A.O. 89-37. See also A.O. 93-2 (City Councilor could not participate in matter where a restaurant owner who received supplies from the Councilor as a food market owner appeared before the City Council).

After considering Code of Ethics and the petitioner's representations, the Commission concludes that the petitioner, as a member of the Rhode Island Investment Commission, must recuse himself if Fleet Investment Advisors, Inc. appears before the Investment Commission. This opinion is based on the appearance of impropriety and potential violations of R.I. Gen. Laws § 36-14-5(a),(d),(f) & (7)(a) as the petitioner can expect that Fleet Investment Advisors, a business associate, may derive a financial gain from his participating on Fleet's reapproval as an investment advisor to the Rhode Island Investment Commission. In the event that this or any other matter concerning Fleet Investment Advisors, Inc. should come before him in his capacity as a Commissioner, the petitioner should utilize the notice and recusal sections provided in R.I. Gen. Laws § 36-14-6.

Code Citations:

36-14-5(a)

36-14-5(d)

36-14-5(f)

36-14-6

36-14-7

36-14-7(a)

Related Advisory Opinions:

95-62

93-77

93-2

92-67

92-31

91-86

91-7

89-65

89-37

89-103

85-100

Keywords:

business associate