FPPC Amends Regulation Governing Conflicts of Interest for Public Official Businesses

by on February 23, 2015

posted in Administrative Regulations, Ethics,

The Fair Political Practices Commission (“FPPC”) has recently adopted a new regulation governing when public officials have conflicts of interests in businesses they own or for which they are investors. The amended regulation, which became effect in January 2015, is part of a broader FPPC program to streamline and simplify the regulations that implement the Political Reform Act of 1974, California’s principal law governing the ethics of public officials. The recent amendment concerning business-based conflicts follows changes the FPPC made in 2014 to the regulation governing conflicts for public official interests in real property. (See here for a summary of those changes.)

The Old Regulation

The Political Reform Act provides that a public official has a conflict of interest when a government decision affects a business entity in which the official has a direct or indirect investment of more than $2,000. (Government Code § 87103(a).)

In implementing this statutory language, the old FPPC regulation for business-based conflicts focused on a distinction between government decisions that had direct versus indirect effects on business interests. For direct impacts, the regulation created a presumption of materiality but also created an exception for when it was reasonably foreseeable that a governmental decision would not have any financial effect on a business entity. For indirect impacts, the regulation imposed a complex decision-tree for which materiality depended on such factors as whether the business was listed on a stock index (e.g., NYSE or Nasdaq), the value of the business, and the amount of increase or decrease in revenues or expenses.

The New Regulation

The new regulation is simpler. It abolishes the direct/indirect and reasonably-foreseeable standards and provides a more straightforward analysis. The regulation defines the circumstances that determine when a government decision affecting a business is material, and thus for which the official has a conflict. Specifically, it states that a financial effect is material if the business:

  • Makes an application or initiates a proceeding (such as for a permit, license, entitlement, or other approval);
  • Is the subject of an investigation or enforcement proceeding or is “otherwise subject to an action” by the agency (e.g., code enforcement);
  • Offers a service or to sell a product to the agency;
  • Bids on or enters into a contract with the agency; or
  • Manufactures a product the agency purchases (if the value of the sales exceeds $1,000 over a 12-month period).

Despite the effort to instill simplicity into the analysis, the new regulation still leaves room for interpretation. In addition to the above grounds, the regulation provides an additional, broader ground in which the financial effect of decision affecting a business can be considered material and for which a conflict of interest exists. Specifically, the regulation states that a financial effect on a business is material:

“… if a prudent person with sufficient information would find it is reasonably foreseeable that the decision’s financial effect would contribute to a change in the price of the business entity’s publicly traded stock, or the value of a privately-held business entity.”

Those who have attended law school are familiar with terms such as “prudent person” and “reasonably foreseeable,” which are bedrock concepts in tort law (and some other areas of the law). Fortunately, the drafters of the regulation are well aware that not every public official is a lawyer. To make the new rules understandable to a lay audience, the drafters have taken care to identify circumstances that fall within this new definition, and for which conflicts of interest exist. These include government decisions that:

  • “Authorize, prohibit, regulate or otherwise establish conditions for an activity in which the business entity is engaged”;
  • Increase or decrease the amount of competition in the business’ field;
  • Increase or decrease the need for the business’ products or services;
  • Make improvements in the surrounding neighborhood that may affect, either temporarily or permanently, the amount of business received (such as changes that affect traffic, parking, or roads);
  • “Decide the location of a major development, entertainment facility, or other project that would increase or decrease the amount of business the entity draws from the location of the project”; or
  • “Increase or decrease the tax burden, debt, or financial or legal liability of the business entity”.

What Should Public Officials Do?

While the FPPC is attempting to simplify the regulations for conflicts of interest, it still is casting an intentionally broad net when it comes to defining when officials have conflicts concerning businesses or business investments. As a general rule, public officials should approach any potential conflict situation with the utmost caution. When there is any reasonable argument that a conflict might exist, the best response is to simply abstain from taking any action. Another option is to seek formal or informal advice from the FPPC before taking any action or making a decision.

tags: Business Interests, conflicts of interest, Regulations,

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