Ethics: Advisory Opinion No. 2001-3

Advisory Opinion No. 2001-3
Advisory Opinion No. 2001-3

Application Of The Code Of Ethics For Public Officials To Members
Of The Investment Advisory Council

Steven Hart, the Chairman of the State’s Investment Advisory Council (IAC), has asked the State Ethics Commission how the requirements of The Code Of Ethics For Public Officials, Conn. Gen. Stat. Chapter 10, Part I, apply to his current and contemplated private investment work.

Pursuant to Public Act No. 00-43, the members of the IAC are specifically denominated as "Public officials", as the term is used in Conn. Gen. Stat. 1-79(k); and, hence, are subject to the provisions of The Code Of Ethics For Public Officials. P.A. No. 00-43 at 16. P.A. No. 00-43 also significantly amended and enhanced the duties of the IAC. See, 1, 3 and 4 which: provide for the IAC’s review and approval of the Treasurer’s Investment Policy Statement, governing all trust fund investments; require IAC approval of any contract for services related to the investment of trust funds; and bar the Treasurer from making any private equity or real estate investment without IAC approval for the balance of the term of a Treasurer after such Treasurer has been defeated at a party convention, in a primary or in a general election.

Mr. Hart’s current investments are made through his wholly owned company, Hart Capital, which functions as the managing member of Five Mile River Capital Partners (FMRC), a private investment fund. FMRC is composed of sixteen investors, with its sole investment to date, totaling 3.1 million dollars, being in a privately held for profit education company, Lincoln Technical Institute (Lincoln). The Fund is currently seeking investors to provide up to 6 million dollars in additional investment for Lincoln.

In addition to requesting guidance regarding the application of the Code to his current investments, Mr. Hart has requested an opinion concerning the propriety of his seeking funds from investors under the following hypothetical situations:

    1. Individual A, who is an employee or a partner of an "investment services" (as defined by Section 1-84(n) of the Code of Ethics For Public Officials) firm that the Connecticut Retirement Plan and Trust Funds (CRPTF Plans) invested in over one year ago and in which it may invest again;
    2. Individual B, who is an employee or a partner of a "investment services" firm that either is, or has an interest in, doing business with the CRPTF Plans;
    3. Individual C, who invested in FMRC and subsequently became an employee or a partner in an "investment services" firm that either is, or has an interest in, doing business with the CRPTF Plans; and
    4. Entity D, which is an "investment services" firm that either is, or has an interest in, providing financial services to the CRPTF Plans.

Finally, with respect to hypotheticals 1, 2 and 3, Mr. Hart queries whether investment by individual A, B or C would impact the ability of the individual’s "investment services" firm to continue to provide, or seek to provide, "investment services" to the CRPTF Plans.

Pursuant to 1 of P.A. No. 00-43, the public members of the IAC "shall be experienced in matters relating to investments." Additionally, the section states that "No such public member or such member’s business organization or affiliate shall directly or indirectly contract with or provide any services for the investment of trust funds of the State of Connecticut during the time of such member’s service on said council and for one year thereafter." Id.

When, as in this instance, a public official’s appointment provisions specifically require a certain expertise, the State Ethics Commission has explicitly recognized that the General Assembly intended that such expertise not be viewed as, per se, impairing one’s independence of judgement or constituting a conflict of interests under 1-84(b) or (c) of the Code. See, e.g., State Ethics Commission Advisory Opinion No. 2000-21, 62 CLJ No. 24, p. 6D (12/12/00): The members of the State Insurance and Risk Management Board, by statute, must be "qualified by training and experience to carry out their duties…. Accordingly, the mere fact of a Board member’s simultaneous employment in the insurance industry does not violate" 1-84(b) or (c).

Additionally, when, as in this instance, the public official’s appointment provisions specifically prohibit certain activities within the required area of expertise, the Commission has taken this prohibition as essentially establishing the parameters of unethical conduct with regard to the issue of outside employment.

Based on the above factors, the Commission holds that it would be a violation of the 1-84(b) ban on accepting employment that impairs independence of judgement and the 1-84(c) ban on misuse of office for financial gain for Mr. Hart, Hart Capital, or FMRC to directly or indirectly provide any services relating to the investment of State of Connecticut trust funds. It would not, however, be a violation of the Code for Mr. Hart or his businesses to solicit or accept investments from individuals or firms which are currently providing, or seeking to provide, investment services to the CRPTF Plans. Nor would such investments preclude these individuals or firms from continuing to provide or seek investment services work from the Office Of The Treasurer.

In order to avoid a violation of 1-84(c), however inadvertent, Mr. Hart and his businesses must refrain from referencing his IAC position in any oral or written solicitation of the private investments in question. Furthermore, to avoid both the actuality and appearance of a potential conflict of interests, if any individual or firm with investments in, or being solicited to invest in, Mr. Hart’s businesses should come before the IAC for review or approval of an investment services contract, or other matter, Mr. Hart should disclose the potential conflict on the record and recuse himself from participation in the decision-making process.

By order of the Commission,

Rosemary Giuliano

Content Last Modified on 9/7/2005 8:03:54 AM