Advisory Opinion No. 2002-10

Application Of The Codes Of Ethics And Commission Regulations To Entities
Soliciting Investments From The Office Of The Treasurer

Daniel Papermaster, Esq. has asked the State Ethics Commission for an advisory opinion regarding the application of certain provisions of The Code Of Ethics For Public Officials, The Code Of Ethics For Lobbyists and Commission Regulations to various scenarios involving the solicitation of investments from the Office Of The Treasurer.

In pertinent part, the statutory and regulatory provisions read as follows:

1. "Lobbying" means communicating directly or soliciting others to communicate with any official or his staff in the legislative or executive branch of government or in a quasi-public agency, for the purpose to influencing any legislative or administrative action except that the term "lobbying" does not include…(2) communications by a representative of a vendor or by an employee of the registered client lobbyist which representative or employee acts as a salesperson and does not otherwise engage in lobbying regarding any administrative action….Conn. Gen. Stat. §1-91(k).
2. In implementing the statutory exceptions set forth in subsection (k) of section 1 -91 of the general statutes, the terms "representative of a vendor" and "salesperson"shall be construed according to their ordinary and customary usage. Regulations of Conn. State Agencies §1-92-42b.

3. No person may, directly or indirectly, pay a finder’s fee to any person in connection with any investment transaction involving the state, any quasi-public agency, as defined in section 1-120 of the general statutes, or any political subdivision of the state. No person may, directly or indirectly, receive a finder’s fee in connection with any investment transaction involving the state, any quasi-public agency, as defined in section 1-120 of the general statutes, or any political subdivision of the state. Conn. Gen. Stat. §3-131(a).
4. Pursuant to Section 7(a) of Public Act 00-43, no person may, directly or indirectly, pay a finder’s fee to any person in connection with any investment transaction involving a public agency. No person may, directly or indirectly, receive a finder’s fee in connection with any investment transaction involving a public agency. Regulations of Conn. State Agencies §1-92-52a(a) (proposed).
5. As used in this subsection, "investment services" means legal services, investment banking services, investment advisory services, underwriting services, financial advisory services or brokerage firm services. The Treasurer shall not pay any compensation, expenses or fees or issue any contract to any firm which provides investment services when (1) a political committee, as defined in section 9-333a, established by such firm, or (2) an individual who is an owner of such firm or employed by such firm as a manager, officer, director, partner or employee with managerial or discretionary responsibilities to invest, manage funds or provide investment services for brokerage, underwriting and financial advisory activities which are in the statutory and constitutional purview of the Treasurer, has made a contribution, as defined in section 9-333b, on or after October 1, 1995, to, or solicited contributions on or after said date on behalf of, any exploratory committee or candidate committee, as defined in section 9-333a, established by a candidate for nomination or election to the office of Treasurer. The Treasurer shall not pay any compensation, expenses or fees or issue any contract to such firms and individuals during the term of office as Treasurer, including, for an incumbent Treasurer seeking reelection, any remainder of the current term of office. Conn. Gen. Stat. §1-84(n). Attorney Papermaster’s questions are as follows:

   Scenario A:

   A registered investment adviser ("Manager") forms one or more ventures ("Joint Ventures") with an entity("Co-Venturer") owned, directly or indirectly, by two or more individuals. The Joint Ventures are structured as general partnerships.

   The Joint Ventures will seek business from private and public pension plans ("Plans"), including those of the State of Connecticut ("Connecticut Plans"), in respect of new investments in limited partnerships formed, in part, by the Joint Venture, as well as serving as the liquidator of existing private equity investments of Plans (the "Business").

   The Manager will be responsible for all investment decisions in respect of the Business. The responsibilities of one or more of the individuals who have an equity interest in the Co-Venturer (each a "Client Relations Representative" and collectively, the "Client Relations Representatives") in respect of the Joint Ventures will be to interact with and coordinate the continuing flow of information to the Plans. For example, Client Relations Representatives will serve as the point of contact for the initial marketing of the Business to the Plans, the continuing marketing of the Business to the Plans, and delivering to and receiving from the Plans information between the Joint Ventures and the Plans. No Client Relations Representative will be responsible for any investment decisions, nor will such Client Relations Representative have any managerial or discretionary responsibilities to invest, manage funds or provide investment services for brokerage, underwriting and financial advisory activities. The relationship between the Manager and the Co-Venturer will allow the Manager to have a consistent point of presence with numerous diverse Plans around the country, without employing sales personnel other than the Client Relations Representatives charged to marketing to these additional potential customers.

   Question 1: Will the activities of the Co-Venturer and/or any Client Relations Representative with regard to Connecticut Plans fall within the exception to "lobbying" for "communications by a representative of a vendor or by an employee of the registered client lobbyist which representative or employee acts as a salesperson and does not otherwise engage in lobbying regarding any administrative action" under Conn. Gen. Stat. §1-91(k)(2) and Conn. Agencies Reg. §1-92-42b to implement such statutory exception?

   Question 2: Will the Co-Venturer’s (and ultimately any Client Relations Representative’s) receipt of a portion of the profits from the Joint Venture qualify as a prohibited "finder’s fee to any person in connection with any investment transaction involving the state, any quasi-public agency, as defined in section 1-120 of the General Statutes, or any political subdivision of the state" under section 7 of Public Act 00-43 and proposed Conn. Agencies Reg. §1-92-52a (proposed pursuant to Notice of Intent to Adopt Regulations Nov. 28, 2000) to implement such section of the Public Act?

   Question 3: Will any Client Relations Representative qualify as "an individual who is an owner of [any firm which provides investment services] or employed by such firm as a manager, officer, director, partner or employee with managerial or discretionary responsibilities to invest, manage funds or provide investment services for brokerage, underwriting and financial advisory activities which are in the statutory and constitutional purview of the Treasurer," and therefore preclude the Treasurer from "pay[ing] any compensation, expenses or fees or issu[ing] any contract to any firm which provides investment services" if any Client Relations Representative "has made a contribution, as defined in section 9-333b, on or after October 1, 1995, to, or solicited contributions on or after said date on behalf of, any exploratory committee or candidate committee, as defined in section 9-333a, established by a candidate for nomination or election to the office of Treasurer" under Conn. Gen. Stat. §1-84(n)?

   Question 4: Would the results in Questions 1, 2, and 3 change if any Client Relations Representative were a majority or minority owner of Co-Venturer?

   Question 5: Would the results in Questions 1, 2, and 3 change if no Client Relations Representative had any equity interest in the Co-Venturer but was paid through salary and/or commissions as a full or part-time employee by the Joint Venture?

   Scenario B:

   The facts are the same except, rather than a Co-Venturer that is structured as an entity owned by two or more individuals, the Co-Venturer is an individual operating as a sole proprietor and serving as a Client Relations Representative ("Individual A").

   The questions are the same as Questions 1, 2 and 3 in Scenario A.

   Scenario C:

   The facts are as in Scenario A except, rather than the Joint Ventures’ seeking business from Plans, the Manager will contract with a marketing entity ("Marketing Entity") owned, directly or indirectly, by two or more individuals. The individuals who have an equity interest in the Marketing Entity will serve as Client Relations Representatives as they are described in Scenario A. Under this scenario, the Marketing Entity will not be a general partner in any partnership with the Manager.

   The questions are as in Scenario A, substituting Marketing Entity for Co-Venturer and Joint Venture.

   Scenario D:

   The facts are as in Scenario A except, rather than the Joint Ventures’ seeking business from Plans, the Manager will contract with Individual A. Individual A will be a sole proprietor and serve as a Client Relations Representative as the role is described in Scenario A. Under this scenario, Individual A will not be a general partner in any partnership with the Manager.

   The questions are the same as Questions 1, 2 and 3 in Scenario A.

   As a threshold matter, it is, without question, within the State Ethics Commission’s jurisdiction to issue an advisory opinion interpreting the Codes and Commission Regulations. The Finder’s Fee Regulations (§1-92-52a(a) et. seq.), however, have not yet received final approval from the Legislature’s Regulations Review Committee. Nonetheless, the Commission believes it is both necessary and appropriate to issue guidance regarding these proposed Regulations; since, pursuant to statute, interim criteria identical to the Regulations have been issued by the Treasurer and are currently in effect. See, Conn. Gen. Stat. §3-131(b)(3)(C).

   Taking Attorney Papermaster’s questions in turn:

   A.1. The Lobbyist Code’s "salesperson" exemption does not extend to "client relations representatives" who coordinate the flow of information between an investment fund and the Office Of The Treasurer. Simply stated, such conduct does not come within the ordinary and customary definition of salesperson; i.e., an individual engaged in selling merchandise or services. In fact, it is illegal, under both federal and state law, for a non-licensed person to engage in the marketing or sale of securities.

   In contrast, an "Investment professional" (e.g., a licensed broker dealer or investment adviser agent) does fall within the salesperson exemption and is, therefore, not a lobbyist. Such an interpretation is consistent with the statutory framework established by the General Assembly in Public Act No. 00-43, which prohibits lobbying of the Office Of The Treasurer regarding investment transactions, but allows the payment of placement fees to qualified "Investment professionals." See, Conn. Gen. Stat. §3-131(a) and (b)(2).

   A.2. The non-licensed client relations representative’s receipt of a portion of the profit resulting from the placement of investments by the Office Of The Treasurer is, in general, prohibited as an illegal "Finder’s fee." See, Regulations of Conn. State Agencies §1-92-52a(a) (proposed). Specifically, a client relations representative may only receive a portion of such fees, if the individual qualifies as an "Investment professional" by meeting certain objective criteria. First, the individual must establish that he or she is engaged in the investment marketing business by, for example, proving that during the preceding twelve months they have had contact with more than five potential investors and have been involved in the offer or sale of more than one investment to institutional investors. See, Regulations of Conn. State Agencies §1-92-52a(c)(4) (proposed). Second, the individual must establish that they are not disqualified from receipt of such fees by virtue of their status; e.g., that they are not otherwise employed as a "communicator lobbyist" or "public official" as defined under the Ethics Codes. See, Regulations of Conn. State Agencies §1-92-52a(d) (proposed).

   A.3. By virtue of the partnerships established under Scenario A, the client relations representative is a "partner" of an "investment services" firm as those terms are used in Conn. Gen. Stat. §1-84n. Consequently, the Treasurer will be precluded from awarding business to the firm if the representative has given a disqualifying political contribution.

   A.4. The responses to A1, 2 and 3 are not altered by the status of the client relations representative as a majority or minority owner of the co-venturer.

   A.5. The response to A1 remains unchanged regardless of whether the client relations representative is a partner or an employee of the Joint Venture. The response to A2 is, however, dependent on the employment status of the representative. Specifically, the disqualifications of §1-92-52a(d) (proposed) only apply if the individual is an owner, partner, director, or officer of the firm; with officer being limited to the president, executive or senior vice-president and treasurer of the entity. As a consequence, the firm would not be prohibited from receiving a placement fee from the Treasurer, if the representative was functioning only as a salaried employee. If, however, the representative received a contingent commission it would create the clear possibility that they had received an indirect finder’s fee in violation of both the statute and proposed regulations. Furthermore, whether salaried or on commission, a non-investment professional representative who received $2,000 or more in a calendar year for seeking to influence the decisions of the Treasurer would be engaged in illegal lobbying. See, Conn. Gen. Stat. §§3-131(b)(1) and 1-97(b). Finally, the response to A.3. is also dependent on the employment status of the individual. Pursuant to Conn. Gen. Stat. §1-84(n), an employee is subject to the contribution limitation only if he or she "…has managerial or discretionary responsibilities to invest, manage funds or provide investment services…." Given the stated duties of a client relations representative, such an employee would not meet these criteria; and, therefore, would not be subject to the §1-84(n) restrictions.

   B. 1, 2 and 3. The fact that the Co-Venturer is a sole proprietor rather than an entity owned by two or more individuals does not alter the initial answers to questions A.1, 2 and 3.

   C.1. The fact that the client relations representative will not be a partner with the manager but will alternatively function as a separate marketing entity does not affect the response to question A.1.

   C.2. The restructuring of the client relations representative as a distinct marketing entity does not alter the representative’s ability to receive fees as set forth in A.2.

   C.3. The establishment of the manager and client relations representative as separate business entities exempts the representative from the strictures of Conn. Gen. Stat. §1-84(n). Consequently, under this scenario, the Manager’s business entity would not be precluded, pursuant to §1-84(n), from the receipt of compensation from the Office of the Treasurer.

   D. 1, 2 and 3. The responses to this scenario are identical to the answers under Scenario C.

By order of the Commission,

Rosemary Giuliano
Chairperson