Applicability of 18 U.S.C. § 208 to Proposed Appointment of Government Official to the Board of Connie Lee
A n e x e c u tiv e b ra n c h o ff ic e r o r em p lo y ee a p p o in te d to th e B o ard o f D ire c to rs o f C o n n ie L ee w o u ld be a “d ir e c to r ” w ith in th e m e a n in g o f 18 U S .C § 2 0 8 (a ) a n d th e re fo re w o u ld b e d is q u a lifie d fro m p a r tic ip a tin g “ p e rs o n n a lly a n d s u b sta n tia lly ” in an y “p a rtic u la r m a tte r” im p lic a tin g the fin a n c ia l in te r e s ts o f C o n n ie L e e u n le s s th e c o n d itio n s o f s u b se c u o n 2 0 8 (b ) are s atisfied .
June 22, 1994
M e m o r a n d u m O p in io n f o r t h e A s s i s t a n t G e n e r a l C o u n s e l D epa r tm en t o f th e T r ea su ry
This memorandum is in response to your request of May 23, 1994, for an opin ion as to whether the Deputy Assistant Secretary, if appointed to the Board of Di rectors of the College Construction Loan Insurance Association (“Connie Lee”), would be subject to the requirements imposed by 18 U.S.C. § 208 on “directors” of outside organizations. We have concluded that if appointed, the Deputy Assistant Secretary would be a “director” of an outside organization within the meaning of § 208, and accordingly would have to comply with the provisions of that section in discharging his or her government duties. This conclusion does not preclude the appointment of the Deputy Assistant Secretary or another Treasury official to the board of Connie Lee. Rather, it means that if appointed, the official could not par ticipate in any particular matter in his or her government capacity in which Connie Lee had a financial interest, unless he or she received a waiver issued pursuant to § 208(b).
B ackground
Connie Lee was incorporated as a private, for-profit corporation of the District of Columbia in 1987 as directed by Title VII of the Higher Education Amendments of 1986, Pub. L. No. 99-498, sec. 701, § 751, 100 Stat. 1268, 1528 (codified at 20 U.S.C. §§ 1132f-1132f-9).* At that time, many colleges and universities were un able to obtain private financing for capital improvements and routine maintenance of their physical plants. By providing financial insurance and guarantees for quali fying loans, Connie Lee enhances the credit quality of these educational institu-
’ E d i t o r ’s N o te T h e statu to ry provisions co n cern in g C o n n ie Lee that are discussed in this opinion were su b sequ en tly rep ealed in 1996 and replaced b y the pro v isio n s that are now codified at 20 U .S.C. § 113 2 f-10 See S tu d e n t L oan M ark etin g A ssociation R eo rg an izatio n A ct o f 1996, Pub. L No. 104-208, § 603, 110 Stat 3009-27 5 , 3 0 0 9 -2 0 9 (en a ctm en t o f current sec tio n ), 30 0 9 -2 9 3 (repeal) T he changes to the statute do not affect the an aly sis o r c o n clu sio n s o f this opinion.
136 Applicability o f J8 U.S C § 208 to P roposed A ppointm ent o f G overnm ent O fficial to the B oard o f Connie Lee
tions, facilitating their access to private credit. H.R. Rep. No. 99-383, at 71-73 (1985), reprinted in 1986 U.S.C.C.A.N. 2572, 2642-44 (“House Rep.”). In form and function, Connie Lee is similar to the Student Loan Marketing Association (“Sallie M ae”). Connie Lee began operating as a joint venture of the Secretary of Education, Sallie Mae and interested members of the higher education community. Congress “intended that the Corporation . . . initially operate under the stewardship of the Student Loan Marketing Association, subject to the direction and control of the Corporation’s Board of Directors. . . . [T]he direct interest o f the federal govern ment in the Corporation is expected to diminish and eventually terminate.” House Rep. at 74, reprinted in 1986 U.S.C.C.A.N. at 2645. The statute authorized the Secretary o f Education and Sallie Mae to subscribe to voting common stock in a four to one ratio. See 20 U.S.C. § 1132f-4(a), (b). Congress gave the board the authority to issue additional shares of voting common stock for sale to the public and institutions of higher education. Id. § 1132f-4(d). After five years, the statute authorized the Secretary of Education to sell the stock held by that department, and gave Sallie Mae a right of first refusal in the event of such a sale. Id. § 1132f-7(a). Connie Lee is governed by an eleven member board of directors. At present, two directors are appointed by the Secretary of Education, two by the Secretary o f the Treasury, and three by Sallie Mae. The remaining four directors are elected by the holders of the voting common stock. Id. § 1132f-3(a). A director serves for a term o f one year or until a successor has been appointed and qualified. Id. If Sal lie Mae acquires enough voting common stock from the Secretary o f Education to own more than fifty percent o f the outstanding voting shares, the entire board is to be elected by the shareholders. Id. § 1132f-7(c). In the past, the individuals appointed by the Secretary o f the Treasury have been private citizens. The Secretary is now considering appointing a Deputy Assistant Secretary to the board of Connie Lee. You are concerned that if appointed, the Deputy Assistant Secretary would no longer be able to participate in the form ula tion o f the Department’s policies regarding its interests in Connie Lee.
Discussion
Under § 208, no officer or employee in the executive branch may participate “personally and substantially” in any “particular m atter” in which an “organization in which he is serving as officer, director, trustee, general partner or employee . . . has a financial interest” unless he obtains a waiver or satisfies an exception as out lined in subsection 208(b). 18 U.S.C. § 208(a). However, this Office has previ ously taken the position that “a federal official serving on the board of an essentially private entity by virtue of a federal statutory mandate is not an ‘officer, director or trustee’ o f that entity within the meaning o f section 208.” M em oran dum for David H. Martin, Director, Office of Government Ethics, from Samuel A.
137 Opinions o f the O ffice o f L egal C ounsel
Alito, Jr., Deputy A ssistant Attorney General, Office of Legal Counsel, Re: USIA D ir e c to r’s S ervice on the Board o f the U nited S tates Telecom m unications Training Institute at 2 (Dec. 3, 1986) (“USTTI M em o”). You have suggested that the Sec retary’s appointm ent o f a Deputy Assistant Secretary to the Connie Lee board would establish a position analogous to an “ex officio” director and therefore should not trigger the application o f § 208. Unfortunately, we cannot agree. This O ffice has found that a governm ent official serves on the board of a private entity in an ex officio rather than personal capacity where that service is expressly authorized by statute.1 W e have also ruled that a government official’s service as a director does not violate § 208 where the rules of the private entity designate that official as a m em ber o f the board and neither the rules or state law appear to im pose a fiduciary duty to the private entity on that director.2 The proposed arrangem ent for Connie Lee would not fall into either of these categories.
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Applicability of 18 U.S.C. § 208 to Proposed Appointment of Government Official to the Board of Connie Lee
A n e x e c u tiv e b ra n c h o ff ic e r o r em p lo y ee a p p o in te d to th e B o ard o f D ire c to rs o f C o n n ie L ee w o u ld be a “d ir e c to r ” w ith in th e m e a n in g o f 18 U S .C § 2 0 8 (a ) a n d th e re fo re w o u ld b e d is q u a lifie d fro m p a r tic ip a tin g “ p e rs o n n a lly a n d s u b sta n tia lly ” in an y “p a rtic u la r m a tte r” im p lic a tin g the fin a n c ia l in te r e s ts o f C o n n ie L e e u n le s s th e c o n d itio n s o f s u b se c u o n 2 0 8 (b ) are s atisfied .
June 22, 1994
M e m o r a n d u m O p in io n f o r t h e A s s i s t a n t G e n e r a l C o u n s e l D epa r tm en t o f th e T r ea su ry
This memorandum is in response to your request of May 23, 1994, for an opin ion as to whether the Deputy Assistant Secretary, if appointed to the Board of Di rectors of the College Construction Loan Insurance Association (“Connie Lee”), would be subject to the requirements imposed by 18 U.S.C. § 208 on “directors” of outside organizations. We have concluded that if appointed, the Deputy Assistant Secretary would be a “director” of an outside organization within the meaning of § 208, and accordingly would have to comply with the provisions of that section in discharging his or her government duties. This conclusion does not preclude the appointment of the Deputy Assistant Secretary or another Treasury official to the board of Connie Lee. Rather, it means that if appointed, the official could not par ticipate in any particular matter in his or her government capacity in which Connie Lee had a financial interest, unless he or she received a waiver issued pursuant to § 208(b).
B ackground
Connie Lee was incorporated as a private, for-profit corporation of the District of Columbia in 1987 as directed by Title VII of the Higher Education Amendments of 1986, Pub. L. No. 99-498, sec. 701, § 751, 100 Stat. 1268, 1528 (codified at 20 U.S.C. §§ 1132f-1132f-9).* At that time, many colleges and universities were un able to obtain private financing for capital improvements and routine maintenance of their physical plants. By providing financial insurance and guarantees for quali fying loans, Connie Lee enhances the credit quality of these educational institu-
’ E d i t o r ’s N o te T h e statu to ry provisions co n cern in g C o n n ie Lee that are discussed in this opinion were su b sequ en tly rep ealed in 1996 and replaced b y the pro v isio n s that are now codified at 20 U .S.C. § 113 2 f-10 See S tu d e n t L oan M ark etin g A ssociation R eo rg an izatio n A ct o f 1996, Pub. L No. 104-208, § 603, 110 Stat 3009-27 5 , 3 0 0 9 -2 0 9 (en a ctm en t o f current sec tio n ), 30 0 9 -2 9 3 (repeal) T he changes to the statute do not affect the an aly sis o r c o n clu sio n s o f this opinion.
136 Applicability o f J8 U.S C § 208 to P roposed A ppointm ent o f G overnm ent O fficial to the B oard o f Connie Lee
tions, facilitating their access to private credit. H.R. Rep. No. 99-383, at 71-73 (1985), reprinted in 1986 U.S.C.C.A.N. 2572, 2642-44 (“House Rep.”). In form and function, Connie Lee is similar to the Student Loan Marketing Association (“Sallie M ae”). Connie Lee began operating as a joint venture of the Secretary of Education, Sallie Mae and interested members of the higher education community. Congress “intended that the Corporation . . . initially operate under the stewardship of the Student Loan Marketing Association, subject to the direction and control of the Corporation’s Board of Directors. . . . [T]he direct interest o f the federal govern ment in the Corporation is expected to diminish and eventually terminate.” House Rep. at 74, reprinted in 1986 U.S.C.C.A.N. at 2645. The statute authorized the Secretary o f Education and Sallie Mae to subscribe to voting common stock in a four to one ratio. See 20 U.S.C. § 1132f-4(a), (b). Congress gave the board the authority to issue additional shares of voting common stock for sale to the public and institutions of higher education. Id. § 1132f-4(d). After five years, the statute authorized the Secretary of Education to sell the stock held by that department, and gave Sallie Mae a right of first refusal in the event of such a sale. Id. § 1132f-7(a). Connie Lee is governed by an eleven member board of directors. At present, two directors are appointed by the Secretary of Education, two by the Secretary o f the Treasury, and three by Sallie Mae. The remaining four directors are elected by the holders of the voting common stock. Id. § 1132f-3(a). A director serves for a term o f one year or until a successor has been appointed and qualified. Id. If Sal lie Mae acquires enough voting common stock from the Secretary o f Education to own more than fifty percent o f the outstanding voting shares, the entire board is to be elected by the shareholders. Id. § 1132f-7(c). In the past, the individuals appointed by the Secretary o f the Treasury have been private citizens. The Secretary is now considering appointing a Deputy Assistant Secretary to the board of Connie Lee. You are concerned that if appointed, the Deputy Assistant Secretary would no longer be able to participate in the form ula tion o f the Department’s policies regarding its interests in Connie Lee.
Discussion
Under § 208, no officer or employee in the executive branch may participate “personally and substantially” in any “particular m atter” in which an “organization in which he is serving as officer, director, trustee, general partner or employee . . . has a financial interest” unless he obtains a waiver or satisfies an exception as out lined in subsection 208(b). 18 U.S.C. § 208(a). However, this Office has previ ously taken the position that “a federal official serving on the board of an essentially private entity by virtue of a federal statutory mandate is not an ‘officer, director or trustee’ o f that entity within the meaning o f section 208.” M em oran dum for David H. Martin, Director, Office of Government Ethics, from Samuel A.
137 Opinions o f the O ffice o f L egal C ounsel
Alito, Jr., Deputy A ssistant Attorney General, Office of Legal Counsel, Re: USIA D ir e c to r’s S ervice on the Board o f the U nited S tates Telecom m unications Training Institute at 2 (Dec. 3, 1986) (“USTTI M em o”). You have suggested that the Sec retary’s appointm ent o f a Deputy Assistant Secretary to the Connie Lee board would establish a position analogous to an “ex officio” director and therefore should not trigger the application o f § 208. Unfortunately, we cannot agree. This O ffice has found that a governm ent official serves on the board of a private entity in an ex officio rather than personal capacity where that service is expressly authorized by statute.1 W e have also ruled that a government official’s service as a director does not violate § 208 where the rules of the private entity designate that official as a m em ber o f the board and neither the rules or state law appear to im pose a fiduciary duty to the private entity on that director.2 The proposed arrangem ent for Connie Lee would not fall into either of these categories. W hile the governing statutes do not prohibit the appointment or elec tion of federal officers to the Connie Lee board, no government official is desig nated as a board m em ber in either a personal or official capacity. See 20 U.S.C. §§ 1132f-3, 1132f-7(c). As we stated in the USTTI opinion:
[S]ection 208 is premised on a concern to avoid any conflict be tween a federal official’s public and private obligations and inter ests. . . . [W Jhere a government official is authorized by statute to serve on the board of a private group as part o f his or her official governm ental duties, in w hat is essentially an ex officio capacity, the reasonable inference to be drawn is that the official is to serve the interests o f the government in the event of any conflict between those interests and the interests of the private organization.
Id. at 2. Any fiduciary duty the director owes to the organization in question is clearly subordinate to that director’s duties to his or her government office and the United States.
1 T h u s this O ffice has d eterm in ed that the restrictio n s o f § 208 did not apply w here a federal statute ex- phcitly d esig n ated the A tto rn ey G eneral as an ex officio m em ber o f the B oard o f T rustees o f the N ational T ru st for H istoric P reserv atio n , Q uestions R a ise d by the A tto rn e y G en era l's Service as a T rustee o f the N a tio n a l T rust f o r H isto ric P reservation, 6 O p . O L C . 443, 4 4 6 (1982), or where the D irector o f the U.S. Inform ation A g en cy served on the board o f a p riv ate institute pursuant to a federal statute authorizing several executiv e ag en cies to p ro v id e o fficial support to that in stitute ‘‘including . . . service on the board o f the In s titu te /’ U ST T I M em o at 2 (quoting the O m n ib u s D iplom atic Security and A nti-T errorism A ct o f 1988, Pub. L N o 9 9 -3 9 9 , § 1307, 100 S tat 8 5 3 ,8 9 9 ). *■ N o r did § 208 apply w here the constitution o f the A m erican B ar A ssociation designated the A ttorney G eneral as an ex o fficio m e m b e r o f the A B A H ouse o f D elegates, M em orandum for T hom as E. Kauper, A ssistant A tto rn ey G en eral, A n titru st Division, from M ary C L aw ton, D eputy A ssistant A ttorney G eneral, O ffice o f Legal C ounsel, Re. C ontem plated A B A Suit (M ay 21, 1976), or where every D irector o f the N a tional B ureau o f Stan d ard s since 1951 had serv ed on the bo ard o f a private standard setting organization and that org an izatio n am en d ed its b y law s to d esig n ate the D irector as a non-voting ex officio m em ber of the board L etter fo r the H on. W arren G M agnuson, C hairm an, S enate C om m ittee on C om m erce, S cience and T ransp o rtatio n , from Leon U lm an, Deputy A ssistan t A ttorney G eneral, O ffice o f Legal C ounsel at 4-6 (Dec. 13, 1977)
138 A p p lic a b ility o f 18 U S C. § 2 0 8 to P ro p o se d A p p o in tm e n t o f G o v e r n m e n t O ffic ia l to th e B o a r d o f C o n n ie Lee
There is no indication that the fiduciary duty of a Connie Lee director appointed by the Secretary is subordinate to any duty to the government. Congress expressly provided that absent a conflict with the provisions o f the Higher Education Act, Connie Lee was to be subject to the corporation law o f the District of Columbia. 20 U.S.C. § 1132f(c). The language and structure of the statutory provisions gov erning the board of directors are in no way inconsistent with the proposition that all Connie Lee directors, including those appointed by the Secretary, owe the fiduci ary duty dictated by D.C. law to the corporation and its shareholders. W hile the Secretaries o f Education and the Treasury were both granted the power to appoint two directors and to replace these directors by appointing replacements anytime after the end of their one year term because of the “significant interests” of the government in the early years o f operation, see House Rep. at 73, rep rin ted in 1986 U.S.C.C.A.N. at 2644; 20 U.S.C. § 1132f-3(a), the articles and bylaws of Connie Lee vest limited removal power in the board, not in any of the appointing bodies.3 If a government official appointed by the Secretary resigned or was re moved from that government position, he or she could retain a seat on the Connie Lee board for the duration of the term unless he or she resigned or was removed by the remaining board members.4 This structure suggests that Congress did not in tend for the Secretary to exercise direct control over his appointees once they were appointed. Connie L e e ’s status as a private, for-profit corporation with outstanding voting shares held by private individuals and institutions strengthens the conclusion that its directors are bound by a fiduciary duty to the corporation and to these share holders in their capacity as directors. 20 U.S.C. § 1132f(a),(b); Bylaws, art. Ill, § 3.8. Furthermore, directors may receive compensation for their service to the corporation “in their capacities as Directors or otherw ise.” Bylaws, art. Ill, § 3.8. W hile you have indicated that a Treasury official appointed to the board would waive any compensation, this provision is additional evidence o f the directors’ fiduciary duty to the corporation and potentially presents the appearance o f a con flict of interest. These obligations and the attendant potential for conflict are pre cisely the circum stances that § 208 is designed to address.
Conclusion
An executive officer or employee appointed to the board of Connie Lee by the Secretary would be a “director” within the meaning o f 18 U.S.C. § 208(a). Ac-
3 A rticle V II, clause 4 o f the original articles o f incorporation, see D istrict o f C olum bia D epartm ent o f C onsum er and R egulatory A ffairs, Business R egulation A dm inistration C ertificate o f Incorporation, College C onstruction L oan Insurance A ssociation (Feb. 13, 1987), and article III, section 3 6 o f the bylaw s, see B y laws o f the C o lleg e C onstruction Loan Insurance A ssociation (Sept. 11, 19 9 1) ("B ylaw s"), both specify that “ (a]ny D irector m ay be rem oved for cause by vote o f a m ajority o f the rem aining D irectors.’’ 4 T hus, ev en if the Secretary ordered the D eputy A ssistant Secretary to vote in a particular w ay on the Board, the Secretary could not enforce that o rder by rem oving him or h e r from the Board.
139 Opinions o f th e O ffice o f L egal Counsel
cordingly, he or she would be disqualified from participating “personally and sub stantially” in any “particular matter” implicating the financial interests o f Connie Lee unless the conditions o f subsection 208(b) were satisfied.
W ALTER DELLINGER A ssistan t A ttorn ey G en eral O ffice o f L egal C ounsel