This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.
CONFLICT OF INTEREST -- Banking Transactions (purchase of bonds and notes when town supervisor is director and stockholder of bank); (designation of bank as depository when town supervisor is director and stockholder)
GENERAL MUNICIPAL LAW, §§801, 802(1)(a), (1)(g); LOCAL FINANCE LAW, §60.10: (1) A town supervisor who is a director of a bank has a prohibited interest in the designation of the bank as a town depository unless the exception in General Municipal Law, §802(1)(a) applies. The exception does not apply if the only reason the town could not designate another bank within the town as depository is because the other bank refused to comply with the town's preferred policy of requiring securities pledged as collateral to be held by a third party custodian. (2) A town may sell obligations to a bank of which the town supervisor is a director only in accordance with Local Finance Law, §60.10.
You ask whether a town may designate a bank as a depository if the town supervisor is a director of the bank and a shareholder of less than one percent of the bank's outstanding stock. You state that there is only one other bank in the town and that one of the town councilmen is a member of that bank's advisory board. You further indicate that, while the second bank will accept town accounts, it will not comply with the town's "preferred practice" of having securities pledged to secure town deposits and investments held by a third party custodian. The first bank is willing to comply with this policy. You also ask whether the town may sell bonds and notes, at public or private sale, to the bank of which the supervisor is a director and shareholder.
Article 18 of the General Municipal Law (§§800, et seq.) contains the provisions of law which relate to conflicts of interest of municipal officers and employees. Pursuant to General Municipal Law, §800(3), a municipal officer or employee has an interest in any contract with his or her municipality if he or she receives a direct or indirect pecuniary or material benefit as a result of that contract. In addition, regardless of whether an officer or employee receives a direct or indirect pecuniary benefit from a contract, an officer or employee is deemed to have an interest in any contract of a corporation of which the officer or employee is a director, officer, employee or stockholder (General Municipal Law, §800[c],[d]). We note that the term "contract" is defined for purposes of article 18 to include the designation of a depository of public funds (General Municipal Law, §800).
Section 801 provides that, except as provided in section 802, an interest is prohibited if the officer or employee, individually or as a member of a board, has the power or duty to: (a) negotiate, prepare, authorize or approve the contract or approve payments thereunder; (b) audit bills or claims under the contract; or (c) appoint an officer or employee who has any such powers or duties. Section 801 further states that, except as provided in section 802, no chief fiscal officer, treasurer, or his deputy or employee, shall have an interest in a bank or trust company designated as a depository, paying agent, registration agent or for investment of funds of the municipality of which he is an officer or employee.
Any contract willfully entered into in which there is a prohibited interest is null, void and unenforceable (General Municipal Law, §804) and any officer or employee who willfully or knowingly violates the provisions of article 18 may be guilty of a misdemeanor (General Municipal Law, §805). We also note that, if an officer or employee has an interest in a contract that is not prohibited under the provisions of article 18, General Municipal Law, §803 nonetheless generally requires that the nature and extent of the interest be disclosed in writing and included in the official record of the governing board's proceedings. Disclosure is not required under section 803 in the case of an interest in a contract which is not prohibited under subdivision two of section 802 (General Municipal Law, §803).
The town supervisor, as a director and shareholder of the bank, is deemed to have an interest in the bank's contracts with her municipality (General Municipal Law, §800[c],[d]; 1985 Opns St Comp No. 85-34, p 47; 23 Opns St Comp, 1967, p 841). Further, the town supervisor is the treasurer and, generally, the chief fiscal officer of the town (Town Law, §29; Local Finance Law, §2.00[c]; see Myruski v Town Board of the Town of Goshen, 87 Misc 2d 1063, 386 NYS2d 984). Therefore, the supervisor's interest in the bank or trust company designated as a depository would be prohibited under section 801, except as provided in section 802.
There are several provisions in section 802 which are relevant here. Pursuant to General Municipal Law, §802(2)(a), an interest in a municipal contract with a corporation which would otherwise be prohibited is not prohibited when the municipal officer or employee has an interest by reason of ownership of less than five per centum of the outstanding stock of the corporation. Since the supervisor owns less than 5% of the bank's outstanding stock, the supervisor would not have a prohibited interest by virtue of her stockholding. Nothing in section 802, however, provides an exception when the municipal officer or employee has an interest because he or she is a director of the contracting entity (23 Opns St Comp 841, supra).
General Municipal Law §802(1)(a) further provides that the prohibitions contained in section 801 of that statute shall not apply to:
The designation of a bank or trust company as a depository, paying agent, registration agent or for investment of funds of a municipality except when the chief fiscal officer, treasurer, or his deputy or employee, has an interest in such bank or trust company; provided, however, that where designation of a bank or trust company outside the municipality would be required because of the foregoing restriction, a bank or trust company within the municipality may nevertheless be so designated.
Therefore, even under this exception, since the town supervisor is the treasurer of the town, the town may designate the bank of which the supervisor is director as a depository only if the town would be otherwise required to designate a bank outside the town (23 Opns St Comp, 1967, p 242; 23 Opns St Comp 841, supra).
The town has adopted a policy of requiring an unrelated third party to hold securities pledged to secure the town's deposits and investments. This policy is consistent with the recommendation of our Office that a custodian other than the trading partner hold securities pledged to secure municipal deposits or investments. Our recommendation was intended to: (1) ensure that a perfected security interest is obtained; (2) avoid a pledge of the same collateral to more than one customer or creditor by an unscrupulous financial intermediary; and (3) assure that the security would be available for immediate liquidation in the case of default so that the municipality can continue to meet expenses.
With regard to our recommendation concerning third party delivery, we note that section 8-313 of the Uniform Commercial Code was recently amended with respect to the definition of "financial intermediary" to read as follows:
A "financial intermediary" is a bank, broker, clearing corporation or other person (or the nominee of any of them) which in the ordinary course of its business maintains security accounts for its customers and is either acting in that capacity or acting as transferor of a security or an interest in a security, irrespective (in either case) of whether such person is also acting in any other capacity. (L 1988, ch 708)
The apparent intent of this amendment is to provide that a perfected security interest can be obtained by customers, depositors or secured creditors of a "financial intermediary" in securities retained in the possession of the financial intermediary, through book entries and conformation, even if the financial intermediary is also a party to the underlying secured transaction. This amendment, however, appears to address only the first of our concerns. Therefore, it is still our position that delivery to an unrelated third party custodian is the safest course. This is especially true if the municipality is not in a position to carefully monitor the credit worthiness of the trading partner or if the municipality has substantial exposure because of the size of its deposits and investments with the trading partner.
As noted, you advised us that the bank of which the supervisor is a director is the only bank within the town which is willing to comply with the town's policy. Therefore, it must be determined whether, under these circumstances, the bank in which the supervisor has an interest may be designated as a depository on the grounds that the town would otherwise be "required" to designate a bank located outside the town.
In our opinion, section 802(1)(a) contemplates something more than compliance with a recommended policy in order for a town to show that it would be required to designate a bank outside the town. Rather, we believe the statute contemplates situations such as where town banks in which the supervisor does not have an interest are precluded as a matter of law from accepting municipal deposits (see Banking Law, §237) or refuse to comply with statutory collateralization requirements (see General Municipal Law, §11). In the situation at hand, it is our opinion that the town's investment policy with respect to holding collateral must yield to the strong public policy evinced by article 18. Accordingly, it is our opinion that the exception is section 802(1)(a) does not apply and, therefore, that town may not designate the bank of which the supervisor is a director as depository unless the supervisor resigns her directorship or the office of town supervisor.
If the town chooses to waive its policy with respect to holding of securities pledged as collateral by a third party and designate the other bank in town as depository, the councilman who is a member of that bank's advisory board would have an interest in that designation if, as a member of the advisory board, the councilman is an officer, employee or director of the bank, or receives a direct or indirect pecuniary or material benefit as a result of the designation (General Municipal Law, §800; 20 Opns St Comp, 1964, p 309). That interest, however, would not be prohibited because, unlike in the case of a treasurer or chief fiscal officer, the exception in section 802(1)(a) would be applicable. Nevertheless, the interest would be required to be disclosed in accordance with section 803.
With respect to whether the town may sell bonds and notes to the supervisor's bank, section 802(1)(g) provides an exception for the sale of bonds or notes pursuant to Local Finance Law, §60.10. Section 60.10 provides that a municipality may sell notes at private sale to a bank or trust company of which an officer or employee has an interest which would otherwise be prohibited, provided that at least two other banks are unwilling or unable to purchase the notes at a rate of interest equal to or less than that at which the officer's or employee's bank proposes to purchase the notes. The exception, however, does not apply if: (a) during the current fiscal year of the municipality, the bank has purchased, or by virtue of the sale, would purchase, at private sales, notes, the aggregate principal amount of which is or would exceed $100,000; or (b) the bank is, or by virtue of the sale would become, the holder of notes, purchased at private sales, the aggregate principle amount of which is or would exceed $100,000 (Local Finance Law, §60.10[a]). Section 60.10 also provides an exception for the sale of bonds at private sale unless the bank or trust company is or by virtue of the sale would become the holder of bonds of the municipality, purchased at private sales, the aggregate principal amount of which is or would exceed $100,000 (Local Finance Law, §60.10[b]). There is no other exception to the conflict of interest provisions of article 18 for sale of obligations to a bank or trust company, whether at public or private sale (cf. former Local Finance Law, §60.20 providing a limited exception for certain public sales).
February 9, 1989
Charles D. Hill, Esq., Town Attorney
Town of Delhi