WSR 97-21-154

PROPOSED RULES

DEPARTMENT OF

RETIREMENT SYSTEMS

[Filed October 22, 1997, 11:37 a.m.]

Original Notice.

Exempt from preproposal statement of inquiry under RCW 34.05.310(4).

Title of Rule: Recusal of board members.

Purpose: To adopt model rules promulgated by the state of Washington Executive Ethics Board regarding the duty of members of executive boards to recuse themselves in the event they have a beneficial interest in either a transaction before the board or in an entity involved in a transaction with the board.

Other Identifying Information: The model rules adopted by the Employee Retirement Benefits Board were promulgated by the Executive Ethics Board on July 18, 1997, in Supplemental Advisory Opinion 96-09A.

Statutory Authority for Adoption: RCW 41.50.086.

Statute Being Implemented: RCW 42.52.030, 42.52.903.

Summary: Proposed rules allow Employee Retirement Benefits Board members to disclose particular financial interests in contracts and other transactions and recuse themselves from discussing and voting on those matters.

Reasons Supporting Proposal: Some executive boards expressed concern to the Executive Ethics Board that a strict application of RCW 42.52.030 might prevent otherwise qualified members from serving on the board. Because of the language in RCW 42.52.903 expressing a legislative intent to avoid that result, the Executive Ethics Board developed model rules that would allow recusal on a transaction-by-transaction basis. The Employee Retirement Benefits Board must adopt those rules for itself in order to utilize them.

Name of Agency Personnel Responsible for Drafting: Paul Neal, 1025 East Union Avenue, Olympia, WA, (360) 709-4747; Implementation and Enforcement: David Ward, 1025 East Union Avenue, Olympia, WA, (360) 586-0036.

Name of Proponent: Employee Retirement Benefits Board, governmental.

Rule is not necessitated by federal law, federal or state court decision.

Explanation of Rule, its Purpose, and Anticipated Effects: Proposed rules allow Employee Retirement Benefits Board members to disclose particular financial interests in contracts and other transactions and recuse themselves from discussing and voting on those matters. A number of executive boards expressed concern to the Executive Ethics Board that a strict application of RCW 42.52.030 might prevent otherwise qualified members from serving on the board. Because of the language in RCW 42.52.903 expressing a legislative intent to avoid that result, the Executive Ethics Board developed model rules that would allow recusal on a transaction-by-transaction basis. The anticipated effect is that board members who have a beneficial interest in a transaction can recuse themselves from the transaction rather than resigning from the board.

Proposal does not change existing rules.

No small business economic impact statement has been prepared under chapter 19.85 RCW. The rules apply to public employers and employees participating in the retirement systems administered by the Department of Retirement Systems. No private businesses are affected by the rules, therefore, no small business economic impact statement is required.

RCW 34.05.328 does not apply to this rule adoption. The Department of Retirement Systems is not one of the agencies that RCW 34.05.328 applies to. The Department of Retirement Systems does not opt to voluntarily bring itself within the coverage of those rules.

Hearing Location: Boardroom, State Investment Board, 2424 Heritage Court S.W., Olympia, WA 98504-0916, on November 25, 1997, at 9:00.

Assistance for Persons with Disabilities: Contact Paul Neal, TDD (360) 586-5450, or (360) 709-4747.

Submit Written Comments to: David Ward, P.O. Box 48380, Olympia, WA 98504-8380, FAX (360) 753-3166.

Date of Intended Adoption: December 3, 1997.

October 22, 1997

Paul Neal

Rules Coordinator

NEW SECTION

WAC 415-200-050 Recusal of board members--Beneficial interest in transaction. (1) When a member of the board is beneficially interested, directly or indirectly, in a contract, sale, lease, purchase or grant that may be made by, through, or is under the supervision of the board, in whole or in part, or when the member accepts, directly or indirectly, any compensation, gratuity, or reward from any other person beneficially interested in such contract, sale, lease, purchase or grant, the member shall:

(a) Recuse him or herself from the board discussion regarding the specific contract, sale, lease, purchase or grant;

(b) Recuse him or herself from the board vote on the specific contract, sale, lease, purchase or grant; and

(c) Refrain from attempting to influence the remaining board members in their discussion and vote regarding the specific contract, sale, lease, purchase or grant.

(2) The prohibition against discussion set forth in subsection (1)(a) and (c) of this section shall not prohibit the member of the board from using his or her general expertise to educate and provide general information on the subject area to the other members.

(3) Under subsection (1) of this section, "any other person" has a beneficial interest in a contract, sale, lease, purchase or grant when the other person bids or otherwise seeks to be awarded the contract, sale, lease, purchase or grant.

Example: The board is composed in part of individuals who are employed by companies which provide investment options to retirement plans. The board is in the process of selecting investment options for the defined contribution portion of the Teachers' Retirement System Plan 3. A company which employs one of the board members has bid on the contract. The board member who is employed by the bidding company may use his general expertise to educate and provide general information to the board regarding investments and defined contribution retirement plans in general. The member is prohibited from participating in the board discussion and analysis implementing the criteria for selecting an investment company, and is prohibited from participating in the board vote to select the company.

Example: The board has a contract with an investment company to provide investment options for the defined contribution portion of Teachers' Retirement System Plan 3 (TRS Plan 3). The board's contract with the investment company is almost expired, and the board must seek proposals from investment companies for the next contract period. The board issues a request for proposal to various investment companies, including Investment Company "A." Approximately one year ago, a board member worked for Investment Company "A" and received compensation from that company. The board member subsequently retired. The board member is not required to recuse himself from selecting the investment company for TRS Plan 3. Investment Company "A" did not have a beneficial interest in the board's contract until it bid on the contract. Therefore, Investment Company "A" was not beneficially interested in the contract when the board member received the compensation. However, if the board member received compensation from Investment Company "A" after it bid on the contract, the board member would be required to disclose the fact that she received the compensation from the bidder, and to recuse herself from the board's specific discussion and the vote awarding the contract.

[]

NEW SECTION

WAC 415-200-060 Recusal of board members--Beneficial interest in entity engaged in transaction with the board. (1) When a member of a board either owns a beneficial interest in or is an officer, agent, employee or member of an entity or individual which is engaged in a transaction involving the board the member shall:

(a) Recuse him or herself from the board discussion regarding the specific transaction;

(b) Recuse him or herself from the board vote on the specific transaction; and

(c) Refrain from attempting to influence the remaining board members in their discussion and vote regarding the specific transaction.

(2) The prohibition against discussion and voting set forth in subsection (1)(a) and (c) of this section shall not prohibit the member of the board from using his or her general expertise to educate and provide general information on the subject area to the other members.

(3)(a) "Transaction involving the board" means a proceeding, application, submission, request for a ruling or other determination, contract, claim, case, or other similar matter that the member in question believes, or has reason to believe:

(i) Is, or will be, the subject of board action; or

(ii) Is one to which the board is or will be a party; or

(iii) Is one in which the board has a direct and substantial proprietary interest.

(b) "Transaction involving the board" does not include the following: Preparation, consideration, or enactment of legislation, including appropriation of moneys in a budget, or the performance of legislative duties by a member; or a claim, case, lawsuit, or similar matter if the member did not participate in the underlying transaction involving the board that is the basis for the claim, case, or lawsuit. Rule making is not a "transaction involving the board."

(4) "Board action" means any action on the part of the board, including, but not limited to:

(a) A decision, determination, finding, ruling, or order; or

(b) A grant, payment, award, license, contract, transaction, sanction, or approval, or the denial thereof, or failure to act with respect to a decision, determination, finding, ruling, or order.

Example: The board selects investment options for the deferred compensation program. The board currently has a contract with Investment Company "B" which allows program participants to purchase Company "B's" stock. The board is in the process of determining whether to renew Company "B's" contract. One of the board members owns fifty shares of Company "B" stock. That board member must recuse herself from the board's discussion and vote regarding whether to renew Company "B's" contract. The board member also must refrain from attempting to influence the remaining board members in their discussion and vote regarding the contract renewal.

Example: The board selects investment options for the deferred compensation program. The board is in the process of obtaining proposals from mutual fund companies to provide mutual fund options to program participants. Mutual Fund Company "C" bids on the contract. A board member owns one hundred shares of Mutual Fund "C," but does not have any management powers in the mutual fund company. The board member does not have a beneficial interest in Mutual Fund Company "C." RCW 42.52.010(4). The board member thus is not required to recuse himself from the board's discussion and vote on the mutual fund contract.

[]

NEW SECTION

WAC 415-200-070 Recusal of board members--Disclosure of reason for recusal. If recusal occurs pursuant to WAC 415-200-050 or 415-200-060, the member of the board shall disclose to the public the reasons for his or her recusal from any board action whenever recusal occurs. The board staff shall record each recusal and the basis for the recusal.