FPPC Adopts Amended Regulations (Part 1)

The Fair Political Practices Commission adopted and issued an amended regulation defining the “materiality” standard for a “business entity” financial interest that can give rise to a conflict under California’s Political Reform Act. The change comes as part of the FPPC’s on-going Regulation Project to update and revise certain FPPC Regulations.

The “materiality” standards set by this regulation are critical in determining whether there is a conflict of interest requiring recusal. The PRA prohibits a public official, officer, employee and certain consultants from making, participating in making or seeking to influence a governmental decision that will have “a reasonably foreseeable material financial effect” on their economic interest(s) under Government Code section 87103.

Materiality Standard for “Business Entity” (Regulation section 18702.1, effective Sept. 25, 2019)

An individual covered by the PRA has an economic interest in a “business entity” when:

• The official has a direct or indirect investment in the business entity worth $2,000 or more, per Government Code section 87103(a) or
• The official is a director, officer, partner, trustee, employee or holds any position of management with the business entity per section 87103(d).

As now amended, Regulation section 18702.1 establishes these “materiality” standards:

• Assumes a “material” effect when the business entity is explicitly involved or named in the proceeding or matter, such as a contract, before the agency.
• Provides a "bright-line" standard with additional "clarity and guidance" regarding when an official's interest in a business entity is "not explicitly involved" in the decision, referencing value thresholds for the decision’s effects on the business entity’s revenues, assets, liabilities or expenses.
• Incorporates new standards for decisions affecting a real property interest of a business entity, assuming materiality when the business entity’s real property is the subject of the decision, or where there is clear and convincing evidence the decision will have a substantial effect on the property, even if not explicitly involved in the decision.
• Re-establishes the "Small Shareholder Exception" on investments of $25,000 or less, which is also less than 1 percent of the shares of the company, for a business not explicitly involved, referenced to the “bright line” value standards.

Watch for Part 2 of this Legal Alert series, New “Source of Income” Materiality Standard, tomorrow!

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