FPPC Adopts Amended Regulations (Part 2)

As part of its on-going Regulation Project to update and revise certain Fair Political Practices Commission Regulations, the FPPC recently adopted and issued an amended regulation defining the “materiality” standard for a “source of income” financial interest that can give rise to a conflict under California’s Political Reform Act.

The “materiality” standards set by Regulation 18702.3 are critical in determining whether there is a conflict of interest requiring recusal. This is because 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).

Materiality Standard for “Source of Income” (Regulation 18702.3, effective Oct. 6)
An individual covered by the PRA has an economic interest in a “source of income” whenever a single source (person or business entity) provides $500 or more in value to the individual within 12 months prior to the time when the decision is made under Government Code section 87103(c).

As now amended, Regulation 18702.3 establishes these materiality standards:

• For income received by the official or his or her spouse for goods and services provided in the ordinary course of business, including a salary, the financial effect is material if:
  • (Explicitly Involved) The source is a claimant, applicant, respondent, contracting party or is otherwise named or identified as the subject of the proceeding.
  • (Not Explicitly Involved) The source is an individual and the decision may affect the individual’s income, investments or other assets or liabilities (other than an interest in a business entity or real property) by $1,000 or more, or the official knows or has reason to know that the individual has an interest in a business entity or real property that will be financially affected under the standards applied to a financial interest in Regulations 18702.1 or 18702.2, respectively.
• (Nonprofit Organization) The source is a nonprofit that will receive a measurable financial benefit or loss, or the official knows or has reason to know that the nonprofit has an interest in real property that will be financially affected under the standards applied to a financial interest in Regulation 18702.2.
• The source is a business entity that will be financially affected under the standards as applied to a financial interest in Regulation 18702.1, as recently amended.
• For income from the sale of personal or real property belonging to the official, or the official's spouse if the property is community property, the financial effect of the decision is material if the official knows, or has reason to know, that the source of income is a claimant, applicant, respondent, contracting party or is otherwise named or identified as the subject of the proceeding, or has an interest in any business entity or real property that will be financially affected under the standards applied to a financial interest in Regulations 18702.1 or 18702.2, respectively.
• (Nexus Test) Any reasonably foreseeable financial effect on a person who is a source of income to a public official or the official’s spouse is deemed material if the decision will achieve, defeat, aid or hinder a purpose or goal of the source and the public official or the official’s spouse receives or is promised the income.
• (Government Entity Exception) Where a government entity qualifies as a source of income, including where a public official is paid by the entity as a consultant or contractor, the regulation does not apply. Under Regulation 18703(e)(7), an official with an interest in a governmental entity is disqualified from taking part in a decision only if there is a unique effect on the official.

Read Part 1 of this Legal Alert series, New “Materiality” Standard for a “Business Entity.”

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