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Is Your First Conflict-of-Interest Report Past Due?

Bill Morris in Board Operations on January 15, 2019

New York City

Conflict of Interest
Jan. 15, 2019

One big thing. In an effort to snuff out conflicts of interest on co-op and condo boards, the state Legislature passed a new law requiring annual reporting of all contracts in which a board member has a financial interest. The law went into effect on January 1, 2018, and board’s first annual report was due by December 31, 2018. 

Why it matters. The deadline for filing the first annual report expired when the ball dropped on Times Square on New Year’s Day. “If boards are behind, they need to get their act together,” says attorney David Berkey, a partner at Gallet, Dreyer & Berkey. He adds that while the law sets no monetary penalties for boards that fail to meet the annual deadline, there’s a compelling reason for boards to comply in a timely fashion: “Someday a shareholder or unit-owner will sue because the board is not fulfilling its obligations.”  

What you need to know is that the law’s requirements are stringent. The annual report must list all contracts or transactions that were voted on by the board with an entity in which a director has a financial interest. The report must be signed by all directors and include information on the amount and purpose of the contract, the recipient, a record of the meetings of the directors in which the contract was voted on – including attendance and how each director voted – plus the date of the vote and the effective date of the contract. Even if there were no contracts involving interested directors, that fact must be disclosed. The report must be distributed to all shareholders or unit-owners. 

Go deeper. The law has increased the importance of accurate record-keeping by the board’s secretary. “The detail of the required disclosures might seem a little onerous,” Berkey say. “If you don’t keep detailed records as you’re voting on a contract, you’ll have to reconstruct the voting.” 

One level deeper. But it doesn’t end there. Gray areas abound, where lawyers are still not certain about the proper way for boards to comply. What if a board member’s spouse, relative or friend has a financial interest in a transaction? “The brother, the cousin and the best friend are a bit far afield for this report – unless they share proceeds with a director,” says attorney Robert Braverman, a principal and managing partner at Braverman Greenspun. If the director shares in the proceeds, Braverman adds, “[those] transactions ought to be disclosed.” According to Braverman, another transaction that should be disclosed is when the wife of a board member is a real estate agent who has been involved in sales of units in the building. When Braverman Greenspun advised a board on exactly that situation, the board did disclose all the transactions that the wife participated in. 

Here’s more from David Berkey. “Suppose there’s a real estate broker who wants to sell or rent a unit in a building where he is also a director,” Berkey says. “He is the interested party because he will get the commission if the transaction closes. The broker is not a contracting party with the co-op and has no financial interest in either of the contracting parties, but he has a financial interest in the transaction itself. Our view has been to advise the board that such a situation should be disclosed.”

Bottom line. If your board hasn’t prepared and distributed its 2018 conflict-of-interest report, get busy. As 2019 unfolds, keep accurate records of every vote on every contract.

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