Transparency Rules

So much paperwork, so little time. If it seems the “to-do” lists for co-op boards and property managers keep on growing, that’s because they do – and now there’s another item to add. On January 1, 2018, a new state law went into effect requiring boards to prepare an annual report of all contracts they awarded in which a director has a financial interest.

But wait, there’s more. The report has to be signed by all directors, and it must include information on the recipient; the amount and the purpose of the contract; a record of the board meetings in which the contract was voted upon, including attendance and how each member voted; the date of the vote; and the effective date of the contract. Finally, boards are required to distribute the report to shareholders and unit-owners. The new statute, which amends the state’s Business Corporation Law and the Not-for-Profit Corporation Law, was designed to cover both co-ops and condos, but since it does not amend the Real Property Law, which governs condos, they aren’t affected – at least for now.

The law has the laudable intention of eliminating conflicts of interest from the dealings of co-op and condo boards and addressing the oft-heard complaints about lacks of transparency.“It’s hard to argue against that,” says attorney James Glatthaar, a partner at Bleakley Platt & Schmidt. “But I think it’s a remedy for something that’s not really a significant problem. With well-run boards, conflicts of interest – or even the perception of conflicts – are already disclosed in the minutes of any meeting. This is going to require a lot of unnecessary and redundant record-keeping. Still, there are always shareholders who suspect their board is hiding something. For them, this law is the Holy Grail.” Hastily passed last September, the amendment is poorly drafted, says Glatthaar, which could cause headaches for boards and property managers as they scramble to comply and get their papers in order. To shepherd them through the process, Glatthaar has made up his own list, which he has presented to several management companies, including Hudson North and Gramatan, both based in Westchester County.

The Lines Get Fuzzy

The first step is compiling an A-to-Z list of current contracts. “It has to include everything, from elevator service to ammonia garbage supplies,” says Glatthaar. “Then circulate it to the board, asking members if they have [a connection to] any of the vendors, and have them sign it, right off the bat.” Then, keep a running tab throughout the year of new contracts. “The law requires disclosure of all contracts voted on, not just those that were approved,” he explains. “Say you have gotten five bids on one of them. Technically, that means if you voted for one vendor, you silently voted on the other four, so do those have to go in your report? I don’t know. For now, I’m advising people to err on the safe side and include them all.”

While readying a report and distributing it to shareholders seems straightforward enough, in practice it may not be so simple, cautions Glatthaar. “When it comes to conflict of interest, the lines can get very fuzzy,” he says. If a board votes to put their reserve fund at JPMorgan Chase and a director’s son works there, most people would agree that’s a conflict. But suppose a member owns stock in the bank? A hundred shares wouldn’t benefit that person enough to be a conflict, but how many shares would? If you and your spouse socialize with a roofing contractor, does that make you an interested party?

Another tricky issue is whether directors have to disclose any conflicts because a broker is on the board. “If that person is handling sales in the building and getting commissions, it definitely is a conflict, and non-interested members have to approve it,” says attorney Lisa Smith, a partner at Smith, Gambrell & Russell. Because of the law’s vagueness, however, it would not have to be disclosed to shareholders, since technically the transactions are between the purchaser and the seller, though the board is voting on the contract. “I’d err on the side of caution and report it, because it’s something shareholders would want to know,” adds Smith. “But brokers may not want to serve on boards if their commissions are disclosed to everyone.”

Kicking and Screaming

With all the blurred lines, Glatthaar advises boards and managing agents alike to lean on their lawyers. “It’s essential to get co-op attorneys involved, because first off, some board members are going to have to be dragged kicking and screaming into the process,” he says. “Also, given the law’s vagueness, you want attorneys to look over everything the first couple years until everyone has a better sense of exactly how compliance should be done.”

Bram Fierstein, a principal at Gramatan, is already bringing them into the fold. “I’ve suggested to my agents that they talk with their co-ops’ attorneys to help them clarify what their obligations are going to be,” he says. “Attorneys usually don’t attend board meetings and are not part of the regular running of a building, but we’re going to be proactive and have them explain things to boards as well, since advice from managing agents often doesn’t carry the same weight.”

Fierstein also plans to have attorneys prepare a written explanation of the law that will accompany the reports when they’re distributed to shareholders. “A year from now, when they get that statement out of the blue, I think people will be confused because they aren’t going to understand it,” he says. Notifying shareholders before that, Fierstein adds, isn’t an option. “That would only set off more bells, and it would be just one more burden for managing agents and boards to deal with.”

Attorney Bruce Cholst, a shareholder at the firm Anderson Kill, is also bracing himself for the future, but for a different reason. Because the law does not indicate any penalties for non-compliance, Cholst, who specializes in cooperative and condominium law, fears that boards could be sued by shareholders who claim their directors aren’t playing by the rules.

“Since there’s no oversight or enforcement system in place, a lawsuit is the only other recourse,” he says. To avoid any misunderstandings that could lead to court, he suggests highlighting certain parts of the annual reports. “I would highlight in bold, conspicuous print that each transaction complies with the law, and underscore that any board member with a possible conflict of interest did not vote.” And if it turns out a director isn’t upfront? “I’m proposing to my clients that they amend their governing documents so that any board member who fails to disclose would automatically be deemed to have resigned,” says Cholst, who is also a tenant shareholder at the Newport co-op on East 76th Street. “That way, the statute would be self-enforcing.”

With the new law, reams of additional paperwork are the reality for co-op boards – and, given a likely amendment in an upcoming legislative session, for condo boards as well. “The only issue now is what needs to be reported, when, and how,” says Brian Scally, vice president at Hudson North. “There is always speculation about favoritism with contractors, even though in most buildings that’s almost never the case. Boards and managing agents always have to be prepared to provide more information to shareholders. It just comes with the territory.”