The Clock Is Ticking on Preparing Conflict-of-Interest Reports

Time is running out for co-op and condo boards to compile and disseminate their first annual report under the state’s new conflict-of-interest law. The reports 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 reports 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. 

The law, which originally affected only co-ops but was amended to include condominiums as well, has sown its share of confusion. The law states that the report must include “a list of all contracts voted on by the board of directors.” Some attorneys are of the opinion that transactions that were not approved by the board do not have to be disclosed; others believe that any contracts the board voted on, even those that did not pass, should be included in the report. The consensus in the face of this and other ambiguities is that boards should err on the side of disclosure. 

There are many more gray areas. What if the wife, brother, cousin or best friend of a director has a substantial interest in a transaction? “There is a difference about the ethics – what should be disclosed to the other board members and what should be disclosed in the report,” says attorney Robert Braverman, a principal and managing partner at Braverman Greenspun. “The brother, the cousin and the best friend are a bit far afield for this report, unless they share proceeds with a director; in my view, [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.

Attorney David Berkey, a partner at Gallet Dreyer & Berkey, has also advised boards about the law’s gray areas. “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.” 

What if a director owns stock in the bank that financed the co-op’s underlying mortgage? In such a case, the interest would be deemed “speculative,” according to attorneys, because nobody knows if the stocks will go up or down. Speculative interests do not have to be disclosed, unless they are “substantial.” While there is no definitive criterion for a what qualifies as a “substantial” interest, if the director would stand to benefit from the board’s action, that would require disclosure. 

There are no guidelines in the statute as to how or when the annual report must be distributed to residents. However, attorneys advise boards to send their annual conflict-of-interest report at the same time each year and maintain proof of service. The hope is that the law’s many gray areas will come into sharper focus with time. As for now: when in doubt, err on the side of disclosure.