New Conflict-of-Interest Law Inflicting Confusion

On New Year’s Day, a new state law went into effect requiring co-op boards to prepare an annual report of all contracts they awarded in which a director has a financial interest. The law’s intentions are laudable – to shine a light on co-op board dealings and remove possible conflicts of interest. But for all the light, there are still some murky gray areas. 

While preparing an annual report and distributing it to shareholders seems straightforward enough, in practice it may not be so simple, cautions attorney James Glatthaar, a partner at Bleakley Platt & Schmidt. “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.”

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 Management, 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,” he says, “I think people will be confused because they aren’t going to understand it.” He’s hoping the attorneys' written explanations will clear up any confusion.