Blinded by the Light: New Texas “Sunshine” Law Yields Thousands of Filings and Practical Implications for Businesses

Friday, July 1, 2016

Ross Fischer of the Gober Group is the former Chairman of the Texas Ethics Commission and an expert in the field of Texas campaign finance and lobby laws.

On January 1, 2016, a new law took effect in Texas that has changed the way in which government contractors do business. Referred to as “House Bill 1295”, the new law has generated an unforeseen level of interest in the usually dry rulemaking process of the Texas Ethics Commission. It has also generated an unprecedented amount of disclosures – during the first three months in which disclosures were made, the Texas Ethics Commission received over 15,000 filings.

The Law:  The new law provides that a governmental entity – broadly defined to include state agencies, cities, counties, school districts, special districts, and more – cannot enter into certain contracts until the selected vendor discloses its “interested parties.” In other words, the contractor must disclose who is going to make money off the deal.

Covered Contracts:  The law applies to two types of contracts: (1) those that require approval by the governing body; and (2) those with a contract amount of one million dollars. Not only does the law apply to new contracts, but also to renewed contracts, extended contracts, and amended contracts.

What’s it worth?  Even determining the value of a contract has proven problematic under the new law. What if the contract amount is less than one million dollars, but a change order brings it over that amount? What if it is a contract for professional services paid hourly without a fixed ceiling? How should the purchase of insurance be valued? Neither the statute nor recently adopted rules provide much guidance.

Interested Parties:  Figuring out the value of the contract may prove to be relatively simple compared to identifying the “interested parties” to the contract. “Interested party” means (1) a person who has a controlling interest in a business entity with whom a governmental entity contracts or (2) an intermediary.

In its adopted rules, the Commission defined “controlling interest” as greater than 10%. This designation generated a great deal of concern within the regulated community since – from a business standpoint – ten percent is not likely to actually constitute a controlling interest.

“Controlling interest” also includes service as a director when the board has ten or fewer directors, or service as an officer when the entity has less than five officers, or service as one of the entity’s four highest paid officers when an entity has more than four officers. The Commission recently clarified, however, that an officer of a publicly held business entity or its wholly owned subsidiaries does not have a “controlling interest” for the purposes of the new law.

The definition of “interested parties” includes “intermediaries,” which the Commission says encompasses a person who actively participates in the facilitation or negotiation of a contract – including a broker, adviser, or attorney agent –  and who: (1) is paid for their participation; (2) communicates directly with the public entity regarding the contract; and (3) is not an employee of the business entity or a related company. So a vendor that uses different legal counsel to negotiate contracts in Lubbock and Harlingen will be responsible for reporting different “interested parties.”

Filing the form:  The Texas Ethics Commission has promulgated Form 1295 for vendors to use for their disclosures. All filings must be made online, so each vendor needs to establish an online filing account with the Ethics Commission. Once the vendor has been selected by the governmental entity, the vendor must file its sworn disclosure of interested parties with the Commission. The Commission then electronically transmits the form to the public entity, which may then enter into the contract. (It is worth noting that neither the Ethics Commission nor the public entity is under an obligation to verify the veracity of the filings.)

Practical Implications:  As a practical matter, a business will be expected to know – and to report – details spanning the business’s entire operation. This means having a knowledge of the big picture – the corporate structure, the board composition, the best compensated employees – as well as the minutia – which employees and contractors were involved in negotiating each contract with a public entity.

If the current pace of filings – over 5,000 disclosures per month – continues unabated, the Texas Legislature may ask at what point the value of “transparency” is undermined by the sheer volume of information available. In other words, can too much sunshine be blinding?

For the Texas Ethics Commission materials on House Bill 1295, click here.