GOP SLOTS BILL WOULD BAR OFFICIALS FROM MUTUAL FUNDS
HARRISBURG, October 14, 2004 – Public officials in Pennsylvania -- state, county and local -- would be prevented from investing in most mutual funds, deferred compensation plans and 401 (k) plans if a Republican-sponsored gambling bill that passed the Senate last week becomes law.
SB 1209 seeks to ban public officials from directly owning any portion of a gambling-related business, but exempts indirect ownership such as mutual funds.
The bill’s authors, however, in rushing the bill to passage, only excluded slot parlor operations when drafting that portion of the legislation. Thus, the exemption would not apply to publicly traded slot machine manufacturers and other gambling-related businesses, and any investor whose mutual fund held stock in any such company would be guilty of a misdemeanor crime.
A memo from Senate Democratic Appropriations Committee legal counsel Christopher Craig to Sen. Vince Fumo (D-Philadelphia) explaining the error in detail is attached.
(On Senate Democratic Appropriations Committee Stationary)
October 13, 2004
TO: Senator Vincent J. Fumo, Chairman
Senate Democratic Appropriations Committee
FROM: Christopher B. Craig, Counsel
Senate Democratic Appropriations Committee
SUBJECT: Senate Bill 1209 – Significant Drafting Errors
In their rush to pass Senate Bill 1209, printer’s number 1862, without amendment or comment, the Senate Republican leadership committed significant errors in drafting the "Financial Interests and Complimentary Services and Discounts" section of the bill -- the very provision that was claimed to be the primary justification for amending the recently enacted Pennsylvania Race Horse Development & Gaming Act. As written, this lapse renders the entire section unenforceable.
Section 1512, as it appears on page 22 of Senate Bill 1209, provides that no public official shall hold, directly or indirectly(*), a "financial interest" in any "slot machine licensee, manufacturer licensee, supplier licensee, licensed racing entity or in any holding, affiliate, intermediary or subsidiary company thereof . . .". (Page 22-23, lines 25-30; 1-5). While Act 71 sought to limit such financial interests to 1%, Senate Bill 1209 completely bans such interests, with limited exceptions.
In their extraordinary rush to move the bill out of the Senate, the drafters incorrectly defined the scope of the exceptions. The bill appropriately exempts from the general prohibition such passive investments as – blind trusts, defined benefit pension plans, tuition account plans, and mutual funds. However, the exemption for mutual funds in the bill (which would include some deferred compensation and 401(k) investments) provides as follows:
Senate Bill 1209 – Significant Drafting Errors
"(4) An interest held in a mutual fund where the interest owned by the individual fund in the licensed gaming entity does not amount to control of the licensed gaming entity as defined by the Investment Company Act of 1940 54 Stat. 789, 15 U.S.C. § 80A-1 et seq.)." (Page 26, lines 5-9)."
Unfortunately, the term "licensed gaming entity" is a narrowly defined term in the Act, which only includes an entity that holds a slot machine operator license. 4 Pa.C.S.A. § 1103. It does not include slot machine manufacturers. As such, any type of mutual fund that may hold an equity interest in any of the 20+ publicly traded slot machine manufacturers (as most do) is therefore not included in the exemption.
The practical effect of this error is to render the holding of most small cap, emerging market, or S&P tracking mutual funds as misdemeanor violations (page 24, line 18-27) of the Act. For example, a public official who invested in the USAA Small Cap Stock Fund last quarter would hold an interest in both Scientific Games, Corp. and in Multimedia Games, Inc., and therefore would have to either divest his mutual fund or be found in violation of the Act, if Senate Bill 1209 were enacted in its current form. This problem is compounded by the fact that the authors of the bill also failed completely to exempt any non - "defined benefit pension plan," such as deferred compensation and 401(k) plans or Individual Retirement Accounts.
The proper way to draft this provision would be to substitute the term "licensed entity" for the term "licensed gaming entity," and to expand the exemption to include deferred compensation and 401(k) plans. It is worthwhile noting that this error does not exist in Senate Bill 1221 (as introduced by Senator Kukovich) or in the similar House Rule – both of which were carefully crafted. Ironically, this error could have easily been avoided if the relevant amendment, drafted by Senator Kukovich, were permitted to be offered.
(*)Though not the focus of this memorandum, the use of the term "indirectly" is conspicuously absent from the provision of this section that prohibits family members of public officials from being employed by a licensed entity. (Page 23, line 27-28). As such, Senate Bill 1209 would permit the family member of a public official to work "indirectly" for a gaming company. The section also removes the one-year provision that would have prevented family members of public officials from being employed directly by a gaming company after the public official leaves office. (Page 24, line 2). These loopholes do not exist in Act 71.