SERVING TWO MASTERS? PUBLIC ETHICS AND THE REGULATION OF FINANCIAL CONFLICTS OF INTEREST IN THE ADMINISTRATIVE STATE.

• Author: Peterson, Jordan Carr

INTRODUCTION

"No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other."-Matthew 6:24. (1)

On January 31, 2018, Brenda Fitzgerald, director of the Centers for Disease Control and Prevention, resigned her position after holding it for less than a year. (2) A statement released by the Department of Health and Human Services upon Fitzgerald's resignation indicated that she elected to resign due to her ownership of "certain complex financial instruments that have imposed a broad recusal limiting her ability to complete all of her duties... ." (3) In the foregoing weeks, members of Congress had grown increasingly concerned about potential conflicts of interest stemming from Fitzgerald's personal finances, and such concerns were only exacerbated upon the revelation that Fitzgerald had traded in tobacco securities just a month into her tenure as leader of the CDC--the federal agency responsible for discouraging tobacco use. (4) Although Fitzgerald suggested she could simply recuse herself from instances in which she faced a financial conflict of interest, public officials and ethics observers maintained the requisite number of recusals to offset potential conflicts would preclude Fitzgerald from participating in a significant amount of agency business. (5) Under mounting pressure, she resigned. (6)

Just over a year before Brenda Fitzgerald voluntarily left the CDC, Secretary of Health and Human Services designate Tom Price was embroiled in a scandal of his own over securities trading. (7) In late 2016, news broke that during the years before his nomination to a cabinet post, then-U.S. Representative Price had traded over $300,000 in shares of medical and pharmaceutical firms, (8) during which time he had also sponsored or cosponsored over forty bills related to the regulation of the health care sector. (9) Further, Price--who as Secretary of Health and Human Services would also lead the FDA--had, like Fitzgerald, traded in tobacco securities. (10) Unlike Fitzgerald, however, this did not spell the end of Price's time in public service as he declined to withdraw from consideration and was instead confirmed by the Senate on a 52-47 party line vote on February 10, 2017. (11)

To be sure, the situations faced by Price and Fitzgerald were not legally equivalent. Whereas Fitzgerald traded tobacco securities during her time as CDC Director, (12) Price traded in medical stocks while he was a legislator prior to his appointment to lead the Department of Health and Human Services, (13) so his conduct--while normatively disconcerting to many--was governed by conflict of interest rules for Congress rather than federal administration. Nevertheless, like Fitzgerald's purchase of tobacco stocks while running the agency charged with convincing fewer Americans to smoke, Price's trading in medical sector equities mere months before his nomination to lead the cabinet department responsible for administering Medicare and Medicaid raised important questions regarding administrative integrity and public ethics. Why do conflicts of interest impair judgments by public officials, and at what point do officials with conflicted judgment imperil democratic legitimacy? What sorts of investments should or do constitute financial conflicts? How should federal law mitigate against financial conflicts of interest in government? And what good is the legal regime governing conflicts of interest if an official with an evident financial conflict of interest enjoys discretion over their own continued tenure in office?

Conflicts of interest, actual or apparent, depress the collective faith in government institutions by calling into question whether public officials are sincerely advancing the public interest, or simply their own. American law regulates financial conflicts of interest because it presumes that public officials with conflicted judgment cannot, as the quotation from the Book of Matthew in the epigraph poetically cautions against, serve two masters. Federal conflict of interest regulations, however, manage to create a welter of obligations for public officials without either thoroughly regulating financial conflicts of interest or packing overweening remedial force. In short, the rules as they currently stand fail to constrain financial conflicts in either actuality or appearance.

This Article examines the current state of conflict of interest law for the executive branch, posits that large swaths of financial conflicts go unregulated by the extant regime, and offers to my knowledge the first systematic empirical examination of financial conflicts of interest in federal administration. Part I articulates why conflicts of interest threaten democratic legitimacy, explains the popular focus on financial conflicts, and introduces the concept of penumbral financial conflicts of interest, in which an administrative official's personal investments render them conflicted despite holding no stake in firms subject to direct regulation. Part II surveys the current legal framework governing financial conflicts in the executive branch, noting the manner in which penumbral financial conflicts manage to evade review. Part III uses an original data set on the personal finances of federal administrative officials to conduct an empirical analysis of penumbral conflicts of interest in the National Labor Relations Board, employing both observational and natural experimental methods. Part IV recommends that federal conflict of interest law be revised to regulate penumbral financial conflicts expressly. Part V concludes.

1. CONFLICTS OF INTERESTS AND THE LEGITIMACY OF FEDERAL LAWMAKING INSTITUTIONS

   1. Conflicts of Interest as Threats to Public Integrity

      Democratic legitimacy requires that lawmaking institutions be configured such that they achieve some minimum standards of procedural fairness. (14) Formulating and implementing procedures that meet these conditions for legitimacy is most straightforward for institutions whose members take office after contesting and winning elections: as long as the laws governing electoral processes protect certain bedrock political freedoms, (15) and collective decisionmaking in multimember bodies to which representatives are elected involves a defensible means of preference aggregation, (16) there is a strong presumption that such institutions are legitimate. Thus, while legislative decisions may be tremendously unpopular, it remains comparatively unlikely they will be reasonably criticized as illegitimate so long as legislators gain access to office via democratically fair elections and adhere to established practices in the course of the legislative process. (17) In most cases, the remedy for unpopular legislative choices--rather than legalistic scrutiny into a legislator's motivations for supporting one policy or another--is to rely on the very electoral processes that confer legitimacy on the legislature in the first place and hope the public will hold legislators accountable for their suboptimal decisions and "vote the bastards out." (18)

      Because officials in the executive branch are not elected at the federal level, analyses of institutional legitimacy in this coordinate lawmaking realm cannot reasonably employ the vitality of the democratic process as a central evaluative criterion. (19) Indeed, no single factor looms so large in determinations of administrative integrity as does the maintenance of procedurally fair elections in assessments of legislative affairs. The issue of political legitimacy is particularly urgent in the arena of the administrative state since "[a]gency officials write laws of general applicability but lack the political accountability of elected legislators" and "decide individual matters with binding authority but lack the independence of Article III judges," (20) and because agency procedures tend to shield administrative decisions from public examination despite federal legislation encouraging bureaucratic transparency. (21) This "recurrent sense of crisis" (22) in administrative policymaking aside, consistency with several conventionally accepted indicia of legitimacy tends to confer perceptions of ethical integrity on agency action. (23) Namely, administrative decisions and the processes via which they are reached should adhere to the rule of law by not exceeding the authority afforded them in their constitutional and statutory mandates, foster the achievement of goals desired by the populace, and confront the consequences for and preferences of constituencies affected by agency policy. (24) Further, due precisely to the absence of express democratic accountability (i.e., there is no procedural mechanism for removal of agency officials by the public), there is a more exacting degree of scrutiny directed at the factors that motivate substantive policy decisions by administrative officials. (25) The apprehension that conflicts of interest may call into question the legitimacy of decisions by executive branch officials represents an especially prominent manifestation of suspicion regarding administrative motivation. (26)

      Conflicts of interest jeopardize the legitimacy of administrative institutions because officials who make policy decisions in which their judgment is conflicted violate the broadly accepted norms of impartiality and service in pursuit of the public interest. (27) Eventually, and if left unchecked, extensive delegitimization of public institutions may imperil the operation of democratic government altogether if the state loses popular credibility in performing its core functions such as serving as a distributor of rights and obligations across the citizenry and a guarantor of the rule of law. (28) While the normative concerns raised by conflicts of interest in public administration are almost immediately apparent, defining conflicts of interest can be less straightforward. (29) Testifying...