Pay to Play Law Blog

Still Wondering If The SEC Is Serious About Pay-to-Play Enforcement?

Stefan Passantino — Fri, 24 May 2013 09:43:00 -0500

To the tune of a $100,000 fine and five year debarment against an individual broker, the Securities and Exchange Commission let it be known – again – that it is very serious about putting teeth behind its new pay-to-play rules.

Yesterday, the SEC announced entry of a consent order by which former Goldman Sachs investment banker Neil Morrison accepted the largest individual penalty ever handed down for a federal pay-to-play violation of MSRB Rule G-37. What makes the settlement especially noteworthy are the fact that most of the "contributions" Mr. Morrison were alleged to have made were in the form of personal "in-kind" services to Massachusetts gubernatorial candidate Tim Cahill rather than just cash donations, the fact that Goldman Sachs had repeatedly warned its bankers about G-37 prior to Mr. Morrison's conduct, and the fact that Goldman self-reported the violation.

(COMPLIANCE TIP: If you are an investment banker, don't send emails to your municipal clients saying "'as an advisor/consultant/friend...PLEASE don't give these (underwriter) slots away' to others because of all the campaign work I've done for you.")

Loyal readers of this blog (humor me, I HAVE to keep telling myself there are some) will know that we have been riding through town on Brown Beauty warning that the SEC is really, really serious about enforcing MSRB Rule G-37. The Commission has previously entered into a $14 million consent judgment with Goldman Sachs over its alleged failure to supervise the activities of its bankers.

MSRB Rule G-37, like its companion Rule 206(4)-5, has teeth, and the SEC has made it very, very clear that municipal underwriters and investment advisors must educate and control their personnel when it comes to their campaign activity.

Have a compliance plan!! Train your people!! The penalty for insufficient action is debarment, dough, and "D'oh!"

The Regulators are coming! The Regulators are coming!

Do SEC and MSRB Pay-to-Play Rules Scare Off Donations to Federal Candidates?

Stefan Passantino — Wed, 22 May 2013 12:35:23 -0500

By Stefan Passantino & Ben Keane

As readers of this blog know well, the avowed goal of the SEC's pay-to-play framework is to protect the integrity of the public procurement process by preventing registered investment advisors from improperly influencing the award of state and local contracts for the management of public investment funds. On its surface, Rule 206(4)-5, which bars investment advisors from managing public investment funds in jurisdictions where their political contributions or the contributions of their “covered associates” exceed $150 per election to elected officials who directly or indirectly oversee such funds, seems well suited to this task. The problem is that many covered by these provisions – and their helpful in-house compliance officers – erroneously believe that SEC restrictions apply to contributions to ALL candidates. This is incorrect.

The language of Rule 206(4)-5 neither prohibits nor restricts investment advisors from contributing to federal candidates who presently hold no state or local office – only state "officials" from a "government entity" who have the power to directly or indirectly influence the outcome of the hiring of investment advisors (check out page 43 of the SEC's link above if you don’t believe me). As we, and others, have pointed out previously, this rule does not apply to contributions to sitting federal candidates or to private citizens running to replace those federal candidates. Likewise, the SEC's pay-to-play provisions place no restrictions on political donations from covered entities or individuals to state or municipal candidates who play no role in the direct or indirect oversight of public investment funds. Of course, state and local pay-to-play rules might still apply in certain circumstances – such as where a sitting state official is running for federal office, but there is no need (as a reaction to SEC pay-to-play regulations) to adopt caps that artificially restrict the ability of investment firm employees to engage in constitutionally-protected political speech.

Much the same error of interpretation can be seen in the MSRB pay-to-play context. Like their brethren in the investment advisory world, many municipal finance professionals covered by Rule G-37 erroneously believe that its provisions restrict political contributions to ALL candidates. This is simply not the case. Rule G-37's candidate contribution provisions only restrict donations to "official(s) of any issuer" who can directly or indirectly influence the hiring of a municipal securities professional, or donations to state officials or candidates who have the authority to appoint persons with such influence. The MSRB's regulatory framework does not prohibit contributions to federal candidates who hold no state or local office, nor does it bar contributions to private citizens turned federal candidates.

Keeping these points mind, we hope that our readers working in the investment advisory and municipal finance arenas take a moment to examine their current political contribution policies, and ensure that they successfully protect their business development interests without unnecessarily curbing otherwise legitimate and beneficial political activities. On the other hand, it could be that the SEC and MSRB pay-to-play rules are simply an inoffensive way to say "thanks, but no thanks" to your friendly neighborhood federal candidate. Can’t do anything about that…

Video Interview: Discussing Recent STOCK Act Developments with LXBN TV

Stefan Passantino — Thu, 02 May 2013 15:15:46 -0500

Recent developments have brought once and future changes to the STOCK Act. Not surprisingly, these changes afford less transparency for public sector conduct and potentially far greater disclosure obligations for the private sector.

Moreover, the political intelligence community’s “close up”, which we warned about last week while wearing our best Little Orphan Annie dress, is upon us as the Securities and Exchange Commission just today announced issuance of the subpoenas we knew were “only a day away”.

I talk about it all with LexBlog here:

Is the "Political Intelligence" Community Ready for its Close Up? (It Better Be)

Stefan Passantino — Wed, 24 Apr 2013 16:10:02 -0500

Some time ago, we alerted you to the STOCK Act and warned purveyors of "political intelligence" to prepare for some "enhanced scrutiny". Think of it as akin to "enhanced interrogation" without the need for towels. (And for those for whom a talking head is worth a thousand words, I discuss all this here courtesy of my good friend Colin O'Keefe at LexBlog).

For those new to the issue, the Stock Act was a reaction to news reports appearing to demonstrate that some members of Congress and their staff were benefitting from stock trades based on nonpublic information. Specifically, as we wrote previously, the bill affirmed that Members of Congress are not exempt from insider trading laws and mandated comprehensive online disclosure of trading activities by Congress. Parallel language in the bill designed to mandate enhanced disclosure by "political intelligence" firms died in the House of Representatives.

In an election year, a bill like the STOCK Act made a good deal of sense. This year, it would appear, not so much. In case you missed it, the Senate recently slipped language through in the dark of night gutting the Act's application to staffers and eliminating the requirement that mandated disclosures actually be searchable online. In a nice touch, the White House quietly announced that the President had signed the bill limiting the STOCK Act on the day your taxes were due. Commentators from the Sunlight Foundation to OpenSecrets to Jon Stewart voiced outrage.

The Daily Show with Jon Stewart
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Meanwhile, as Stewart and other political commentators are focused on what is happening with regard to the public sector, a real push towards enhanced disclosure on the part of "political intelligence" firms is proceeding at full steam.

First, the United States Government Accountability Office this month issued a comprehensive report analyzing the current market for political intelligence and examining potential impediments to expanded disclosure and reporting requirements designed to capture these activities. The implications of that report can be found in this excellent law firm client alert. While significant constitutional and practical impediments stand in the way of legislation designed to regulate the gathering, analysis and dissemination of public information (like the paytoplaylawblog!!!), the smell of cordite is clearly in the air and we should all remain alert.

Second, alarm bells went off in Washington last week as POLITICO reported that Senator Grassley issued a letter to a Washington law firm and a former aide seeking information on whether the law firm had tipped off a political intelligence firm about non-public Medicare Advantage rates. The resulting client memo, issued one hour before market close, triggered a surge in buying of health insurer stocks and resulting Congressional scrutiny. Just this week, the law firm in question announced it would no longer do business with political intelligence firms.

All of this leaves political intelligence and law firms – which appear in virtually all cases to be doing nothing illegal or unethical in analyzing and distilling public information better than the rest of us – reaching for the antacid.

This is definitely an issue to bookmark.

Just Call It The "Pay-to-Play" Corridor

Benjamin P. Keane — Thu, 11 Apr 2013 16:05:16 -0500

When one hears about state pay-to-play reform efforts underway along the “Northeastern Corridor”, it’s only natural to look first to the news wires in New Jersey, Connecticut and New York. After all, those jurisdictions have proven themselves to be the leaders of the pack when it comes to pay-to-play advancements, or at least reformist, pay-to-play rhetoric. In recent weeks, however, we have begun to see momentum building behind new pay-to-play legislation in the neighboring jurisdictions of Pennsylvania and Rhode Island. Depending on the outcome of these new efforts, perhaps it’s time that we drop the directional nomenclature and simply start calling the entire region the “Pay-to-Play Corridor”.

Pennsylvania Legislative Activity

Given the steady stream of “perp walks” seen in the Keystone state over the past month, one could have anticipated significant legislative action on the pay-to-play front. For those of our readers who missed the reports because they were busy “Spring Breaking” or watching their March Madness brackets go down in flames, here’s the long and short of it. In mid March, Pennsylvania Attorney General Kathleen Kane brought a collection of criminal charges against eight Pennsylvania lawmakers and government officials in connection with a wide-ranging bid-rigging and bribery scheme associated with the Pennsylvania Turnpike Commission. Included among those charged were former State Senator Robert Mellow, former Turnpike CEO Joseph Brimmeier, and former Turnpike Chairman Mitchell Rubin, who allegedly directed Turnpike contracts to favored vendors and campaign supporters, and misused millions of dollars in public funds.

With the discovery of this textbook pay-to-play scandal, Pennsylvania lawmakers have been scurrying to distance themselves from the parties involved and position themselves on the right side of pay-to-play reform. The result has been a flurry of legislative ideas and proposals from members in both the state House of Representatives and state Senate. Among the more heavily publicized bills under consideration are SB 750 through SB 758, a collection of pay-to-play and ethics bills sponsored by the bi-partisan tandem of State Senator Mike Stack (D-Philadelphia) and State Senator John Eichelberger, Jr. (R-Blair). As one might expect, the range of issues addressed by these nine bills is quite broad.

Although the specific language in the draft bills has not yet been made publicly available, SB 753, SB 754 and SB 755 appear to focus on contracting issues, requiring the public disclosure of vendor scoring on state RFP bids, the reporting of any payments made to state vendors by registered state PACs or candidate committees, and the disclosure of all subcontractors by state vendors. Meanwhile, SB 750, SB 756 and SB 758 purport to tackle gift and contribution issues by calling for a decrease in the state gift reporting threshold from $250 to $50, requiring the public disclosure of certain campaign contributions by executive branch advisory commission and task force members, and installing an outright ban on gifts to executive branch officials and employees by all companies that do business with, or are regulated by, the Commonwealth.

As of this blog’s publication, none of these proposals have been taken up for consideration in the Pennsylvania State Senate. Their introduction, however, does indicate one direction that the Keystone State’s legislature is looking to go in the wake of the Turnpike scandal.

Another potential pathway to reform in Pennsylvania was launched earlier this week in the state House of Representatives by Representative George Dunbar (R-Westmoreland). His bill, HB 201, attempts to bring increased transparency and accountability to the state procurement process by incorporating a two-year “revolving-door” provision into Pennsylvania laws governing the competitive sealed bidding process. The legislation passed the House unanimously on Tuesday, but failed to include several amendments proposed by Rep. Brandon Neuman (D-Washington) and others, which would have implemented pay-to-play contribution reporting provisions akin to those seen at the state level in New Jersey.

Perhaps Keystone legislators were scared off by the recent words of New Jersey Election Law Enforcement Commissioner Jeff Brindle, which highlight the unwieldy nature of the Garden State’s pay-to-play framework? Or perhaps it was a pure political dodge? Their true motivations may never be known, but we will continue to keep our readers posted as the aforementioned bills make their way through the state legislative process and new proposals are introduced.

Rhode Island Legislative Activity

Further north on the Pay-to-Play Corridor, we are also beginning to see Rhode Island officials join the push for reform. At present, Rhode Island’s pay-to-play laws place limited, disclosure-only reporting obligations on state contractors. Under these obligations, vendors with contracts for goods or services valued at $5,000 or more are required to disclose on an affidavit all contributions to state officers, general assembly candidates and political parties in excess of $250 made within two years of the beginning of a state contract. These provisions do not, however, place any inherent limitations on the political giving of potential or actual state vendors.

Hoping to rectify this shortcoming, State Attorney General Peter Kilmartin and State Representative Michael Marcello have worked together to draft and introduce legislation that would prohibit state vendors, their owners, their executive officers, and the spouses and minor children of those owners and officers from making political contributions to state officials and state candidates who are or could be generally responsible for awarding state contracts. This ban would apply to all vendors with existing state contracts valued at over $5,000 (or aggregating to over $25,000), and would be effective for the duration of the officeholder’s term or for two years following the termination or expiration of the contract, whichever is longer.

The bill, H 5490, also places a similar restriction on the executives and family members of companies with pending bids for state contracts. This ban on contributions by vendors with pending bids or contracts would likewise apply in all situations where contract value exceeds $5,000 on any one bid or contract, or $25,000 on aggregate bids or contracts.

The language of the Kilmartin/Marcello bill is broadly drafted to cover contributions made to a wide range of state officials, including the Governor, and includes a low value threshold to ensure nearly universal application to all state contracts. Whether those particular elements survive the legislative process moving forward, however, is yet to be seen. So far, the bill remains in its introduced form and has been held over for further study by the Rhode Island House Judiciary Committee. As additional news on its progress becomes available, we here at Pay to Play Law Blog will keep everyone updated.

A Smart Proposal in the Garden State

Stefan Passantino — Wed, 03 Apr 2013 12:48:20 -0500

Jeff Brindle, the Executive Director of the New Jersey Election Law Enforcement Commission has made a sensible proposal on pay-to-play reform which deserves both our attention and state action.

One could populate an entire pay-to-play blog with entries culled from the Garden State. We have pointed out here and here that New Jersey enjoys the most complex, and challenging, web of pay-to-play compliance schemes in the country. We’ve even gone out on a limb and editorialized to a large degree that “Until Governor Christie (or someone at the state level) succeeds in implementing a uniform statewide protocol for procurement efforts such as the one proposed here, New Jersey will extend its dubious distinction of having more varieties of pay-to-play legislation than its Turnpike has exits”

For this reason, I generally avoid posting on the now-routine Police Blotter of New Jersey criminal indictments arising out of Garden (State) variety bribery and campaign finance violations. Admittedly, last week’s indictment of seven Birdsall Services Group executives in an alleged scheme to use straw donors to avoid disclosure of contributions that would have disqualified the contractor from being awarded public contracts is a pretty big deal. Birdsall’s executives are facing prison terms between 10 to 20 years and a state action to seize the company. Ultimately, however, if the allegations are true, the conduct in the Birdsall case likely would have resulted in criminal enforcement action under state bribery, campaign finance, and money laundering statutes even absent the existence of New Jersey’s myriad of pay-to-play laws.

What is interesting about the Birdsall case – and the bird dropping-like splatter effect on state contractors and politicians alike – is the effect it has had on Jeff Brindle, the Executive Director of the New Jersey Election Law Enforcement Commission. In an Op Ed posted on newjerseynewsroom.com, Mr. Brindle echoed the words of this blog’s postings cited above to observe:

Overlooked in the news coverage [of the Birdsall case] is a central issue involving the Pay-to-Play Law: it is way too complicated.

Benjamin Franklin said: “Laws too gentle are seldom obeyed; too severe, seldom executed.”

Put another way: Laws with loopholes are often ignored; too convoluted, difficult to enforce.

New Jersey’s Pay-to-Play statutes pose both problems.

. . .

Making matters worse, the Pay-to-Play Law allows for municipalities and counties to pass their own ordinances “as long as they are consistent with the theme of pay-to-play.”

While local laws almost always can be more restrictive than state law, this broad language implies that local pay-to-play laws can be less restrictive as well.

Finally, besides State law and almost 60 local ordinances, several gubernatorial executive orders have been issued dealing with contracting at the State level. The level of complexity is mind-boggling.

Count this blog as standing with Mr. Brindle and his proposal. New Jersey would be well served to have a single, state level, pay-to-play proposal that is relatively easy to understand, comply with and enforce. Bad boys (and girls) are still going to do bad things in an effort to get a competitive edge and New Jersey is well equipped to deal with those folks under existing criminal statutes. The current state pay-to-play scheme is indecipherable to both local regulators and those simply trying to do business legally in New Jersey.

Is it Illegal "Pay-to-Play" for a Government Contractor or National Bank to Contribute to a Super PAC?

Stefan Passantino — Wed, 06 Mar 2013 10:17:38 -0500

A new complaint was filed with the Federal Election Commission yesterday alleging that Chevron USA violated campaign finance laws and corollary “federal pay-to-play” laws by contributing $2.5 million to the Congressional Leadership Fund, a Super PAC tied by press reporting and former staffers to House Speaker Boehner. While the FEC complaint was filed by organizations likely more interested in “poking the bear” because of Chevron’s environmental footprint than its politics (Public Citizen, Friends of the Earth, Greenpeace, and Oil Change International, hereinafter referred to as “The Usual Suspects”), the complaint has facial merit and needs to be on the radar screen of government contractors, national banks, and foreign nationals everywhere.

The logic of the complaint is relatively straightforward and not new. Federal law (2 USC 441c) prohibits government contractors from making campaign contributions to candidates, political committees, or political parties. 2 USC 441b imposes similar restrictions on corporations, national banks, and labor unions. “Chevron”, as a government contractor, the complaint alleges, thus violated federal law by making a $2.5 million contribution to the Super PAC Congressional Leadership Fund (technically, an “independent expenditure political committee”).

At issue is whether the landmark Supreme Court opinion in Citizens United v. FEC has changed the rules with regard to contributions to independent expenditure committees (one of too many law firm “client alerts” on the meaning of Citizens United can be found here). There has not been a case addressing this precise issue squarely since that case. Arguably, the same United States Supreme Court which found corporate and labor union finance of political speech to enjoy First Amendment protection notwithstanding federal law to the contrary will likely extend such protections to government contractors, national banks and potentially foreign nationals notwithstanding the laws referred to above.

The Usual Suspects, in their complaint against Chevron, allege as a matter of fact that “The Federal Election Commission has appropriately interpreted the prohibition against contractor contributions to “any political party committee, or candidate for public office or to any person for any political purpose or use” to include political committees and super PACs involved in Federal elections.” (The Usual Suspects Complaint, p.3, emphasis added). This might be news to three of the six commissioners of the Federal Election Commission.

It is true that a Democratic commissioner of the FEC testified to this effect before Congress in a House Oversight hearing. It is also true that the FEC, in a footnote I am convinced the Republican Commissioners failed to catch before publication of an explanation of FEC policy, wrote “Foreign nationals, government contractors, national banks and corporations organized by authority of any law of Congress cannot contribute to ... separate [independent expenditure] accounts. §§ 2 U.S.C. 441b, 441c, and 441e.”

It is also true that the Usual Suspects’ complaint cites a prominent law firm blog for this same proposition although, if one reads the actual blog post cited, one gains a new appreciation for the phrase “selective, out-of-context, quoting”.

Chevron argues in its own defense that the “Chevron” that made the contribution is a distinct company from the “Chevron” which contracts with the government. I guess I’d argue that too were I Chevron, but this fight will ultimately be won or lost at the Altar of the First Amendment.

Dollars to Donuts...Federal and State Pay-to-Play Rules Make 2013 New Jersey Political Engagement a Veritable Minefield for Current and Prospective Government Contractors, Investment Advisers, Municipal Securities Professionals and Swap Dealers

Benjamin P. Keane — Thu, 14 Feb 2013 17:12:37 -0500

While 2013 may be a quiet year on the federal election front, there will still be plenty of political noise made this fall in the Garden State as New Jersey’s state and local elections take center stage. The ardent politicos among our readers are probably disappointed that we won’t be seeing the “rising star” gubernatorial showdown between incumbent Chris Christie and Newark Mayor Cory Booker, but there will still be high-stakes drama along the Turnpike as both parties tussle over important state and local offices this November. These races will present ample opportunity for political participation throughout the year by individuals, corporations, unions, trade associations, PACs and organizations from around the country. After all, Governor Christie and other state candidates can’t win reelection with only donuts in their pockets… they might need some financial resources as well.

Whether dealing with donuts or dollars, however, due to the combination of federal pay-to-play rules and New Jersey’s highly restrictive state and local pay-to-play framework, the Garden State will be a treacherous political playing field for those individuals and entities that “do business” in one manner or the other with state, county and municipal government. This is particularly the case for those who are current or prospective government contractors, and those who fit the definition of investment advisers, municipal securities professionals, or swap dealers.

Readers of this blog should be intimately familiar with federal pay-to-play provisions such as SEC Rule 206(4)-5, MSRB Rule G-37, and CFTC Rule 23.451, which prohibit “covered” investment, municipal finance and swap firms, their covered employees, and any political action committees (PACs) under their control from making, soliciting or coordinating contributions on behalf of covered officials. New Jersey Officials covered under these rules include Governor Christie (who appoints individuals to the State Investment Council and other entities that may select an investment adviser or issue municipal bonds) and various other county and local elected officials who have the authority to directly or indirectly select or influence the hiring of governmental investment advisers, municipal securities dealers, or governmental special entity swap dealers.

Due to these federally-imposed restrictions, potentially-covered firms, employees and their PACs should think carefully about the pay-to-play consequences of engaging politically on behalf of the Governor or any other covered elected officials or candidates for elected office. After all, anything more than a de minimis contribution to a covered official or candidate by an investment adviser, municipal securities dealer, swap dealer or affiliate can lead to a two year ban on the receipt of compensation for services provided to state or local government. Contribution solicitation or coordination activities by covered firms and their affiliates can also lead to similar disqualifications from government engagements.

Federal pay-to-play rules, however, do not represent the only potential political activity traps awaiting those who do business with state and local governments in New Jersey. Existing or prospective government contractors must also be weary of the expansive pay-to-play framework in place at the state, county and municipality levels in the Garden State. At the state level, pay-to-play restrictions set forth in N.J.P.S. §19:44A et seq., N.J.A.C. §19:25-24 et seq., and the provisions of Executive Orders #117 & #118 effectively limit the political giving and fundraising abilities of commercial entities and associated individuals that do business with state government, the state legislature, and various county and municipal governments.

These rules limit political activity by banning certain prospective contractors from entering into agreements with the state if their business entities have solicited or made more than de minimis contributions to candidates for Governor or Lieutenant Governor, or to any legislative leadership committee or state/county/municipal party committee within 18 months of commencing negotiations for a contract or agreement. The state pay-to-play provisions also prohibit existing government contractors from soliciting or contributing money to the same covered officials and committees during the life of their contract or agreement. Additional restrictions likewise limit the political donations and solicitations of state-legislative, county and municipal contractors to de minimis levels within 12 months of seeking a government contract or agreement and during the life of such contract or agreement when the contributions or solicitations involve covered officials. In certain settings, state law also places similar restrictions on redevelopment contractors and individuals or entities that seek to evade the normal pay-to-play rules through indirect, earmarked contributions to covered officials via intermediary groups.

As a result of these restrictions, a wide range of “business entities” and affiliated individuals must weigh whether New Jersey political engagement is worth the potential cost of losing business opportunities with state, county and municipal governments. Potential affected parties include corporations and their officers, partnerships and their partners, LLPs and their partners, professional corporations and their shareholders or officers, LLCs and their members, sole proprietorships and their proprietors, and other organizations and their principals/officers/partners. Directly or indirectly controlled subsidiaries of such business entities, PACs and SSFs directly or indirectly controlled by such business entities, and the spouses and dependent children of affiliated individuals also face a similar dilemma.

Add to this mix the hodgepodge of unique county and municipal pay-to-play provisions layered on top of the statewide rules, and New Jersey political engagement becomes a very risky proposition for potential or existing government contractors, investment advisers, municipal securities professionals, swap dealers, and others who do a great deal of business with government. As such, before our readers dive headlong into political engagement in New Jersey this cycle, it is imperative that they seek out experienced political law counsel and stay tuned for our latest updates from the Garden State.

And for those sticking to donut donations this year, be sure to keep your in-kind contribution of Krispy Kremes to de minimis levels and pay-to-play compliant.

Holiday "Gifts" from the Nation's Capitol

Benjamin P. Keane — Thu, 13 Dec 2012 09:33:27 -0500

A Contrasting Pair of Pay-to-Play Reprieves Emerge in the District

By Ben Keane and Stefan Passantino

Just in time for the holiday season, an unexpected present from the U.S. Commodity Futures Trading Commission (CFTC) has found its way under the tree of a group that was most likely expecting to receive coal in its pay-to-play stocking. “Swap dealers”, the target of increased pay-to-play scrutiny from the CFTC over the past year, recently received the gift of thoughtful pay-to-play enforcement restraint from the Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO). Meanwhile, a similar enforcement reprieve has also been given by the D.C. Council to the city’s municipal government contractors, a popular target among pay-to-play reform groups – although perhaps not for the same reason. The gifts brought to the manger might be the same, but the wisdom of the bearers … not so much.

The CFTC was the first to show its holiday spirit in the form of a no-action letter addressing the pay-to-play rules applicable to swap dealers who conduct business with certain “governmental special entities”. The CFTC pay-to-play rules in Commission Regulation 23.451, which this blog previously covered in detail, restrict a swap dealer from engaging in certain activities with a “governmental special entity” if the swap dealer (or a covered associate of the swap dealer) made or solicited contributions to an official of that governmental special entity during the two preceding years. Such rules were meant to be in regulatory harmony with similar pay-to-play provisions promulgated by the Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB). The DSIO, however, found them to be unnecessarily broader than their SEC and MSRB counterparts, particularly as they applied to political contributions associated with officials of federal or other non-state or non-local government agencies or instrumentalities.

As such, the DSIO issued its November no-action letter to provide swap dealers and their covered associates with relief from having to unnecessarily “expend significant resources to update their current policies and procedures to ensure compliance with Regulation 23.451’s prohibition” on contributions not otherwise covered by the SEC and/or MSRB rules. In its letter, the DSIO officially stated that “the Division will not recommend that the [CFTC] take an enforcement action against any [swap dealer] or covered associate of any [swap dealer] for failure to be fully compliant with Regulation 23.451” with respect to contributions not generally subject to restriction by the SEC and/or MSRB pay-to-play rules.

By implementing this limitation, the DSIO appears to be making an effort to provide swap dealers with clarity regarding the scope of the CFTC’s pay-to-play provisions and likewise to harmonize such regulatory requirements with the statutory directives of the Dodd-Frank Act and other federal law. In this sense, the CFTC reprieve is both well meaning and a sensible policy decision. The reprieve offered by the D.C. Council, however, appears to be more the product of bureaucracy and delay than sensibility.

As such, on the other end of the naughty/nice list, we have the D.C. Council’s foot dragging on pay-to-play reform. As detailed in the pages of this blog over the course of the past year, various elected officials in the District of Columbia have been “hard at work” pushing comprehensive ethics and pay-to-play reform proposals in front of the D.C. Council. Back in March, Councilman Tommy Wells introduced a piece of legislation containing a collection of pay-to-play reforms for the District that had been previously ignored by the Council in 2011. Similarly, in September of this year, Mayor Vincent Gray presented his own proposal, drafted by D.C. Attorney General Irvin Nathan, which would seriously restrict the ability of major Washington vendors to make political contributions to any District official or candidate involved in influencing the award of a contract or grant by the municipal government. Shortly thereafter, Councilman Jack Evans also introduced his own “pay-to-play” proposal that seeks to entirely remove the D.C. Council from the municipal contract-approval process.

Despite the sound and fury associated with the introduction of these reform efforts, the council has yet to produce any results. In fact, none of these proposals has moved an inch in the D.C. Council’s legislative process, leaving many reform advocates wondering whether the push toward campaign finance and pay-to-play reform in the District is more about politicians seeking to score public relations points and less about serious legislative changes. As the Editorial Board of The Washington Post put it earlier this week:

“[The fact] that the council didn’t have the time [to move forward on campaign finance and pay-to-play reform] – the excuse offered for inaction – speaks to a distressing lack of urgency in addressing this critical issue. Even more worrisome, it suggests a reluctance among those who benefit from the slack regulation of political dollars to fix a system that has helped perpetuate the District’s ‘pay-to-play’ culture.”

The excuse being referenced by the Post is a recent statement by D.C. Council Chairman Phil Mendelson indicating that no legislative progress will be made on campaign finance reform before the end of the Council’s yearly session. Similar comments have also been made by Councilwoman Muriel Bowser, the Chairwoman of the Government Operations Committee, who claimed that “most members [of the Council] … don’t want to rush” with regard to reform efforts. Can kicking at its best.

Long story short… don’t expect pay-to-play changes in the District any time soon. Nevertheless, should the D.C. Council decide to take action in the new year, Pay-to-Play Law Blog will be right here keeping our readers up to date.

Pay-to-Play Developments to Watch For in 2013: Is Federal Lobbyist Pay-to-Play on the Table?

Stefan Passantino — Mon, 19 Nov 2012 16:16:57 -0500

In a post I wrote for the Politics, Law and Policy Blog, I noted that change is coming to Washington in the form of an anticipated overhaul of federal election and tax laws. You can read the whole post here but federal lobbyists – and those who employ them – should take particular note of an initiative launched this week by an organization known as “United Republic”. This group represents the tip of a grass-roots spear pointed at Washington and no one can argue they have a political agenda. Any organization with as diverse a Board of Advisors as United Republic can boast (representing as they do Wall Street, the Occupy Movement, Jack Abramoff, former FEC Chairman Trevor Potter, academics, nonprofits and political operatives) defies partisan categorization.

A little-noticed element of United Republic’s recent proposal – termed the American Anti-Corruption Act – seeks to impose elements of municipal pay-to-pay prohibitions on the federal lobbying community and the Congress they woo. While UR’s proposal has a certain emotional charm, one must be mindful of the myriad unintended consequences and compliance challenges that accompany all feel-good populist proposals.

First, the specifics. To counter a perceived lack of transparency in federal lobbying, the AACA proposes federal legislation amending the Lobbying Disclosure Act to expand the definition of the term “federal lobbyist” to capture greater “consulting” activities by insiders (referred to derisively by United Republic as “historical advisors” – cheap shot United Republic). The proposal on the table is to accomplish this by defining “lobbying” as

(1) Two lobbying contacts or providing strategic advice to lobbying efforts or directing or supervising the provision of strategic advice to lobbying efforts, and (2) 12 hours or more spent [per quarter?] engaging in lobbying activities.

Once the universe of “lobbyists” has been expanded, United Republic proposes implementation of a pay-to-play prohibition with severe restrictions on the ability of those lobbyists to contribute to, or raise money for, Members of Congress. The proposal calls for a $500 cap on lobbyist contributions, a ban on lobbyist bundling, and a requirement that lawmakers recuse themselves from committee hearings if they have received a contribution from a lobbyist or a lobbyist client that has a particular interest in that hearing. Finally, the proposal seeks to extend the “government contractor” ban on contributions to “the lobbyists, high-level executives and government relations employees and PACs of federal government contractors.”

It is certainly conceivable that legislation could be drafted to accomplish these objectives which would survive first amendment scrutiny. Less clear is whether such legislation – however well meaning and however grounded in legitimate concerns – makes for good public policy when one considers the compliance burden such legislation would impose. The devil, as they say, is in the details. Does the definition of “high level executives” extend to spouses, siblings, pets, and anyone within two degrees of separation on LinkedIn? This blog is replete with examples of the challenges public interest “bans” impose on the regulated community when the rubber actually hits the road.

This will be the battlefield in the coming year. Keep your head on a swivel out there.

Pay-to-Play Legislating Gets Heated in the Garden State

Stefan Passantino — Fri, 26 Oct 2012 12:28:47 -0500

Another Episode of Jersey ~~Shore~~ City

And here you were feeling empty because MTV has taken “Jersey Shore” off the air . . .

Last night, the New Jersey City Council agreed unanimously to pass a revised pay-to-play ordinance restricting vendor contributions to Board of Education candidates. No real news there. The story, as they say, is in the story that got them there.

The ordinance only passed when Ward F Councilwoman Michele “Snookie” Massey rescinded her support of a competing proposal offered by Ward E Councilman Steve “The Situation” Fulop just two hours after casting the deciding vote in favor of The Situation’s proposed ordinance. According to accounts of the meeting, The Situation was not pleased and publicly accused Snookie of being a “rubber stamp” for the administration of Mayor Jerramiah “Pauly D” Healy, the Situation’s political rival.

“Do not insult me”, Snookie responded. “You are so rude.”

As is always the case, the hostilities were due to a misunderstanding caused when Snookie showed up late for the council meeting, just as The Situation’s proposal was being voted on and cast her ballot the wrong way.

Of course, the competing pay-to-play ordinances had gotten the Jersey City gang riled up only two weeks before when their discussion caused The Situation to get into a heated shouting match with Corporation Counsel Bill “Vinny” Matsikoudis.

It seems Vinny publicly accused The Situation of protecting his chief contributor who benefitted from the Board of Education. The Situation objected, noting that the contributor in question had contributed $1,000 to Pauly D’s campaign and accused Vinny of being “soft” on the city’s pay-to-play ordinance when it was originally proposed in 2008. Those were apparently fighting words.

“That’s a lie,” Vinny retorted, causing Ward D Councilman Bill “Ronnie” Gaughan to chide the boys to show “a little respect for the city council here,” or otherwise “take your petty nonsense outside.”

The cause of the friction among the Jersey City gang? It appears that The Situation’s proposed revision to the pay-to-play ordinance extended beyond Pauly D’s proposal to additionally prohibit vendor contributions to state Senate and Assembly candidates. Snookie and Vinny expressed strong concerns that Pauly D’s proposal would have been neither constitutional nor enforceable.

In this regard, Snookie and Vinny’s constitutional analysis appears sound.

D.C. Pay-to-Play Updates - Examining the Legislative Language of the Mayor's Proposed Pay-to-Play Rules and A New Proposal From D.C. Councilman Jack Evans

Benjamin P. Keane — Fri, 12 Oct 2012 13:35:57 -0500

Right before the Labor Day holiday weekend, Pay-to-Play Law Blog offered its readers a quick update on some of the latest pay-to-play regulatory happenings along the Potomac. In particular, we previewed the strict pay-to-play proposal being championed by Washington, D.C. Mayor Vincent Gray and Attorney General Irving Nathan, and promised a follow-up post in the wake of a formal legislative submission to the D.C. Council. Well… that time is upon us. And for all of our readers who bet that Gray and Nathan would offer up a bill that matched their rhetoric, it’s time to collect.

Submitted to the Council at the end of September, Gray and Nathan’s draft bill memorialized their previous verbal proposals in a written form that, if passed, would make the District’s pay-to-play regulatory scheme one of the strictest in the nation. The key provision in the draft legislation is designed to severely curb political donations from city vendors and prospective vendors who hold or seek municipal contracts valued at $250,000 or more. The proposed legislative language appears to accomplish that goal by attacking pay-to-play politics from both the government and contractor side of the equation.

First and foremost, the bill prohibits the D.C. government, its purchasing agents or agencies, and its independent authorities from entering into any agreement or otherwise contracting to procure goods, services or equipment from or sell property to any “covered contractor” if such contractor seeks or holds grants with the District with a cumulative value of $250,000 or more and has solicited or made any contribution or expenditure to a “prohibited recipient” within the prescribed time period. Simultaneously, from the contractor perspective, the legislation also prohibits any prospective or current “covered contractor” seeking or holding District grants worth $250,000 or more from soliciting or making any contribution or expenditure to a “prohibited recipient” within the same prescribed time period. Under either prohibition, the prescribed time period encompasses at least the bid/proposal solicitation and determination window, and for successful contractors, stretches for one year following the final payment date on the contract or grant at issue.

For the purposes of these legislative restrictions, the term “covered contractor” is defined to refer to any individual or sole proprietor, business, corporation, firm, partnership or association seeking or holding a contract to provide goods or services to the D.C. government, or seeking or holding a grant from the D.C. government. Meanwhile, the term “prohibited recipient” refers to a wide range of individuals and entities, including the following: any elected District official who is or could be involved in influencing the award of a government contract or grant; any candidate for elected District office who is or could be involved in influencing the award of a government contract or grant; any political committee affiliated with such officials or candidates; any constituent-service program or fund controlled by such officials or candidates; any political party; or any entity or organization controlled or owned by an official, candidate, or their immediate family.

The bill’s ban on contributions and expenditures by covered contractors also stretches to cover any “related party” of the contractor, including associated trusts, LLCs, general partners of LLCs, and political committees. If the contractor is a corporation, the ban also applies to the officers and directors of the corporation, or any principal who has a controlling interest in the corporation. The terms of the legislation even go so far as to limit contributions and expenditures to prohibited recipients by the immediate family members of covered contractors to $300 per election per person.

In sum, Gray and Nathan’s bill seeks to institute a comprehensive, but not quite universal, ban on political contributions and expenditures by major District contractors and prospective contractors, their officers, directors and principals, and any other “related parties” affiliated with such contractors or prospective contractors. In the process, the legislation also sets up a penalty structure whereby offending parties are subject to a panoply of punishments, including sizeable civil penalties, termination of existing contracts or grants, temporary debarment from District contracting (for a period of up to four years), and even criminal prosecution (in certain settings).

The language of the present bill is certain to change as it makes its way through the D.C. Council this fall, but it would be naïve to think that some components of its pay-to-play restrictions will not survive to become law. This is particularly the case in light of the bill’s early endorsement by several Democrat political organizations within the District, including the Ward 4 Democrats. Stay tuned to Pay-to-Play Law Blog for continuing coverage…

Proposal to Remove the D.C. Council’s Right of Review Over Large City Contracts

In the wake of the legislative submission by Mayor Gray and Attorney General Nathan, we have also seen other D.C. officials scrambling to hop on board the pay-to-play reform train. One of the officials leading the charge down the Union Station platform has been Councilman Jack Evans, who recently announced a legislative proposal that would revoke the District Council’s “right of review” with regard to city contracts worth over $1 million.

From Evans’ perspective, the best way to remove the D.C. Council’s incentive to engage in pay-to-play politics is to remove it entirely from the contract-approval process. Under D.C.’s current procurement procedures, both the executive and the legislative branches of District government are tasked with reviewing and approving contracts and grants. This system was initially established in the 1990s as a reaction to increasing mistrust concerning the executive branch’s handling of the procurement review process. Evans’ proposed bill, however, would effectively turn back the clock on contract review in the District and give the Mayor’s office much more sway over grant approval or rejection.

According to Evans, the dual contract review system is “supposed to serve as a check and a balance on the [M]ayor”, but instead functions as an invitation to either blind rubber-stamping or pay-to-play activities on the part of the District Council. From his point of view, the Council typically engages in the procurement process for political purposes and rarely meddles in contracts or grants because of the relative merits of the awards.

That very well may be the case, but Pay-to-Play Law Blog is not at all convinced that Evans’ proposal fully tackles pay-to-play activities in the District. In fact, in the absence of any other regulatory changes, the proposal might well be seen as a larger opportunity for pay-to-play conduct on the part of the Mayor and those in the executive branch. Not that Evans would participate in such activities if he is successful in his future mayoral run, but his proposal certainly wouldn’t decrease the temptation to play politics with District contracts among future mayors.

It remains to be seen what the ultimate outcome of Evans’ proposal will be, but it is safe to say that Mayor Gray is unlikely to turn down an opportunity to secure greater authority over the District procurement process. Commentators and other members of the D.C. Council, however, have not been so quick to offer support to Evans’s legislative idea. We’ll see how things proceed in the coming weeks and be sure to keep our readers posted as D.C. continues to reshape its campaign finance and pay-to-play regulatory structures.

The SEC is Now OFFICIALLY Serious About Pay-to-Play Enforcement: "Money Talks, Perps Walk"

Stefan Passantino — Fri, 28 Sep 2012 08:59:30 -0500

Just a few weeks ago, we posted an entry which took note of a recently-issued Securities and Exchange Commission (SEC) “Risk Alert” concerning industry compliance with with MSRB Rule G-37. That entry advised the regulated community to treat the Alert as a signal from the Commission that it was dissatisfied with the industry’s continued failures to comply with federal pay-to-play laws and closed with the following warning:

The wise among us would do well to heed this warning to straighten up and get formal compliance protocols in place along the lines of those singled out by the Commission for praise. Punishment is coming and this is our “don’t say we didn’t warn you” moment.

(Alas, it would now appear that I have accomplished the highly complex, and dangerous, “Narcissism Triple-Double Combination” by quoting myself twice, along with a self-reference to my own blog entry using the plural “we” in the context of setting up an “See, I was right” closing. Do NOT try this at home. It is very difficult and reveals numerous, significant flaws of character.)

Yesterday, the SEC revealed just how serious it was in announcing both charges and an agreement by Goldman Sachs to pay over $14 million in fines in a case that reveals the importance of formal compliance protocols and training for the regulated industry. The facts of the case, themselves, are noteworthy: Goldman Sachs banker Neil Morrison allegedly (Morrison is still under investigation and has not admitted violation – hence the need for employment of the ubiquitous “allegedly”) made numerous contributions to Massachusetts Treasurer Tim Cahill’s campaign for Governor. As we all know, MSRB Rule 37 thus debarred Goldman from engaging in Massachusetts municipal underwriting for a period of two years and further imposed significant disclosure obligations on the bank, all of which were unwittingly violated when the bank engaged in another 30 prohibited underwritings with Massachusetts underwriters after Morrison’s activities.

Several significant lessons must be learned from this case.

First, what makes this case so noteworthy, and in a subtle way, is that the Commission chose to impose such a significant penalty upon an entity that had trained Morrison on Rule G-37, discovered, and then self-reported the violation on the ground that Goldman had failed to implement proper oversight procedures. In a statement, Goldman said it "detected Morrison's activities, promptly alerted regulators, terminated his employment, and fully cooperated with the investigations." Morrison was purportedly "discharged" because of "allegations involving outside activity without preapproval." Goldman’s coffers are $14 million lighter today nonetheless. As noted by the Commission’s triumphant press release:

The [SEC’s order against Goldman Sachs] found that Goldman Sachs did not disclose any of the contributions on MSRB Forms G-37, and did not make or keep records of the contributions in violation of MSRB Rules G-37(e), G-8 and G-9. The order found that Goldman Sachs did not take steps to ensure that the attributed contributions or campaign work or the conflicts of interest raised by them were disclosed in the bond offering documents, in violation of MSRB Rule G-17, which requires broker-dealers to deal fairly and not engage in any deceptive, dishonest, or unfair practice. The order found that Goldman Sachs failed to effectively supervise Morrison in violation of MSRB Rule G-27.

Second, the “contributions” triggering application of Rule 37 were not simply traditional contributions of money. Rather, the offending contributions were “in-kind” contributions of services of value to the campaign by Morrison “that were attributable to Goldman Sachs” such as the drafting of speeches, media services, and other administrative services to the campaign. That such “volunteer” services rendered by an employee to a campaign could result in an eight-figure fine to one’s employer is not intuitive to all employees. This fact underscores the absolute imperative that any underwriter subject to Rule 37 cannot simply implement the oversight protocols called for by the Commission. Direct training of all covered personnel as to the nuances of the law is mandatory. Here, it was the mere use of bank resources in service of the campaign that resulted in the largest ever penalty imposed by the Commission for a pay-to-play violation:

“The pay-to-play rules are clear: municipal finance professionals that use their firm’s resources to campaign on behalf of political candidates compromise themselves and the firms that employ them,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

The time has come to take the Commission and Rule G-37 seriously. Let’s all wipe the sweat off our collective brows, say our obligatory “that could have been my company,” and get about the work of ensuring that our compliance procedures are in place and our folks are trained.

SEC issues a Pay-to-Play "Risk Alert"

Stefan Passantino — Tue, 04 Sep 2012 16:43:44 -0500

Ever heard a parent say to a child “and this time I mean it”?

Last Friday, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations let the municipal securities underwriting community know that it has had enough with not being listened to and is “getting ready to pull this car over right now if you don’t straighten up in the back seat”.

This warning, in the form of a “Risk Alert” issued to brokers, dealers and municipal securities dealers, advises that the Commission’s examiners have observed continued failures by the regulated community to comply with MSRB Rule G-37. Specifically, the SEC expressed concern that its investigators repeatedly observe failures to comply with Rule G-37 in four main areas

compliance with a ban on doing business with an issuer within two years of a political contribution, possible record-keeping violations, failure to file accurate and complete political contribution information with regulators, and inadequate supervision.

On the other hand, the SEC also ensured that its Risk Alert served to praise those among us who have been eating our vegetables by pointing out that it has observed some institutions engaging in productive compliance practices. The productive practices singled out include the initiation of training programs for municipal finance professionals, self-certification of compliance with political contribution restrictions, internal auditing against unreported political contributions, and certain “preclearance” practices with respect to political contributions where such practices are permitted by law.

As this blog has reported years ago, this is not the first such warning the SEC has issued with respect to federal pay-to-play compliance. One must assume that this most recent warning, however, means that the SEC has . . . had . . . it . . . up . . . to . . .here with repeated failures among the municipal securities underwriting community to establish basic internal pay-to-play compliance protocols and is getting ready to act.

Local Pay-to-Play Provision To Be Put Before the Voters In South Jersey, While DC Mayor Vincent Gray Makes A Push for New Pay-to-Play Rules in the Nation's Capitol

Benjamin P. Keane — Fri, 31 Aug 2012 10:36:16 -0500

With Labor Day weekend at hand and the Republican and Democratic National Conventions upon us, much of the American electorate is finally beginning to tune back into politics and prepare themselves for what will certainly be a very interesting close to the 2012 campaign season. News regarding the race for The White House will certainly dominate the media over the coming months, and rightfully so, but Pay-to-Play Law Blog is here to offer our readers, particularly those residing in swing states, a brief respite from the 24-7 presidential election coverage. We know our readers love Super PAC advertisements, political campaign internet pop-ups, and robo-calls as much as (if not more than) anyone, but we also know that they like to stay up to date on the important state and local pay-to-play news that might otherwise be slipping through the cracks between now and November 6^th. With that in mind, we offer up a few recent items of interest from the Garden State and D.C.

New Jersey

In New Jersey, where individuals and businesses alike must already deal with restrictive pay-to-play provisions at the state level, we are continuing to see similar (and often more serious) restrictions contemplated and put in place at the municipal level. For example, consider recent developments in Gloucester Township, an exurb of Philadelphia, which has had an extraordinarily busy summer when it comes to “pay-to-play” developments.

Several months ago, a conservative transparency group known as South Jersey Citizens made an effort to launch citizen-crafted pay-to-play provisions through the township’s petition process, but were unable to gather the requisite signatures to advance the proposed legislation to the Gloucester Council and, if necessary, the November ballot. At nearly the same time, Gloucester Councilman Dan Hutchinson presented his own set of pay-to-play rules specifically targeting Super PAC donation disclosure, which were unanimously approved by the Council on first reading, but subsequently withdrawn before a final vote. Following the withdrawal of these proposed rules, a group of Democratic Gloucester residents took up the pay-to-play mantle by repackaging the Councilman’s draft ordinance and gathering the requisite petition signatures for its public submission to the Council. As a result of their work, the pay-to-play proposal came before the Council members for tacit approval on Monday and will appear on the November general election ballot for the voters of Gloucester Township to consider.

The content of Gloucester’s prospective pay-to-play ordinance, O-12-17, places a combination of contribution restrictions and disclosure requirements on prospective township vendors. Specifically, if passed, the proposed provision would prohibit any business entity from entering into any agreement or contract with Gloucester Township or any of its departments, instrumentalities, purchasing agents or authorities for a one year period following the solicitation or making of a contribution above the “monetary threshold” to any Gloucester-specific candidate, candidate committee, joint candidate committee, political party committee, or to any PAC or Super PAC that “regularly engages in the support of Gloucester Township municipal elections…” The monetary threshold for this one-year, cooling-off period is set at the following levels: $300 per calendar year for mayoral or governing body contributions; $500 per calendar year for joint candidate committees supporting mayoral or governing body candidates; $300 per calendar year to municipal political committees or municipal political party committees; $500 per calendar year to any PAC or Super PAC; and $2,500 in aggregate in to all Gloucester candidates, committees, joint committees, political committees and political party committees. The potential ordinance would also require all business entities entering into agreements or contracts with the township to file a certification statement disclosing all their contributions to Super PACs, regardless of whether or not those Super PACs actively engage in Gloucester elections.

All-in-all, the proposed ordinance appears to represent an honest attempt by the township to reign in pay-to-play corruption and encourage transparency in political giving. Like many of the municipal pay-to-play provisions in the Garden State, however, it takes a fairly heavy-handed approach and, if passed, may force many potential Gloucester vendors to either cool their political speech at the local level or avoid municipal contract work altogether. Regardless of this blog’s commentary, however, the residents of Gloucester Township will weigh in with their thoughts on the proposed ordinance on November 6^th.

District of Columbia

Meanwhile, a few hours down I-95, embattled Washington, D.C. Mayor Vincent Gray made news this week by proposing a series of campaign finance disclosure requirements and donation restrictions that he claims will curb “pay-to-play” activities in D.C., and minimize the influence of lobbyists and contractors on District politics. While at least partially a public relations move designed to draw attention away from the continuing federal investigation into Gray’s fundraising and campaign spending activities, the proposals – if passed by the D.C. Council this fall – would leave Washington, D.C. with one of the strictest campaign finance structures in the country. Although not yet memorialized in legislative language, let’s nevertheless take a quick look at some of the rough proposals set forth by the Mayor and D.C. Attorney General Irvin Nathan this past Tuesday.

From a pure pay-to-play perspective, Gray and Nathan suggested putting in place legislative provisions that curb political donations from any city vendor who holds a municipal contract valued at $250,000 or more. Specific details regarding how significant this “curbing” would be have yet to be put forth, but Gray and Nathan pledged to have more definite plans for the D.C. Council’s consideration this fall. Stay tuned for updates on this front…

In addition to this proposed contribution restriction for D.C. government vendors, Gray and Nathan also called for additional legislation that would prohibit registered District lobbyists from bundling campaign contributions, ban corporations from donating to District candidates through linked or affiliated entities, and require candidates that receive campaign donations within 30 days of an election to disclose such contributions within 24 hours of receipt. They also floated two other proposals that, if passed, could have a profound impact on political participation in D.C. Specifically, the Mayor and Attorney General announced that they will be pursuing campaign finance rules that severely restrict political contributions from LLCs and corporations, and also seeking legislation that will require candidate-like donor disclosure for other types of political organizations in the District.

Just as with the pay-to-play proposal discussed above, the details of these legislative prerogatives are hazy at best. Gray and Nathan will be working in the coming weeks to put meat on the bone for D.C. Council consideration, but the final product (if any) that emerges from that body will almost certainly tackle the pertinent policy issues in a different manner than proposed by the Mayor and Attorney General. With that in mind, Pay-to-Play Law Blog will be here to monitor the process and keep our readers up-to-date on all the fun.

Honolulu Update: Cayetano in a Run-Off and Pay-to-Play Still an Issue

Stefan Passantino — Mon, 13 Aug 2012 09:06:17 -0500

Updating our last post, former HI Governor Ben Cayetano advanced to a run-off election in the race for Honolulu mayor over the weekend. His opponents, particularly the Hawaii Carpenters Union (operating under the nom de guerre Pacific Resource Partnership), continue to use then-Governor Cayetano’s veto of proposed pay-to-play legislation as a wedge issue.

Recently, the Pacific Resource Partnership has been circulating this petition against pay-to-play practices in general – and Cayetano in particular – to its followers.

All of this has caused the otherwise mild-mannered Cayetano to question the motivations of his accusers with this hard-hitting radio spot:

Stay tuned. The waters are not peaceful in “Mar Pacifico” and Election Day (November 6) is a long way off.

Pay-to-Play Legislation Takes Center Stage in Honolulu Mayoral Race

Stefan Passantino — Thu, 09 Aug 2012 12:40:59 -0500

The phenomena of outside groups attacking a political opponent with thinly-veiled allegations that he is corrupt is certainly nothing new. Sliming one’s opponent over the airways with allegations that she awarded government contracts to unworthy major donors draws a collective yawn from our now-jaded electorate. What we are seeing in the Honolulu mayoral race right now, however, takes this phenomenon to a new level: mayoral candidate Ben Cayetano is currently under heavy fire for his position on pay-to-play legislation he vetoed as Governor back in 2002.

To hear the story told on Honolulu’s airwaves, the attacks sound familiar and can be heard here.

The reality is more subtle (shockingly) than as portrayed in this ad and highlights an emerging political risk for legislators and chief executives as they seek to strike the proper balance between public corruption and harmful over-regulation of the public procurement process. An angry public wants absolute transparency and prohibitions against government contractor contributions. Responsible legislators on the other hand, also see the need to ensure that the law-abiding 99% operates within an environment free of legislation that does not impose unworkable restrictions or unintended consequences.

Honolulu’s race highlights the risks involved. In recent political advertising against Cayetano, the Pacific Resource Partnership, cited “insiders” who “revealed” that Governor Cayetano had been squishy soft on curbing pay-to-play while in office. As reported by the Hawaii Reporter, these insiders alleged (in part):

“Pay-to-play is real and has been part of Hawaii's political culture for decades. I know because I am a retired engineer who managed the Hawaii businesses of two different engineering companies. Few bothered to challenge the awarding of contracts to those who "paid to play" because speaking out would guarantee no future work on government projects.

“In 2002, the Legislature passed a bill to ban direct political contributions from government contractors and corporations to county and state elected officials who issue contracts. It was vetoed [by then-Gov. Ben Cayetano], even though supporters said it was the most significant campaign finance reform bill in decades. ... The ban would have been a good first step, but the veto stopped any chance to weaken the pay-to-play culture. …

As long as elected officials permit their campaign contributors to exercise influence, the "pay-to-play" system will continue. I hope the people will finally wake up and refuse to elect such officials. We don't need "pay-to-play" in Hawaii.”

Strong stuff, and a powerful populist message that has gained traction in campaigns and state legislatures across the country. In reality, however, if one gets in our “way-back” machine to 2002, then-Governor Cayetano actually announced he was vetoing the legislation in question because the State’s legislators had exempted themselves from its provisions banning contributions from government contractors! (As a side note, the Pacific Resource Partnership behind that negative advertising may have some “essplaining” to do of its own before the Hawaii Campaign Spending Commission).

Unfortunately, the toll of such rough and tumble attacks are more than theoretical. Unworkable legislation can make its way onto the books due to misplaced public pressure. The toll can also be personal. This week, mayoral candidate Ben Cayetano was admitted to Queen’s Medical Center in Honolulu with a bleeding ulcer which his wife attributed, in part, to the wave of negative advertising against him.

We wish you a speedy recovery Governor Cayetano and are submitting a travel request for a visit today.

Citizen's United Update: Supreme Court Confirms Montana Subject to US Constitution

Stefan Passantino — Mon, 25 Jun 2012 14:47:18 -0500

Back in April, this blog boldly predicted that the United States Supreme Court would exert little effort in dismissing the State of Montana’s effort to convince us that the Court’s holding in Citizens United v. FEC, and the First Amendment analysis that supported it, did not apply in Big Sky Country. Journalistic integrity, and the fact that my prediction was correct, impels me to revisit that prediction now that the Court has ruled.

In a ruling issued today in the case American Tradition Partnership v. Bullock, the Supreme Court affirmed the principle that its Constitutional analysis must be applied throughout the country and is binding even upon those state courts which may disagree with that analysis:

The question presented in this case is whether the holding of Citizens United applies to the Montana state law. There can be no serious doubt that it does. See U. S. Const., Art. VI, cl. 2. Montana’s arguments in support of the judgment below either were already rejected in Citizens United, or fail to meaningfully distinguish that case.

Those paytoplaylawblog readers who bet the twenty-five word “over” and the one page “under” may now make their way to the cashier’s window to collect their winnings.

SEC Gives Registered Investment Advisers More Time to Bring Themselves Into Compliance with the "Pay-to-Play" Ban on Third-Party Solicitation

Benjamin P. Keane — Tue, 19 Jun 2012 09:34:19 -0500

For more than two years, this blog has been covering the Securities and Exchange Commission’s foray into the world of pay-to-play regulation and the Commission’s attempt to implement federal pay-to-play restrictions for registered investment advisers. The latest chapter in this long and winding saga occurred earlier this month, when the SEC formally extended the compliance date for the third-party solicitation ban imposed by the recently-crafted amendments to Rule 206(4)-5 under the Investment Advisers Act of 1940. As a result, the formal compliance deadline, which had been set for June 13, 2012, has now been reset to a indeterminate date nine months following the compliance date set forth in the Commission’s final rules for the registration of municipal advisors, which have been proposed but not yet adopted. To put it simply – the SEC has chosen to “kick the can down the road” for a second time on pay-to-play solicitation compliance.

By way of a quick refresher, the third-party solicitation ban, which officially went into effect on September 13, 2010, effectively prohibits SEC-registered investment advisers (and certain executives and employees of such advisers) from paying any third party for the solicitation of advisory business from any governmental entity unless the solicitor is an SEC-registered investment adviser, broker-dealer or municipal advisor. In the case of broker-dealers and municipal advisors, the ban also provides that any such solicitors must be subject to the pay-to-play restrictions that are purportedly due to be adopted in the future by either the Financial Industry Regulatory Authority (FINRA) or the Municipal Securities Rulemaking Board (MRSB).

At the time of Rule 206(4)-5’s initial adoption by the SEC, the third-party solicitation ban’s compliance date was set for September 13, 2011, thus providing registrants with a so-called transition period in which to come into conformity with the rule. This transition period was intended to provide investment advisers and third-party solicitors with sufficient time to revise their compliance policies and procedures so as to prevent future regulatory violations. Likewise, the period was designed to provide an opportunity for FINRA and the MRSB to adopt analogous pay-to-play rules and for the Commission to assess how such rules would dovetail with Rule 206(4)-5’s provisions.

Due to delays in the adoption of a FINRA pay-to-play regulation and complications in the MSRB rulemaking process caused by various provisions of the Dodd-Frank Act, the SEC made the decision last summer to move the official third-party solicitation ban compliance deadline from September 13, 2011 to June 13, 2012. The additional nine months, the Commission posited, would provide registrants with sufficient time for an orderly transition under the rules.

Fast forward to present day and the same justification is again being put forth by the SEC – this time to explain this month’s indeterminate extension of the compliance deadline. According to the SEC’s explanation in Release No. IA-3418, an orderly regulatory transition under the solicitation ban can only be accomplished through the extension of the present transition period beyond the Commission’s finalization of the new Dodd-Frank-imposed registration requirements for municipal advisor firms and subsequent to the MSRB’s re-introduction and implementation of its draft pay-to-play proposals.

What are we to make of this second round of “can kicking” on the part of the SEC? From a practical perspective, registered investment advisers and third-party solicitors now have additional time to bring their corporate compliance policies and procedures up to speed with SEC standards. The benefit of this additional time, however, is partially undone by the fact that the present compliance standards are not yet set and will not be set until the pending mishmash of regulations makes its way out of the SEC, FINRA and MSRB sausage grinders.

From a policy and political perspective, the SEC’s action is equally as ambiguous. Do we take the SEC at its word and classify both compliance extensions as necessary steps to ease the transition of businesses into an unchartered regulatory environment? Or do we simply characterize the extensions as additional examples of the federal government “kicking the can down the road” when it comes to implementing difficult actions or decisions?

Our most cynical readers likely view it as the later – patchwork political punting on the part of a governmental agency in a highly-charged election year. By contrast, our less-jaded readers may attach a more innocent explanation to the delays in implementation – after all, the SEC is forced to operate in conjunction with other entities in this instance. Whatever your particular take on the Commission’s action, however, Pay-to-Play Law Blog will be here to keep you updated and to help potential registrants understand their full compliance obligations moving forward.

CFTC Pay-to-Play Rules: Does this Mean I have to Dissolve my PAC?

Stefan Passantino — Fri, 08 Jun 2012 15:26:43 -0500

The Commodities Futures Trading Commission (CFTC) has joined its social network of federal regulators (which includes MSRB and the SEC) in imposing wide-ranging and punitive pay-to-play restrictions on the financial world. The CFTC’s new rule, 23.451, imposes contribution prohibitions on “swap dealers” (discussed in nauseating technical detail here) and highlights the challenges for the regulated community in seeking to comply with the details of broad-brush government restrictions.

In a nutshell, CFTC Rule 23.451 prohibits a swap dealer from entering into a swap (or trading strategy involving a swap) with a governmental special entity for two years if the institution, one of its defined “covered associates”, or a Political Action Committee “controlled by the swap dealer” has made a contribution in excess of certain threshold amounts to an “official” of that governmental special entity in the preceding two years.

If you are a “swap dealer”, or think you might be one (and a number of “main street” banks are wrestling with that possibility now), this is a big deal. A single campaign contribution in excess of $150, if made by the wrong employee to the wrong candidate, will have the effect of debarring your entire financial institution from the derivative swap market for two full years.

“Sorry about that boss. Does this mean I can’t come to the Goldman Sachs Christmas Party this year?”

With draconian penalties like this, one would assume that the CFTC would go out of its way to define the specific “executive officers” the rule applies to or would provide some guidance whether an institution “controls” its PAC simply by covering its administrative expenses. One would be wrong. The regulated industry is on its own with the Sword of Damocles hanging perpetually over its head.

For now, pending further guidance from the CFTC between now and the October 15, 2012 effective date, the best one can do will be to look to guidance the SEC and MSRB provide with respect to their versions of pay-to-play regulation with respect to issues such as the definition of an “executive officer”, the nature of corporate compliance programs required, or the question of who “controls” of the corporate PAC.

The law of good intentions collides with the law of unintended consequences yet again. I’ll see some of you at the Christmas Party.