Much has already been written about the impact of the US Supreme Court’s ruling in McCutcheon v. FEC this week; some of it actually accurate. On its face, the ruling in that case has to do with aggregate contribution limits and has nothing to do with state pay-to-play laws. (If you want to read one of the fifty law firm client alerts that breathlessly delved into the nuances of the case on the very day the opinion issued, why not read ours? It’s a good one.). The reasoning employed by the Supreme Court in reaching the holding it did in McCutcheon, however, would appear to threaten the constitutional foundation upon which many state pay-to-play laws are based.
In McCutcheon, the US Supreme Court weighed whether federal laws prohibiting individuals from giving contributions in excess of aggregate limits over a two-year period ($123,200 of which no more than $48,600 could go to candidates and no more than $74,600 could go to PACs and parties) could withstand constitutional analysis. (We should all have such problems). In ruling as it did, the Court made clear that First Amendment freedoms of speech will invalidate virtually any effort to restrict political spending other than direct contribution limits which are designed to prevent direct quid pro quo corruption (fancy legal language for “bribes”). If the law can’t be shown to be narrowly drawn solely to prevent corruption, First Amendment freedoms of speech will trump even laudable goals such as circumvention or public distaste for a system whereby wealthy insiders enjoy undue influence. This is why the Court did not strike down (this time) contribution limits, but did find that limits on contributions to an unlimited number of candidates are unconstitutional.
This leads us to an analysis of the potential impact the Court’s ruling might have on the myriad of state and federal pay-to-play laws on the books. As we have pointed out since our inaugural blog post, pay-to-play laws are not designed to prohibit pure corruption; state bribery laws are already on the books for that purpose. Rather, pay-to-play laws typically ban all (otherwise legal) contractor contributions to procurement officials expressly because proving direct quid pro quo corruption (bribery) is so difficult. Statistically, legislators, regulators, and the public can see a correlation between vendor political contributions and success in winning contracts but can’t prove corruption (unless they are fortunate to live in Chicago where politicians are willing to be audio taped doing such things). Because such a correlation is unseemly, but direct corruption difficult to prove, pay-to-play laws are born whereby actual corruption need not be proven but its appearance generally is prevented through a blanket restriction on contributions (speech?) imposed upon an entire suspect class.
Framed that way, there are a number of pay-to-play laws, including those put forth by the Securities and Exchange Commission, which might not sleep quite as soundly after McCutcheon. Colorado‘s pay to play provisions have already experienced the consequences to straying too far in restricting contractor contribution activity. Others might follow closely behind.
Yesterday a bipartisan coalition of lawyers representing tax-exempt 501(c)(4) social welfare organizations issued joint comments to the Internal Revenue Service (IRS) commending the IRS for attempting to bring additional clarity to political activities by tax-exempt organizations. The comments also highlight the key ways in which current proposed regulatory rulemaking falls short. Among the concerns raised by the bipartisan coalition, the lawyers recommended the following…
There is nothing like a snow day to focus the mind on compliance and there is nothing like public admonition and discipline of others to induce night-sweats on a cold day. Just this week, both the Connecticut Office of Government Accountability and the California Fair Political Practices Commission have used different vehicles to remind us all that pay-to-play compliance is not simply theoretical. The consequences for circumvention are very real.
As we predicted here…“Moorestown council will undo recent campaign finance reforms, but one council member doesn’t think the discussion should end there.”
See the full article here.
We have previously used our little corner of "The Cloud" to blog about the unintended consequences that often present themselves when local governments respond to (already illegal) bribery scandals with increased pay-to-play legislation. What can appear at first blush to be a thoughtful means of preventing undue influence and increasing transparency frequently becomes stymied in legal loopholes and legislation impossible both for the regulated community to comply with and for regulators to enforce.
By David Fine and Mason Smith
New Jersey engineering firm Birdsall Services Group realized the full consequences of violating state pay-to-play laws on August 30th after a state court judge ordered that the contractor pay $1M in criminal penalties, the maximum allowable by law.
Under the state’s pay-to-play law, which many agree requires an overhaul, business entities are prohibited from making reportable contributions (in excess of $300) to elected officials prior to the award of certain government contracts and during their pendency. See N.J.S.A. 19:44A-20.3 through 20.25. In a scheme designed to work around these restrictions, Birdsall bundled several non-reportable $300 contributions written by individual employees, sent them to elected officials as one contribution, and reimbursed the employees with bonuses. The scheme stretched over six years, during which Birdsall contributed over $1M to various campaigns and netted millions of dollars in revenue on public contracts subject to the restrictions – contracts for which Birdsall was technically ineligible under state law.
As frequent readers of this blog know well, California has always been considered a fairly restrictive jurisdiction when it comes to the regulation of pay-to-play politics. One large exception to that general rule, however, has been in the school bond campaign context, where financial institutions, attorneys and underwriters have traditionally been permitted to give sizable campaign contributions in support of potential bond initiatives that could benefit their bottom line.
Like a slow-moving train wreck, we simply cannot look away from the debacle stirred up by the sexual harassment allegations lodged against San Diego Mayor Bob Filner recently. Admittedly, those allegations rank pretty high on the "Public Official Being Gross" Scale; sufficiently high, in fact, to break John Oliver’s "Eww-O-Meter". That’s impressive in the modern political era when one considers the, uh, stiff competition Filner faces in the category. Here at the Pay-to-Play Law Blog, however, we are far too cerebral to focus on such prurient matters and are instead drooling salaciously at the brewing scandal currently hidden behind the icky one playing out before us everywhere.
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.
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.