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Pay to Play Law Blog

Articles, Resources, Insights on Pay to Play Regulations on the Federal and State Level

April Showers Bring… Another Round of Pay-to-Play Changes in the State of Maryland

Posted in Maryland

Spring may have sprung in the mid-Atlantic, but those contracting and doing business with the State of Maryland don’t feel like they’re receiving anything close to a flowery reception from the Maryland General Assembly this April. On the heels of a winter of discontent in the Old Line State, where those in the regulated community had to scramble to adjust to a new pay-to-play regime that involved unwieldy online filing obligations, modified contract valuation standards and contribution reporting requirements, and enhanced record retention and certification obligations, another new set of legislative changes has been adopted that will further alter the compliance playing field. You know what they say – when it rains it pours.

This new round of amendments to Maryland’s pay-to-play framework, contained in House Bill 769, was passed by the state legislature earlier this month and has been sent to new Governor Larry Hogan for his signature. If the bill is signed into law, as anticipated, Maryland state contractors will have until June 1, 2015 to “unlearn” some of what they just learned about Maryland’s comprehensive pay-to-play overhaul on January 1st of this year. Given that we’re currently less than four months into the new framework, at least the regulated community can say it hasn’t had time to get comfortable with the “suddenly-old” regime.

Under the changes proposed by House Bill 769, entities with more than $200,000 in total Maryland contracts as of the end of 2014 will be required to submit semi-annual pay-to-play contribution disclosure reports with the State Board of Elections starting in August of this year. This is the case even if such contractors receive no new government contracts from the state during 2015 – a change from the pay-to-play regime that went into effect on January 1, 2015, which exempted companies with no new 2015 contracts from having to file disclosures.

In addition to closing this potentially-unintended loophole in the recently-enacted pay-to-play regime, the legislative amendments in House Bill 769 also attempt to somewhat ease the existing reporting burden for disclosing contractors. Specifically, the new changes will excuse companies without reportable political contributions (by either the entity or its covered representatives) from having to openly disclose the minute details of all of their existing state contracts. Moving forward, contractors without such reportable contributions will need only indicate the specific government agencies with which they do business, but will no longer need to report the value, start date and termination date of all their state contracts. This will undoubtedly be seen as a small ray of sunshine for those in the reporting community.

Before those doing business with the State of Maryland go getting all giddy, however, they should also take note of how House Bill 679 will alter the traditional pay-to-play reporting schedule for state contractors. As noted above, the next semiannual disclosure filing for contractors will be due in August of this year. The filing deadline for that report, however, has been moved from the customary date of August 5th to a new date of August 31st. The August disclosure will be required to cover reportable contractor activities between February 1, 2015 and July 31, 2015.

Following the completion of that submission, filing parties will be required to submit another pay-to-play report by November 30, 2015 covering reportable activities between August 1st and October 31st. Subsequent to that November 30th filing, all government contractors will face a semi-annual filing schedule for 2016 and beyond. Such reports will be due on May 31st and November 30th of each year, and will cover reportable activities during the preceding six month periods.

Keeping the above amendments in mind, the good news for the regulated community is that these changes will be the only new legislative wrinkles in Maryland pay-to-play law for at least the next 8 months. The bad news is that regulators in Annapolis will have ample time between now and next January (when the General Assembly goes back into session) to weigh in on the changes and unleash their own brand of administrative storm clouds. No matter when the next storm hits, however, you can count on your friendly legal meteorologists here at Pay-to-Play Law Blog to keep you up to date

Pay-to-Play Law Blog Makes The Law Review!

Posted in First Amendment

It had to happen eventually.  It was inevitable.  Sooner or later, an intelligent, articulate legal scholar was bound to apply legitimate intellectual rigor and research to this blog’s musings.  That scholar is Allison C. Davis, J.D. candidate and graduate fellow in election law at William & Mary Law School, and her note, “Presupposing Corruption:  Access, Influence, and the Future of the Pay-to-Play Legal Framework, which been accepted for publication in the William & Mary Business Law Review, Vol. 7 (2016), is an excellent contribution to pay-to-play scholarship.

WMMs. Davis’ note takes on a theme, which this blog has attempted to tackle several times previously, to reach the conclusion “that the legal and constitutional framework for much of pay-to-play law as it currently stands rests on shaky ground.” Id., p. 2.  Specifically, Ms. Davis’ note undertakes a thorough analysis of pay-to-play and Supreme Court jurisprudence as articulated through cases such as McCutcheon v. FEC to conclude that the “status crime” represented by many pay-to-play laws is inconsistent with the Court’s thinking on First Amendment protections:

If courts choose to apply the same First Amendment analysis to pay-to-play laws as they do to campaign finance regulation, the compelling state interest behind the pay-to-play legal framework—that is, the presupposition of corruption—may well come into question in the near future.

Id., p. 40.  I couldn’t agree more.

This note, particularly footnote 42, is a very well-written, thoughtful and insightful read.  Soon enough, the opportunity will present itself to see whether the Supreme Court agrees.  Good job, Allison.

State Pay to Play Laws Have Real, Revenue Threatening, Consequences

Posted in Compliance, New Jersey




Like the nagging parent stressing the dangers of a hot stove, unappreciated Chief Compliance Officers and General Counsel everywhere have been on a p5-types-of-burns-and-how-to-treat-themperpetual mission to warn fellow employees of the dangers inherent in mixing contribution activity and state procurement without proper oversight.  Such is the lot of the under-appreciated “Cost Center” compliance personnel.  Like the tear-filled 8 year-old icing red fingers, many of the high flying boys and girls on the “Revenue Center” sales side of those same companies are not paying sufficient attention to pay-to-play compliance warnings until it is too late.

Our most recent example of this cautionary tale comes from Paterson, New Jersey, where the prominent law firm McManimon, Scotland & Baumann, LLC just learned that a mere $500 in contributions upended a 20 year relationship as bond counsel to the cityPaterson’s pay-to-play law debars any contractor from receiving contracts for a full year if ANY of its executives (or partners . . .  or their spouses . . .  or their children . . .  or their subcontractors, etc.) make contributions in excess of $300 to local officials.  Just in case the pain were not sufficient for the firm’s partners who didn’t participate in any way in the offending contribution, Paterson Business Administrator Nellie Pou made a point to emphasize that

the decision not to rehire the firm had nothing to do with the quality of the firm’s work. “They’ve always been first-rate,” she said. “We’ve had nothing but excellent relations with them.”

Edward McManimon did not respond to a phone message seeking his comment for this story.

It is important to note that the initial contract in question was simply to be an extension of a contract awarded two years ago and that the recipient of the offending contribution had recused himself from the vote to approve the extension.  None of this was sufficient to prevent small fingers from getting burned.

We have seen in the past (especially in New Jersey) that pay-to-play violations can result in significant criminal consequences as well as major fines.  Some, like the authors of this blog, have shouted warnings into the wind; largely to no avail.  Hits to bottom line revenues should be enough to get the C Suite to take pay-to-play compliance seriously.

Don’t let it be said that the purpose of your compliance program is only to serve as a warning to others.

Amicus Brief Highlights the Massive Reach and Unintended Consequences of SEC Rule 206(4)-5

Posted in Compliance, SEC

PL blog

By Stefan Passantino and Ben Keane

We have been following for some time the legal challenge brought by various political parties to the SEC’s pay-to-play Rule 206(4)-5.  That lawsuit, you will recall, challenges both the constitutionality and administrative jurisdiction of the SEC’s efforts to regulate campaign activity (“protected speech” by another name?) by investment advisors.  Litigation continues to press forward as the parties are set to square off again before the Court of Appeals on March 23. The latest briefing is here and our take on the appellate issues is set forth here in case you were getting popcorn and missed the action.

Now, the ongoing litigation has revealed a new plot line that this blog has written about several times: pay-to-play rules in general (and Rule 206(4)-5 specifically) have a really annoying way of converting well-intentioned policy aspirations into a morass of unintended compliance uncertainty and costs for the regulated community.  Simply stated, it is very easy to say, “Gee, it would be nice for my regulating agency to give the public confidence that government largesse isn’t handed out on the basis of who writes the biggest campaign checks.”  It is very, very hard for the appropriate regulating authority to write restrictions into law that don’t violate constitutional principles of free speech, become unconstitutionally overbroad, or otherwise create a compliance nightmare for the 99.98% of the private sector, who simply want to go about the process of doing business with the government without unknowingly finding themselves subjected to massive liability.

That tension has manifested in the thoughtful – and, quite frankly, scary – amicus brief filed by the Center for Competitive Politics on behalf of the Financial Services Institute.  In that brief, FSI notes that it is a network of independent financial advisors which are each independent broker-dealers operating entirely separately from each other as independent contractors.  Because some of these advisors are registered to provide services to pension funds and other government retirement plans, FSI member firms are subject to Rule 206(4)-5.  Makes sense, right?  Sure, until one contemplates the fact that 206(4)-5 as crafted treats all of these Mom-and-Pop advisers who happen to be performing as independent contractors under the same FSI logo are inter-related “covered associates” for pay-to-play purposes.  They are all responsible for each other’s campaign activity because the SEC chooses to treat “independent contractors” as “employees” for pay-to-play enforcement purposes (Black’s Law Dictionary having no jurisdiction over the Wisdom of the Sovereign).

Think about that.  Part-time FSI advisor Mabel in Topeka can make a political contribution that prevents Reggie in Trenton from being able to get paid under his investment advisory services contract for two years even though the two have never met (or, possibly, Reggie really pissed Mabel off with something he said at the FSI Christmas gathering in Orlando)!  What can FSI do other than what every rational, responsible, compliance-based organization would do?  It simply bans all contribution activity by all agents; regardless of the fact that the contributing agent has no intentions of ever doing business with the recipient politician.  (Amicus Brief, p. 6).

That can’t be the answer mandated by the Constitution.  It is, however, the logical response to the current morass of unintended compliance uncertainty suffered by the FSIs of the world.

FEC Increases Political Contribution Limits, Coordinated Party Expenditure Limits and the Lobbyist Bundling Disclosure Threshold

Posted in Articles

This week, the Federal Election Commission (“FEC”) published a formal notice in the Federal Register adjusting certain political contribution and expenditure limits and the lobbyist bundling disclosure threshold for inflation in accordance with the Consumer Price Index. In the individual contribution context, the Commission increased the amount a person may contribute to a candidate for federal office from $2,600 per election to $2,700 per election. As a result of this change, an individual may now contribute up to $5,400 per candidate during the 2015-2016 election cycle to any candidate participating in both a primary and general election. The FEC’s adjustment of the contribution limit is retroactive to November 5, 2014, so any 2016 primary contribution given late last year may be legally supplemented by the donor to match the new limits.

To read the full update from MLA’s Political Law team, please click here.

FINRA Quietly Proposes Pay-to-Play Type Rules for Its Broker-Dealer Members

Posted in SEC


By Ben Keane and Stefan Passantino

Late last week, the Financial Industry Regulatory Authority (FINRA) quietly posted a new regulatory notice proposing a series of pay-to-play type rules for its broker-dealer members that closely track the pay-to-play provisions set forth by the Securities and Exchange Commission (SEC) in Rule 206(4)-5. FINRA, the self-regulatory organization for broker-dealers, announced three specific rule proposals in its notice – Rule 2390, Rule 2271 and Rule 4580.

Proposed Rule 2390, which is clearly modeled on Rule 206(4)-5, would restrict FINRA’s member firms from engaging in distribution or solicitation activities on behalf of registered investment advisers that provide or seek to provide investment advisory services to government entities if “covered employees” of those advisors make a disqualifying political contribution. The proposed rule would not specifically ban or limit the amount of political contributions covered FINRA members or their covered associates could make to government officials, but would instead impose a two-year time out on engaging in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser when the FINRA member or its covered associates make a disqualifying contribution.

While this type of pay-to-play framework should be familiar to those in the regulated community, what might not be so familiar are the disgorgement of profit provisions contained in proposed Rule 2390. Unlike SEC Rule 206(4)-5, the currently-announced framework of Rule 2390 would obligate covered FINRA members to disgorge any compensation or other remuneration received in association with, pertaining to, or arising out of, distribution or solicitation activities during the two-year time out period caused by a disqualifying contribution. The proposed rule would also prohibit covered FINRA members from entering into arrangements with investment advisers or government entities to recoup any such disgorged compensation at a later time period.

The remaining two proposals set forth in FINRA’s regulatory notice – Rule 2271 and Rule 4580 – deal with disclosure and recordkeeping requirements for broker-dealer members engaged in covered government distribution and solicitation activities. Specifically, proposed Rule 2271 would obligate covered FINRA members engaging in distribution and solicitation activities with a government entity to make specified disclosures to such entity regarding the identity of the investment adviser(s) being represented and the nature of the compensation arrangement associated with the representation.  Meanwhile, proposed Rule 4580 would require covered FINRA members engaging in distribution and solicitation activities with a government entity on behalf of any investment adviser to maintain specified records that could be examined by FINRA for compliance with the obligations of proposed Rules 2390 and 2271.

In conjunction with the publication of its current regulatory notice, FINRA has requested public comment from both members and non-members on all aspects of the planned provisions, including “any potential costs and burdens of the proposed rules.” For those interested in participating in the open comment process, December 15 has been set as the current response deadline. Given the likelihood of swift adoption of the proposed rules following that date, broker-dealers subject to the regulatory reach of FINRA should begin updating their compliance programs in short order.

Federal Pay-to-Play CLE Webcast – Tomorrow!

Posted in Compliance

backtoschoolCan’t get enough Pay-to-Play knowledge? Need some quick Continuing Legal Education credits before year end? You might want to check out ALI-CLE’s audio presentation on Federal “Pay-to-Play” Rules: Latest Enforcement Initiatives and Compliance Strategies tomorrow, November 18, at 12:00 – 1:30 pm Eastern Standard Time.

The “Pay-to-Play All-Stars” who will be speaking include:

S. Jane Moffat, Vice President, Government Interactions Compliance, Goldman, Sachs & Co., Salt Lake City

Leslie M. Norwood, Managing Director and Associate General Counsel, Municipal Securities Division, Securities Industry and Financial Markets

Jason Torchinsky, Holtzman Vogel Josefiak PLLC, Washington, D.C.

As well as Yours Truly.

We are going to discuss SEC Rule 206(4)5, MSRB Rule G-37, CFTC business conduct rules, anticipated developments in the law, ongoing litigation, as well as recommended compliance programs

Join us, it should be fun.

Federal District Court Rules It Does Not Have Jurisdiction To Hear Challenge to the SEC’s Pay-to-Play Law

Posted in SEC

Pay2Play(But the SEC Provides Some Helpful Guidance Anyway)

In a ruling that did not get to the merits of the substantive arguments, a federal court has ruled that it lacks jurisdiction to consider whether the SEC contravened either the US Constitution or the Federal Election Commission’s exclusive turf when it adopted its pay-to-play rule governing investment advisors. Several weeks ago, we noted the filing of this case and observed that five Justices of the US Supreme Court might be inclined to agree that First Amendment concerns warranted the overturn of the rule were they to reach the merits of that question. For now, such questions are purely academic in light of the court’s ruling that “[t]he plaintiffs have failed to meet their burden in establishing subject matter jurisdiction because this Court is not the proper forum for their challenge.” (Order. p.2)  The complaint should have been brought originally, in the opinion of the trial court, directly to the US Court of Appeals for the District of Columbia under a provision of the Investment Advisers Act which calls for all challenges of an “order” of the SEC to be brought before that court.

(In an interesting window into the byzantine, Through the Looking Glass logic that infects the minds of lawyers everywhere, the trial court then goes on to reject the parties’ argument that that “Rule 206(4)-5 isn’t an ‘order’, Your Honor, its, ummm, a ‘rule'” on the ground that standing precedent allows the court to interchange the terms as needed and that “[w]hat appears to be an affirmative grant of appellate jurisdiction to review agency rules becomes, in reality, an affirmative revocation of jurisdiction to review all agency rules not otherwise enumerated in the direct review statute.” (Op. p. 18). Huh?)

Logical gymnastics aside, one kernel of helpful guidance has arisen from this judicial leg wrestling match. The SEC has conceded that state legislators are not necessarily “covered officials” for purposes of application of the pay-to-play rules.

Rule 206(4)-5 prohibits investment advisors from receiving compensation for providing their services to government pension plan clients when those advisors (or certain covered executives) have made campaign contributions above minimal thresholds to “covered officials” who have the ability to influence the award of public investment advisory contracts. The complaint filed by the parties noted that New York State Senator Lee Zeldin is a member of the New York State Senate and arguably a “covered public official” because he is “charged with confirming members of the New York Board of Regents, which sets guidelines and standards for managing certain state endowments.” (Complaint, para. 44). Similarly, the plaintiffs alleged, “[t]he Tennessee Republican Party has state officials currently seeking federal office who are covered by this rule, which restricts Plaintiff Tennessee Republican Party’s ability to fundraise.” (Id. para. 44).

In an important concession, the SEC has confirmed that merely having the power to confirm members of the board which selects investment advisors is not akin to “the ability to influence the award of public investment advisory contracts”. The Commission expressly admitted as such in oral argument and that position in writing here at pages 6-9 and here on page 17.  The court’s order references that concession/clarification in footnote 6 of its opinion (or should I say, the court’s “rule”, the two terms are interchangeable these days, you know).


MSRB Looks to Extend Pay-to-Play Regulation to Municipal Advisors

Posted in SEC


This week, the Municipal Securities Rulemaking Board (MSRB) requested public comment on draft amendments it is proposing to its rules regulating pay-to-play practices. Here, the MSRB is proposing a revision to Rule G-37 so as to extend its reach to municipal advisors. The regulated community knew this revision was coming last May but now we get a chance to examine the actual proposal, contemplate its policy implications, and place our bets on the outcome of inevitable judicial review.

As anticipated, the proposed changes would extend Rule G-37’s regulation of  contribution activity by municipal securities dealers (the folks who initiate the principal sales of bonds) to municipal advisors (the folks who help local governments decide how and when to issue bonds and then how to invest the proceeds). I say “as anticipated” because the Dodd Frank Wall Street Reform and Consumer Protection Act extended MSRB’s jurisdiction to permit the regulation of municipal advisors way back in 2010. Power may abhor a vacuum, but that is nothing compared to the contempt a regulating agency has for new authority unaccompanied by a Notice of Proposed Rulemaking.

Snark aside, MSRB’s proposed revisions are not, on their face, earth shattering. If Rule G-37 prevents broker-dealers from engaging in municipal business within two years of making campaign contributions to issuers, it stands to reason that municipal advisors should share their fate. That is especially true when one considers that some municipal advisors are also registered broker-dealers (and thus already subject to Rule G-37) while others are not.  What is not obvious to all is whether the United States Supreme Court will agree that anyone can be forced to abide by such restrictions consistent with the First Amendment.  That is less apparent.

Back in May, MSRB Board Chair Daniel Heimowitz was quoted as saying that these revisions are necessary to prevent the “appearance of corruption” manifest in municipal advisor contribution activity. In what is surely not a coincidence, that language is echoed by MSRB Executive Director Lynnette Kelly in the MSRB’s official press rollout of the proposed changes this week:

“Addressing corruption, or the appearance of corruption, in the awarding of municipal advisory business is a fundamental goal of the MSRB’s comprehensive regulatory framework for municipal advisors,” said MSRB Executive Director Lynnette Kelly. “Applying our well-established dealer pay-to-play rule to municipal advisors will help ensure that all regulated municipal market entities and professionals are held to the same high standards of integrity.”

Time will tell, but it is not at all clear that the MSRB’s articulated “appearance of corruption” justification will impress our current Supreme Court which expressly announced in McCutcheon v. FEC that the “appearance of corruption” rationale behind limitations on political speech is precisely the kind of thing that won’t withstand First Amendment scrutiny. It is clear that MSRB is aware of McCutcheon and has undertaken steps to conform with the holding.  MSRB’s proposed amendments require an actual link between a ban on municipal securities business “and a contribution made to an official with the ability to influence the awarding of that type of business.” The proposed new rules similarly require a link between a ban on municipal advisory business and a contribution made to an official with the ability to influence the awarding of that type of business. For reasons we discussed in connection with the TL Ventures case, these are significant concessions.

Let’s leave it here with the MSRB proposed regulations for now:  Logical? Clearly. Sound and acceptable public policy? Probably. Constitutional in the eyes of Chief Justice Roberts and Justices Thomas, Alito, Scalia, and Kennedy?  I gotta say, the early line is 3:2 against.

Your comments to the MSRB proposal are due October 1, 2014.