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SEC Pumps the Breaks on the Adoption of FINRA’s Proposed Pay-to-Play Rule

We’ve all been there before – charging headlong down the interstate at a few (or more than a few) miles per hour over the speed limit, when we suddenly come upon a speed trap conveniently tucked into a service road in the highway median.  The natural reaction – pump the breaks, keep it at the limit for the next half mile or so, and hope upon hope that you are not the unlucky one singled out for the traffic stop and corresponding ticket.   Sometimes you escape unscathed…. sometimes you don’t.

Slow Road Picture

Well, who says federal regulators aren’t just like the rest of us.  On Tuesday, in our nation’s capital, the Securities and Exchange Commission (SEC) did its best interstate speed trap impression when it announced that it would delay the adoption of the pay-to-play regulatory proposal submitted by the Financial Industry Regulatory Authority (FINRA) in late December of 2015 so as to allow further comment on the potential impact of the provisions.  The delay itself is likely a surprise to many of our loyal readers – after all, it’s not often that our blog gets the chance to cover regulators (federal or otherwise) who decide to slow the push toward stricter pay-to-play and transparency regulations .  In all likelihood, however, most members of FINRA and others in the regulated community see the SEC’s action as nothing more than a pump of the bureaucratic breaks as the Commission navigates its way past some constitutional speed traps and on its way back up to high-speed regulation.

For those who haven’t followed our recent coverage of this issue (here and here), FINRA first proposed a set of pay-to-play provisions way back in 2014 that, although modeled on SEC Rule 206(4)-5, included unique compensation disgorgement and disclosure elements that drew a slew of negative public comments from many in the regulated community.  In light of those objections, FINRA reconsidered the structure of its initial proposal and submitted a new framework to the SEC late last December for review, approval and adoption.

The main component of the proposed regulatory structure – Rule 2030(a) – again borrowed from SEC Rule 206(4)-5 and sought to restrict the ability of FINRA member firms to engage 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 the broker-dealers make prohibited political contributions.  The submitted rule, like other federal pay-to-play regulations already in effect, would not specifically ban or limit the amount of political contributions covered FINRA members and their covered associates can make to government officials.  Rather, Rule 2030(a) seeks to impose a two-year “time out” on the earning of compensation for distribution or solicitation engagements with a government entity on behalf of an investment adviser when a FINRA member or its covered associate makes a disqualifying contribution.

So, if FINRA’s new pay-to-play proposal merely tracks the provisions already in place against registered investment advisors under current SEC rules, why did the Commission even bother to pump the breaks at all on its approval?  Well, many in the regulated community believe that the delay is a direct result of the SEC’s concern about the constitutional “speed trap” the Commission has once again run into in the pay-to-play context.  As we here at Pay to Play Law Blog have highlighted with some frequency these past few years, recent First Amendment jurisprudence coming out of the federal courts has (in many people’s eyes) begun to erode much of the constitutional justification for pay-to-play rules that restrict political speech for the sake of regulating the appearance of corruption rather than actual quid pro quo corruption.

The SEC first tangled with such a free-speech “speed trap” in litigation with the New York and Tennessee Republican Parties, who sought declaratory and injunctive relief invalidating and enjoining the Commission from enforcing Rule 206(4)-5.  Although the Commission was able to escape this pay-to-play constitutional challenge without being pulled over and ticketed – due to the dismissal of the suit at the District Court level and affirmation of that decision by the D.C. Circuit – it nevertheless made the regulators stand up and become slightly more defensive drivers when cruising down the regulatory highway.  The Commission’s reaction to the present FINRA proposal makes this readily apparent.

Just months after concluding its litigation battle with the GOP state parties, the SEC received a flurry of well-reasoned comments from groups (including the NY and TN GOP, the Center for Competitive Politics, and others) opposing the FINRA proposal on similar constitutional grounds to what the Commission faced in the Rule 206(4)-5 suit.  Seeing this same free-speech “speed trap” appearing again on the horizon, the SEC thoughtfully withheld its rubber stamp for the FINRA proposal and decided to pump the breaks on its regulatory activity until a more thorough rulemaking could be conducted.  Depending on the outcome of that process, which will permit the submission of additional written comments and the presentation of oral testimony on the FINRA proposals, the delay could be a full blown traffic stop for the SEC, or nothing more than an obligatory slowdown by the Commission as it makes its way past the radar gun.

Those in the regulated community who question the constitutionality of the FINRA provisions (and the analogous SEC rules), see this delay as a key opportunity to reign in the Commission and its approach to federal pay-to-play provisions.  Others, however, simply see the delay as a postponement of the inevitable – a move by the SEC that simply allows it to get its ducks in a row regarding the FINRA provisions and insulate itself against any future legal challenges.  Only time will tell which part of the regulated community is correct, but we here at Pay to Play Law Blog will be right here to keep our readers apprised of the next steps in this ongoing saga.

SEC Pumps the Breaks on the Adoption of FINRA’s Proposed Pay-to-Play Rule

Enforcing Pay-to-Play Violations

blog pic 3.25
I recently had an interesting dialogue with a city attorney in a pay-to-pay state about a new and – from the perspective of candidates everywhere – concerning state trend in pay-to-pay enforcement: mandatory candidate reimbursements.   States and local jurisdictions are taking a hard look at revising their statutes to add language that requires the recipient of violating contributions to provide a refund under penalty of law and further imposes an additional  penalty upon that elected official for failing to do so.

Most provisions, such as in the granddaddy state of New Jersey, mirror their rules on relatively standard provisions developed by at the state level that puts the burden on the donor to “seek and receive reimbursement” when trying to cure.  Saddle River New Jersey’s pay-to-play law represents a good example of such a law.  Clearly, these laws as drafted require the return of the donation by the recipient, but they do not expressly mandate that the recipient “shall” or “must” return the requested donation under penalty of law.  For the recipient of those precious funds – the local politician – that is a very, very important distinction with a difference.

Similarly, many state and local provisions have “curing” language which follows the SEC’s federal regulation of investment advisors, Rule 206(4)-5, which mandates that the “contributor must obtain a return of the contribution”.  While that language requires more effort than a simple request of the refund, it does not expressly place a dictate upon the official to return the money upon penalty of law.

This is not to say that such laws are unprecedented or that the momentum is not headed in that way.  The City of Houston’s statute provides:

It shall be unlawful for any contractor to contribute or offer any contribution to a candidate, or for any candidate to solicit or accept any contribution from a contractor during a contract award period. In the event that a candidate unknowingly accepts a contribution in contravention of the foregoing provision, it shall be the duty of the candidate to return the contribution within ten days after he becomes aware of the violation.  Sec. 18-36(a) (emphasis added).

Similarly, Albuquerque’s City Charter provides:

Ban on Contributions from Business Entities and City Contractors. No candidate shall accept a contribution in support of the candidate’s campaign from any corporation, limited liability company, firm, partnership, joint stock company or similar business entity or any agent making a contribution on behalf of such a business entity. No candidate shall accept a contribution in support of the candidate’s campaign from any person, other than a City employee, who at the time of the contribution is in a contractual relationship with the City to provide goods or services to the City. The remedy for an unknowing violation of this subsection shall be the return of the contribution.  A.C. Art. XIII §4(f) (emphasis added).

Such laws clearly represent the directional trend in pay-to-play enforcement.  It is hard to dispute the facial appeal of any law transferring compliance obligations upon both the donor and the recipient of such funds.  More enforcement and deterrence is always better than less, right?  Possibly, possibly not.   If this blog has shown anything over the years, pay-to-play enforcement is filled with the potential for unintended consequences and such consequences abound if the recipient of such funds cannot be shown to know of the violation occasioned by the contribution and willfully refuses to refund.  As one who represents candidates as well as donors, it is clear that in even the smallest of races, the candidate herself is not always aware of contributions and certainly does not always know the business interests of the donors.  The potential for political shenanigans abounds if one were inclined to set an incumbent up.

Enforcing Pay-to-Play Violations

FINRA Submits Final Pay-to-Play Provision for SEC Approval

When the average American looks back on the close of another holiday season, they think about all the longstanding traditions that were renewed yet again – the family gatherings, the holiday parties, the celebrations of faith, and the resolutions for self improvement.  When we here at the Pay-to-Play Law Blog look back on the end of the holiday season, we gaze warmly back at the Federal Register and determine which of our favorite regulatory agencies left a surprise under the tree for our loyal readers.  We know, we know… we’re the Ebenezer Scrooge of legal blogs.

SEC logoFinra logo

 

One of this year’s regulatory gift givers is a repeat holiday patron – the Financial Industry Regulatory Authority (FINRA) – that preliminarily proposed an initial suite of pay-to-play provisions in late 2014.  Those provisions, although modeled closely on Securities and Exchange Commission (SEC) Rule 206(4)-5, included unique compensation disgorgement and disclosure elements that drew the attention of many in the regulated community.  After consideration of the public comments surrounding those elements and the regulatory proposals as a whole, FINRA reconsidered the structure of its initial provisions and submitted the newly framed Rule 2030(a) and Rule 4580 to the SEC on December 24th for adoption.

From a pay-to-play perspective, Rule 2030(a) is where the rubber meets the road.  If formally enacted, Rule 2030(a) would effectively restrict the ability of FINRA member firms to engage 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 the broker-dealers make prohibited political contributions.  The proposal, like Rule 206(4)-5 and other federal pay-to-play rules, would not specifically ban or limit the amount of political contributions covered FINRA members and their covered associates can make to government officials.  Rather, Rule 2030(a) seeks to impose a two-year “time out” on the earning of compensation for distribution or solicitation engagements with a government entity on behalf of an investment adviser when a FINRA member or its covered associate makes a disqualifying contribution.

For the purposes of the newly-proposed rule, a disqualifying contribution is defined as any political donation made to an official of a government entity that is valued at an aggregate value of more than $350 in an election year or more than $150 in a non-election.  In the case of an inadvertent or mistaken contribution above these levels, Rule 2030(a) permits a broker-dealer to cure the potential pay-to-play violation without penalty so long as a refund of the donation is received within a four-month period of the initial contribution.

With the publication of the proposed rules in the Federal Register on December 30th, the regulated community now has just over two weeks left in the 21-day comment period to respond to the SEC with pertinent observations and concerns about both Rule 2030(a) and Rule 4580 (which represents a formal recitation of FINRA’s new recordkeeping requirements for broker-dealer members).  For those of our readers who are interested in participating in the open comment process, submissions must be made on or before January 20, 2016 and may be filed online at https://www.sec.gov/cgi-bin/ruling-comments.

Following the completion of the formal notice and comment process and finalization of the provisions by the SEC, both FINRA rules should be put into effect in short order – likely during the second half of 2016 or early 2017.  Broker-dealers looking to engage politically during the 2016 election cycle should take heed, monitor the situation accordingly, and ensure their compliance and recordkeeping systems are fully up-to-date.  And we here at Pay-to-Play Law Blog will be sure to keep the regulated community posted on any future developments or changes.

 

FINRA Submits Final Pay-to-Play Provision for SEC Approval

MSRB Formally Proposes Rule Extending Pay-to-Play to Municipal Advisors

MSRB

After much deliberation, the Municipal Securities Rulemaking Board (MSRB) has filed proposed pay-to-play rules revising Rule G-37 so as to extend its reach to all municipal advisors, including those acting as third-party solicitors. The regulated community has known this revision was coming for several years but now we get a chance to see what the MSRB thought of our public comments this year (Spoiler Alert: Not much – it’s pretty much the same rule proposed back in 2010 when Dodd Frank extended MSRB jurisdiction to permit regulation of municipal advisors).

Government regulators, it would appear, do not share the same affinity for last minute plot twists and “I didn’t see that coming” reversals of fortune as the rest of us. If you are a member of the regulated community – and not a blog author looking for breaking news – that is probably a good thing. Here, predictability has resulted in a much anticipated extension of the existing G-37 pay-to-play rule for dealers (the folks who initiate the principal sales of bonds) to include a prohibition against municipal advisors (the folks who help local governments decide how and when to issue bonds and then how to invest the proceeds) from engaging in their craft for two years if certain political contributions have been made to officials of those entities who can influence the award of business.

Similarly, as is the rule for dealers, the proposed rule also requires municipal advisors to disclose their political contributions to municipal entity officials and bond ballot campaigns for posting on the MSRB’s Electronic Municipal Market Access website (affectionately referred to as the “Go Tell EMMA®” Provision).

Interestingly, however, the proposed rule appears not to extend the $250 “de minimis” contribution exception to municipal advisor firms.

One thing is clear, the good folks at the MSRB have not spent the last two years thinking of new ways to describe their rule to the press. As we reported in August of 2014:

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.”

This week, MSRB Executive Director Kelly decided to switch things up by issuing a press release sayingFor more than 20 years, the MSRB’s pay-to-play rule for dealers has served as a model for other regulations to address public corruption, or the appearance of corruption. Applying this proven model to municipal advisors will ensure that all regulated municipal finance professionals are held to the same high standards of integrity.”

Candidly, this is a rule that makes sense – especially when one considers that under the existing rule, some municipal advisors are also registered broker-dealers (and thus already subject to Rule G-37) while others are not. The MSRB deals with this “multiple hat” phenomenon by “cross banning” such individuals who make a contribution to an official who can influence either the selection of advisors or dealers from future business on either side of the fence. On the other hand, professionals who make a contribution to an official who has influence over one type of business only burn their firm by subjecting it a ban on that business line and not the other. They should, of course, expect to be banned from the entire firm Christmas party nonetheless.

What is not obvious to all is whether the United States Supreme Court will agree that the MSRB’s articulated “appearance of corruption” justification for the proposed rule 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 presents a First Amendment challenge.

MSRB Formally Proposes Rule Extending Pay-to-Play to Municipal Advisors

In the Wake of Maryland’s Recent Pay-to-Play Changes … A Chance to Weigh In on Pending State Regulations

detailsAs the reader’s of this blog know well, the State of Maryland has been hard at work over the past few years refining and retooling its pay-to-play framework for those contracting with or otherwise doing business with Annapolis or local governments across the Old Line State.  In late August, companies with one or more Maryland government contracts valued at $200,000 or more were obligated to file their first semi-annual disclosure reports under the state’s newest regulatory regime.  With the second round of reports coming due in November, the State Board of Elections (SBOE) has finally proposed regulations for public comment that deserve the attention of our readers and all businesses engaged in government procurement activities in Maryland.

The proposed regulations, which were published in the Maryland State Register last Friday, provide important insight into how the SBOE plans on administering and enforcing the currently-operative, pay-to-play framework.  The released rules touch on a wide range of significant subjects, including registration procedures and timelines, disclosure protocols for registrants with parent companies, certification and affidavit systems for registrants, waiver procedures, and internal corporate reporting mandates.

These are the “details” made famous by the phrase “The Devil is in . . . ”

From the registration perspective, SBOE’s regulations seek to speed up the timeline by which prospective registrants are obligated to submit their initial political contribution reports following the award of a covered contract or contracts.  These initial disclosures, covering the two years leading up to the start of the procurement, would effectively become same-day reports contemporaneously due at the time the agreement is signed.  This tweak to the statutorily-referenced “one business day” deadline is minor, but would undoubtedly place greater time pressure on prospective state and local contractors to complete their pre-contract, due diligence concerning organizational political activity.

In the technical disclosure context, the recently-released regulations help to clarify the disclosure obligations of registrants with corporate parent entities, and likewise seek to formalize the certification requirements for registrants who have no reportable contributions in a given disclosure period.  For registering companies with parent entities, the SBOE’s proposed rules confirm that only the immediate parent of a registrant with a qualifying contract need register and report with the state for pay-to-play purposes (provided the parent company possesses the requisite 30% ownership or controlling stake in the registrant).  The regulations also attempt to clarify the meaning of the terms ownership and control as they relate to this standard.

For registrants with qualifying Maryland contracts but no applicable political contributions in a given disclosure period, the new regulations also specify the process by which proper notice of this fact may be given to the SBOE.  Specifically, the regulations allow for an electronic system through which registrants can certify that no reportable contributions were given and list their qualifying procurement relationships with state and/or local governments in Maryland.

In addition to the above subject matters, the proposed SBOE regulations also provide meaningful insight into the state’s proposed waiver system for registrants seeking leave of the standard procedures for contribution disclosure, contract reporting, and the payment of late filing fees.  The released rules also shed light on how the SBOE believes the internal corporate reporting mandates contained in the present pay-to-play structure should be implemented.

All of the rules and regulations set forth in SBOE’s proposal are open for public comment until November 16, 2015.  We here at Pay-to-Play Law Blog anticipate a wide range of letters of opposition and support for the proposed rules and will be ready to offer further insight on any major changes incorporated into the final adopted provisions.

 

 

 

In the Wake of Maryland’s Recent Pay-to-Play Changes … A Chance to Weigh In on Pending State Regulations

FBI Corruption Probe Leads to Allentown Pay-to-Play Ordinance

It is a pattern we have seen and reported on repeatedly: public revelations of alleged corruption – already criminalized under state law – lead to passage of new pay-to-play laws designed to assure the public that previously lawful campaign activity creating the appearance or potential for corruption will not be tolerated.  Most recently, it is the Allentown City Council which has now passed a pay-to-play ordinance in the wake of a criminal probe.

Allentown, PA

The Allentown inquiry giving rise to the legislation included all of the “usual suspects” in a garden variety public corruption and bribery scandal.  According to published reports and court documents, a local developer pled guilty to participation in a conspiracy – purportedly involving Mayor (and US Senate candidate) Ed Pawlowski – to exchange campaign donations for unnamed government favors, “destroying records, conducting sweeps of government offices for electronic surveillance, and procuring disposable ‘burner phones’ that he believed would be difficult for law enforcement to monitor”.  (For the record, Mayor Pawlowski’s counsel vociferously denies his client’s involvement in the activities or conspiracy for which the developer pled guilty).

Despite the alleged criminal conduct providing the impetus for the legislation, Allentown’s new ordinance – as passed by the city council – provides for significant consequences to the unwary.  As passed, if any individual or business makes a single or multiple contributions in excess of $250.00 or provides services in that amount in a calendar year to a candidate or incumbent, the individual or business “shall not be eligible to apply for or enter into any non-competitive bid contract or be eligible to be a sub-contractor for a non-competitive bid contract or to receive financial assistance (grants, tax incentive, etc.) from the city.” 

It is unclear whether this prohibition applies for the remainder of the year or forever but the ordinance clearly provides that violation of the law by any individual or business (or “family members with a financial interest in the business, business associates, subcontractors,”

PACs, or consultants) during a period when a contract is in place “shall be cause to void the contract” and “shall make the contractor liable for liquidated damages of 10% of the maximum payment to the contractor.”  OUCH!  This is not an ordinance you want your family members, business associates, subcontractors, or consultants violating.

Ironically, the ordinance does not take effect until it has been signed into law by . . . . . . Mayor Ed Pawlowski.  I’m guessing he doesn’t choose to take a stand against this legislation.

Well we’re living here in Allentown
And they’re closing all the contractors down
Out in Bethlehem they’re doin’ time
Ripping up forms
Burning their phones
Well we’re waiting here in Allentown
For the contracts that we never found
For the promises our government gave
If we gave dough
If we behaved

So the contracts they hang on the wall
But they never really helped us at all
No they never taught us what was void
the public’s upset
And they’re annoyed
And we’re waiting here in Allentown

  Every contractor had a pretty good shot
To get at least as far as their old man got
But something happened on the way to that place
They threw pay-to-play in our face

 Well I’m living here in Allentown
And it’s hard to keep a good man down
But I won’t be getting up today

And it’s getting very hard to stay
And we’re living here in Allentown

(Sincere apologies to Billy Joel and the people of Allentown)

 

FBI Corruption Probe Leads to Allentown Pay-to-Play Ordinance

DC Circuit Court of Appeals Provides Major Support For the Constitutionality of Pay-to-Play Laws . . . And Probably Makes an Executive Order Mandating Contractor Disclosure of Political Spending Likely

Ever since the US Supreme Court’s landmark rulings in Citizens United and McCutcheon, significant questions have been raised (mostly by real scholars but also by agitators and pot-stirrers such as myself) as to whether pay-to-play laws – based as they are on appearances of potential corruption and not direct bribery – are constitutional.   The DC Circuit has now weighed in to provide significant legal and factual justification for the constitutionality of laws limiting personal campaign activity in order to prevent the appearance of corruption and to promote the “merit-based administration” of our government (which is only a GRADE 3 oxymoron, falling as it does on the scale between “pretty ugly” and “jumbo shrimp”).

The case in question is Wagner v. FEC in which a number of federal contractors brought free speech and associational challenges to a federal law prohibiting their planned contributions to federal candidates and political parties.  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.  Of most importance to those of us tasked with pay-to-play compliance is not that 2USC 441c was upheld, that law has been on the books a long time and really only impacts individuals who directly contract with the federal government (in contrast with the myriad of people who work as employees of government contractors).  The Court also did not examine the issue of whether federal contractors may give to independent expenditure groups (SuperPACs).  What is significant about Wagner is the fact that the DC Circuit appears to contravene the US Supreme Court’s analysis in McCutcheon to hold that federal and state governments may enact pay-to-play laws admittedly abridging speech and associational rights in order to assure the public believes that government servants are not corruptible and are fulfilling their public duties “effectively and fairly”, free of “improper influence or corruption”.  (Wagner, Slip Op. 12-15).

Other federal courts have not agreed with the DC Circuit’s reading of McCutcheon to allow such latitude:

Our Supreme Court has made clear that only certain contribution limits comport with the First Amendment. Since contributing money is a form of speech, preventing quid pro quo corruption or its appearance is the only governmental interest strong enough to justify restrictions on political speech. Citizens United v. FEC, 558 U.S. 310, 357-61 (2010). More recently in McCutcheon, the Court concluded that “the possibility that an individual who spends large sums may garner influence over or access to elected officials or political parties . . . does not give rise to such quid pro quo corruption.” Id. at 1438. In effect, it is only direct bribery—not influence—that the Court views as crossing the line into quid pro quo corruption.

New York Progress and Protection PAC v. James Walsh, 13 Civ. 6769, S.D.N.Y, April 24, 2014, Slip Op. 3.

It will be interesting to see whether the Supreme Court reads its own opinion in McCutcheon as the DC Circuit does.  Recent reversal statistics of DC Circuit cases might indicate that the DC Circuit’s reading is not a slam dunk.

One civil servant who might not be inclined to wait for additional guidance from the Supreme Court on the issue is the one who resides at 1600 Pennsylvania Avenue.  As we have written previously, the White House is very serious about mandating contribution and issue advocacy disclosure obligations on federal contractors.  There are many who now believe that the Wagner decision will encourage President Obama to issue a long-awaited Executive Order mandating contractor disclosure of all political spending.  Recent reports by The Brennan Center that in the 2014 cycle, the top 25 federal contractors all made disclosed contributions through their PACs and, in total, gave more than $30 million are sure to spur additional calls for mandatory contractor disclosure.

DC Circuit Court of Appeals Provides Major Support For the Constitutionality of Pay-to-Play Laws . . . And Probably Makes an Executive Order Mandating Contractor Disclosure of Political Spending Likely

SEC Promotes Pay-to-Play Compliance with a Friendly Reminder – and a Wells Notice

With a friendly reminder and notice of an investigation, the Securities and Exchange Commission has reminded us all, yet again, that it is moving forward with pay-to-play enforcement whether the regulated community is ready or not. This is a theme that has played out for some time now as the SEC has done a good job of signaling their punches. The Commission is, however, starting to throw punches.cops

On the “Good Cop” side of promoting pay-to-play compliance, the SEC issued a friendly reminder yesterday that the compliance date for Rule 206(4)-5’s prohibition against investment advisers and their covered associates from providing payments to unregulated third-parties to solicit advisory business from any government entity is almost upon us (July 31, 2015).

As a bit of a history lesson, Rule 206(4)-5 became effective way back in September 13, 2010 and included the third-party solicitor ban. At that time, the SEC set the compliance date for that ban to September of 2011 but later added municipal advisors to the definition of “regulated persons”. Because of this, the Commission also extended the third-party solicitor ban’s compliance date to June 13, 2012. In the absence of a final municipal advisor registration rule, the Commission then extended the third-party solicitor ban’s compliance date from June 13, 2012 to nine months after the compliance date of the final rule. When the final rule was released with a final registration date of October 31, 2014 (see Section V), the compliance date for everyone, including municipal advisors, to comply with the third-party solicitor ban was known to be July 31, 2015.

In short, this compliance date is absolutely not a surprise to the regulated community but rather reflects execution on a regulatory scheme the SEC has been telegraphing for some time now. It is still a nice gesture to send out a reminder, however.

On the other side of the coin, it has recently been reported that SEC staff has made clear, via a “Wells” notice that it intends to ask the Commission for authorization to initiate a civil inquiry into allegations that State Street Corporation improperly used third party consultants and lobbyists (and possibly campaign contributions) to influence a public bidding process. This little tidbit was contained within State Street’s Form 8-K filing of June 18, 2015 which read:

On June 18, 2015, State Street Corporation announced that the enforcement staff of the U.S. Securities and Exchange Commission has provided it with a “Wells” notice. The notice relates to a previously disclosed SEC investigation into our solicitation of asset servicing business for public retirement plans and, specifically, our relationships with particular clients in two states during a period ending in 2011. As previously reported, the investigation includes our use of consultants and lobbyists and, in at least one instance, political contributions by one of our consultants during and after a public bidding process. The Wells notice informs State Street that the SEC staff intends to ask the Commission for permission to bring a civil enforcement action that would allege violations of the securities laws (i.e., Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder). The issuance of a Wells notice provides State Street with the opportunity to make a submission to the Commission in response to the SEC staff’s position. State Street intends to submit such a response.

Some are more motivated by the misfortunes of others than friendly reminders from our public servants. Either way, the SEC is signaling, yet again, that painful pay-to-play enforcement is here to stay.

SEC Promotes Pay-to-Play Compliance with a Friendly Reminder – and a Wells Notice

Ninth Circuit Upholds Constitutionality of Hawaii Pay-to-Play Ban

As we advised back in 2010, Hawaii is among an ever-expanding list of states which have seen their pay-to-play laws challenged on constitutional grounds. Just this week, however, the United States Court of Appeals for the Ninth Circuit dismissed those concerns.  At issue was Hawaii’s prohibition against campaign contributions by government contractors until “completion of the contract.” In challenging the law, the plaintiffs’ complaint highlighted a little-discussed, unintended consequence of such laws that result in exorbitant expenditures of compliance time and resources (mostly in the form of legal fees): “Hawaii’s ban on candidate and non-candidate committees receiving contributions from government contractors means [contractors] must constantly keep track not only of whether it has government-construction jobs but also of whether a single . . . service technician is somewhere providing some minor service on a previous . . . job”. Complaint, p. 10-11.  The law, however, is premised on the need to prevent bribery or “quid pro quo” corruption regardless of the burden it places on the regulated.

Back in 2010 we wrote:

Bribery laws may be “fundamental to prevent corruption in government”
— even narrowly tailored prohibitions against contractor contributions to politicians with authority to award future contracts may be “fundamental to prevent corruption in government” — but Hawaii’s law in its current incarnation may be a Bridge Too Far to make such a claim.

Then again, no president has ever seen fit to nominate me to serve on the Ninth Circuit either. Those who have received such a nomination did not see it the same way.

In its 58-page order, the Ninth Circuit found that Hawaii’s contractor-contribution ban is an important and constitutional government tool to combat “quid pro quo corruption” and “serves sufficiently important governmental interests by combating both actual and the appearance of quid pro quo corruption”:

And as in Connecticut, Hawaii’s decision to adopt an outright ban rather than mere restrictions on how much contractors could contribute was justified in light of past “pay to play” scandals and the widespread appearance of corruption that existed at the time of the legislature’s actions. See Yamada III, 872 F. Supp. 2d at1058–59 nn. 26–27 (summarizing the evidence of past scandals and the perception of corruption). Thus, as a general matter, Hawaii’s ban on contributions by government contractors satisfies closely drawn scrutiny.

A-1’s narrower argument that the contractor contribution ban is unconstitutional as applied to its contributions to lawmakers and candidates who neither award nor oversee its contracts is also without merit. Hawaii’s interest in preventing actual or the appearance of quid pro quo corruption is no less potent as applied to A-1’s proposed contributions because the Hawaii legislature as a whole considers all bills concerning procurement. Thus, although an individual legislator may not be closely involved in awarding or overseeing a particular contract, state money can be spent only with an appropriation by the entire legislature.  See Haw. Const. art. VII, §§ 5, 9. Hawaii reasonably concluded that contributions to any legislator could give rise to the appearance of corruption.

Yamada v. Snipes, 1:10-cv-00497-JMS-RLP (9th Cir. 2015), slip op. 49-50 (link to this blog’s past post on Connecticut ruling added – unfortunately).

The court also upheld the state’s law requiring political action committees to register with the state after spending more than $1,000 to influence an election, something officials said is necessary to follow the money during campaign season.

The Ninth Circuit and the US Supreme Court—as currently constituted—don’t always read the First Amendment the same way when it comes to government regulation.  This round, however, without a doubt, has gone to the regulators.

Ninth Circuit Upholds Constitutionality of Hawaii Pay-to-Play Ban

Big Bond Firms Test the MSRB’s Compliance Line

Readers of this blog know that MSRB Rule G-37 regulates the political contribution activities of banks and other entities which initiate the principal sales of municipal bonds. Specifically, Rule G-37 provides that any broker, dealer or municipal securities dealer which makes a contribution to those who oversee the issuance of such bonds is subject to a two-year “Time Out” for bad behavior.

around-circumventThis prohibition extends beyond the activities of individual brokers and dealers. Rule G-37 specifically provides that its prohibition applies equally to “any political action committee (PAC) controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional”. For further clarity regarding its intentions, the Rule mandates against circumvention of these restrictions via the wily ways of Legal Loophole Exploiters:

(d) Circumvention of Rule. No broker, dealer or municipal securities dealer or any municipal finance professional shall, directly or indirectly, through or by any other person or means, do any act which would result in a violation of sections (b) or (c) of this rule.

To demonstrate its seriousness about this prohibition, the Municipal Securities Rulemaking Board has decreed that the proper punishment for violation of its rule is that “no broker, dealer or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer”.

You’re still with me, right? Seems pretty clear: “Securities dealers should not use political action committees or other vehicles to circumvent the prohibition against campaign contributions to municipal bond issuers.” Some of us have been warning our friends for years that the MSRB views PAC activities as an improper vehicle to circumvent G-37. Others, it might appear, see this as a line ripe for testing.

Last week, David Sirota and Matthew Cunningham-Cook of the International Business Times (two of the best reporters in the business when it comes to ferreting out potential links between contributions to those in power and official action) broke a story detailing contributions to New York Governor Andrew Cuomo by three PACs associated with NY bond issuers. Political Action Committees associated with these banks, it would appear, contributed more than $131,000 to the Governor prior to being selected by his administration to manage state bond work. The banks do not dispute the contributions by their PACs but rather challenge the premise that these PACs represent contributions by the individual bond dealers or a PAC that they control:

“Citi has two separate PACs, a state and a federal,” said Citigroup spokeswoman Molly Meiners. “To the extent anyone on our Muni team donates money, they are required to give to our Federal PAC only, which has never given to Cuomo.”

Ultimately, the determination surrounding this situation will be factual in nature and this blog is never one to cast the first stone when it comes to the challenges of applying well-intentioned regulation in the real world. As we warned back in 2010, however, this factual inquiry is informed by specific guidance issued by the MSRB in August of that year, which clearly establishes that this is not an area where winks and nods will be tolerated:

Indirect Contributions Through Bank PACs or Other Affiliated PACs

As noted above, if an affiliated PAC is determined not to be a dealer-controlled PAC, a dealer must still consider whether payments made by the dealer or its MFPs to such affiliated PAC could be viewed as an indirect contribution that would become subject to Rule G-37 pursuant to section (d) thereof. The MSRB has provided extensive guidance on such indirect contributions, noting in 1996 that, depending on the facts and circumstances, contributions to a non-dealer associated PAC that is soliciting funds for the purpose of supporting a limited number of issuer officials might result in the same prohibition on municipal securities business as would contributions made directly to the issuer official. The MSRB also noted that dealers should make inquiries of a non-dealer associated PAC that is soliciting contributions in order to ensure that contributions to such a PAC would not be treated as an indirect contribution.

The MSRB also has previously provided guidance in 2005 with regard to supervisory procedures that dealers should have in place in connection with payments to a non-dealer associated PAC or a political party to avoid indirect rule violations of Rule G-37(d). In such guidance, the MSRB stated that, in order to ensure compliance with Rule G-27(c) as it relates to payments to political parties or PACs and Rule G-37(d), each dealer must adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that neither the dealer nor its MFPs are using payments to political parties or non-dealer controlled PACs to contribute indirectly to an official of an issuer. Among other things, dealers might seek to establish procedures requiring that, prior to the making of any contribution to a PAC, the dealer undertake certain due diligence inquiries regarding the intended use of such contributions, the motive for making the contribution and whether the contribution was solicited. Further, in order to ensure compliance with Rule G-37(d), dealers could consider establishing certain information barriers between any affiliated PACs and the dealer and its MFPs. Dealers that have established such information barriers should review their adequacy to ensure that the affiliated entities’ contributions, payments or PAC disbursement decisions are neither influenced by the dealer or its MFPs, nor communicated to the dealers and the MFPs.

Big Bond Firms Test the MSRB’s Compliance Line