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Pay to Play Law Blog

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

“It’s About to Get Real Up in Here”

Posted in California, CalPERS


Former CalPERS CEO to Plead Guilty in Pay-to-Play Case

Last week we highlighted the case of TL Ventures to warn of the large enforcement claim staked by the SEC in connection with Rule 206(4)-5 of the Advisers Act. Not to be outdone by a sister regulator, the Justice Department has now announced that Federico R. Buenrostro Jr., the former CEO of the California Public Employees’ Retirement System, is expected to plead guilty for his involvement in the CalPERs “pay-to-play” scheme. When one considers that TL Ventures was required to disgorge their fees – and that the firm associated with former CalPERS board member Mr. Villalobos’ firm brought in $14 million in connection with the alleged scam, the regulated community needs to see the threat and recognize that this is likely not all a coincidence.

SEC Starts Hitting the Private Sector Hard for Pay-to-Play Violations

Posted in SEC

Stay Alert

By Stefan Passantino

For the first time ever, the SEC has brought a pay-to-play case against an investment advisor for making political contributions. Previously, and with the requisite lack of subtlety and fanfare you have come to expect from this blog, we highlighted the SEC’s massive consent judgment against Goldman Sachs over a series of “in kind” contributions by one of its bankers. What makes this case equally noteworthy in the wake of the Goldman precedent is not only the fact that the SEC is signaling that its enforcement efforts will not be tempered either by a lack of intent to influence and investment decisions, but that such efforts will also not be deterred even by a lack of opportunity to influence those decisions.

The investment community needs to take note and heed these warnings immediately. TL Ventures gives us all 285,000 reasons to do so.

As spelled out in greater detail in a recent, articulate, insightful, and well-crafted law firm client alert, in April 2011, a “covered associate” of TL Ventures made contributions to the campaign of a candidate for Mayor of Philadelphia and the Governor of Pennsylvania. The Mayor of Philadelphia appoints three of the nine members of the Philadelphia Retirement Board and the Governor of Pennsylvania appoints six of the eleven members of the board of the Pennsylvania SERS. The SEC charged TL Ventures with pay-to-play violations under Rule 206(4)-5 of the Advisers Act because the contributions triggered the two-year “time out” from receiving advisory fees from the Philadelphia Retirement Board and SERS. As was the case with Goldman, TL Ventures agreed to settle the matter without admitting or denying the allegations, disgorging its fees of over $250,000, and paying a penalty of $35,000.

For the uninitiated, Rule 206(4)-5 generally prohibits investment advisors from providing advisory services for compensation to a government entity for two years after the adviser or certain of its executives or employees make political contributions above specified thresholds to an elected official or candidate for political office if the office is “directly or indirectly responsible for, or can influence that government entity’s selection of the adviser.”

It is a significant question whether the facts alleged in this matter represent the type of case that was envisioned when the pay-to-play rules were adopted, and whether this is the type of case that combats what the SEC described as a significant problem of influence in the management of public funds. Absent from the SEC’s allegations was any assertion that TL Ventures or the covered associate at issue attempted to influence an investment decision of either the Philadelphia Board or SERS. Indeed, the SEC went out of its way in its consent order to declare that “Rule 206(4)-5 does not require a showing of quid pro quo or actual intent to influence an elected official or candidate.”

Of particular relevance here, TL Ventures did not appear even to have an opportunity to influence an investment decision. The SEC alleged that both SERS and the Philadelphia Board were investors in the funds prior to the political contribution and that the funds were in wind down mode, and that both SERS and the Philadelphia Board were already committed to TL Venture funds until the funds officially wound down. Additionally, there was no allegation that TL Ventures marketed any additional funds for investments during the two-year period after the covered associate at issue made the prohibited political contributions. Thus, the political donations in question could not have had any effect on any investment decision because there was simply no investment decision to be made.

In addition to being a bit scary and a large neon flashing compliance alert for the regulated community, one has to wonder whether the SEC’s enforcement action against TL Ventures and its pay-to-play rules are constitutional under the Supreme Court’s recent decision in McCutcheon v. Federal Election Commission, 572 U.S.__(2013).  Readers of this blog will recall that in McCutcheon, the Supreme Court found that aggregate political contribution limits violated the First Amendment because the  regulation of political speech must be limited to targeting instances of “quid pro quo” corruption or its appearance. No such concern was found by the Court in the aggregate campaign contribution limit context. Coincidentally, the existence or appearance of quid pro quo corruption is precisely the standard the SEC has gone out of its way to assert is NOT required to allege a Rule 206(4)-5 violation. In turn, one has to wonder how the Roberts Court would view the SEC’s attempted application of a strict liability standard for Rule 206(4)-5 violations that involve absolutely no opportunity to influence an actual investment decision.

Contractor Contribution Bans Post McCutcheon – “Um, Hans, There Appear to be More Cracks in the Dike!”

Posted in District of Columbia


As predicted, the United States Supreme Court’s analysis in McCutcheon v. FEC threatens once again to topple the constitutional underpinnings supporting contractor bans on contributions.

This time, the crack in the dike in dire need of young Hans Brinker’s able finger appears in the D.C. Circuit where the court – sitting en bancannounced today in Wagner v. FEC that it will hear oral argument in September on First Amendment challenges to the long-standing prohibition against federal contractor contributions in connection with federal elections.

It is difficult to see how this law (2 USC 441c) survives Justice Roberts’ analysis in McCutcheon. As noted political law academic Rick Hasen sagely (and succinctly) observes on his blog, “[t]his will be a tough case for the government after McCutcheon, and potentially a big decision.”  He is correct, of course. This might be the case that cracks the pay-to-play dike and floods us all with contractor contributions.

See you in September. Russell Crowe and I will be out back working on our boat.

MSRB Announces Pay-to-Play Rules are Coming for Municipal Advisors

Posted in First Amendment, SEC


The Municipal Securities Rulemaking Board (“MSRB”) announced this week that it has decided to propose amendments to existing pay-to-play rules governing broker dealers (Rule G-37) to have them also cover municipal advisors. Basically, a “municipal advisor” is simply a technical way to describe a financial advisor who provides her services to local municipalities which have shown themselves to date to be in dire need of quality financial advice. (Seriously, read this last link – it alone is worth the price of your subscription to this blog).

Regular followers of this blog (there’s gotta’ be one right?) will recall that Rule G-37 is designed to prevent broker-dealers from engaging in municipal business within two years of making campaign contributions to issuers. Interestingly, MSRB Board Chair Daniel Heimowitz was quoted after the Board’s quarterly meeting as saying that the need for this curb on campaign activity is the “appearance of corruption” manifest in municipal advisor contribution activity:

For two decades, MSRB Rule G-37 has played a central role in curbing the use of, and the appearance of the use of, political contributions to secure municipal securities business,” . . . “Extending these provisions to municipal advisors will help prevent quid pro quo political corruption, or the appearance of such corruption, in public contracting for both dealers and municipal advisors.

This rationale is noteworthy, of course, because the United States Supreme Court just 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.

Public comment on the proposed revisions should be offered within a month. I’m guessing Chief Justice Roberts will wait until later to offer public comment.


Federal Judge Notes the Implications of McCutcheon in Striking New York’s Limits on Contributions to SuperPACs

Posted in First Amendment, New York


Our last post analyzed the clear implications of the US Supreme Court’s reasoning in McCutcheon v. FEC to pay-to-play laws everywhere. Now, it would appear, at least one federal judge in New York has reluctantly, but decisively, relied upon that same reasoning to strike New York State’s contribution limits for SuperPACs. In that case, New York Progress and Protection PAC v. James Walsh, Judge Crotty opined that he was compelled to “apply the Supreme Court’s binding decisions” notwithstanding the Court’s “concern” over the “misguided” result:

“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. The Court agrees with Justice Breyer. He said that, “[t]his critically important definition of ‘corruption’ is inconsistent with the Court’s prior case law.” McCutcheon, 134 S. Ct. at 1466 (Breyer, J., dissenting). But this Court is bound to apply this definition “no matter how misguided . . . [the Court] may think it to be.” Hutto v. Davis, 454 U.S. 370, 375 (1982).”

It is only a matter of time before this same analysis is applied to state pay-to-play laws. When that happens, one can anticipate that several such laws will fail to withstand the scrutiny.

Editor’s Note: If you did not catch Peter Overby’s thoughtful reflection on the 20th anniversary of federal pay-to-play laws on NPR, it is worth listening to.

Editor’s Note to the Editor’s Note: Be aware, the first editor uses the adjective “thoughtful” as a euphemism for “it’s really cool that NPR referred to the blog on ‘All Things Considered’.”

Did the US Supreme Court’s ruling in McCutcheon v. FEC Put the Constitutionality of Some Pay-to-Play Laws in Doubt?

Posted in Citizens United, First Amendment, In The News


 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.

Exempt Organization Attorneys Raise Comments and Concerns to IRS

Posted in Exempt Organizations

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…

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Compliance Warnings on Both Coasts: Connecticut and California Both Issue Pay-to-Play Warnings

Posted in California, Connecticut

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.


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Rethinking Pay-to-Play Legislation

Posted in Illinois, New Jersey

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.

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