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Hedge Fund Seeks Absolution from the SEC Claiming the Potential Pay-to-Play Penalty Doesn’t Fit the Violation

Pershing Square Capital Management has found itself in the unenviable position of having to seek absolution from the Securities and Exchange Commission for the consequences of an unintended $500 pay-to-play error by one of its former analysts, which may result in the hedge fund being forced to return millions of dollars in fees.  It has not gone unnoticed by this blog and others that the SEC has made clear it intends for the regulated community to be very, very aware of the restrictions imposed by Advisers Act Rule 206(4)-5 and has little sympathy for the potentially draconian consequences the rule can impose.  It has also not gone unnoticed by the regulated community that the penalties for failure to comply with the law can be severe – violators are debarred from receiving payment of fees (to be distinguished from being forbidden to do the work) for a period of two years from the date of the violation.

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According to Pershing Square’s application for exemption from 206(4)-5’s penalty provisions, which was filed with the SEC in September but only made public this week,  a single Pershing Square analyst made a single $500 contribution to a Massachusetts candidate for governor in excess of the $150 limit proscribed by 206(4)-5.  As the law makes clear, it did not matter that Pershing Square employs a robust compliance program and that the analyst’s contribution was made in violation of firm policy and apparently without the knowledge of Pershing Square’s Chief Compliance Officer.  It did not matter that the analyst never spoke with the state fund or its representatives.  It did not matter that the analyst was arguably not sufficiently senior to fit the definition of a “covered associate”.   It did not matter that the recipient of the funds was the sister of family friend who the donor never spoke with.  It did not matter that the candidate did not even receive sufficient votes to get on the ballot and it did not matter that the contribution was returned.  All that matters under the regulation is that Pershing Square is one of many funds managing the Massachusetts  Pension Reserves Investment Fund and that one of its lower-level investment analysts donated to a candidate seeking election to an office (governor) that has the power to appoint members of the state pension fund who, in turn, would have the power to select those firms hired to manage the fund’s money.

From the somewhat-biased perspective of an adviser to those seeking to comply with the myriad of pay-to-play rules at the federal, state and local levels, Pershing’s application for an exemption would appear well-founded and the relief sought appropriate.  Past experience, however, has made clear that the Commission has historically viewed the virtues of its enforcement mission as superior to the unintended consequences borne by those who, quite frankly, appear to have done as much as a large operation could possibly do to enforce internal compliance with pay-to-play requirements.  One needs look no further than the SEC’s response to another unfortunate Massachusetts political contribution by a former Goldman Sachs investment banker to discern where the Commission’s sympathies are likely to lie.

As stated by Pershing Square in its application for exemption from 206(4)-5’s penalty provisions, the rule “can be violated as a result of circumstances wholly unrelated to the harm the Rule was designed to prevent. . . . Despite the best efforts of an adviser, an employee’s unintentional violation of the adviser’s internal policies could cause the adviser to suffer a financial loss many thousands of times greater than the value of a contribution that the adviser would have never approved in the first place.”

As of yet, the SEC has declined to comment.  Gulp.

Hedge Fund Seeks Absolution from the SEC Claiming the Potential Pay-to-Play Penalty Doesn’t Fit the Violation

California State Treasurer Sets His Sights on Curbing Pay-to-Play in the Municipal Bond Arena

California Treasurer SealWhile it’s easy for mainstream news outlets to get caught up in the mid-summer drama of Vice-Presidential selections, national political party conventions, and the geopolitical repercussions of Brexit, we remain focused on sharing updates on the real hot button issues of 2016 – like municipal bond pay-to-play. Don’t worry… you can thank us after you get back from your summer vacations and tune back into the reality of regulatory creep.  (“You want us on that wall.  You NEED us on that wall!”)

As many in the regulated community were enjoying some well-earned time away from the office last week, California State Treasurer John Chiang was hard at work in Sacramento announcing new policies aimed at curbing the ability of municipal bond counsels, underwriters, and financial advisors to participate in local bond election campaigns.  These policies are part of a new enforcement initiative launched July 27 that requires municipal finance firms seeking California state business to certify that they will no longer make contributions to local bond election campaigns.

As detailed in Treasurer Chiang’s letter to law firms, underwriters and financial advisors currently in the California state bond pool, continued participation in the underwriter pool will now be contingent upon the making of “an affirmative statement that the firm, or any officer, director, partner, co-partner, shareholder, owner, or employee of the firm, will not make any cash or in-kind service contributions … to promote or facilitate any bond or ballot measure in California.”  Additionally, access to the underwriter pool will also be premised on a concurrent certification by covered entities and officials that they will not provide “bond campaign services” in connection with California municipal bond campaigns or ballot measures.

This second certification will effectively prevent municipal bond attorneys, underwriters and financial advisors from performing or facilitating any of the following activities in conjunction with local bond campaigns or ballot measures: fundraising; public opinion polling; election strategy and management; volunteer organization; get-out-the-vote services; development of campaign literature; or the production of advocacy materials.  Certain exceptions to these prohibitions will apply, but the Treasurer’s Office is clearly looking to take an aggressive stance against any and all behaviors that it views as pay-to-play tactics designed to engender favoritism in the issuance of bond packages approved by local California voters.

While the addition of a few basic certification statements may seem minor to the untrained eye, requiring affirmative statements such as these will also almost certainly heighten the compliance risk borne by the regulated community.  After all, the “inadvertent non-compliance” defense is dramatically more difficult to assert, and a “false statement” indictment is dramatically more easy to obtain, when affirmative certifications are a compliance obligation.

The launch of this new initiative was met with strong support from members of the local government community, including the California Association of County Treasurers and Tax Collectors, and by transparency advocacy organizations such as California Forward and Common Cause.  Those entities and individuals caught in the regulatory crosshairs of the Treasurer’s new policies, however, undoubtedly have a more cynical view of their adoption.  This is particularly the case given the fact that the initiative targets forms of political engagement that are already highly-limited by Municipal Securities Rulemaking Board Rule G-37, and was introduced at a time when Treasurer Chiang is launching his candidacy for California Governor.  Coincidence?  They think not.

Regardless of timing, the restrictions put in place by this new enforcement initiative require entities in the current California state bond pool to comply by August 31, 2016 or risk suspension from participation.  Those entities and individuals seeking to gain entry into the current pool will also face similar certification requirements as of that date.  So, a small public service announcement to those of our readers in either category – be sure to get your Golden State pay-to-play house in order before summer comes to an end.

California State Treasurer Sets His Sights on Curbing Pay-to-Play in the Municipal Bond Arena

Connecticut Stands Firm to Enforce Pay-to-Play Against State Party Committee

In announcing a $325,000 settlement with the Connecticut Democratic State Central Committee, the State Elections Enforcement Commission (“SEEC”) has made clear that it will not tolerate efforts to circumvent the state’s pay-to-play laws.  At issue was the state party’s solicitation of state contractor money into the party’s federal account and subsequent use of those funds to finance mailers in support of Governor Dannel Malloy’s re-election campaign.  The agency, which oversees enforcement of Connecticut’s pay-to-play law (Ct. Gen. Stat. 9-612), had earlier chosen to offer a friendly warning not to use federal political party accounts to circumvent the state’s pay-to-play regulatory scheme.  As we have previously noted, Connecticut takes some degree of pride in its restrictive pay-to-play statute, and in the fact that the statute’s constitutionality was upheld in federal court.  Connecticut is one of those states which will debar a state contractor or prospective state contractor from future business for a full year if it, or its employees, directors, spouses, or children, engage in impermissible contribution activity.

You can thus imagine that the SEEC was none too amused to read news reports back in 2014 highlighting Connecticut Governor Malloy’s prowess in raising funds in $10,000 chunks from state contractors for the Connecticut Democratic Party’s federal account.  (PRO TIP: If you are going to “launder” state contractor funds through your federal account, don’t issue press releases airing your dirty laundry).  Thus, on February 11, 2014, the SEEC convened a special meeting for the purpose of issuing an unsolicited advisory opinion “clarify[ing] and publish[ing] advice on the use of money and assets of the federal account in Connecticut elections”.  Mostly, however, the SEEC used the opportunity to clarify that “[o]f most concern is the fact that much of the reported fundraising has involved Connecticut state contractors, who are prohibited from making contributions to party committees registered with the SEEC,” and to make clear everyone understands that federal “funds that are generally prohibited from being used in Connecticut elections are not, in fact, used to make expenditures in Connecticut elections.”

When the state party failed to acquiesce and acknowledge the SEEC’s inherent wisdom, the Commission filed suit in state court asserting the long-standing principles of administrative law and common law sovereignty referred to by legal scholars as the “Doctrine of Can You Hear Me Now?”

While Connecticut Republicans expressed dismay that the Democratic Party will not have to abandon its argument that federal campaign finance laws “Trump” the Connecticut statute and were able to characterize their payment of $325,000 as “voluntary”, the fact remains that SEEC executive director Michael Brandi was able to state that the penalty was “probably in the range of multiple times what the commission has ever issued in the past” and that to his recollection the previous high-water mark for such a “voluntary” payment was $20,000.

Ultimately, the solution set forth in the proposed settlement agreement involves the common use of separate “Compliance Accounts” within the state party’s federal account.  The fix is relatively simple but one which allows state regulators to ensure their guidance is being heard.

Connecticut Stands Firm to Enforce Pay-to-Play Against State Party Committee

Maryland Just Can’t Help Itself When It Comes to Pay-to-Play Revisions

Avid followers of the Pay to Play Law Blog know how active the State of Maryland has been over the past few years with regard to the amendment and revision of its pay-to-play framework for those contracting with or otherwise doing business with state and local governments.  In 2014, we saw a new pay-to-play regime implemented that instituted an array of new filing obligations, contribution reporting requirements, and enhanced record retention and certification obligations for Maryland government contractors.  Then, in 2015, state legislators followed up with a collection of amendments to the new regime that closed unintended disclosure loopholes and shifted the semi-annual reporting calendar to the May and November schedule that now applies to covered contractors across the Old Line State.  A few months after those legislative changes, the State Board of Elections (“SBOE”) joined the party with the promulgation of an array of regulations clarifying how the rapidly evolving pay-to-play regime would be administered and enforced moving forward.

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Fast forward to 2016 and the regulated community probably feels like it’s having deja vu all over again.  During this year’s General Assembly session, lawmakers in Annapolis once again took it upon themselves to pass legislative amendments tweaking their beloved pay to play framework.  The changes, which are relatively minor in comparison to last spring’s modifications, codify an interpretive rule proposed by the SBOE last year that sought to broaden the political contribution disclosure obligations of covered contractors who have politically-active business affiliates.

Under the existing regulatory regime codified in state law, pay-to-play filers are required to report the political donations of their subsidiaries provided such affiliates are “doing business with” Maryland state or local government and 30% or more owned or controlled by the covered contractor.  The 2016 amendments, however, broaden the scope of potential affiliate disclosure.  The recent legislative revisions, which were signed into law by Governor Larry Hogan in late April and go into effect on October 1 of this year, clarify that covered contractors should disclose the donations of all politically-active subsidiaries (which are 30% owned or controlled) regardless of whether or not such affiliates do business with state or local governments in Maryland.  An express exemption to this disclosure obligation was provided for a very narrow group of subsidiaries that are affiliated with publicly-traded, bank holding companies and that are not doing public business in Maryland.  The legislative changes will, however, require that most covered contractors disclosure the political contributions of their affiliated subsidiaries.

A few short days after these legislative changes were signed into law, the SBOE followed the General Assembly’s lead in preening over Maryland’s “precious” pay-to-play framework.  The Board, in a Notice of Proposed Action published in the State Register, recommended changes to several of its current regulatory provisions governing the disclosure of political contribution activity by covered state and local government contractors.  First, as one might expect, the proposed regulations seek to align current SBOE rules with this year’s legislative changes regarding the attribution of contributions by the subsidiaries of covered government contractors.  Perhaps more interestingly, however, the proposed rules also seek to alter the current timing of the “initial” pay to play disclosure filings required of new Maryland contractors and to clarify how entities doing business in the state can comply with the “CEO reporting obligations” concerning disclosable political contributions.

As those in the regulated community know well, Maryland’s current regulations require specific state and local government contractors to file with the SBOE an initial registration statement (highlighting specific contract information) and a statement of reportable political contributions (covering the two years prior to the contract) within one business day of the contract’s award.  The Board’s new proposal advocates for an extension of the filing window for the registration from one business day to fifteen business days after the contract’s award.  The proposed rules also request that the time frame for submitting the political contribution disclosure report be extended to fifteen business days after the registration statement is filed.

In addition to these administrative changes, the Board’s newly-proposed rules seek to clarify how covered government contractors can meet their CEO-reporting requirements under existing law.  Under current law, the officers, directors and partners of covered contractors are required to report disclosable political contributions to the CEOs of their entities as part of the state disclosure requirements.  Such CEOs are also obligated to notify all reporting individuals with their entities (and reporting subsidiaries) that Maryland law requires public disclosure of their contributions.  To ease the administrative burdens associated with the incoming notification process, the SBOE’s proposed rules would permit a designee of the CEO to collect contribution information on behalf of a reporting entity provided such collection is completed within five business days of the close of the applicable reporting period.  In regard to the outgoing notification process, the proposed rules would allow CEOs to avoid their obligation to warn all reporting individuals about their reporting requirements under state law if the disclosing entity implements a legal pre-clearance framework and a written compliance policy that is annually reviewed by such donors.

These proposed rules and regulations are open for public comment with the SBOE until May 30, 2016.  As the comment period comes to a conclusion and final provisions are adopted, Pay to Play Law Blog will be sure to closely monitor any relevant changes to help the regulated community stay abreast of the latest on Maryland pay-to-play law.

Maryland Just Can’t Help Itself When It Comes to Pay-to-Play Revisions

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

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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.

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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