What Does Citizens United v. FEC Really Mean?

I received an email from a law student who posed a question about the impact of the recent Supreme Court decision in Citizens United v. FEC. The student asked:

"After the recent Supreme Court decision in Citizens United v. Federal Election Commission, it seems to me that pay-to-play laws across the nation will now serve even more of a purpose as corporations are now free to contribute to the political process (although not directly to candidates).

In saying that, I was wondering about your take on the matter. Am I missing something, or does Citizens really mean what I think it does?"

It’s a very good question because, while Citizens United doesn’t directly affect state pay-to-play issues, its impact is certain to be felt this legislative session. States and municipalities have already been struggling to respond to voter angst about the political process - and recent election results combined with breathless media reporting is certain to exacerbate that angst.

In a nutshell, Citizens United is a landmark ruling for corporations, unions and groups of individuals interested in participating in any aspect of the federal political debate. The ruling is particularly relevant because it is predicated upon a recognition that corporations, tax exempt groups and unions have a First Amendment right to use unlimited corporate funds for independent expenditures that expressly advocate the election or defeat of federal candidates. For those interested in reading more about the decision, a link to our firm’s client alert is attached here.

The ruling does not directly impact state pay-to-play laws because it expressly left intact existing federal and state limitations on campaign contributions and upon the ability of federal candidates to “coordinate” their activities with outside groups. It would be an error, however, to conclude that the Supreme Court’s ruling will not affect state legislative action on pay-to-play simply because the ruling doesn't affect contributions, coordination or any of the quid pro quo issues that pay-to-play laws are generally looking to capture. If anything, it is more likely that Citizens United is going to cause a number of state legislatures and municipal bodies to feel they need to pass tougher pay-to-play laws to counter the perceived invitation for corporations and unions to overwhelm the political process.

It is likely that such concerns are somewhat exaggerated. Rather than being incentivized by this enhanced recognition of rights to engage in pay-to-play politics, if anything, corporations and unions now have the opportunity to exert much more leverage with politicians simply by threatening to fund independent expenditures either for or against candidates depending on how responsive they are to the corporate or union cause. These groups no longer have to make contributions to exert leverage - they can do just fine on their own, thank you. As was seen just last week when a group of 40 corporate executives notified congressional leaders that they were tired of being solicited for campaign contributions, the ruling has already begun to change the political landscape away from the candidates and parties and towards the “independent expenditure”.

Governor Christie Issues Pay-to-Play Executive Order

As we mentioned in our previous blog entry, New Jersey is giving even further attention to its pay-to-play laws. Yesterday, to show the seriousness of his promises of reform, Governor Chris Christie issued an executive order that curbs political donations by labor unions and is intended to prevent pay-to-play politics from this donor group. Specifically, unions are now included in the group of donors who are barred from having state contracts worth more than $17,500 if they had donated more than $300 to a campaign for Governor or county political committee in the previous 18 months.

Democrats are voicing their opposition saying it is "over the top", as an important portion of their base is made up of labor unions. They do not believe the order will stay in place, denouncing it as an unconstitutional violation of free speech. Governor Christie claims that this simply applies the same rules as other similar types of businesses must comply with such as law and engineering firms.

Pay-to-Play Winds Blowing in New Jersey

For those that interact with this area of the law, it is well known that New Jersey has some of the most robust pay-to-play laws in the nation, at both the state and local levels. Perhaps not surprisingly, due to the numerous recent political scandals in New Jersey, the pay-to-play heat in the Garden State has been turned up even further.

At the state level, newly elected Governor Chris Christie made strengthening pay-to-play laws a central issue in his November 2009 campaign against John Corzine. Additional pay-to-play legislation at the state level seems likely, and the issue has already come up for the Governor personally during the short time after his victory.

Despite the fact that New Jersey's statewide pay-to-play statute applies in part to municipalities, local jurisdictions have joined in the rush to act. With the coming of the new year, New Jersey's media has been abuzz about pay-to-play in recent weeks in towns and cities across the state:
South Bergen
Seaside Park
Morristown

We at the Pay to Play Law Blog will continue to monitor the developments in New Jersey closely, as 2010 is sure to bring more complexity to an already difficult procurement environment. Stay tuned.

Governor Paterson Announces Sweeping Ethics and Campaign Finance Reform Legislation

New York Governor David A. Paterson has announced extensive ethics and campaign finance reform legislation, the "Reform Albany Act", which will be a focus of his second State of the State address.

The proposed legislation calls for the creation of a single, independent State Government Ethics Commission with advisory and enforcement powers regarding campaign finance, ethics and lobbying; and which would replace the New York State Commission on Public Integrity. It also provides for increased oversight and enhanced reporting by state officers of outside business activities, and enhanced reporting requirements for lobbyists. And, it would replace the State Comptroller as sole trustee of the New York State Common Retirement Fund (one of the largest pension funds in the U.S.) with a 5-member Board of Trustees.

The legislation also includes sweeping campaign finance reform: drastically reducing maximum contribution limits, limiting contributions to housekeeping accounts, and banning corporate contributions; as well as providing for a new system for the public financing of campaigns. The Governor has also proposed term limits for members of the Legislature and statewide officials (which would require a State Constitutional amendment).

The sweeping ethics reform initiative follows the recent trial and conviction former Senate Majority Leader Joseph L. Bruno on corruption charges, which exposed weaknesses in State ethics laws; as well as Attorney General Andrew Cuomo's investigation of Pay to Play activity involving the administration of the Common Retirement Fund under the former State Comptroller.

While several of the concepts in the legislation have been the subject of prior proposals, the reform package faces an uphill battle in the State Legislature. The State Senate and State Assembly are developing their own ethics initiatives. And, the estimated 30 million dollar price tag for public financing of campaigns comes at a time of financial crisis in the State, with the budget deficit in 2010 estimated at between 7 and 9 billion dollars.

Broad, Bipartisan Ethics Legislation Being Considered in Missouri

With the opening of legislative sessions nationwide, 2010 is sure to be one of the busiest years ever for pay-to-play legislation. As the Kansas City Star reports, numerous pieces of ethics reform legislation have already been filed in advance of Missouri's 2010 legislative session, which begins on January 6.

According to published reports, the most notable legislation is a bipartisan proposal aimed at overhauling Missouri's campaign finance system. Among other things, the legislation proposes to stop the common practice in Missouri of transferring funds between campaign committees, which can obscure the original donor of such funds. Additionally, the legislation would institute a mandatory online filing system for Missouri filing entities, and would require registration of some political consultants as "de facto lobbyists."

Notably, such legislation also has significant pay-to-play ramifications. Specifically, the new Missouri legislation would codify a prohibition on exchanging campaign contributions for legislative action. The Pay-to-Play blog will monitor this legislation as it goes through the legislative process, as well as similar legislation that is sure to be at issue nationwide in 2010.

MSRB Files Rule Change with SEC

As we highlighted in our November 11, 2009 blog post, in June the Municipal Securities Rulemaking Board (“MSRB”) announced plans to file a rule change with the SEC to revise Rule G-37. The MSRB created Rule G-37 in 1994 to prevent municipal securities dealers from being awarded business based on political contributions. The rule prohibits dealers from engaging in municipal securities business with issuers for two years if they make certain contributions to the political campaigns of officials of such issuers. The proposed revision to Rule G-37 would require municipal securities dealers, their muni professionals, and political action committees to disclose the political contributions they make to bond ballot election campaigns. On December 4, 2009, the MSRB filed with the SEC amendments to Rule G-37 and Rule G-8. Rule G-8 pertains to books and records to be made by brokers, dealers, and municipal securities dealers. Below please find a link to the text of the proposed rule changes. The SEC must approve the rules before they would become effective.

NY Pay-to-Play Probe Continues

Venture Capitalist Pleads Guilty

New York Attorney General Andrew Cuomo has announced that Elliott Broidy, chairman of Markstone Capital Group, has pleaded guilty to a felony charge of rewarding official misconduct, in cases involving senior officials in the office of former New York State Comptroller Alan Hevesi. Broidy funneled close to 1 million dollars in payments for the benefit of four senior officials in Hevesi's office, while he was pursuing work with the New York State Common Retirement Fund. The payments were made to friends or relatives of the officials. The Common Retirement Fund is one of the largest pension funds in the country, and the State Comptroller serves as its sole trustee.

Hevesi Implicated

It has been reported that the Attorney General's ongoing investigation has also directly implicated former state Comptroller Hevesi, for accepting luxury trips to Israel and Italy from Mr. Broidy. This is the first time that Mr. Hevesi has been implicated for receiving a direct financial benefit from an entity seeking work with the Common Retirement Fund.

Michigan Adds a New Wrinkle

A bill has recently been introduced in the Michigan State Senate to curtail a new element of “pay to play” politics. Michigan State Senator Cameron Brown (R-Fawn River Township, MI), has introduced a bill to prohibit candidates from paying others to endorse their candidacy. Like virtually all new restrictive pieces of pay to play legislation (especially those of dubious constitutionality), this legislation arises from recent significant media attention paid in Detroit to an alleged practice by city council candidates to pay unions, community organizations and other organizations to endorse their candidacy.

Senate Bill 984, which has been referred to the Michigan Senate Committee on Campaign and Election Oversight, provides that “A person shall not make a contribution to another person with the agreement or arrangement that the person receiving the contribution will then endorse a particular candidate”. The bill contemplates that violation of this new prohibition shall be a criminal misdemeanor.

Senator Brown is quoted as saying that he introduced this criminal prohibition because the practice of paying others to endorse one’s candidacy “raises questions of political corruption and pay to play. The support of respected community organizations should not be up for sale to the highest bidder.”

While this is surely true, one has to wonder whether criminal prohibitions on speech serve as the best means available to accomplish this worthy objective. One would assume that mere disclosure of such payments, similar to those now required of federal lobbyists through Form LD-203, combined with the desire of respected community organizations not to be revealed as up for sale, would serve to squelch such “corruption” as surely as the proposed legislation.

The SEC Has Been Busy With Pay-to-Play Compliance and Expects You To Be As Well

The Securities and Exchange Commission (SEC) has given notice that it intends to take a very active role with respect to pay-to-play issues in the securities markets and has put the regulated community on notice that it expects private corporate compliance training to be well under way as well.

As we have recently reported, the SEC has announced its intentions to take a significantly more aggressive regulatory posture with regard to the confluence of campaign contributions and public investing. Just last week, the House Financial Services Committee saw to it that the SEC has the tools for the job when it voted to double the SEC’s budget and awarded the Commission significantly greater regulatory powers.

The Municipal Securities Rulemaking Board (“MSRB”) has also gotten into the act by recently announcing plans to file a rule change with the SEC to revise Rule G-37 to prohibit dealers from engaging in municipal securities business with issuers for two years if they make certain contributions to the political campaigns of officials of issuers. The proposed revision to Rule G-37 would require municipal securities dealers, their muni professionals, and political action committees to disclose the political contributions they make to bond ballot election campaigns.

Meanwhile, in a case which should get the attention of compliance officers everywhere, the SEC has recently notified Southwest Securities Inc. that it plans to recommend “administrative and cease-and-desist proceedings” against the company based, in part, on the company’s failure to conduct compliance training for its financial services staff. In that case, the SEC initiated the action as a result of the company’s alleged use of political donations to win municipal bank work. Southwest’s (now former) employee at the center of the allegations maintained that he only unintentionally exceeded the MSRB cap of $250 donation per election and that the SEC was “more concerned about Southwest Securities and their lack of compliance training of their bankers.” According to FINRA records, Southwest said the employee had failed to report political contributions as required by MSRB and the employee, in turn, faulted the company for failing to adequately inform him of the MSRB rules.

In another, very significant action, the SEC announced last week that banking powerhouse JPMorgan has entered into a multi-million dollar settlement with the agency over allegations that company employees made unlawful payments to friends of county officials. Under the settlement JPMorgan agreed to cancel interest-rate swap contracts between it and Jefferson County, Alabama, pay $75 million in civil fines and payments, and forfeit $647 million in claimed termination fees under the swap contracts.

The allegations giving rise to liabilities in excess of $722 million for JP Morgan ultimately arose from allegations concerning the actions of just two (now former) managing directors of JPMorgan. “The transactions were complex but the scheme was simple,” SEC Enforcement Director Robert Khuzami said in a statement. “Senior JP Morgan bankers made unlawful payments to win business and earn fees.”

These federal enforcement developments highlight the importance of instituting a proper compliance training program. Firms should review and revise policies, practices, and procedures to stay current on the most recent versions of the rules and regulations promulgated by the SEC and MSRB. The SEC has put the regulated community on notice that failure to implement proper compliance policies and train employees adequately can have significant negative consequences. By undertaking the effort to develop a comprehensive compliance program before problems arise, companies can better protect themselves from potential liability and its related, potentially catastrophic, costs and expenses. 

Pay-to-Play Reform Enacted in Wake of Corruption Conviction

Trends regarding the enactment of pay-to-play legislation remain remarkably consistent and robust nationwide. Typically, pay-to-play legislation is passed in the wake of a corruption scandal that befalls a high-ranking public official. In such an instance, the political pressure on governing bodies is so tremendous to act, that pay-to-play reform is inevitable.

This trend has just played itself out once again in Dallas, where the Dallas City Council just yesterday passed a series of Ethics reform measures in the wake of the corruption conviction of former Mayor Pro Tem Don Hill. The entirety of the legislation, which exceeds some 1300 pages, can be found here.

The ethics package contains numerous changes to existing lobbyist registration and disclosure requirements, City Council zoning powers and the disclosure of gifts to Council members. Most relevant to the pay-to-play space is that anyone bidding on a city contract is now prohibited from making donations during the bid period. Additionally, "major" zoning applicants can no longer make contributions to Council members during the window which begins on the date of public notice of the zoning case, and which ends 60 days after the zoning case is resolved. Such changes are not too surprising in this instance, given that the scandal involving Hill revolved around favorable treatment for developers.