The Commodities Futures Trading Commission (CFTC) has joined its social network of federal regulators (which includes MSRB and the SEC) in imposing wide-ranging and punitive pay-to-play restrictions on the financial world. The CFTC’s new rule, 23.451, imposes contribution prohibitions on “swap dealers” (discussed in nauseating technical detail here) and highlights the challenges for the regulated community in seeking to comply with the details of broad-brush government restrictions.
In a nutshell, CFTC Rule 23.451 prohibits a swap dealer from entering into a swap (or trading strategy involving a swap) with a governmental special entity for two years if the institution, one of its defined “covered associates”, or a Political Action Committee “controlled by the swap dealer” has made a contribution in excess of certain threshold amounts to an “official” of that governmental special entity in the preceding two years.
If you are a “swap dealer”, or think you might be one (and a number of “main street” banks are wrestling with that possibility now), this is a big deal. A single campaign contribution in excess of $150, if made by the wrong employee to the wrong candidate, will have the effect of debarring your entire financial institution from the derivative swap market for two full years.
“Sorry about that boss. Does this mean I can’t come to the Goldman Sachs Christmas Party this year?”
With draconian penalties like this, one would assume that the CFTC would go out of its way to define the specific “executive officers” the rule applies to or would provide some guidance whether an institution “controls” its PAC simply by covering its administrative expenses. One would be wrong. The regulated industry is on its own with the Sword of Damocles hanging perpetually over its head.
For now, pending further guidance from the CFTC between now and the October 15, 2012 effective date, the best one can do will be to look to guidance the SEC and MSRB provide with respect to their versions of pay-to-play regulation with respect to issues such as the definition of an “executive officer”, the nature of corporate compliance programs required, or the question of who “controls” of the corporate PAC.
The law of good intentions collides with the law of unintended consequences yet again. I’ll see some of you at the Christmas Party.