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April Showers Bring… Another Round of Pay-to-Play Changes in the State of Maryland

Spring may have sprung in the mid-Atlantic, but those contracting and doing business with the State of Maryland don’t feel like they’re receiving anything close to a flowery reception from the Maryland General Assembly this April. On the heels of a winter of discontent in the Old Line State, where those in the regulated community had to scramble to adjust to a new pay-to-play regime that involved unwieldy online filing obligations, modified contract valuation standards and contribution reporting requirements, and enhanced record retention and certification obligations, another new set of legislative changes has been adopted that will further alter the compliance playing field. You know what they say – when it rains it pours.unnamed

This new round of amendments to Maryland’s pay-to-play framework, contained in House Bill 769, was passed by the state legislature earlier this month and has been sent to new Governor Larry Hogan for his signature. If the bill is signed into law, as anticipated, Maryland state contractors will have until June 1, 2015 to “unlearn” some of what they just learned about Maryland’s comprehensive pay-to-play overhaul on January 1st of this year. Given that we’re currently less than four months into the new framework, at least the regulated community can say it hasn’t had time to get comfortable with the “suddenly-old” regime.

Under the changes proposed by House Bill 769, entities with more than $200,000 in total Maryland contracts as of the end of 2014 will be required to submit semi-annual pay-to-play contribution disclosure reports with the State Board of Elections starting in August of this year. This is the case even if such contractors receive no new government contracts from the state during 2015 – a change from the pay-to-play regime that went into effect on January 1, 2015, which exempted companies with no new 2015 contracts from having to file disclosures.

In addition to closing this potentially-unintended loophole in the recently-enacted pay-to-play regime, the legislative amendments in House Bill 769 also attempt to somewhat ease the existing reporting burden for disclosing contractors. Specifically, the new changes will excuse companies without reportable political contributions (by either the entity or its covered representatives) from having to openly disclose the minute details of all of their existing state contracts. Moving forward, contractors without such reportable contributions will need only indicate the specific government agencies with which they do business, but will no longer need to report the value, start date and termination date of all their state contracts. This will undoubtedly be seen as a small ray of sunshine for those in the reporting community.

Before those doing business with the State of Maryland go getting all giddy, however, they should also take note of how House Bill 769 will alter the traditional pay-to-play reporting schedule for state contractors. As noted above, the next semiannual disclosure filing for contractors will be due in August of this year. The filing deadline for that report, however, has been moved from the customary date of August 5th to a new date of August 31st. The August disclosure will be required to cover reportable contractor activities between February 1, 2015 and July 31, 2015.

Following the completion of that submission, filing parties will be required to submit another pay-to-play report by November 30, 2015 covering reportable activities between August 1st and October 31st. Subsequent to that November 30th filing, all government contractors will face a semi-annual filing schedule for 2016 and beyond. Such reports will be due on May 31st and November 30th of each year, and will cover reportable activities during the preceding six month periods.

Keeping the above amendments in mind, the good news for the regulated community is that these changes will be the only new legislative wrinkles in Maryland pay-to-play law for at least the next 8 months. The bad news is that regulators in Annapolis will have ample time between now and next January (when the General Assembly goes back into session) to weigh in on the changes and unleash their own brand of administrative storm clouds. No matter when the next storm hits, however, you can count on your friendly legal meteorologists here at Pay-to-Play Law Blog to keep you up to date

April Showers Bring… Another Round of Pay-to-Play Changes in the State of Maryland

Amicus Brief Highlights the Massive Reach and Unintended Consequences of SEC Rule 206(4)-5

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We have been following for some time the legal challenge brought by various political parties to the SEC’s pay-to-play Rule 206(4)-5.  That lawsuit, you will recall, challenges both the constitutionality and administrative jurisdiction of the SEC’s efforts to regulate campaign activity (“protected speech” by another name?) by investment advisors.  Litigation continues to press forward as the parties are set to square off again before the Court of Appeals on March 23. The latest briefing is here and our take on the appellate issues is set forth here in case you were getting popcorn and missed the action.

Now, the ongoing litigation has revealed a new plot line that this blog has written about several times: pay-to-play rules in general (and Rule 206(4)-5 specifically) have a really annoying way of converting well-intentioned policy aspirations into a morass of unintended compliance uncertainty and costs for the regulated community.  Simply stated, it is very easy to say, “Gee, it would be nice for my regulating agency to give the public confidence that government largesse isn’t handed out on the basis of who writes the biggest campaign checks.”  It is very, very hard for the appropriate regulating authority to write restrictions into law that don’t violate constitutional principles of free speech, become unconstitutionally overbroad, or otherwise create a compliance nightmare for the 99.98% of the private sector, who simply want to go about the process of doing business with the government without unknowingly finding themselves subjected to massive liability.

That tension has manifested in the thoughtful – and, quite frankly, scary – amicus brief filed by the Center for Competitive Politics on behalf of the Financial Services Institute.  In that brief, FSI notes that it is a network of independent financial advisors which are each independent broker-dealers operating entirely separately from each other as independent contractors.  Because some of these advisors are registered to provide services to pension funds and other government retirement plans, FSI member firms are subject to Rule 206(4)-5.  Makes sense, right?  Sure, until one contemplates the fact that 206(4)-5 as crafted treats all of these Mom-and-Pop advisers who happen to be performing as independent contractors under the same FSI logo are inter-related “covered associates” for pay-to-play purposes.  They are all responsible for each other’s campaign activity because the SEC chooses to treat “independent contractors” as “employees” for pay-to-play enforcement purposes (Black’s Law Dictionary having no jurisdiction over the Wisdom of the Sovereign).

Think about that.  Part-time FSI advisor Mabel in Topeka can make a political contribution that prevents Reggie in Trenton from being able to get paid under his investment advisory services contract for two years even though the two have never met (or, possibly, Reggie really pissed Mabel off with something he said at the FSI Christmas gathering in Orlando)!  What can FSI do other than what every rational, responsible, compliance-based organization would do?  It simply bans all contribution activity by all agents; regardless of the fact that the contributing agent has no intentions of ever doing business with the recipient politician.  (Amicus Brief, p. 6).

That can’t be the answer mandated by the Constitution.  It is, however, the logical response to the current morass of unintended compliance uncertainty suffered by the FSIs of the world.

Amicus Brief Highlights the Massive Reach and Unintended Consequences of SEC Rule 206(4)-5

FINRA Quietly Proposes Pay-to-Play Type Rules for Its Broker-Dealer Members

FINRA
Late last week, the Financial Industry Regulatory Authority (FINRA) quietly posted a new regulatory notice proposing a series of pay-to-play type rules for its broker-dealer members that closely track the pay-to-play provisions set forth by the Securities and Exchange Commission (SEC) in Rule 206(4)-5. FINRA, the self-regulatory organization for broker-dealers, announced three specific rule proposals in its notice – Rule 2390, Rule 2271 and Rule 4580.

Proposed Rule 2390, which is clearly modeled on Rule 206(4)-5, would restrict FINRA’s member firms from engaging 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 those advisors make a disqualifying political contribution. The proposed rule would not specifically ban or limit the amount of political contributions covered FINRA members or their covered associates could make to government officials, but would instead impose a two-year time out on engaging in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser when the FINRA member or its covered associates make a disqualifying contribution.

While this type of pay-to-play framework should be familiar to those in the regulated community, what might not be so familiar are the disgorgement of profit provisions contained in proposed Rule 2390. Unlike SEC Rule 206(4)-5, the currently-announced framework of Rule 2390 would obligate covered FINRA members to disgorge any compensation or other remuneration received in association with, pertaining to, or arising out of, distribution or solicitation activities during the two-year time out period caused by a disqualifying contribution. The proposed rule would also prohibit covered FINRA members from entering into arrangements with investment advisers or government entities to recoup any such disgorged compensation at a later time period.

The remaining two proposals set forth in FINRA’s regulatory notice – Rule 2271 and Rule 4580 – deal with disclosure and recordkeeping requirements for broker-dealer members engaged in covered government distribution and solicitation activities. Specifically, proposed Rule 2271 would obligate covered FINRA members engaging in distribution and solicitation activities with a government entity to make specified disclosures to such entity regarding the identity of the investment adviser(s) being represented and the nature of the compensation arrangement associated with the representation.  Meanwhile, proposed Rule 4580 would require covered FINRA members engaging in distribution and solicitation activities with a government entity on behalf of any investment adviser to maintain specified records that could be examined by FINRA for compliance with the obligations of proposed Rules 2390 and 2271.

In conjunction with the publication of its current regulatory notice, FINRA has requested public comment from both members and non-members on all aspects of the planned provisions, including “any potential costs and burdens of the proposed rules.” For those interested in participating in the open comment process, December 15 has been set as the current response deadline. Given the likelihood of swift adoption of the proposed rules following that date, broker-dealers subject to the regulatory reach of FINRA should begin updating their compliance programs in short order.

FINRA Quietly Proposes Pay-to-Play Type Rules for Its Broker-Dealer Members

No More “Golden Goose” for School Bond Campaign Donors in the Golden State?

As frequent readers of this blog know well, California has always been considered a fairly restrictive jurisdiction when it comes to the regulation of pay-to-play politics. One large exception to that general rule, however, has been in the school bond campaign context, where financial institutions, attorneys and underwriters have traditionally been permitted to give sizable campaign contributions in support of potential bond initiatives that could benefit their bottom line.

From the perspective of political transparency advocates, such school bond campaigns have long been the “golden goose” of California’s pay-to-play politics. The formula in these settings has been simple – feed the government “goose” with large donations to help a municipal bond campaign pass, and reap the “golden egg” benefits by being hired by the corresponding state or municipal government to underwrite, advise or consult on the bond issuance. Based upon the recent comments and actions of various California officials, however, it appears that the era of the school board campaign golden goose may soon be coming to an end in the Golden State.

The push to curb pay-to-play activities in the school bond context began earlier this year when California State Treasurer Bill Lockyer sounded the alarm on such activities and asked State Attorney General Kamala Harris to examine the legality of several deals involving active school bond campaign donors. Building off of that effort, Treasurer Lockyer next called on state officials in Sacramento to take legislative action to institute a rule forbidding financial advisers, bond underwriters and bond lawyers that give money to bond campaigns from working in association with such bond projects.

While Lockyer has failed to spell out a specific regulatory model of his own, he has embraced statewide legislative action and backed a bill previously introduced by State Assemblyman Donald Wagner earlier this year. That bill, A.B. 621, passed the California Assembly by an overwhelming margin in mid-May. Despite broad bipartisan support for the legislation, however, it has since stalled out in the State Senate Governance and Finance Committee. Lockyer has also endorsed similar legislative solutions put forth by municipal groups such as the California Association of County Treasurers and Tax Collectors.

Coinciding with the push from Lockyer and other state officials for a California-wide approach to school bond campaign pay-to-play regulation, there has also been recent momentum on the municipal front. Leading the charge has been Los Angeles County Treasurer Mark Saladino, who earlier this month pledged to ban bond underwriting firms who donate to school bond campaigns from doing business with the county. Saladino asserts, based upon research conducted by the Los Angeles Times and other publications, that virtually all vendors hired by California school districts in recent years to assist with bond issuances have made contributions to the associated district bond campaigns and been retained without competitive bidding. This phenomenon, he claims, drives up the cost of bond issuance for state taxpayers.

In the wake of this recent announcement, Saladino has been rallying his local government counterparts across the state to adopt similar approaches until such time as Treasurer Lockyer and the folks in Sacramento implement a broad-based solution. Not all county and municipalities have been quick to follow suit, however.

San Diego County appears to be one such municipality. Despite what appears to be strong evidence of a growing pay-to-play culture in San Diego area school bond campaigns, San Diego County Treasurer-Tax Collector Dan McAllister is skeptical of the Los Angeles County approach. While sympathetic to Saladino’s call for tighter pay-to-play restrictions in the school bond campaign context, McAllister believes that a local, piece-meal approach to reform will be both difficult to implement and enforce, and unlikely to be as effective as a comprehensive, statewide approach to the problem.

Regardless of which reform model leads the charge in the Golden State over the next few months, it appears relatively clear that the days of school bond campaign pay-to-play in California are numbered. As changes occur in the state and local landscape, we here at Pay to Play Law Blog will be here to help you take a “gander” at the relevant legal changes.

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No More “Golden Goose” for School Bond Campaign Donors in the Golden State?

Do SEC and MSRB Pay-to-Play Rules Scare Off Donations to Federal Candidates?

As readers of this blog know well, the avowed goal of the SEC’s pay-to-play framework is to protect the integrity of the public procurement process by preventing registered investment advisors from improperly influencing the award of state and local contracts for the management of public investment funds. On its surface, Rule 206(4)-5, which bars investment advisors from managing public investment funds in jurisdictions where their political contributions or the contributions of their “covered associates” exceed $150 per election to elected officials who directly or indirectly oversee such funds, seems well suited to this task. The problem is that many covered by these provisions – and their helpful in-house compliance officers – erroneously believe that SEC restrictions apply to contributions to ALL candidates. This is incorrect.

The language of Rule 206(4)-5 neither prohibits nor restricts investment advisors from contributing to federal candidates who presently hold no state or local office – only state “officials” from a “government entity” who have the power to directly or indirectly influence the outcome of the hiring of investment advisors (check out page 43 of the SEC’s link above if you don’t believe me). As we, and others, have pointed out previously, this rule does not apply to contributions to sitting federal candidates or to private citizens running to replace those federal candidates. Likewise, the SEC’s pay-to-play provisions place no restrictions on political donations from covered entities or individuals to state or municipal candidates who play no role in the direct or indirect oversight of public investment funds. Of course, state and local pay-to-play rules might still apply in certain circumstances – such as where a sitting state official is running for federal office, but there is no need (as a reaction to SEC pay-to-play regulations) to adopt caps that artificially restrict the ability of investment firm employees to engage in constitutionally-protected political speech.

Much the same error of interpretation can be seen in the MSRB pay-to-play context. Like their brethren in the investment advisory world, many municipal finance professionals covered by Rule G-37 erroneously believe that its provisions restrict political contributions to ALL candidates. This is simply not the case. Rule G-37’s candidate contribution provisions only restrict donations to “official(s) of any issuer” who can directly or indirectly influence the hiring of a municipal securities professional, or donations to state officials or candidates who have the authority to appoint persons with such influence. The MSRB’s regulatory framework does not prohibit contributions to federal candidates who hold no state or local office, nor does it bar contributions to private citizens turned federal candidates.

Keeping these points mind, we hope that our readers working in the investment advisory and municipal finance arenas take a moment to examine their current political contribution policies, and ensure that they successfully protect their business development interests without unnecessarily curbing otherwise legitimate and beneficial political activities. On the other hand, it could be that the SEC and MSRB pay-to-play rules are simply an inoffensive way to say “thanks, but no thanks” to your friendly neighborhood federal candidate. Can’t do anything about that…

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Do SEC and MSRB Pay-to-Play Rules Scare Off Donations to Federal Candidates?

Just Call It The “Pay-to-Play” Corridor

 

 When one hears about state pay-to-play reform efforts underway along the “Northeastern Corridor”, it’s only natural to look first to the news wires in New Jersey, Connecticut and New York. After all, those jurisdictions have proven themselves to be the leaders of the pack when it comes to pay-to-play advancements, or at least reformist, pay-to-play rhetoric. In recent weeks, however, we have begun to see momentum building behind new pay-to-play legislation in the neighboring jurisdictions of Pennsylvania and Rhode Island. Depending on the outcome of these new efforts, perhaps it’s time that we drop the directional nomenclature and simply start calling the entire region the “Pay-to-Play Corridor”.

Pennsylvania Legislative Activity

Given the steady stream of “perp walks” seen in the Keystone state over the past month, one could have anticipated significant legislative action on the pay-to-play front. For those of our readers who missed the reports because they were busy “Spring Breaking” or watching their March Madness brackets go down in flames, here’s the long and short of it. In mid March, Pennsylvania Attorney General Kathleen Kane brought a collection of criminal charges against eight Pennsylvania lawmakers and government officials in connection with a wide-ranging bid-rigging and bribery scheme associated with the Pennsylvania Turnpike Commission. Included among those charged were former State Senator Robert Mellow, former Turnpike CEO Joseph Brimmeier, and former Turnpike Chairman Mitchell Rubin, who allegedly directed Turnpike contracts to favored vendors and campaign supporters, and misused millions of dollars in public funds.

With the discovery of this textbook pay-to-play scandal, Pennsylvania lawmakers have been scurrying to distance themselves from the parties involved and position themselves on the right side of pay-to-play reform. The result has been a flurry of legislative ideas and proposals from members in both the state House of Representatives and state Senate. Among the more heavily publicized bills under consideration are SB 750 through SB 758, a collection of pay-to-play and ethics bills sponsored by the bi-partisan tandem of State Senator Mike Stack (D-Philadelphia) and State Senator John Eichelberger, Jr. (R-Blair). As one might expect, the range of issues addressed by these nine bills is quite broad.

Although the specific language in the draft bills has not yet been made publicly available, SB 753, SB 754 and SB 755 appear to focus on contracting issues, requiring the public disclosure of vendor scoring on state RFP bids, the reporting of any payments made to state vendors by registered state PACs or candidate committees, and the disclosure of all subcontractors by state vendors. Meanwhile, SB 750, SB 756 and SB 758 purport to tackle gift and contribution issues by calling for a decrease in the state gift reporting threshold from $250 to $50, requiring the public disclosure of certain campaign contributions by executive branch advisory commission and task force members, and installing an outright ban on gifts to executive branch officials and employees by all companies that do business with, or are regulated by, the Commonwealth.

As of this blog’s publication, none of these proposals have been taken up for consideration in the Pennsylvania State Senate. Their introduction, however, does indicate one direction that the Keystone State’s legislature is looking to go in the wake of the Turnpike scandal.

>Another potential pathway to reform in Pennsylvania was launched earlier this week in the state House of Representatives by Representative George Dunbar (R-Westmoreland). His bill, HB 201, attempts to bring increased transparency and accountability to the state procurement process by incorporating a two-year “revolving-door” provision into Pennsylvania laws governing the competitive sealed bidding process. The legislation passed the House unanimously on Tuesday, but failed to include several amendments proposed by Rep. Brandon Neuman (D-Washington) and others, which would have implemented pay-to-play contribution reporting provisions akin to those seen at the state level in New Jersey.

Perhaps Keystone legislators were scared off by the recent words of New Jersey Election Law Enforcement Commissioner Jeff Brindle, which highlight the unwieldy nature of the Garden State’s pay-to-play framework? Or perhaps it was a pure political dodge? Their true motivations may never be known, but we will continue to keep our readers posted as the aforementioned bills make their way through the state legislative process and new proposals are introduced.

Rhode Island Legislative Activity

Further north on the Pay-to-Play Corridor, we are also beginning to see Rhode Island officials join the push for reform. At present, Rhode Island’s pay-to-play laws place limited, disclosure-only reporting obligations on state contractors. Under these obligations, vendors with contracts for goods or services valued at $5,000 or more are required to disclose on an affidavit all contributions to state officers, general assembly candidates and political parties in excess of $250 made within two years of the beginning of a state contract. These provisions do not, however, place any inherent limitations on the political giving of potential or actual state vendors.

Hoping to rectify this shortcoming, State Attorney General Peter Kilmartin and State Representative Michael Marcello have worked together to draft and introduce legislation that would prohibit state vendors, their owners, their executive officers, and the spouses and minor children of those owners and officers from making political contributions to state officials and state candidates who are or could be generally responsible for awarding state contracts. This ban would apply to all vendors with existing state contracts valued at over $5,000 (or aggregating to over $25,000), and would be effective for the duration of the officeholder’s term or for two years following the termination or expiration of the contract, whichever is longer.

The bill, H 5490, also places a similar restriction on the executives and family members of companies with pending bids for state contracts. This ban on contributions by vendors with pending bids or contracts would likewise apply in all situations where contract value exceeds $5,000 on any one bid or contract, or $25,000 on aggregate bids or contracts.

The language of the Kilmartin/Marcello bill is broadly drafted to cover contributions made to a wide range of state officials, including the Governor, and includes a low value threshold to ensure nearly universal application to all state contracts. Whether those particular elements survive the legislative process moving forward, however, is yet to be seen. So far, the bill remains in its introduced form and has been held over for further study by the Rhode Island House Judiciary Committee. As additional news on its progress becomes available, we here at Pay to Play Law Blog will keep everyone updated.

Just Call It The “Pay-to-Play” Corridor

Dollars to Donuts…Federal and State Pay-to-Play Rules Make 2013 New Jersey Political Engagement a Veritable Minefield for Current and Prospective Government Contractors, Investment Advisers, Municipal Securities Professionals and Swap Dealers

While 2013 may be a quiet year on the federal election front, there will still be plenty of political noise made this fall in the Garden State as New Jersey’s state and local elections take center stage. The ardent politicos among our readers are probably disappointed that we won’t be seeing the “rising star” gubernatorial showdown between incumbent Chris Christie and Newark Mayor Cory Booker, but there will still be high-stakes drama along the Turnpike as both parties tussle over important state and local offices this November. These races will present ample opportunity for political participation throughout the year by individuals, corporations, unions, trade associations, PACs and organizations from around the country. After all, Governor Christie and other state candidates can’t win reelection with only donuts in their pockets… they might need some financial resources as well.

Whether dealing with donuts or dollars, however, due to the combination of federal pay-to-play rules and New Jersey’s highly restrictive state and local pay-to-play framework, the Garden State will be a treacherous political playing field for those individuals and entities that “do business” in one manner or the other with state, county and municipal government. This is particularly the case for those who are current or prospective government contractors, and those who fit the definition of investment advisers, municipal securities professionals, or swap dealers.

Readers of this blog should be intimately familiar with federal pay-to-play provisions such as SEC Rule 206(4)-5, MSRB Rule G-37, and CFTC Rule 23.451, which prohibit “covered” investment, municipal finance and swap firms, their covered employees, and any political action committees (PACs) under their control from making, soliciting or coordinating contributions on behalf of covered officials. New Jersey Officials covered under these rules include Governor Christie (who appoints individuals to the State Investment Council and other entities that may select an investment adviser or issue municipal bonds) and various other county and local elected officials who have the authority to directly or indirectly select or influence the hiring of governmental investment advisers, municipal securities dealers, or governmental special entity swap dealers.

Due to these federally-imposed restrictions, potentially-covered firms, employees and their PACs should think carefully about the pay-to-play consequences of engaging politically on behalf of the Governor or any other covered elected officials or candidates for elected office. After all, anything more than a de minimis contribution to a covered official or candidate by an investment adviser, municipal securities dealer, swap dealer or affiliate can lead to a two year ban on the receipt of compensation for services provided to state or local government. Contribution solicitation or coordination activities by covered firms and their affiliates can also lead to similar disqualifications from government engagements.

Federal pay-to-play rules, however, do not represent the only potential political activity traps awaiting those who do business with state and local governments in New Jersey. Existing or prospective government contractors must also be weary of the expansive pay-to-play framework in place at the state, county and municipality levels in the Garden State. At the state level, pay-to-play restrictions set forth in N.J.P.S. §19:44A et seq., N.J.A.C. §19:25-24 et seq., and the provisions of Executive Orders #117 & #118 effectively limit the political giving and fundraising abilities of commercial entities and associated individuals that do business with state government, the state legislature, and various county and municipal governments.

These rules limit political activity by banning certain prospective contractors from entering into agreements with the state if their business entities have solicited or made more than de minimis contributions to candidates for Governor or Lieutenant Governor, or to any legislative leadership committee or state/county/municipal party committee within 18 months of commencing negotiations for a contract or agreement. The state pay-to-play provisions also prohibit existing government contractors from soliciting or contributing money to the same covered officials and committees during the life of their contract or agreement. Additional restrictions likewise limit the political donations and solicitations of state-legislative, county and municipal contractors to de minimis levels within 12 months of seeking a government contract or agreement and during the life of such contract or agreement when the contributions or solicitations involve covered officials. In certain settings, state law also places similar restrictions on redevelopment contractors and individuals or entities that seek to evade the normal pay-to-play rules through indirect, earmarked contributions to covered officials via intermediary groups.

As a result of these restrictions, a wide range of “business entities” and affiliated individuals must weigh whether New Jersey political engagement is worth the potential cost of losing business opportunities with state, county and municipal governments. Potential affected parties include corporations and their officers, partnerships and their partners, LLPs and their partners, professional corporations and their shareholders or officers, LLCs and their members, sole proprietorships and their proprietors, and other organizations and their principals/officers/partners. Directly or indirectly controlled subsidiaries of such business entities, PACs and SSFs directly or indirectly controlled by such business entities, and the spouses and dependent children of affiliated individuals also face a similar dilemma.

Add to this mix the hodgepodge of unique county and municipal pay-to-play provisions layered on top of the statewide rules, and New Jersey political engagement becomes a very risky proposition for potential or existing government contractors, investment advisers, municipal securities professionals, swap dealers, and others who do a great deal of business with government. As such, before our readers dive headlong into political engagement in New Jersey this cycle, it is imperative that they seek out experienced political law counsel and stay tuned for our latest updates from the Garden State.

And for those sticking to donut donations this year, be sure to keep your in-kind contribution of Krispy Kremes to de minimis levels and pay-to-play compliant.

Dollars to Donuts…Federal and State Pay-to-Play Rules Make 2013 New Jersey Political Engagement a Veritable Minefield for Current and Prospective Government Contractors, Investment Advisers, Municipal Securities Professionals and Swap Dealers

Holiday “Gifts” from the Nation’s Capitol

A Contrasting Pair of Pay-to-Play Reprieves Emerge in the District

Just in time for the holiday season, an unexpected present from the U.S. Commodity Futures Trading Commission (CFTC) has found its way under the tree of a group that was most likely expecting to receive coal in its pay-to-play stocking. “Swap dealers”, the target of increased pay-to-play scrutiny from the CFTC over the past year, recently received the gift of thoughtful pay-to-play enforcement restraint from the Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO). Meanwhile, a similar enforcement reprieve has also been given by the D.C. Council to the city’s municipal government contractors, a popular target among pay-to-play reform groups – although perhaps not for the same reason. The gifts brought to the manger might be the same, but the wisdom of the bearers … not so much.

The CFTC was the first to show its holiday spirit in the form of a no-action letter addressing the pay-to-play rules applicable to swap dealers who conduct business with certain “governmental special entities”. The CFTC pay-to-play rules in Commission Regulation 23.451, which this blog previously covered in detail, restrict a swap dealer from engaging in certain activities with a “governmental special entity” if the swap dealer (or a covered associate of the swap dealer) made or solicited contributions to an official of that governmental special entity during the two preceding years. Such rules were meant to be in regulatory harmony with similar pay-to-play provisions promulgated by the Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB). The DSIO, however, found them to be unnecessarily broader than their SEC and MSRB counterparts, particularly as they applied to political contributions associated with officials of federal or other non-state or non-local government agencies or instrumentalities.

As such, the DSIO issued its November no-action letter to provide swap dealers and their covered associates with relief from having to unnecessarily “expend significant resources to update their current policies and procedures to ensure compliance with Regulation 23.451’s prohibition” on contributions not otherwise covered by the SEC and/or MSRB rules. In its letter, the DSIO officially stated that “the Division will not recommend that the [CFTC] take an enforcement action against any [swap dealer] or covered associate of any [swap dealer] for failure to be fully compliant with Regulation 23.451” with respect to contributions not generally subject to restriction by the SEC and/or MSRB pay-to-play rules.

By implementing this limitation, the DSIO appears to be making an effort to provide swap dealers with clarity regarding the scope of the CFTC’s pay-to-play provisions and likewise to harmonize such regulatory requirements with the statutory directives of the Dodd-Frank Act and other federal law. In this sense, the CFTC reprieve is both well meaning and a sensible policy decision. The reprieve offered by the D.C. Council, however, appears to be more the product of bureaucracy and delay than sensibility.

As such, on the other end of the naughty/nice list, we have the D.C. Council’s foot dragging on pay-to-play reform. As detailed in the pages of this blog over the course of the past year, various elected officials in the District of Columbia have been “hard at work” pushing comprehensive ethics and pay-to-play reform proposals in front of the D.C. Council. Back in March, Councilman Tommy Wells introduced a piece of legislation containing a collection of pay-to-play reforms for the District that had been previously ignored by the Council in 2011. Similarly, in September of this year, Mayor Vincent Gray presented his own proposal, drafted by D.C. Attorney General Irvin Nathan, which would seriously restrict the ability of major Washington vendors to make political contributions to any District official or candidate involved in influencing the award of a contract or grant by the municipal government.  Shortly thereafter, Councilman Jack Evans also introduced his own “pay-to-play” proposal that seeks to entirely remove the D.C. Council from the municipal contract-approval process.

Despite the sound and fury associated with the introduction of these reform efforts, the council has yet to produce any results. In fact, none of these proposals has moved an inch in the D.C. Council’s legislative process, leaving many reform advocates wondering whether the push toward campaign finance and pay-to-play reform in the District is more about politicians seeking to score public relations points and less about serious legislative changes. As the Editorial Board of The Washington Post put it earlier this week:

            “[The fact] that the council didn’t have the time [to move forward on campaign finance and pay-to-play reform] – the excuse offered for inaction – speaks to a distressing lack of urgency in addressing this critical issue. Even more worrisome, it suggests a reluctance among those who benefit from the slack regulation of political dollars to fix a system that has helped perpetuate the District’s ‘pay-to-play’ culture.”

The excuse being referenced by the Post is a recent statement by D.C. Council Chairman Phil Mendelson indicating that no legislative progress will be made on campaign finance reform before the end of the Council’s yearly session. Similar comments have also been made by Councilwoman Muriel Bowser, the Chairwoman of the Government Operations Committee, who claimed that “most members [of the Council] … don’t want to rush” with regard to reform efforts. Can kicking at its best.

Long story short… don’t expect pay-to-play changes in the District any time soon. Nevertheless, should the D.C. Council decide to take action in the new year, Pay-to-Play Law Blog will be right here keeping our readers up to date.

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Holiday “Gifts” from the Nation’s Capitol

D.C. Pay-to-Play Updates – Examining the Legislative Language of the Mayor’s Proposed Pay-to-Play Rules and A New Proposal From D.C. Councilman Jack Evans

Right before the Labor Day holiday weekend, Pay-to-Play Law Blog offered its readers a quick update on some of the latest pay-to-play regulatory happenings along the Potomac.  In particular, we previewed the strict pay-to-play proposal being championed by Washington, D.C. Mayor Vincent Gray and Attorney General Irving Nathan, and promised a follow-up post in the wake of a formal legislative submission to the D.C. Council.  Well… that time is upon us.  And for all of our readers who bet that Gray and Nathan would offer up a bill that matched their rhetoric, it’s time to collect.

Submitted to the Council at the end of September, Gray and Nathan’s draft bill memorialized their previous verbal proposals in a written form that, if passed, would make the District’s pay-to-play regulatory scheme one of the strictest in the nation. The key provision in the draft legislation is designed to severely curb political donations from city vendors and prospective vendors who hold or seek municipal contracts valued at $250,000 or more. The proposed legislative language appears to accomplish that goal by attacking pay-to-play politics from both the government and contractor side of the equation.

First and foremost, the bill prohibits the D.C. government, its purchasing agents or agencies, and its independent authorities from entering into any agreement or otherwise contracting to procure goods, services or equipment from or sell property to any “covered contractor” if such contractor seeks or holds grants with the District with a cumulative value of $250,000 or more and has solicited or made any contribution or expenditure to a “prohibited recipient” within the prescribed time period. Simultaneously, from the contractor perspective, the legislation also prohibits any prospective or current “covered contractor” seeking or holding District grants worth $250,000 or more from soliciting or making any contribution or expenditure to a “prohibited recipient” within the same prescribed time period. Under either prohibition, the prescribed time period encompasses at least the bid/proposal solicitation and determination window, and for successful contractors, stretches for one year following the final payment date on the contract or grant at issue.

For the purposes of these legislative restrictions, the term “covered contractor” is defined to refer to any individual or sole proprietor, business, corporation, firm, partnership or association seeking or holding a contract to provide goods or services to the D.C. government, or seeking or holding a grant from the D.C. government. Meanwhile, the term “prohibited recipient” refers to a wide range of individuals and entities, including the following: any elected District official who is or could be involved in influencing the award of a government contract or grant; any candidate for elected District office who is or could be involved in influencing the award of a government contract or grant; any political committee affiliated with such officials or candidates; any constituent-service program or fund controlled by such officials or candidates; any political party; or any entity or organization controlled or owned by an official, candidate, or their immediate family.

The bill’s ban on contributions and expenditures by covered contractors also stretches to cover any “related party” of the contractor, including associated trusts, LLCs, general partners of LLCs, and political committees. If the contractor is a corporation, the ban also applies to the officers and directors of the corporation, or any principal who has a controlling interest in the corporation. The terms of the legislation even go so far as to limit contributions and expenditures to prohibited recipients by the immediate family members of covered contractors to $300 per election per person.

In sum, Gray and Nathan’s bill seeks to institute a comprehensive, but not quite universal, ban on political contributions and expenditures by major District contractors and prospective contractors, their officers, directors and principals, and any other “related parties” affiliated with such contractors or prospective contractors. In the process, the legislation also sets up a penalty structure whereby offending parties are subject to a panoply of punishments, including sizeable civil penalties, termination of existing contracts or grants, temporary debarment from District contracting (for a period of up to four years), and even criminal prosecution (in certain settings).

The language of the present bill is certain to change as it makes its way through the D.C. Council this fall, but it would be naïve to think that some components of its pay-to-play restrictions will not survive to become law. This is particularly the case in light of the bill’s early endorsement by several Democrat political organizations within the District, including the Ward 4 Democrats.  Stay tuned to Pay-to-Play Law Blog for continuing coverage…

Proposal to Remove the D.C. Council’s Right of Review Over Large City Contracts

In the wake of the legislative submission by Mayor Gray and Attorney General Nathan, we have also seen other D.C. officials scrambling to hop on board the pay-to-play reform train. One of the officials leading the charge down the Union Station platform has been Councilman Jack Evans, who recently announced a legislative proposal that would revoke the District Council’s “right of review” with regard to city contracts worth over $1 million.

From Evans’ perspective, the best way to remove the D.C. Council’s incentive to engage in pay-to-play politics is to remove it entirely from the contract-approval process. Under D.C.’s current procurement procedures, both the executive and the legislative branches of District government are tasked with reviewing and approving contracts and grants. This system was initially established in the 1990s as a reaction to increasing mistrust concerning the executive branch’s handling of the procurement review process. Evans’ proposed bill, however, would effectively turn back the clock on contract review in the District and give the Mayor’s office much more sway over grant approval or rejection.

According to Evans, the dual contract review system is “supposed to serve as a check and a balance on the [M]ayor”, but instead functions as an invitation to either blind rubber-stamping or pay-to-play activities on the part of the District Council. From his point of view, the Council typically engages in the procurement process for political purposes and rarely meddles in contracts or grants because of the relative merits of the awards.

That very well may be the case, but Pay-to-Play Law Blog is not at all convinced that Evans’ proposal fully tackles pay-to-play activities in the District. In fact, in the absence of any other regulatory changes, the proposal might well be seen as a larger opportunity for pay-to-play conduct on the part of the Mayor and those in the executive branch. Not that Evans would participate in such activities if he is successful in his future mayoral run, but his proposal certainly wouldn’t decrease the temptation to play politics with District contracts among future mayors.

It remains to be seen what the ultimate outcome of Evans’ proposal will be, but it is safe to say that Mayor Gray is unlikely to turn down an opportunity to secure greater authority over the District procurement process. Commentators and other members of the D.C. Council, however, have not been so quick to offer support to Evans’s legislative idea. We’ll see how things proceed in the coming weeks and be sure to keep our readers posted as D.C. continues to reshape its campaign finance and pay-to-play regulatory structures.

D.C. Pay-to-Play Updates – Examining the Legislative Language of the Mayor’s Proposed Pay-to-Play Rules and A New Proposal From D.C. Councilman Jack Evans

Local Pay-to-Play Provision To Be Put Before the Voters In South Jersey, While DC Mayor Vincent Gray Makes A Push for New Pay-to-Play Rules in the Nation’s Capitol

With Labor Day weekend at hand and the Republican and Democratic National Conventions upon us, much of the American electorate is finally beginning to tune back into politics and prepare themselves for what will certainly be a very interesting close to the 2012 campaign season. News regarding the race for The White House will certainly dominate the media over the coming months, and rightfully so, but Pay-to-Play Law Blog is here to offer our readers, particularly those residing in swing states, a brief respite from the 24-7 presidential election coverage. We know our readers love Super PAC advertisements, political campaign internet pop-ups, and robo-calls as much as (if not more than) anyone, but we also know that they like to stay up to date on the important state and local pay-to-play news that might otherwise be slipping through the cracks between now and November 6th. With that in mind, we offer up a few recent items of interest from the Garden State and D.C.

New Jersey

In New Jersey, where individuals and businesses alike must already deal with restrictive pay-to-play provisions at the state level, we are continuing to see similar (and often more serious) restrictions contemplated and put in place at the municipal level. For example, consider recent developments in Gloucester Township, an exurb of Philadelphia, which has had an extraordinarily busy summer when it comes to “pay-to-play” developments.

Several months ago, a conservative transparency group known as South Jersey Citizens made an effort to launch citizen-crafted pay-to-play provisions through the township’s petition process, but were unable to gather the requisite signatures to advance the proposed legislation to the Gloucester Council and, if necessary, the November ballot. At nearly the same time, Gloucester Councilman Dan Hutchinson presented his own set of pay-to-play rules specifically targeting Super PAC donation disclosure, which were unanimously approved by the Council on first reading, but subsequently withdrawn before a final vote. Following the withdrawal of these proposed rules, a group of Democratic Gloucester residents took up the pay-to-play mantle by repackaging the Councilman’s draft ordinance and gathering the requisite petition signatures for its public submission to the Council. As a result of their work, the pay-to-play proposal came before the Council members for tacit approval on Monday and will appear on the November general election ballot for the voters of Gloucester Township to consider.

The content of Gloucester’s prospective pay-to-play ordinance, O-12-17, places a combination of contribution restrictions and disclosure requirements on prospective township vendors. Specifically, if passed, the proposed provision would prohibit any business entity from entering into any agreement or contract with Gloucester Township or any of its departments, instrumentalities, purchasing agents or authorities for a one year period following the solicitation or making of a contribution above the “monetary threshold” to any Gloucester-specific candidate, candidate committee, joint candidate committee, political party committee, or to any PAC or Super PAC that “regularly engages in the support of Gloucester Township municipal elections…” The monetary threshold for this one-year, cooling-off period is set at the following levels: $300 per calendar year for mayoral or governing body contributions; $500 per calendar year for joint candidate committees supporting mayoral or governing body candidates; $300 per calendar year to municipal political committees or municipal political party committees; $500 per calendar year to any PAC or Super PAC; and $2,500 in aggregate in to all Gloucester candidates, committees, joint committees, political committees and political party committees. The potential ordinance would also require all business entities entering into agreements or contracts with the township to file a certification statement disclosing all their contributions to Super PACs, regardless of whether or not those Super PACs actively engage in Gloucester elections.

All-in-all, the proposed ordinance appears to represent an honest attempt by the township to reign in pay-to-play corruption and encourage transparency in political giving. Like many of the municipal pay-to-play provisions in the Garden State, however, it takes a fairly heavy-handed approach and, if passed, may force many potential Gloucester vendors to either cool their political speech at the local level or avoid municipal contract work altogether. Regardless of this blog’s commentary, however, the residents of Gloucester Township will weigh in with their thoughts on the proposed ordinance on November 6th.

District of Columbia

Meanwhile, a few hours down I-95, embattled Washington, D.C. Mayor Vincent Gray made news this week by proposing a series of campaign finance disclosure requirements and donation restrictions that he claims will curb “pay-to-play” activities in D.C., and minimize the influence of lobbyists and contractors on District politics. While at least partially a public relations move designed to draw attention away from the continuing federal investigation into Gray’s fundraising and campaign spending activities, the proposals – if passed by the D.C. Council this fall – would leave Washington, D.C. with one of the strictest campaign finance structures in the country. Although not yet memorialized in legislative language, let’s nevertheless take a quick look at some of the rough proposals set forth by the Mayor and D.C. Attorney General Irvin Nathan this past Tuesday.

From a pure pay-to-play perspective, Gray and Nathan suggested putting in place legislative provisions that curb political donations from any city vendor who holds a municipal contract valued at $250,000 or more. Specific details regarding how significant this “curbing” would be have yet to be put forth, but Gray and Nathan pledged to have more definite plans for the D.C. Council’s consideration this fall. Stay tuned for updates on this front…

In addition to this proposed contribution restriction for D.C. government vendors, Gray and Nathan also called for additional legislation that would prohibit registered District lobbyists from bundling campaign contributions, ban corporations from donating to District candidates through linked or affiliated entities, and require candidates that receive campaign donations within 30 days of an election to disclose such contributions within 24 hours of receipt. They also floated two other proposals that, if passed, could have a profound impact on political participation in D.C. Specifically, the Mayor and Attorney General announced that they will be pursuing campaign finance rules that severely restrict political contributions from LLCs and corporations, and also seeking legislation that will require candidate-like donor disclosure for other types of political organizations in the District.

Just as with the pay-to-play proposal discussed above, the details of these legislative prerogatives are hazy at best. Gray and Nathan will be working in the coming weeks to put meat on the bone for D.C. Council consideration, but the final product (if any) that emerges from that body will almost certainly tackle the pertinent policy issues in a different manner than proposed by the Mayor and Attorney General. With that in mind, Pay-to-Play Law Blog will be here to monitor the process and keep our readers up-to-date on all the fun.

Local Pay-to-Play Provision To Be Put Before the Voters In South Jersey, While DC Mayor Vincent Gray Makes A Push for New Pay-to-Play Rules in the Nation’s Capitol