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Political Spending and Pay-to-Play Ballot Measure Goes Before San Francisco Voters this Fall

This fall, voters in the consolidated City and County of San Francisco will be faced with an opportunity to weigh in via referendum on whether to intensify the municipality’s already-stringent pay-to-play and campaign finance laws for certain limited liability companies, partnerships and persons with financial interests before city government. The ballot measure, known jointly as Proposition F and the “Sunlight on Dark Money Initiative”, was qualified by the San Francisco Board of Supervisors earlier this summer and recently certified for placement as a ballot question on the November ballot by San Francisco’s City Elections Department, City Attorney and Controller.

From a pay-to-play perspective, Proposition F asks voters to sign-off on the addition of supplemental provisions designed to fill perceived loopholes in the already comprehensive municipal regulatory framework governing contributions by current and prospective contractors and vendors. Currently, San Francisco law prohibits corporations from donating directly to city candidates, and restricts city contractors and associated parties from contributing to elected officials with decision-making authority over relevant contracts. If passed, Proposition F would expand the list of entities prohibited from making direct contributions to candidates to include limited liability companies and limited liability partnerships. The measure would also authorize the City to restrict contributions to candidates for Supervisor, Mayor, and City Attorney (as well as to the current holders of such offices) from organizational and individual contractors with financial interests in city land-use approval matters valued at $5 million or more. Under these limitations, newly restricted individuals would be prohibited from making donations to covered officials during the period of time between the initial request or application concerning a municipal land-use matter and for a period running 12 months following the municipality’s final decision.

In addition to these added pay-to-play elements, Proposition F asks voters to embrace new “sunlight” disclosure requirements for political advertisements purchased by independent expenditure committees (IECs) – the municipal version of Super PACs in San Francisco. Under the Initiative, all IECs that purchase an advertisement in San Francisco in support of or opposition to any candidate for a city elected office or any city ballot measure would be required to name the top three contributors donating more than $5,000 to the committee and disclose the amount contributed. In the event that a contributor is another IEC, a similar disclosure would be required to name the other committee’s top two contributors who donated at least $5,000 and the amount each contributed.

Given what appears to be broad support for Proposal F among the current members of the San Francisco Board of Supervisors and the city electorate’s predisposition toward political transparency initiatives through the years, it is anticipated that the proposal will pass later this November. This is particularly the case given that Proposal F seeks more measured action vis-a-vis the San Francisco business community than the aggressive Anti-Corruption and Accountability Ordinance (ACAO) this blog previously covered at length last year.

Measured or not, however, the message to the regulated community from San Francisco’s elected officials remains clear – doing business with or involving government in the Bay area comes with strings and restrictions on political engagement. As such, businesses in San Francisco should take care to monitor the results of Proposition F this fall and ensure that their internal compliance frameworks are updated accordingly to ensure adherence by their senior employees and representatives. Failure of an internal compliance program to make personnel aware of these new pay-to-play restrictions could leave an organization open to the cancellation of contracts and/or monetary penalties based on inadvertent political engagement or giving. We here at Pay to Play Law Blog will continue to monitor the results of the Proposition this fall and offer commentary on any additional updates in the San Francisco regulatory landscape moving forward.

Political Spending and Pay-to-Play Ballot Measure Goes Before San Francisco Voters this Fall

No Good Deed Goes Unpunished: The SEC’s Recent $100K Penalty For Inadvertent and Self-Reported Pay-to-Play Violations Is A Not So Subtle Reminder of the Need for Compliance Vigilance

While many spent the final days of 2018 taking a much-needed break, the Securities and Exchange Commission (SEC) was busy trumpeting its dedication to holding the regulated community accountable for violations of the federal pay-to-play laws. Just a week before Christmas, the SEC announced the assessment of a $100,000 penalty as part of an administrative settlement it reached with Ancora Advisors LLC, a Cleveland-based investment advisory firm. Ancora neither admitted nor denied the allegations detailed in the associated SEC order announcing the settlement, but the description provided by the Commission alleged violations of Rule 206(4)-5, which limits covered associates of investment advisers from making certain contributions to state and local officials with influence over the award of public contracts for the provision of investment advisory services. 

The SEC’s levied penalty in this settlement is a stark reminder that investment advisory firms must be diligent in the implementation of robust internal compliance policies that pre-screen impermissible contributions before they are made. As Ancora found out, merely having a compliance system in place that allows for post-hoc remediation of inadvertent violations is insufficient from an SEC perspective – even if identified problems are self-reported in a timely fashion.

In this particular instance, the SEC asserted that a covered associate of Ancora Advisors made over $45,000 in campaign contributions to Ohio politicians from 2013 to 2017, including former Governor John Kasich and former State Treasurer Josh Mandel. The Commission’s order also alleges that a second company official contributed $2,500 to an unidentified gubernatorial campaign in the summer of 2017. Given that Ohio’s Governor appoints members to the Ohio Board of Regents (the board overseeing the Ohio state university system), and the Governor and State Treasurer appoint members to the Board of the Ohio Public Employee Retirement System – both purported Ancora clients – the firm found itself subject to the restrictions set forth in Rule 206(4)-5. Namely, by making contributions of over $350 to covered Ohio officials, Ancora could no longer legally receive compensation for providing investment advisory services to the two public funds within the officials’ spheres of influence.

Like the vast majority of registered investment advisors, it does not appear that Ancora was blind to its potential pay-to-play risk. Quite the opposite in fact – it appears that Ancora had a fairly robust internal compliance program that led to the initial discovery of the potential violating contributions during a routine audit of political activity. Upon discovery of the problematic donations, the firm alerted the SEC and ensured that the contributions in question were returned. 

Such remedial measures and cooperation, although reasonable and appropriate, did not convince the SEC to walk away from enforcement. To the contrary, the Commission pursued its pound of monetary flesh and signaled to all advisors that merely having an internal compliance program and self-reporting any identified problems is not enough to find safe harbor. To avoid getting caught up in the pay-to-play trap, firms must employ compliance policies and procedures that prevent problematic donations before they occur. 

While only a one-off enforcement action by the SEC, the Ancora matter provides an important reminder to all in the regulated community concerning the inherent risks associated with political engagement by firm executives. Even through Ancora successfully uncovered the alleged violations through its internal regulatory compliance program and brought the matter to the SEC’s attention, the company was still slapped with a six-figure penalty and is now forced to deal with the associated public relations blowback. In 2019, it thus remains crucial for registered investment advisers and other entities subject to federal pay-to-play provisions to ensure their internal compliance programs are designed to both pre-screen political activity by key employees and educate such individuals about the potential financial and reputational consequences of certain electoral engagement.  

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No Good Deed Goes Unpunished: The SEC’s Recent $100K Penalty For Inadvertent and Self-Reported Pay-to-Play Violations Is A Not So Subtle Reminder of the Need for Compliance Vigilance

New DC Pay to Play Provision Clears Initial Hurdles Before City Council – December 2018

It may be the holiday season, but government officials never have any issue with delivering pay-to-play coal in the stockings of the regulated community.

This year’s Grinch – the DC City Council, which has for years been looking for a way to tackle the purported “pay-to-play” culture that plagues city government in the District of Columbia. While past attempts may have fallen short, increased attention because of recent polls and studies that call into question the conflict of interest policies of the city and its elected officials have lit a fire under the Council to finally take action, even if many in the business community view the action as unnecessary and incapable of reigning in the identified problems.

On Tuesday, November 20, public hearings were held to debate proposed bills related to campaign finance and pay-to-play rules. One of the bills under council review, the Campaign Finance Reform Act of 2017, written by Councilmember Charles Allen (D – Ward 6), moves to prohibit businesses which hold over $250,000 in city government contracts from being able to contribute to political campaigns. The bill would also increase authority of the Office of Campaign Finance by making it independent of the Board of Elections and requiring increased disclosure by independent expenditure committees within the City. The bill also incorporates matters of concern from previous councilmembers’ proposals and is backed by D.C. Attorney General Karl Racine.

In addition to the above restrictions, the proposed legislation also prohibits donations from prospective municipal contractors during the formal bidding process. This restriction applies both to corporate donations and to senior executives of such corporations.

After careful consideration, the legislation passed an initial voting hurdle, with 11 of 13 City Councilmembers voting in favor. Mayor Muriel Bowser has declined to reveal her position on the legislation, although her administration has been under continued scrutiny for receiving large contributions from city vendors. Earlier in 2016, the head of D.C. Department of General Services resigned on the pretext that he was pressured by City Administrator Rashad Young to direct a contract to Fort Myer Construction, a huge campaign donor to the Mayor and other elected officials.

Later this month, the Council will revisit the legislation to take a second vote. If it passes, the bill will find itself on Mayor Bowser’s desk, with the possibility of a veto in play. We shall see. In the meantime, the Pay-to-Play Law Blog will continue to keep tabs on the progress of the bill and provide the regulated community with useful updates as they occur.

New DC Pay to Play Provision Clears Initial Hurdles Before City Council – December 2018

Montana Governor Signs Executive Order Seeking To Unmask Contractor Contributions to 501(c)(4) Nonprofits

Readers of this blog know that we don’t often find ourselves discussing pay-to-play happenings emanating from the Mountain Time Zone. In 2018, however, nothing surprises the Pay-to-Play Law Blog team – not even the recent news that Montana is putting into a place an onerous, and constitutionally questionable, disclosure obligation for contractors seeking to do business with the state. The new provision – put into place via Governor Steve Bullock’s new executive order mandates that prospective state vendors in Montana publicly disclose certain organizational contributions they make to 501(c)(4) non-profit organizations. The unprecedented move was announced on June 8th by Bullock, who appears to be carving himself out a strong transparency niche among what is anticipated to be a crowded field for the 2020 Democratic presidential nomination. We’re not sure how big a niche that actually is in the electoral sense, but can’t blame a Governor for trying.

Under the new order, which goes into effect October 1, 2018 and does not apply to existing contractors, recipients of goods contracts over $50,000 and services contracts over $25,000 will be required to disclose contributions exceeding $2,500 that they have made to 501(c)(4) social welfare organizations in the two-year period prior to bid submission. These organizations, colloquially referred to as “dark money” groups by those in the transparency community, are allowed to shield their donors from public scrutiny under federal law due to their nonprofit tax status. Such organizations (like all corporations) are prohibited from making direct political contributions to federal, state and local candidates in Montana.

Since the 2010 Citizens United decision, however, such groups have been free to expend funds on independent expenditure and other election-related communications in the state, so long as such expenditures are not coordinated with Montana candidates or political committees. The connection between such independent political activities by non-profits and the appearance of improper influence over state contracting decisions seems fairly tenuous (particularly when the contributions being disclosed are not “behested” payments encouraged by public officials), but groups like the Center for American Progress are nevertheless hailing the move as a win for Montana’s citizens.

The announcement by Governor Bullock opens up what will likely be a new front in the pay-to-play disclosure battle between the regulated community and public officials. Nonprofits in jurisdictions such as California and New York are used to battling it out with state attorney generals over the limited disclosure of 501(c)(4) donor information to charitable regulators in the state, but businesses seeking and holding state contracts are generally not used to sharing such otherwise private information – particularly with the public at large. Contractors are familiar with candidate and PAC contribution disclosure in certain jurisdictions, but social welfare group donation reporting represents a whole new frontier of mandated disclosure

In just the first few weeks since the executive order’s release, it has seen supporters and detractors alike. Bullock’s backers maintain that the reporting requirement is just a good-government reform designed to ensure fair and transparent elections and contracting. Opponents, however, have highlighted the speech chilling impact of such a disclosure obligation and criticized how it undermines the reasonable expectation of privacy for donors to social welfare organizations.

As we continue through the summer and move closer to implementation of the order on October 1st, we here at Pay-to-Play Law Blog will be sure to keep the regulated community apprised of any updates or tweaks in the Treasure State. Likewise, we’ll be sure to keep everyone apprised of any jurisdictions looking to make an even bigger splash in this new pay-to-play pool after watching Montana gently dip its toe in the water.

 

Thanks to Claire McDowell for her assistance with this post.

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Montana Governor Signs Executive Order Seeking To Unmask Contractor Contributions to 501(c)(4) Nonprofits

San Francisco’s Potential Anti-Corruption and Accountability Ordinance Includes New Compliance Provisions That Venture Beyond Standard Pay-to-Play Laws

For those of our readers with a latent East Coast bias or who have just been preoccupied with the latest political drama emanating from Washington, you may have missed the recent flurry of activity in the Bay Area that appears to be threatening the City of San Francisco’s efforts to pass a controversial ethics reform bill. The proposed Ordinance, known as the Anti-Corruption and Accountability Ordinance (ACAO), takes an aggressive tact on regulating political engagement within the City and seeks to implement a series of unique compliance obligations that venture beyond the standard approaches to eliminating pay-to-play politics.

At present, the ACAO has proven to be more of a political football than a legislative success story. The Chair of the City’s Ethics Commission recently stepped down following the Commission’s failure to approve its placement on the June primary ballot for voter consideration.  Despite this very public disappointment for backers of the measure, a motion has recently been introduced for the ACAO to be taken up for additional consideration by the Commission on April 3rd.  A similar request has been made to the San Francisco Board of Supervisors.  Given the political dynamics at play and the controversial nature of the ACAO in general, passage (or even a vote) on the ordinance next week is less than a certainty.  Some of its prospective contents, however, bear further discussion.

There are a litany of interesting regulations and restrictions included in the ACAO, including disclosure obligations related to so-called “behested payments” made on behalf of public officials and a new prohibition on certain political contributions made by entities with interests in specified land-use decisions.  But a recently inserted measure that would require large donors to state-level independent expenditure committees (Super PACs) to disclose certain personal business investments in San Francisco is catching our eyes.  This measure represents a novel disclosure mechanism obligating those wishing to politically engage through state-level Super PACs to open up their private business portfolio to public scrutiny.

The measure, sponsored by San Francisco Board of Supervisors Member Aaron Peskin, would require individuals who contribute more than $10,000 to Super PACs to disclose their financial investments of $10,000 or more in San Francisco businesses.  Such individuals would also need to report any businesses in San Francisco from which they receive compensation.   These disclosures would be required within 24 hours following the triggering contribution.

Supervisor Peskin’s proposal was met with at least some skepticism by the Ethics Commission, which questioned the constitutionality of such a disclosure obligation and the heavy regulatory burden such a provision would place on both donors and City compliance officials. Certain donors, the Commission noted, could have thousands of investments in the city, making compliance with the Peskin measure expensive and impractical.  The Commission also appeared to express some doubt as to the overall public policy value of implementing such a new requirement, which seems fairly disconnected from the stated goal of rooting out pay-to-play politics.  We here at the Pay-to-Play Law Blog would tend to agree with such skepticism.

Existing San Francisco ethics rules, which include a pay-to-play provision that prohibits contractor contributions to elected officials who have oversight responsibilities of those contracts, already seem well situated to curb the sort of unsavory political engagement elected officials and voters are most concerned about.  When paired with California’s additional disclosure requirements for entities that make contributions of $250 or more to elected officials before whom the entities have official business, it is somewhat difficult to find the added compliance value of the contemplated measure.  As our readers know well, however, that’s no true predictor of political passage in the pay-to-play context.

As April approaches, we here at Pay to Play Law Blog will continue to monitor the ACAO’s progress in San Francisco and its potential impact on pay to play compliance and political engagement within the City. Those in the regulated community with Bay Area business interests should stay tuned.

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San Francisco’s Potential Anti-Corruption and Accountability Ordinance Includes New Compliance Provisions That Venture Beyond Standard Pay-to-Play Laws