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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

CFTC Pay-to-Play Rules: Does this Mean I have to Dissolve my PAC?

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.

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CFTC Pay-to-Play Rules: Does this Mean I have to Dissolve my PAC?