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State Pay to Play Laws Have Real, Revenue Threatening, Consequences


Like the nagging parent stressing the dangers of a hot stove, unappreciated Chief Compliance Officers and General Counsel everywhere have been on a p5-types-of-burns-and-how-to-treat-themperpetual mission to warn fellow employees of the dangers inherent in mixing contribution activity and state procurement without proper oversight.  Such is the lot of the under-appreciated “Cost Center” compliance personnel.  Like the tear-filled 8 year-old icing red fingers, many of the high flying boys and girls on the “Revenue Center” sales side of those same companies are not paying sufficient attention to pay-to-play compliance warnings until it is too late.

Our most recent example of this cautionary tale comes from Paterson, New Jersey, where the prominent law firm McManimon, Scotland & Baumann, LLC just learned that a mere $500 in contributions upended a 20 year relationship as bond counsel to the cityPaterson’s pay-to-play law debars any contractor from receiving contracts for a full year if ANY of its executives (or partners . . .  or their spouses . . .  or their children . . .  or their subcontractors, etc.) make contributions in excess of $300 to local officials.  Just in case the pain were not sufficient for the firm’s partners who didn’t participate in any way in the offending contribution, Paterson Business Administrator Nellie Pou made a point to emphasize that

the decision not to rehire the firm had nothing to do with the quality of the firm’s work. “They’ve always been first-rate,” she said. “We’ve had nothing but excellent relations with them.”

Edward McManimon did not respond to a phone message seeking his comment for this story.

It is important to note that the initial contract in question was simply to be an extension of a contract awarded two years ago and that the recipient of the offending contribution had recused himself from the vote to approve the extension.  None of this was sufficient to prevent small fingers from getting burned.

We have seen in the past (especially in New Jersey) that pay-to-play violations can result in significant criminal consequences as well as major fines.  Some, like the authors of this blog, have shouted warnings into the wind; largely to no avail.  Hits to bottom line revenues should be enough to get the C Suite to take pay-to-play compliance seriously.

Don’t let it be said that the purpose of your compliance program is only to serve as a warning to others.

State Pay to Play Laws Have Real, Revenue Threatening, Consequences

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

PL blog

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

Federal Pay-to-Play CLE Webcast – Tomorrow!

backtoschoolCan’t get enough Pay-to-Play knowledge? Need some quick Continuing Legal Education credits before year end? You might want to check out ALI-CLE’s audio presentation on Federal “Pay-to-Play” Rules: Latest Enforcement Initiatives and Compliance Strategies tomorrow, November 18, at 12:00 – 1:30 pm Eastern Standard Time.

The “Pay-to-Play All-Stars” who will be speaking include:

S. Jane Moffat, Vice President, Government Interactions Compliance, Goldman, Sachs & Co., Salt Lake City

Leslie M. Norwood, Managing Director and Associate General Counsel, Municipal Securities Division, Securities Industry and Financial Markets

Jason Torchinsky, Holtzman Vogel Josefiak PLLC, Washington, D.C.

As well as Yours Truly.

We are going to discuss SEC Rule 206(4)5, MSRB Rule G-37, CFTC business conduct rules, anticipated developments in the law, ongoing litigation, as well as recommended compliance programs

Join us, it should be fun.

Federal Pay-to-Play CLE Webcast – Tomorrow!

Is it Illegal “Pay-to-Play” for a Government Contractor or National Bank to Contribute to a Super PAC?

A new complaint was filed with the Federal Election Commission yesterday alleging that Chevron USA violated campaign finance laws and corollary “federal pay-to-play” laws by contributing $2.5 million to the Congressional Leadership Fund, a Super PAC tied by press reporting and former staffers to House Speaker Boehner. While the FEC complaint was filed by organizations likely more interested in “poking the bear” because of Chevron’s environmental footprint than its politics (Public Citizen, Friends of the Earth, Greenpeace, and Oil Change International, hereinafter referred to as “The Usual Suspects”), the complaint has facial merit and needs to be on the radar screen of government contractors, national banks, and foreign nationals everywhere.

The logic of the complaint is relatively straightforward and not new. Federal law (2 USC 441c) prohibits government contractors from making campaign contributions to candidates, political committees, or political parties. 2 USC 441b imposes similar restrictions on corporations, national banks, and labor unions. “Chevron”, as a government contractor, the complaint alleges, thus violated federal law by making a $2.5 million contribution to the Super PAC Congressional Leadership Fund (technically, an “independent expenditure political committee”).

At issue is whether the landmark Supreme Court opinion in Citizens United v. FEC has changed the rules with regard to contributions to independent expenditure committees (one of too many law firm “client alerts” on the meaning of Citizens United can be found here). There has not been a case addressing this precise issue squarely since that case. Arguably, the same United States Supreme Court which found corporate and labor union finance of political speech to enjoy First Amendment protection notwithstanding federal law to the contrary will likely extend such protections to government contractors, national banks and potentially foreign nationals notwithstanding the laws referred to above.

The Usual Suspects, in their complaint against Chevron, allege as a matter of fact that “The Federal Election Commission has appropriately interpreted the prohibition against contractor contributions to “any political party committee, or candidate for public office or to any person for any political purpose or use” to include political committees and super PACs involved in Federal elections.” (The Usual Suspects Complaint, p.3, emphasis added). This might be news to three of the six commissioners of the Federal Election Commission.

It is true that a Democratic commissioner of the FEC testified to this effect before Congress in a House Oversight hearing. It is also true that the FEC, in a footnote I am convinced the Republican Commissioners failed to catch before publication of an explanation of FEC policy, wrote “Foreign nationals, government contractors, national banks and corporations organized by authority of any law of Congress cannot contribute to … separate [independent expenditure] accounts.  §§ 2 U.S.C. 441b, 441c, and 441e.”

It is also true that the Usual Suspects’ complaint cites a prominent law firm blog for this same proposition although, if one reads the actual blog post cited, one gains a new appreciation for the phrase “selective, out-of-context, quoting”.

Chevron argues in its own defense that the “Chevron” that made the contribution is a distinct company from the “Chevron” which contracts with the government. I guess I’d argue that too were I Chevron, but this fight will ultimately be won or lost at the Altar of the First Amendment.

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Is it Illegal “Pay-to-Play” for a Government Contractor or National Bank to Contribute to a Super PAC?

Advice for General Counsel and Boards of Directors on Pay-to-Play Compliance

The Conference Board was kind enough to share the following link to portions of a webinar they hosted a few weeks back on best practices for corporate political spending. It is about 20 minutes long and focused on some of the issues those tasked with pay-to-play compliance lay awake worrying about (yes, those people do exist).

I hope it is helpful and entertaining (hey, one out of two wouldn’t be bad either).

Advice for General Counsel and Boards of Directors on Pay-to-Play Compliance