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Big Bond Firms Test the MSRB’s Compliance Line

Readers of this blog know that MSRB Rule G-37 regulates the political contribution activities of banks and other entities which initiate the principal sales of municipal bonds. Specifically, Rule G-37 provides that any broker, dealer or municipal securities dealer which makes a contribution to those who oversee the issuance of such bonds is subject to a two-year “Time Out” for bad behavior.

around-circumventThis prohibition extends beyond the activities of individual brokers and dealers. Rule G-37 specifically provides that its prohibition applies equally to “any political action committee (PAC) controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional”. For further clarity regarding its intentions, the Rule mandates against circumvention of these restrictions via the wily ways of Legal Loophole Exploiters:

(d) Circumvention of Rule. No broker, dealer or municipal securities dealer or any municipal finance professional shall, directly or indirectly, through or by any other person or means, do any act which would result in a violation of sections (b) or (c) of this rule.

To demonstrate its seriousness about this prohibition, the Municipal Securities Rulemaking Board has decreed that the proper punishment for violation of its rule is that “no broker, dealer or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer”.

You’re still with me, right? Seems pretty clear: “Securities dealers should not use political action committees or other vehicles to circumvent the prohibition against campaign contributions to municipal bond issuers.” Some of us have been warning our friends for years that the MSRB views PAC activities as an improper vehicle to circumvent G-37. Others, it might appear, see this as a line ripe for testing.

Last week, David Sirota and Matthew Cunningham-Cook of the International Business Times (two of the best reporters in the business when it comes to ferreting out potential links between contributions to those in power and official action) broke a story detailing contributions to New York Governor Andrew Cuomo by three PACs associated with NY bond issuers. Political Action Committees associated with these banks, it would appear, contributed more than $131,000 to the Governor prior to being selected by his administration to manage state bond work. The banks do not dispute the contributions by their PACs but rather challenge the premise that these PACs represent contributions by the individual bond dealers or a PAC that they control:

“Citi has two separate PACs, a state and a federal,” said Citigroup spokeswoman Molly Meiners. “To the extent anyone on our Muni team donates money, they are required to give to our Federal PAC only, which has never given to Cuomo.”

Ultimately, the determination surrounding this situation will be factual in nature and this blog is never one to cast the first stone when it comes to the challenges of applying well-intentioned regulation in the real world. As we warned back in 2010, however, this factual inquiry is informed by specific guidance issued by the MSRB in August of that year, which clearly establishes that this is not an area where winks and nods will be tolerated:

Indirect Contributions Through Bank PACs or Other Affiliated PACs

As noted above, if an affiliated PAC is determined not to be a dealer-controlled PAC, a dealer must still consider whether payments made by the dealer or its MFPs to such affiliated PAC could be viewed as an indirect contribution that would become subject to Rule G-37 pursuant to section (d) thereof. The MSRB has provided extensive guidance on such indirect contributions, noting in 1996 that, depending on the facts and circumstances, contributions to a non-dealer associated PAC that is soliciting funds for the purpose of supporting a limited number of issuer officials might result in the same prohibition on municipal securities business as would contributions made directly to the issuer official. The MSRB also noted that dealers should make inquiries of a non-dealer associated PAC that is soliciting contributions in order to ensure that contributions to such a PAC would not be treated as an indirect contribution.

The MSRB also has previously provided guidance in 2005 with regard to supervisory procedures that dealers should have in place in connection with payments to a non-dealer associated PAC or a political party to avoid indirect rule violations of Rule G-37(d). In such guidance, the MSRB stated that, in order to ensure compliance with Rule G-27(c) as it relates to payments to political parties or PACs and Rule G-37(d), each dealer must adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that neither the dealer nor its MFPs are using payments to political parties or non-dealer controlled PACs to contribute indirectly to an official of an issuer. Among other things, dealers might seek to establish procedures requiring that, prior to the making of any contribution to a PAC, the dealer undertake certain due diligence inquiries regarding the intended use of such contributions, the motive for making the contribution and whether the contribution was solicited. Further, in order to ensure compliance with Rule G-37(d), dealers could consider establishing certain information barriers between any affiliated PACs and the dealer and its MFPs. Dealers that have established such information barriers should review their adequacy to ensure that the affiliated entities’ contributions, payments or PAC disbursement decisions are neither influenced by the dealer or its MFPs, nor communicated to the dealers and the MFPs.

Big Bond Firms Test the MSRB’s Compliance Line

Dentons & McKenna Long to Merge, Giving Clients a Competitive Edge

Dentons & McKenna partners approve merger. Learn more about how clients inside the US will gain unrivaled access to markets around the world and international clients will enjoy increased strength and reach across the US.

Learn more at http://www.dentons-mckenna-combination.com/

Press release

 

Dentons & McKenna Long to Merge, Giving Clients a Competitive Edge

Did the US Supreme Court’s ruling in McCutcheon v. FEC Put the Constitutionality of Some Pay-to-Play Laws in Doubt?

McCutcheon

Much has already been written about the impact of the US Supreme Court’s ruling in McCutcheon v. FEC this week; some of it actually accurate. On its face, the ruling in that case has to do with aggregate contribution limits and has nothing to do with state pay-to-play laws. (If you want to read one of the fifty law firm client alerts that breathlessly delved into the nuances of the case on the very day the opinion issued, why not read ours? It’s a good one.). The reasoning employed by the Supreme Court in reaching the holding it did in McCutcheon, however, would appear to threaten the constitutional foundation upon which many state pay-to-play laws are based.

In McCutcheon, the US Supreme Court weighed whether federal laws prohibiting individuals from giving contributions in excess of aggregate limits over a two-year period ($123,200 of which no more than $48,600 could go to candidates and no more than $74,600 could go to PACs and parties) could withstand constitutional analysis. (We should all have such problems). In ruling as it did, the Court made clear that First Amendment freedoms of speech will invalidate virtually any effort to restrict political spending other than direct contribution limits which are designed to prevent direct quid pro quo corruption (fancy legal language for “bribes”). If the law can’t be shown to be narrowly drawn solely to prevent corruption, First Amendment freedoms of speech will trump even laudable goals such as circumvention or public distaste for a system whereby wealthy insiders enjoy undue influence. This is why the Court did not strike down (this time) contribution limits, but did find that limits on contributions to an unlimited number of candidates are unconstitutional.

This leads us to an analysis of the potential impact the Court’s ruling might have on the myriad of state and federal pay-to-play laws on the books. As we have pointed out since our inaugural blog post, pay-to-play laws are not designed to prohibit pure corruption; state bribery laws are already on the books for that purpose. Rather, pay-to-play laws typically ban all (otherwise legal) contractor contributions to procurement officials expressly because proving direct quid pro quo corruption (bribery) is so difficult. Statistically, legislators, regulators, and the public can see a correlation between vendor political contributions and success in winning contracts but can’t prove corruption (unless they are fortunate to live in Chicago where politicians are willing to be audio taped doing such things). Because such a correlation is unseemly, but direct corruption difficult to prove, pay-to-play laws are born whereby actual corruption need not be proven but its appearance generally is prevented through a blanket restriction on contributions (speech?) imposed upon an entire suspect class.

Framed that way, there are a number of pay-to-play laws, including those put forth by the Securities and Exchange Commission, which might not sleep quite as soundly after McCutcheon. Colorado’s pay to play provisions have already experienced the consequences to straying too far in restricting contractor contribution activity. Others might follow closely behind.

Did the US Supreme Court’s ruling in McCutcheon v. FEC Put the Constitutionality of Some Pay-to-Play Laws in Doubt?

A Thoughtful Response to a Past Blog Exchange: Is the “Stick” of Regulation Preferable to a Disclosure Scheme?

This week, CityEthics.org analyzed a past exchange that occurred between Common Cause Georgia and the Pay to Play Law Blog that centered on our competing views as to the most effective means of ensuring public confidence in a workable scheme to prevent pay-to-play practices.

Their post is a thoughtful and lengthy analysis of the strengths and weaknesses of the “disclosure only” vs. “government regulation and debarment” schemes emerging throughout the country. Founded as they are by former prosecutors and ethics commission officials whose self-stated mission is to foster such laws as the means “to combat corruption and establish ethical local governments”, it is not surprising that CityEthics.org has reached the conclusion that “[d]isclosure is not an effective solution.”

Notwithstanding the difference in perspectives between the authors of the CityEthics.org site and the contributors to this blog, who view pay-to-play enforcement issues from the perspective of those required to establish compliance programs to comply with such laws and their oft-unintended consequences, the City Ethics post provides a solid recitation of the issue from the perspective of the regulating community and I recommend that you read it. Personal ego impels me, however, to respond to a few of the post’s assertions about the viability of a strict “government prohibition” solution as well as to defend the motivations of those who believe, as we do, that a scheme based on disclosure often accomplishes the same worthwhile goals without the burden of occasional draconian unintended consequences.

The differences in perspectives tend, in large part, toward the tension between what we aspire to achieve and what can realistically be drafted, enforced, and complied with in a real world where enforcement and corporate compliance resources are limited, free speech is respected, and basic human interactions occur between those somehow associated with vendors and those on a public payroll.p.p1 {margin: 0.0px 0.0px 12.0px 0.0px; font: 12.0px Arial} span.s1 {text-decoration: underline ; color: #002fee}

The universal and noble goal of pay-to-play laws everywhere is to prevent corruption that can occur at the intersection of private sector benefits (in the form of gifts and contributions) on the one hand, and the award of government contracts on the other, in an environment in which existing laws to prevent such corruption are deemed unworkable because of the difficulty in proving the quid pro quo connection between the two required to make a criminal case. Jurisdictions adopting pay-to-play laws do so upon reaching the conclusion that such laws are necessary to prevent any potential or perceived linkage that can not be proven but that we all know exists to some degree.

Some such solutions, such as those offered by CityEthics.org, overreach to ban even the most fundamental freedoms of speech and association as a means of ensuring that such linkage not occur (“many jurisdictions require contractors to disclose what they do, and yet contractors keep giving large contributions anyway” and “[t]he same people who oppose restrictions on contractors making campaign contributions also oppose giving money to publicly funded candidates running against wealthy candidates”). Even if we were to conclude that such solutions were the most effective and narrowly tailored available to the problem of unprovable quid pro quo corruption, such laws can become impossible to enforce in the real world. As many jurisdictions have already learned, once one embarks down the path of prohibiting contributions by corporations and their “agents”, one has placed one’s hind-quarters squarely on the proverbial slippery slope. To prevent circumvention of a law by those few bad actors determined to gain an advantage, one must legislate prohibitions against otherwise lawful conduct by a vast array of potential agents (directors, directors’ spouses, relatives, domestic partners, etc). As states such as Colorado have learned, to cast a net wide enough to prevent circumvention one often does so at the expense of the constitutional rights of innocent parties and always at the expense of lawful businesses who simply want to follow the law.

My personal belief is that it is not realistic to conclude, as CityEthics.org does, that corporations “already have excellent compliance programs to deal with these matters” or that those smaller companies which do not “would, in this sense, be at a disadvantage but, luckily, they have many fewer individuals to keep track of.” If this premise is wrong, and our experience working with the private sector tells me it is, a less draconian impediment to legal, but arguably unseemly conduct, than loss of one’s ability to do business with government, is likely appropriate.

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A Thoughtful Response to a Past Blog Exchange: Is the “Stick” of Regulation Preferable to a Disclosure Scheme?

Lay of the Land 2011

As this blog has sought to highlight, pay-to-play laws at the state and municipal levels are in a constant state of transition as political forces seek to respond to public sentiment surrounding the uneasy connections between money, politics and government contracting. If anything, the national patchwork of pay-to-play regulation has become less coherent or uniform over the past several years. This is a trend which does not look to abate in 2011 and which places a premium on corporate compliance personnel who understand the various trends in the law.

Absent dedicated in-house personnel, it is virtually impossible for entities that sell their goods and services on a national scale to remain attuned to the constant evolution of these laws at the local level. It is also virtually impossible for entities found to have violated a local law to engender much sympathy from those charged with its enforcement by pointing out regulatory inconsistencies across the national spectrum or the relevant insignificance of the regulator’s jurisdiction to overall sales. Trust me, we’ve seen folks try it and it doesn’t go over well.

With this in mind, we thought it might be helpful to categorize a few representative jurisdictions to highlight some recent trends. This listing is not comprehensive but rather is designed to be illustrative. Moreover, these laws are always in a state of flux so be sure to check your local jurisdiction for recent updates before relying on what you read on the internet:

Jurisdictions that Impose Significant Restrictions on Contracting with a Potential Penalty of Debarment. The most aggressive jurisdictions ban entities from engaging in government contracting when they, or their agents (however defined), have made political contributions. Those doing business in such jurisdictions need to be especially watchful of their compliance systems and internal data gathering. The stakes are simply too high. With more and more jurisdictions employing online contribution databases, one can easily see how such laws will present a new realm of a “gotcha” bid protest for disgruntled losing bidders. We haven’t seen much of this tactic yet, but one can easily see how step one after being notified that one has lost a competitive bid will be to go online and see if the winner’s board, executives, spouses, family members or domestic partners have inadvertently made a contribution to a relevant government procurement officer’s campaign.

Examples of laws falling in this category include: California, Hawaii, Ohio, New Jersey, Virginia and West Virginia.

Jurisdictions that Mandate Disclosure of Pay-to-Play Contributions. Many jurisdictions do not prohibit entities from procuring government contracts if they, or their agents, have made political contributions. These jurisdictions simply require disclosure of those contributions with the relevant government agency. While such laws certainly lessen the stakes (and cases of “night sweats” so common with in-house compliance personnel), they do not obviate the often unpleasant task of reaching out to your Chairman’s spouse every quarter to inquire about contributions the spouse might have made.

Examples of laws falling in this category include: Connecticut, Illinois, New Mexico, Pennsylvania, and Rhode Island.

Jurisdictions that have limited Pay-to-Play Restrictions to Specific Municipal or Contracting Subsets. Examples of such jurisdictions include Indiana, in which contractors with the State Lottery Commission, and the contractor’s directors, officers and political action committees, are prohibited from making contributions to candidates for state, state legislative or local office, and to a candidate’s committee, a regular party committee or a state legislative caucus committee, while the contract is in effect and during the three years following expiration or termination of the contract.

Likewise, in Louisiana, persons entering into contracts, subcontracts or transactions to provide goods or services related to hurricane rebuilding efforts, which are not publicly or competitively bid, are prohibited from making a contribution to an elected official if such contract or transaction is under the jurisdiction or supervision of the elected official’s agency. In New York, while no expansive regulations have been enacted to date, the State Comptroller has issued an Executive Order which sets forth robust “pay-to-play” regulations relating to entities who do business, or seek to do business, with the New York State Common Retirement Fund.

Jurisdictions that are Designing, but have not yet Implemented, Pay-to-Play Laws. Candidly, this category captures just about every other jurisdiction. It is simply too easy for a legislator, county commissioner, city council or school board to adopt such laws – or talk about adopting such laws – when one of their own has been caught with her hands in the cookie jar.

Examples of laws falling in this category include: Colorado, Georgia, Michigan, North Carolina, Texas and Wisconsin.

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Lay of the Land 2011

Some Nice Recognition

Sometimes writing blog entries can feel somewhat like chopping trees in the forest. If you’re not sure whether anyone heard you yell “timber!” did you really chop that tree down?

At least it looks like someone is reading. The Pay-to-Play Law Blog was recently given the #1 ranking by the Legal Studies Blog in its posting of the “Top 50 Excellent Blawgs You Aren’t Reading Yet”. Let’s shoot for #1 “Blawg You Are Reading” in 2011! Tell your friends!

Read the full article and check out some other blawgs you may not know about yet.

I guess I can take solace in the fact that the blog’s entries will stick around for a while even if it’s one “You Aren’t Reading Yet”. Yesterday I was advised that the United States Library of Congress has selected the Pay-to-Play Law Blog for inclusion in the historic collection of Internet materials related to Legal Blawgs. The Library of Congress described its mission to include “preserv[ation of] the Nation’s cultural artifacts and provid[ing] enduring access to them. The Library’s traditional functions, acquiring, cataloging, preserving and serving collection materials of historical importance to the Congress and the American people to foster education and scholarship, extend to digital materials, including websites.”

According to staff at the Library, the archive project is a way of capturing current events for historical and research purposes. The Law Library of Congress began harvesting legal blawgs in 2007 and the collection has grown into more than one hundred items covering a broad cross section of legal topics. Blawgs can be retrieved by keywords or browsed by subject, name or title.

The Pay to Play Law Blog in the Law Library of Congress will be available to the public here in Spring 2012.

Straight from a “Blawg You Aren’t Reading Yet” to an “artifact”. That’s a full day.

Some Nice Recognition

When it comes to politics, connections count at McKenna Long & Aldridge

August 15, 2010 – Jim Torpy, of the Atlanta Journal-Constitution, profiled the McKenna Long & Aldridge law firm, including a picture of some of its leaders, Stefan Passantino, Eric Tanenblatt and Keith Mason, and discusses how the firm’s political connections, which have been developed over years of experience, help MLA assist its clients in all types of issues they may have in dealing with government.

The article focuess on such current isues as toughened ethics laws, increased scrutiny of politicians and ever-changing lobbying laws and regulations.

Mr. Passantino is noted as one of the firm’s lawyers who is making his name fighting ethics complaints against politicians. He said the bipartisan nature of the firm “gives clients comfort that they are not getting advice filtered by any political ideology. Once they get past the initial shock of the lions and lambs together here, they realize there’s a benefit.”

http://www.ajc.com/business/when-it-comes-to-592015.html

When it comes to politics, connections count at McKenna Long & Aldridge

On The Rise: Amol S. Naik

August 16, 2010 – Pay-to-play blogger Amol Naik is profiled by the Daily Report in its “On The Rise” feature of rising stars. Amol’s career has included:

  • Working as an intern reporter for the Washington bureau of Toronto’s The Globe and Mail;
  • Serving as General Counsel to mayoral candidate Kasim reed and leading the recount efforts in the mayoral race between Reed and Atlanta City Councilwoman Mary Norwood;
  • Involvement with political campaigns including state Sen. Jason Carter, Fulton County Commission Chairman John Eaves; and state Rep. Rashad Taylor;
  • Political action committee formation and legislative consulting work;
  • Recognition as a Marshall Fellow through the German Marshall Fund of the United States, a group that promotes cooperation on global issues between North America and Europe; and
  • Pro bono work for immigrants.

Please click here to read the article in its entirety.

On The Rise: Amol S. Naik

Stefan Passantino Interviewed on Fox News

July 27, 2010 – Stefan Passantino is interviewed on Fox News discussing ethics violation accusations against Congressman Charlie Rangel. Mr. Passantino discusses the potential fallout of the charges against Congressman Rangel.

 

 

Stefan Passantino Interviewed on Fox News

Law firms see payoff in blogs

June 22, 2010 – Stefan Passantino and his team’s pay-to-play blog is featured in an Atlanta Journal-Constitution article about the growing popularity and newfound benefits of law firms entering the blogosphere.

Mr. Passantino said he started the blog last fall because he found it fun. “It allows me to track the interesting parts of the law but not really having to get into the nuts and bolts of a compliance program. I use it as a credential so that people know that I know this area of the law.”

The article notes that of the top 200 U.S. law firms, 96 now publish blogs, according to LexBlog Inc.

The overall strategy for law firm bloggers is to fine a niche in the legal field and a team that enjoys writing about it. However, showing the effectiveness of the blog can be difficult in certain environments, as the results are not as measurable as tracking the standard billable hour.

To read Péralte C. Paul’s full article on law firm blogs please click here.

Law firms see payoff in blogs