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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

Federal Judge Notes the Implications of McCutcheon in Striking New York’s Limits on Contributions to SuperPACs


Our last post analyzed the clear implications of the US Supreme Court’s reasoning in McCutcheon v. FEC to pay-to-play laws everywhere. Now, it would appear, at least one federal judge in New York has reluctantly, but decisively, relied upon that same reasoning to strike New York State’s contribution limits for SuperPACs. In that case, New York Progress and Protection PAC v. James Walsh, Judge Crotty opined that he was compelled to “apply the Supreme Court’s binding decisions” notwithstanding the Court’s “concern” over the “misguided” result:

“Our Supreme Court has made clear that only certain contribution limits comport with the First Amendment. Since contributing money is a form of speech, preventing quid pro quo corruption or its appearance is the only governmental interest strong enough to justify restrictions on political speech. Citizens United v. FEC, 558 U.S. 310, 357-61 (2010). More recently in McCutcheon, the Court concluded that “the possibility that an individual who spends large sums may garner influence over or access to elected officials or political parties . . . does not give rise to such quid pro quo corruption.” Id. at 1438. In effect, it is only direct bribery—not influence—that the Court views as crossing the line into quid pro quo corruption. The Court agrees with Justice Breyer. He said that, “[t]his critically important definition of ‘corruption’ is inconsistent with the Court’s prior case law.” McCutcheon, 134 S. Ct. at 1466 (Breyer, J., dissenting). But this Court is bound to apply this definition “no matter how misguided . . . [the Court] may think it to be.” Hutto v. Davis, 454 U.S. 370, 375 (1982).”

It is only a matter of time before this same analysis is applied to state pay-to-play laws. When that happens, one can anticipate that several such laws will fail to withstand the scrutiny.

Editor’s Note: If you did not catch Peter Overby’s thoughtful reflection on the 20th anniversary of federal pay-to-play laws on NPR, it is worth listening to.

Editor’s Note to the Editor’s Note: Be aware, the first editor uses the adjective “thoughtful” as a euphemism for “it’s really cool that NPR referred to the blog on ‘All Things Considered’.”

Federal Judge Notes the Implications of McCutcheon in Striking New York’s Limits on Contributions to SuperPACs

There is DEFINITELY a New Sheriff in Albany – Governor Cuomo Proposes Sweeping Ethics and Pay-to-Play Reform

Having apparently abandoned all hope of reforming New York’s Congressional delegation (and with a bipartisan ethics All-Star team including Congressmen Anthony Weiner (D-NY), Christopher Lee (R-NY), Eric Massa (D-NY), Charlie Rangel (D-NY) and Vito Fosella (R-NY)), Governor Cuomo has concluded that it’s time to focus on New York State ethics and disclosure.

This week, Governor Cuomo announced that he, Senate Majority Leader Dean Skelos and Assembly Speaker Sheldon Silver had reached a three-way agreement on a substantial ethics reform package. Initially, and possibly more appropriately, named the “Clean Up Albany Act” in early press releases, the “Public Integrity Reform Act of 2011” proposes sweeping changes across a number of ethical disciplines. The proposed changes include the following:

Financial Disclosures: Financial disclosure statements filed with the new Joint Commission on Public Ethics from elected officials will now be posted on the internet and the practice of redacting the monetary values and amounts reported by the filer will be ended. The Act also includes greater and more precise disclosure of financial information by expanding the categories of value used by reporting individuals to disclose the dollar amounts in their financial disclosure statements. The Act requires disclosure of the reporting individual’s and his or her firm’s outside clients and customers doing business with, receiving grants or contracts from, seeking legislation or resolutions from, or involved in cases or proceedings before the State as well as such clients brought to the firm by the public official.

In Albany, this is a controversial measure as a number of legislators – who will now be required – effective July 1, 2012 and upon potential penalty of $40,000 for failing to do so – to disclose the names of “outside clients and customers” – are attorneys who do not wish to disclose the identities of their clients. As one would expect, backlash from legal members of the Assembly was immediate and vociferous.

Increased Access to Who is Appearing Before the State and Why: The Act establishes a new database of any individual or firm that appears in a representative capacity before any state governmental entity.

Additional Disclosures for Registered Lobbyists: The bill expands lobbying disclosure requirements, including the disclosure by lobbyists of any “reportable business relationships” of more than $1,000 with public officials. It also expands the definition of lobbying to include advocacy to affect the “introduction” of legislation or resolutions, a change that will help to ensure that all relevant lobbying activities are regulated by the new Joint Commission.

A New Joint Commission on Public Ethics: This is potentially the most significant development of the newly proposed legislation. The new Joint Commission on Public Ethics will replace the existing Commission on Public Integrity with jurisdiction over all elected state officials and their employees, both executive and legislative, as well as lobbyists. Among other restrictions, no individual will be eligible to serve on the Joint Commission who has within the last three years been a registered lobbyist, a statewide office holder, a legislator, a state commissioner or a political party chairman. Commissioners will be prohibited from making campaign contributions to candidates for elected executive or legislative offices during their tenure.

The Joint Commission will have jurisdiction to investigate potential violations of law by legislators and legislative employees and, if violations are found, issue findings to the Legislative Ethics Commission, which will have jurisdiction to impose penalties. Significantly, if the joint commission reports such a violation to the Legislative Ethics Commission (with full findings of fact and conclusions of law), that report must be made public along with the Legislative Ethics Commission’s disposition of the matter within strict timeframes. The Joint Commission will have jurisdiction to impose penalties on executive employees and lobbyists. Any potential violations of federal or state criminal laws will be referred to the appropriate prosecutor for further action.

This provision has proven controversial almost immediately. In order to initiate an investigation, the new Joint Commission will require that two appointees of the same party in a given branch assent. This means, as many have already pointed out, that in theory the commission could vote 11-3 to take action without anything being done. Similarly, the New York Times noted that “commissioners appointed by the Assembly speaker, Sheldon Silver, a Democrat, could effectively block investigations of any Democrat in the Legislature, while commissioners appointed by the Senate majority leader, Dean G. Skelos, a Republican, would have similar power over investigations of any Republican.”

Overall, however, it appears that most public interest groups believe that the newly proposed Joint Commission will strike the right balance between unbiased investigation and the prevention of politically motivated “witch hunts” against the party out of power.

Forfeiture of Pensions for Public Officials Convicted of a Felony: Certain public officials who commit crimes related to their public offices may have their pensions reduced or forfeited in a new civil forfeiture proceeding brought by the Attorney General or the prosecutor who handled the conviction of the official.

Clarifying Independent Expenditures For Elections: The Act requires the state board of elections to issue new regulations clarifying disclosure of Independent Expenditures.

Increased Penalties for Violations: The Act substantially increases penalties for violations of the filing requirements and contribution limits in the Election Law, and provides for a special enforcement proceeding in the Supreme Court. The bill also increases penalties for violations of certain provisions of the state’s code of Ethics that prohibits conflicts of interest.

Without a doubt, this legislation represents sweeping change that must be carefully studied, and compliance prepared for, by all doing business in New York.

Now, if only we could get the Governor to introduce a “Clean Up Washington Act”.

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There is DEFINITELY a New Sheriff in Albany – Governor Cuomo Proposes Sweeping Ethics and Pay-to-Play Reform

Additional Settlements in New York Pension Fund Investigation

New York State Attorney General and Governor-Elect Andrew Cuomo has announced additional settlements in his investigation of “pay-to-play” practices and conflicts of interest at public pension funds. Veteran Albany lobbyist Patricia Lynch Associates, Inc. will pay a $500,000 fine and be banned for a period of five years from appearing before the State Comptroller’s Office. The State Comptroller is the sole trustee of New York State’s approximately $133 billion Common Retirement Fund (CRF).

Cuomo’s investigation showed that Lynch, a former top aide of Assembly Speaker Sheldon Silver, arranged contributions to former Comptroller Alan Hevesi’s campaign. She also assisted in securing a consulting contract for the daughter of the Comptroller’s Chief of Staff and provided thousands of dollars in gifts to the daughter. Lynch met with the Comptroller and with senior staff in his office to discuss proposed investments by her lobbying clients. She and a partner, L.W. Strategies, also received fees from a client for lobbying the New York City Police and Fire pension fund.

Cuomo also announced a settlement with fund advisor Aldus Equity, a Dallas-based private equity firm, which includes a $1 million restitution payment. The agreement concerns the firm’s responsibility for securities fraud engaged in by former Aldus principal Saul Meyer, who pleaded guilty in October 2009 to a Martin Act securities fraud felony charge for his conduct.

At the time of Meyer’s conduct, Aldus was a leading outside advisor to several public pension funds including the state and NYC funds. Meyer is scheduled to be sentenced in the criminal case later this month.

Brief Summary of NY Rules / Reforms:

– The NYS Common Retirement Fund (“CRF”) has banned placement agents, meaning paid intermediaries and registered lobbyists, regarding investments with the Fund. The ban includes entities compensated on a flat fee, contingent fee or any other basis (contingent lobbying fees are never permitted in New York).

The NYS Comptroller has issued an executive order that prohibits the CRF from hiring, investing with or committing to any Investment Adviser after a contribution has been made by the Investment Adviser or any Covered Associate of an Investment Adviser (i.e. general partner, managing member, executive officer) who has made a political contribution to the State Comptroller or a candidate for State Comptroller. There is a limited exception that allows individuals to contribute no more than $250 to their own representatives. The prohibition applies to contributions made within the past two years. The definition of “Investment Adviser” includes investment advisers registered with the SEC and those investment advisers exempt from registration with the SEC.

– The NYS Comptroller has created a pension fund task force and a special commission, co-chaired by Mayor Koch and Frank Zarb, to review operations of the State Comptroller. They have also hired special ethics counsel and created an Inspector General position. Legislation has been introduced to codify some of the reforms that were promulgated by Executive Order.

– In New York City, there is a ban on placement agents for private equity. In June of 2010, Comptroller Liu announced a series of new disclosure requirements for those who do business with the City pension system, including both the Teachers Retirement System and the New York City Employees Retirement System (“NYCERS”). For example, investment managers must disclose all contacts with the City Comptroller’s Office; must certify that no placement agent was used in connection with securing private equity; and must disclose all fees.

– Placement agents and other third parties who are engaged in the business of effecting securities transactions are required to be licensed and affiliated with broker-dealers that are regulated by an entity now know as the Financial Industry Regulatory Authority (“FINRA”). See, Attorney General’s Assurance of Discontinuance In the Matter of Patricia Lynch Associates, Inc., p. 4, citing sections 3(a)(4) and 15(b) of the Securities Exchange Act of 1934. To obtain such licenses, agents are required to pass the “Series 7” or equivalent examination administered by FINRA. Id. In addition, the Martin Act (NY General Business Law Article 23-A) requires that all dealers, brokers, or salesmen (e.g., placement agents) who sell or purchase securities within or from New York State must file broker-dealer registration statements with the Attorney General. Id., citing New York General Business Law section 359-e(3).

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Additional Settlements in New York Pension Fund Investigation

Does Everybody Do It?

Recent developments have served to transform this blog into something more of a “crime report” than originally intended as state and federal regulators have increasingly turned to highly publicized criminal prosecutions as a means of limiting pay to play activities. Most recently, New York’s Attorney General felt compelled to file legal pleadings in Manhattan State Court rebutting the assertion that there is nothing inherently wrong with using political connections and favors to secure state contracts because “everybody does it”.

In the public corruption case against Hank Morris, former advisor to State Comptroller Alan Hevesi, the State of New York observed :

“Business as usual” is not a defense to fraud, and “everybody does it” is not a defense to public corruption. It is true that fraud and corruption in politics have existed from the beginning of time. That is not, however, a reason to ignore them; to the contrary, we must zealously root them out. The fact that fraud and corruption may be rampant dies not cloak wrongdoers with impunity.”

(Affirmation and Memorandum of Law in response to Defendant’s Omnibus Motion, p.2)

It is clear that this process of reshaping the perceived “business as usual” of politically influenced government contracting through criminal prosecution is well under way throughout the country.

Nowhere are political shenanigans more susceptible to being confused for “business as usual” than in Trenton, New Jersey, where just this week former city councilman Michael Schaffer pled guilty to federal charges that he funneled campaign funds to former Hoboken Mayor Peter Cammarano in an effort to influence the award of city real estate development projects. This plea is only a small part of a massive FBI investigation into public corruption in Trenton, which has, to date, resulted in federal charges being filed against at least 44 individuals.

This is not to say, however, that everyone universally agrees with the “regulation by prosecution” approach. In connection with SEC efforts to impose a 3 year ban on “Obama Car Czar” Steven Rattner, the SEC and New York A.G. Andrew Cuomo are said to be investigating whether Rattner sought to exert political influence in an effort to secure business from the New York state pension fund. New York Mayor Bloomberg, however, appears not to be convinced. Dismissing the allegations against Rattner as “ridiculous”, Mayor Bloomberg has recently given Rattner $5 billion (not a typo) to establish a new firm.

Now THAT’s a political connection leading to new business.

Does Everybody Do It?

The Perils of Watered Down Reform

Last week, the State of New York provided a graphic illustration of the perils confronting legislators as they attempt to balance public calls for dramatic reform against their own natural self-interest in blunting the impact of the restrictions they are imposing upon themselves.

Responding to public concerns over several high-profile scandals to plague the state, the New York State Assembly recently passed, by a significant margin, what it had advertised to be a comprehensive ethics, lobbying and campaign finance package. On February 2, 2010, New York Governor David Paterson vetoed that legislation on the grounds that the Assembly had effectively neutered the reform package called for by the public. The Assembly had touted the proposed legislation as delivering significant ethics reform by granting the legislature authority to appoint a commission designed to permit the legislature to police itself.

Despite the fact that the measures had garnered widespread support and had originally passed both chambers of the state legislature by wide margins, Governor Paterson vetoed the legislation saying it failed to provide solutions in multiple areas, including campaign limits and the establishment of an independent ethics body to oversee the Assembly.

Gov. David Paterson further stated he is preparing a different, harsher version of the bill, and that he is planning to release new draft legislation containing tighter external controls on local politicians and stricter campaign contribution limits. With concerns that such proposed legislation would be forthcoming, the New York State Senate last week attempted, but failed, to gain the two-thirds majority needed to override the Governor’s veto. As is typical, the parties traded barbs over responsibility for the failure with New York’s Democratic Majority Leader accusing Senate Republicans of having killed ethics reform in Albany and the Senate Minority Leader accusing Democrats of trying to ram through an override even if it meant a weaker bill was enacted.

Common Cause New York released a statement urging the governor and both houses to stop the political grand-standing and work together to negotiate a compromise that means a strong ethics bill for the State of New York.

Ultimately, for now, the State of New York is left with no reform at all and the setback serves as a cautionary tale for other state legislatures as they attempt to balance public outcry for “reform” against restrictions they can live with.


The Perils of Watered Down Reform

Governor Paterson Announces Sweeping Ethics and Campaign Finance Reform Legislation

New York Governor David A. Paterson has announced extensive ethics and campaign finance reform legislation, the “Reform Albany Act”, which will be a focus of his second State of the State address.

The proposed legislation calls for the creation of a single, independent State Government Ethics Commission with advisory and enforcement powers regarding campaign finance, ethics and lobbying; and which would replace the New York State Commission on Public Integrity. It also provides for increased oversight and enhanced reporting by state officers of outside business activities, and enhanced reporting requirements for lobbyists. And, it would replace the State Comptroller as sole trustee of the New York State Common Retirement Fund (one of the largest pension funds in the U.S.) with a 5-member Board of Trustees.

The legislation also includes sweeping campaign finance reform: drastically reducing maximum contribution limits, limiting contributions to housekeeping accounts, and banning corporate contributions; as well as providing for a new system for the public financing of campaigns. The Governor has also proposed term limits for members of the Legislature and statewide officials (which would require a State Constitutional amendment).

The sweeping ethics reform initiative follows the recent trial and conviction former Senate Majority Leader Joseph L. Bruno on corruption charges, which exposed weaknesses in State ethics laws; as well as Attorney General Andrew Cuomo’s investigation of Pay to Play activity involving the administration of the Common Retirement Fund under the former State Comptroller.

While several of the concepts in the legislation have been the subject of prior proposals, the reform package faces an uphill battle in the State Legislature. The State Senate and State Assembly are developing their own ethics initiatives. And, the estimated 30 million dollar price tag for public financing of campaigns comes at a time of financial crisis in the State, with the budget deficit in 2010 estimated at between 7 and 9 billion dollars.


Governor Paterson Announces Sweeping Ethics and Campaign Finance Reform Legislation

NY Pay-to-Play Probe Continues

Venture Capitalist Pleads Guilty

New York Attorney General Andrew Cuomo has announced that Elliott Broidy, chairman of Markstone Capital Group, has pleaded guilty to a felony charge of rewarding official misconduct, in cases involving senior officials in the office of former New York State Comptroller Alan Hevesi. Broidy funneled close to 1 million dollars in payments for the benefit of four senior officials in Hevesi’s office, while he was pursuing work with the New York State Common Retirement Fund. The payments were made to friends or relatives of the officials. The Common Retirement Fund is one of the largest pension funds in the country, and the State Comptroller serves as its sole trustee.

Hevesi Implicated

It has been reported that the Attorney General’s ongoing investigation has also directly implicated former state Comptroller Hevesi, for accepting luxury trips to Israel and Italy from Mr. Broidy. This is the first time that Mr. Hevesi has been implicated for receiving a direct financial benefit from an entity seeking work with the Common Retirement Fund.

NY Pay-to-Play Probe Continues

New York Attorney General Investigates “Pay-to-Play” Donations by Charities

New York State Attorney General Andrew M. Cuomo has ordered dozens of charities to take back illegal political contributions, or risk losing their tax-exempt status, [the New York Post has reported].

Cuomo has uncovered improper campaign contributions by not-for-profit organizations to New York State lawmakers and New York City council members. Federal and state laws prohibit certain not-for-profit organizations from engaging in political activity, including making campaign contributions. Violation of these laws can jeopardize an organization’s tax-exempt status.

It has been reported that Cuomo’s investigation of campaign contributions is a by-product of an ongoing probe launched two years ago into pork-barrel spending — also known as “member items” — by New York State lawmakers. It is being reported that some illegal contributions have been made after an organization received a member item from state lawmakers.

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New York Attorney General Investigates “Pay-to-Play” Donations by Charities

New Mexico Chief Investment Officer Resigns after Investigation

The pay-to-play probe related to U.S. public pension systems led by New York Attorney General Andrew Cuomo, the U.S. Securities and Exchange Commission and the Justice Department has claimed another victim. Bloomberg reports today that New Mexico’s chief investment officer has resigned after being drawn into the nationwide investigation.

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New Mexico Chief Investment Officer Resigns after Investigation