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FINRA Submits Final Pay-to-Play Provision for SEC Approval

When the average American looks back on the close of another holiday season, they think about all the longstanding traditions that were renewed yet again – the family gatherings, the holiday parties, the celebrations of faith, and the resolutions for self improvement.  When we here at the Pay-to-Play Law Blog look back on the end of the holiday season, we gaze warmly back at the Federal Register and determine which of our favorite regulatory agencies left a surprise under the tree for our loyal readers.  We know, we know… we’re the Ebenezer Scrooge of legal blogs.

SEC logoFinra logo

 

One of this year’s regulatory gift givers is a repeat holiday patron – the Financial Industry Regulatory Authority (FINRA) – that preliminarily proposed an initial suite of pay-to-play provisions in late 2014.  Those provisions, although modeled closely on Securities and Exchange Commission (SEC) Rule 206(4)-5, included unique compensation disgorgement and disclosure elements that drew the attention of many in the regulated community.  After consideration of the public comments surrounding those elements and the regulatory proposals as a whole, FINRA reconsidered the structure of its initial provisions and submitted the newly framed Rule 2030(a) and Rule 4580 to the SEC on December 24th for adoption.

From a pay-to-play perspective, Rule 2030(a) is where the rubber meets the road.  If formally enacted, Rule 2030(a) would effectively restrict the ability of FINRA member firms to engage in distribution or solicitation activities on behalf of registered investment advisers that provide or seek to provide investment advisory services to government entities if “covered employees” of the broker-dealers make prohibited political contributions.  The proposal, like Rule 206(4)-5 and other federal pay-to-play rules, would not specifically ban or limit the amount of political contributions covered FINRA members and their covered associates can make to government officials.  Rather, Rule 2030(a) seeks to impose a two-year “time out” on the earning of compensation for distribution or solicitation engagements with a government entity on behalf of an investment adviser when a FINRA member or its covered associate makes a disqualifying contribution.

For the purposes of the newly-proposed rule, a disqualifying contribution is defined as any political donation made to an official of a government entity that is valued at an aggregate value of more than $350 in an election year or more than $150 in a non-election.  In the case of an inadvertent or mistaken contribution above these levels, Rule 2030(a) permits a broker-dealer to cure the potential pay-to-play violation without penalty so long as a refund of the donation is received within a four-month period of the initial contribution.

With the publication of the proposed rules in the Federal Register on December 30th, the regulated community now has just over two weeks left in the 21-day comment period to respond to the SEC with pertinent observations and concerns about both Rule 2030(a) and Rule 4580 (which represents a formal recitation of FINRA’s new recordkeeping requirements for broker-dealer members).  For those of our readers who are interested in participating in the open comment process, submissions must be made on or before January 20, 2016 and may be filed online at https://www.sec.gov/cgi-bin/ruling-comments.

Following the completion of the formal notice and comment process and finalization of the provisions by the SEC, both FINRA rules should be put into effect in short order – likely during the second half of 2016 or early 2017.  Broker-dealers looking to engage politically during the 2016 election cycle should take heed, monitor the situation accordingly, and ensure their compliance and recordkeeping systems are fully up-to-date.  And we here at Pay-to-Play Law Blog will be sure to keep the regulated community posted on any future developments or changes.

 

FINRA Submits Final Pay-to-Play Provision for SEC Approval

In the Wake of Maryland’s Recent Pay-to-Play Changes … A Chance to Weigh In on Pending State Regulations

detailsAs the reader’s of this blog know well, the State of Maryland has been hard at work over the past few years refining and retooling its pay-to-play framework for those contracting with or otherwise doing business with Annapolis or local governments across the Old Line State.  In late August, companies with one or more Maryland government contracts valued at $200,000 or more were obligated to file their first semi-annual disclosure reports under the state’s newest regulatory regime.  With the second round of reports coming due in November, the State Board of Elections (SBOE) has finally proposed regulations for public comment that deserve the attention of our readers and all businesses engaged in government procurement activities in Maryland.

The proposed regulations, which were published in the Maryland State Register last Friday, provide important insight into how the SBOE plans on administering and enforcing the currently-operative, pay-to-play framework.  The released rules touch on a wide range of significant subjects, including registration procedures and timelines, disclosure protocols for registrants with parent companies, certification and affidavit systems for registrants, waiver procedures, and internal corporate reporting mandates.

These are the “details” made famous by the phrase “The Devil is in . . . ”

From the registration perspective, SBOE’s regulations seek to speed up the timeline by which prospective registrants are obligated to submit their initial political contribution reports following the award of a covered contract or contracts.  These initial disclosures, covering the two years leading up to the start of the procurement, would effectively become same-day reports contemporaneously due at the time the agreement is signed.  This tweak to the statutorily-referenced “one business day” deadline is minor, but would undoubtedly place greater time pressure on prospective state and local contractors to complete their pre-contract, due diligence concerning organizational political activity.

In the technical disclosure context, the recently-released regulations help to clarify the disclosure obligations of registrants with corporate parent entities, and likewise seek to formalize the certification requirements for registrants who have no reportable contributions in a given disclosure period.  For registering companies with parent entities, the SBOE’s proposed rules confirm that only the immediate parent of a registrant with a qualifying contract need register and report with the state for pay-to-play purposes (provided the parent company possesses the requisite 30% ownership or controlling stake in the registrant).  The regulations also attempt to clarify the meaning of the terms ownership and control as they relate to this standard.

For registrants with qualifying Maryland contracts but no applicable political contributions in a given disclosure period, the new regulations also specify the process by which proper notice of this fact may be given to the SBOE.  Specifically, the regulations allow for an electronic system through which registrants can certify that no reportable contributions were given and list their qualifying procurement relationships with state and/or local governments in Maryland.

In addition to the above subject matters, the proposed SBOE regulations also provide meaningful insight into the state’s proposed waiver system for registrants seeking leave of the standard procedures for contribution disclosure, contract reporting, and the payment of late filing fees.  The released rules also shed light on how the SBOE believes the internal corporate reporting mandates contained in the present pay-to-play structure should be implemented.

All of the rules and regulations set forth in SBOE’s proposal are open for public comment until November 16, 2015.  We here at Pay-to-Play Law Blog anticipate a wide range of letters of opposition and support for the proposed rules and will be ready to offer further insight on any major changes incorporated into the final adopted provisions.

 

 

 

In the Wake of Maryland’s Recent Pay-to-Play Changes … A Chance to Weigh In on Pending State Regulations

April Showers Bring… Another Round of Pay-to-Play Changes in the State of Maryland

Spring may have sprung in the mid-Atlantic, but those contracting and doing business with the State of Maryland don’t feel like they’re receiving anything close to a flowery reception from the Maryland General Assembly this April. On the heels of a winter of discontent in the Old Line State, where those in the regulated community had to scramble to adjust to a new pay-to-play regime that involved unwieldy online filing obligations, modified contract valuation standards and contribution reporting requirements, and enhanced record retention and certification obligations, another new set of legislative changes has been adopted that will further alter the compliance playing field. You know what they say – when it rains it pours.unnamed

This new round of amendments to Maryland’s pay-to-play framework, contained in House Bill 769, was passed by the state legislature earlier this month and has been sent to new Governor Larry Hogan for his signature. If the bill is signed into law, as anticipated, Maryland state contractors will have until June 1, 2015 to “unlearn” some of what they just learned about Maryland’s comprehensive pay-to-play overhaul on January 1st of this year. Given that we’re currently less than four months into the new framework, at least the regulated community can say it hasn’t had time to get comfortable with the “suddenly-old” regime.

Under the changes proposed by House Bill 769, entities with more than $200,000 in total Maryland contracts as of the end of 2014 will be required to submit semi-annual pay-to-play contribution disclosure reports with the State Board of Elections starting in August of this year. This is the case even if such contractors receive no new government contracts from the state during 2015 – a change from the pay-to-play regime that went into effect on January 1, 2015, which exempted companies with no new 2015 contracts from having to file disclosures.

In addition to closing this potentially-unintended loophole in the recently-enacted pay-to-play regime, the legislative amendments in House Bill 769 also attempt to somewhat ease the existing reporting burden for disclosing contractors. Specifically, the new changes will excuse companies without reportable political contributions (by either the entity or its covered representatives) from having to openly disclose the minute details of all of their existing state contracts. Moving forward, contractors without such reportable contributions will need only indicate the specific government agencies with which they do business, but will no longer need to report the value, start date and termination date of all their state contracts. This will undoubtedly be seen as a small ray of sunshine for those in the reporting community.

Before those doing business with the State of Maryland go getting all giddy, however, they should also take note of how House Bill 769 will alter the traditional pay-to-play reporting schedule for state contractors. As noted above, the next semiannual disclosure filing for contractors will be due in August of this year. The filing deadline for that report, however, has been moved from the customary date of August 5th to a new date of August 31st. The August disclosure will be required to cover reportable contractor activities between February 1, 2015 and July 31, 2015.

Following the completion of that submission, filing parties will be required to submit another pay-to-play report by November 30, 2015 covering reportable activities between August 1st and October 31st. Subsequent to that November 30th filing, all government contractors will face a semi-annual filing schedule for 2016 and beyond. Such reports will be due on May 31st and November 30th of each year, and will cover reportable activities during the preceding six month periods.

Keeping the above amendments in mind, the good news for the regulated community is that these changes will be the only new legislative wrinkles in Maryland pay-to-play law for at least the next 8 months. The bad news is that regulators in Annapolis will have ample time between now and next January (when the General Assembly goes back into session) to weigh in on the changes and unleash their own brand of administrative storm clouds. No matter when the next storm hits, however, you can count on your friendly legal meteorologists here at Pay-to-Play Law Blog to keep you up to date

April Showers Bring… Another Round of Pay-to-Play Changes in the State of Maryland

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

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

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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

FINRA Quietly Proposes Pay-to-Play Type Rules for Its Broker-Dealer Members

FINRA
Late last week, the Financial Industry Regulatory Authority (FINRA) quietly posted a new regulatory notice proposing a series of pay-to-play type rules for its broker-dealer members that closely track the pay-to-play provisions set forth by the Securities and Exchange Commission (SEC) in Rule 206(4)-5. FINRA, the self-regulatory organization for broker-dealers, announced three specific rule proposals in its notice – Rule 2390, Rule 2271 and Rule 4580.

Proposed Rule 2390, which is clearly modeled on Rule 206(4)-5, would restrict FINRA’s member firms from engaging in distribution or solicitation activities on behalf of registered investment advisers that provide or seek to provide investment advisory services to government entities if “covered employees” of those advisors make a disqualifying political contribution. The proposed rule would not specifically ban or limit the amount of political contributions covered FINRA members or their covered associates could make to government officials, but would instead impose a two-year time out on engaging in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser when the FINRA member or its covered associates make a disqualifying contribution.

While this type of pay-to-play framework should be familiar to those in the regulated community, what might not be so familiar are the disgorgement of profit provisions contained in proposed Rule 2390. Unlike SEC Rule 206(4)-5, the currently-announced framework of Rule 2390 would obligate covered FINRA members to disgorge any compensation or other remuneration received in association with, pertaining to, or arising out of, distribution or solicitation activities during the two-year time out period caused by a disqualifying contribution. The proposed rule would also prohibit covered FINRA members from entering into arrangements with investment advisers or government entities to recoup any such disgorged compensation at a later time period.

The remaining two proposals set forth in FINRA’s regulatory notice – Rule 2271 and Rule 4580 – deal with disclosure and recordkeeping requirements for broker-dealer members engaged in covered government distribution and solicitation activities. Specifically, proposed Rule 2271 would obligate covered FINRA members engaging in distribution and solicitation activities with a government entity to make specified disclosures to such entity regarding the identity of the investment adviser(s) being represented and the nature of the compensation arrangement associated with the representation.  Meanwhile, proposed Rule 4580 would require covered FINRA members engaging in distribution and solicitation activities with a government entity on behalf of any investment adviser to maintain specified records that could be examined by FINRA for compliance with the obligations of proposed Rules 2390 and 2271.

In conjunction with the publication of its current regulatory notice, FINRA has requested public comment from both members and non-members on all aspects of the planned provisions, including “any potential costs and burdens of the proposed rules.” For those interested in participating in the open comment process, December 15 has been set as the current response deadline. Given the likelihood of swift adoption of the proposed rules following that date, broker-dealers subject to the regulatory reach of FINRA should begin updating their compliance programs in short order.

FINRA Quietly Proposes Pay-to-Play Type Rules for Its Broker-Dealer Members

SEC Starts Hitting the Private Sector Hard for Pay-to-Play Violations

Stay AlertFor the first time ever, the SEC has brought a pay-to-play case against an investment advisor for making political contributions. Previously, and with the requisite lack of subtlety and fanfare you have come to expect from this blog, we highlighted the SEC’s massive consent judgment against Goldman Sachs over a series of “in kind” contributions by one of its bankers. What makes this case equally noteworthy in the wake of the Goldman precedent is not only the fact that the SEC is signaling that its enforcement efforts will not be tempered either by a lack of intent to influence and investment decisions, but that such efforts will also not be deterred even by a lack of opportunity to influence those decisions.

The investment community needs to take note and heed these warnings immediately. TL Ventures gives us all 285,000 reasons to do so.

As spelled out in greater detail in a recent, articulate, insightful, and well-crafted law firm client alert, in April 2011, a “covered associate” of TL Ventures made contributions to the campaign of a candidate for Mayor of Philadelphia and the Governor of Pennsylvania. The Mayor of Philadelphia appoints three of the nine members of the Philadelphia Retirement Board and the Governor of Pennsylvania appoints six of the eleven members of the board of the Pennsylvania SERS. The SEC charged TL Ventures with pay-to-play violations under Rule 206(4)-5 of the Advisers Act because the contributions triggered the two-year “time out” from receiving advisory fees from the Philadelphia Retirement Board and SERS. As was the case with Goldman, TL Ventures agreed to settle the matter without admitting or denying the allegations, disgorging its fees of over $250,000, and paying a penalty of $35,000.

For the uninitiated, Rule 206(4)-5 generally prohibits investment advisors from providing advisory services for compensation to a government entity for two years after the adviser or certain of its executives or employees make political contributions above specified thresholds to an elected official or candidate for political office if the office is “directly or indirectly responsible for, or can influence that government entity’s selection of the adviser.”

It is a significant question whether the facts alleged in this matter represent the type of case that was envisioned when the pay-to-play rules were adopted, and whether this is the type of case that combats what the SEC described as a significant problem of influence in the management of public funds. Absent from the SEC’s allegations was any assertion that TL Ventures or the covered associate at issue attempted to influence an investment decision of either the Philadelphia Board or SERS. Indeed, the SEC went out of its way in its consent order to declare that “Rule 206(4)-5 does not require a showing of quid pro quo or actual intent to influence an elected official or candidate.”

Of particular relevance here, TL Ventures did not appear even to have an opportunity to influence an investment decision. The SEC alleged that both SERS and the Philadelphia Board were investors in the funds prior to the political contribution and that the funds were in wind down mode, and that both SERS and the Philadelphia Board were already committed to TL Venture funds until the funds officially wound down. Additionally, there was no allegation that TL Ventures marketed any additional funds for investments during the two-year period after the covered associate at issue made the prohibited political contributions. Thus, the political donations in question could not have had any effect on any investment decision because there was simply no investment decision to be made.

In addition to being a bit scary and a large neon flashing compliance alert for the regulated community, one has to wonder whether the SEC’s enforcement action against TL Ventures and its pay-to-play rules are constitutional under the Supreme Court’s recent decision in McCutcheon v. Federal Election Commission, 572 U.S.__(2013).  Readers of this blog will recall that in McCutcheon, the Supreme Court found that aggregate political contribution limits violated the First Amendment because the  regulation of political speech must be limited to targeting instances of “quid pro quo” corruption or its appearance. No such concern was found by the Court in the aggregate campaign contribution limit context. Coincidentally, the existence or appearance of quid pro quo corruption is precisely the standard the SEC has gone out of its way to assert is NOT required to allege a Rule 206(4)-5 violation. In turn, one has to wonder how the Roberts Court would view the SEC’s attempted application of a strict liability standard for Rule 206(4)-5 violations that involve absolutely no opportunity to influence an actual investment decision.

SEC Starts Hitting the Private Sector Hard for Pay-to-Play Violations

The Potential Consequences of Paying to Play: Birdsall Services Group

New Jersey engineering firm Birdsall Services Group realized the full consequences of violating state pay-to-play laws on August 30th after a state court judge ordered that the contractor pay $1M in criminal penalties, the maximum allowable by law.

Under the state’s pay-to-play law, which many agree requires an overhaul, business entities are prohibited from making reportable contributions (in excess of $300) to elected officials prior to the award of certain government contracts and during their pendency. See N.J.S.A. 19:44A-20.3 through 20.25. In a scheme designed to work around these restrictions, Birdsall bundled several non-reportable $300 contributions written by individual employees, sent them to elected officials as one contribution, and reimbursed the employees with bonuses. The scheme stretched over six years, during which Birdsall contributed over $1M to various campaigns and netted millions of dollars in revenue on public contracts subject to the restrictions – contracts for which Birdsall was technically ineligible under state law.

The recent $1M penalty ordered by the state court was only the most recent in a series of consequences faced by the company and its executives. Indicted on charges of money laundering and the making of false representations for government contracts in March of 2013, Birdsall declared bankruptcy just three days after the state moved to seize company assets, and the company pleaded guilty to such charges in June. Money laundering, conspiracy, and a laundry list of similar criminal charges against seven employees – including the firm’s largest shareholder and former CEO – are pending, and two marketing employees have already pleaded guilty to participating in the scheme. Potential penalties for these individuals include fines of up to $1M and 20 years in state prison. Birdsall has already paid the state $2.6M to settle a civil forfeiture action relating to the case and has agreed to be debarred from federal contracting for 10 years. News outlets have also obtained and published lists of the contribution recipients.

Birdsall’s case demonstrates the severe consequences of a contractor’s attempts to work around pay-to-play rules, even those with seeming loopholes or unclear restrictions. There is little doubt that the highly publicized scandal will spark election law reform in New Jersey and perhaps other states as they work to broaden their state-level “False Claims Acts” and similar restrictions on state contractors. (We also continue to await the Wagner case as it heads to oral argument before the en banc D.C. Circuit, which will decide the issue of whether the Federal Election Campaign Act’s more general ban on political contributions by federal government contractors is unconstitutional.)

Birdsall’s experience demonstrates the importance of reviewing business development practices and establishing internal controls that track compliance with state and local ethics rules, in addition to federal restrictions. Instituting such controls and consulting experts capable of advising on such state laws not only helps to ensure compliance, but also shows an intent to fully comply with relevant restrictions in the event an investigation arises.

The Potential Consequences of Paying to Play: Birdsall Services Group

No More “Golden Goose” for School Bond Campaign Donors in the Golden State?

As frequent readers of this blog know well, California has always been considered a fairly restrictive jurisdiction when it comes to the regulation of pay-to-play politics. One large exception to that general rule, however, has been in the school bond campaign context, where financial institutions, attorneys and underwriters have traditionally been permitted to give sizable campaign contributions in support of potential bond initiatives that could benefit their bottom line.

From the perspective of political transparency advocates, such school bond campaigns have long been the “golden goose” of California’s pay-to-play politics. The formula in these settings has been simple – feed the government “goose” with large donations to help a municipal bond campaign pass, and reap the “golden egg” benefits by being hired by the corresponding state or municipal government to underwrite, advise or consult on the bond issuance. Based upon the recent comments and actions of various California officials, however, it appears that the era of the school board campaign golden goose may soon be coming to an end in the Golden State.

The push to curb pay-to-play activities in the school bond context began earlier this year when California State Treasurer Bill Lockyer sounded the alarm on such activities and asked State Attorney General Kamala Harris to examine the legality of several deals involving active school bond campaign donors. Building off of that effort, Treasurer Lockyer next called on state officials in Sacramento to take legislative action to institute a rule forbidding financial advisers, bond underwriters and bond lawyers that give money to bond campaigns from working in association with such bond projects.

While Lockyer has failed to spell out a specific regulatory model of his own, he has embraced statewide legislative action and backed a bill previously introduced by State Assemblyman Donald Wagner earlier this year. That bill, A.B. 621, passed the California Assembly by an overwhelming margin in mid-May. Despite broad bipartisan support for the legislation, however, it has since stalled out in the State Senate Governance and Finance Committee. Lockyer has also endorsed similar legislative solutions put forth by municipal groups such as the California Association of County Treasurers and Tax Collectors.

Coinciding with the push from Lockyer and other state officials for a California-wide approach to school bond campaign pay-to-play regulation, there has also been recent momentum on the municipal front. Leading the charge has been Los Angeles County Treasurer Mark Saladino, who earlier this month pledged to ban bond underwriting firms who donate to school bond campaigns from doing business with the county. Saladino asserts, based upon research conducted by the Los Angeles Times and other publications, that virtually all vendors hired by California school districts in recent years to assist with bond issuances have made contributions to the associated district bond campaigns and been retained without competitive bidding. This phenomenon, he claims, drives up the cost of bond issuance for state taxpayers.

In the wake of this recent announcement, Saladino has been rallying his local government counterparts across the state to adopt similar approaches until such time as Treasurer Lockyer and the folks in Sacramento implement a broad-based solution. Not all county and municipalities have been quick to follow suit, however.

San Diego County appears to be one such municipality. Despite what appears to be strong evidence of a growing pay-to-play culture in San Diego area school bond campaigns, San Diego County Treasurer-Tax Collector Dan McAllister is skeptical of the Los Angeles County approach. While sympathetic to Saladino’s call for tighter pay-to-play restrictions in the school bond campaign context, McAllister believes that a local, piece-meal approach to reform will be both difficult to implement and enforce, and unlikely to be as effective as a comprehensive, statewide approach to the problem.

Regardless of which reform model leads the charge in the Golden State over the next few months, it appears relatively clear that the days of school bond campaign pay-to-play in California are numbered. As changes occur in the state and local landscape, we here at Pay to Play Law Blog will be here to help you take a “gander” at the relevant legal changes.

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No More “Golden Goose” for School Bond Campaign Donors in the Golden State?

Do SEC and MSRB Pay-to-Play Rules Scare Off Donations to Federal Candidates?

As readers of this blog know well, the avowed goal of the SEC’s pay-to-play framework is to protect the integrity of the public procurement process by preventing registered investment advisors from improperly influencing the award of state and local contracts for the management of public investment funds. On its surface, Rule 206(4)-5, which bars investment advisors from managing public investment funds in jurisdictions where their political contributions or the contributions of their “covered associates” exceed $150 per election to elected officials who directly or indirectly oversee such funds, seems well suited to this task. The problem is that many covered by these provisions – and their helpful in-house compliance officers – erroneously believe that SEC restrictions apply to contributions to ALL candidates. This is incorrect.

The language of Rule 206(4)-5 neither prohibits nor restricts investment advisors from contributing to federal candidates who presently hold no state or local office – only state “officials” from a “government entity” who have the power to directly or indirectly influence the outcome of the hiring of investment advisors (check out page 43 of the SEC’s link above if you don’t believe me). As we, and others, have pointed out previously, this rule does not apply to contributions to sitting federal candidates or to private citizens running to replace those federal candidates. Likewise, the SEC’s pay-to-play provisions place no restrictions on political donations from covered entities or individuals to state or municipal candidates who play no role in the direct or indirect oversight of public investment funds. Of course, state and local pay-to-play rules might still apply in certain circumstances – such as where a sitting state official is running for federal office, but there is no need (as a reaction to SEC pay-to-play regulations) to adopt caps that artificially restrict the ability of investment firm employees to engage in constitutionally-protected political speech.

Much the same error of interpretation can be seen in the MSRB pay-to-play context. Like their brethren in the investment advisory world, many municipal finance professionals covered by Rule G-37 erroneously believe that its provisions restrict political contributions to ALL candidates. This is simply not the case. Rule G-37’s candidate contribution provisions only restrict donations to “official(s) of any issuer” who can directly or indirectly influence the hiring of a municipal securities professional, or donations to state officials or candidates who have the authority to appoint persons with such influence. The MSRB’s regulatory framework does not prohibit contributions to federal candidates who hold no state or local office, nor does it bar contributions to private citizens turned federal candidates.

Keeping these points mind, we hope that our readers working in the investment advisory and municipal finance arenas take a moment to examine their current political contribution policies, and ensure that they successfully protect their business development interests without unnecessarily curbing otherwise legitimate and beneficial political activities. On the other hand, it could be that the SEC and MSRB pay-to-play rules are simply an inoffensive way to say “thanks, but no thanks” to your friendly neighborhood federal candidate. Can’t do anything about that…

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Do SEC and MSRB Pay-to-Play Rules Scare Off Donations to Federal Candidates?