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San Francisco’s Potential Anti-Corruption and Accountability Ordinance Includes New Compliance Provisions That Venture Beyond Standard Pay-to-Play Laws

For those of our readers with a latent East Coast bias or who have just been preoccupied with the latest political drama emanating from Washington, you may have missed the recent flurry of activity in the Bay Area that appears to be threatening the City of San Francisco’s efforts to pass a controversial ethics reform bill. The proposed Ordinance, known as the Anti-Corruption and Accountability Ordinance (ACAO), takes an aggressive tact on regulating political engagement within the City and seeks to implement a series of unique compliance obligations that venture beyond the standard approaches to eliminating pay-to-play politics.

At present, the ACAO has proven to be more of a political football than a legislative success story. The Chair of the City’s Ethics Commission recently stepped down following the Commission’s failure to approve its placement on the June primary ballot for voter consideration.  Despite this very public disappointment for backers of the measure, a motion has recently been introduced for the ACAO to be taken up for additional consideration by the Commission on April 3rd.  A similar request has been made to the San Francisco Board of Supervisors.  Given the political dynamics at play and the controversial nature of the ACAO in general, passage (or even a vote) on the ordinance next week is less than a certainty.  Some of its prospective contents, however, bear further discussion.

There are a litany of interesting regulations and restrictions included in the ACAO, including disclosure obligations related to so-called “behested payments” made on behalf of public officials and a new prohibition on certain political contributions made by entities with interests in specified land-use decisions.  But a recently inserted measure that would require large donors to state-level independent expenditure committees (Super PACs) to disclose certain personal business investments in San Francisco is catching our eyes.  This measure represents a novel disclosure mechanism obligating those wishing to politically engage through state-level Super PACs to open up their private business portfolio to public scrutiny.

The measure, sponsored by San Francisco Board of Supervisors Member Aaron Peskin, would require individuals who contribute more than $10,000 to Super PACs to disclose their financial investments of $10,000 or more in San Francisco businesses.  Such individuals would also need to report any businesses in San Francisco from which they receive compensation.   These disclosures would be required within 24 hours following the triggering contribution.

Supervisor Peskin’s proposal was met with at least some skepticism by the Ethics Commission, which questioned the constitutionality of such a disclosure obligation and the heavy regulatory burden such a provision would place on both donors and City compliance officials. Certain donors, the Commission noted, could have thousands of investments in the city, making compliance with the Peskin measure expensive and impractical.  The Commission also appeared to express some doubt as to the overall public policy value of implementing such a new requirement, which seems fairly disconnected from the stated goal of rooting out pay-to-play politics.  We here at the Pay-to-Play Law Blog would tend to agree with such skepticism.

Existing San Francisco ethics rules, which include a pay-to-play provision that prohibits contractor contributions to elected officials who have oversight responsibilities of those contracts, already seem well situated to curb the sort of unsavory political engagement elected officials and voters are most concerned about.  When paired with California’s additional disclosure requirements for entities that make contributions of $250 or more to elected officials before whom the entities have official business, it is somewhat difficult to find the added compliance value of the contemplated measure.  As our readers know well, however, that’s no true predictor of political passage in the pay-to-play context.

As April approaches, we here at Pay to Play Law Blog will continue to monitor the ACAO’s progress in San Francisco and its potential impact on pay to play compliance and political engagement within the City. Those in the regulated community with Bay Area business interests should stay tuned.

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San Francisco’s Potential Anti-Corruption and Accountability Ordinance Includes New Compliance Provisions That Venture Beyond Standard Pay-to-Play Laws

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

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?

Just Call It The “Pay-to-Play” Corridor

 

 When one hears about state pay-to-play reform efforts underway along the “Northeastern Corridor”, it’s only natural to look first to the news wires in New Jersey, Connecticut and New York. After all, those jurisdictions have proven themselves to be the leaders of the pack when it comes to pay-to-play advancements, or at least reformist, pay-to-play rhetoric. In recent weeks, however, we have begun to see momentum building behind new pay-to-play legislation in the neighboring jurisdictions of Pennsylvania and Rhode Island. Depending on the outcome of these new efforts, perhaps it’s time that we drop the directional nomenclature and simply start calling the entire region the “Pay-to-Play Corridor”.

Pennsylvania Legislative Activity

Given the steady stream of “perp walks” seen in the Keystone state over the past month, one could have anticipated significant legislative action on the pay-to-play front. For those of our readers who missed the reports because they were busy “Spring Breaking” or watching their March Madness brackets go down in flames, here’s the long and short of it. In mid March, Pennsylvania Attorney General Kathleen Kane brought a collection of criminal charges against eight Pennsylvania lawmakers and government officials in connection with a wide-ranging bid-rigging and bribery scheme associated with the Pennsylvania Turnpike Commission. Included among those charged were former State Senator Robert Mellow, former Turnpike CEO Joseph Brimmeier, and former Turnpike Chairman Mitchell Rubin, who allegedly directed Turnpike contracts to favored vendors and campaign supporters, and misused millions of dollars in public funds.

With the discovery of this textbook pay-to-play scandal, Pennsylvania lawmakers have been scurrying to distance themselves from the parties involved and position themselves on the right side of pay-to-play reform. The result has been a flurry of legislative ideas and proposals from members in both the state House of Representatives and state Senate. Among the more heavily publicized bills under consideration are SB 750 through SB 758, a collection of pay-to-play and ethics bills sponsored by the bi-partisan tandem of State Senator Mike Stack (D-Philadelphia) and State Senator John Eichelberger, Jr. (R-Blair). As one might expect, the range of issues addressed by these nine bills is quite broad.

Although the specific language in the draft bills has not yet been made publicly available, SB 753, SB 754 and SB 755 appear to focus on contracting issues, requiring the public disclosure of vendor scoring on state RFP bids, the reporting of any payments made to state vendors by registered state PACs or candidate committees, and the disclosure of all subcontractors by state vendors. Meanwhile, SB 750, SB 756 and SB 758 purport to tackle gift and contribution issues by calling for a decrease in the state gift reporting threshold from $250 to $50, requiring the public disclosure of certain campaign contributions by executive branch advisory commission and task force members, and installing an outright ban on gifts to executive branch officials and employees by all companies that do business with, or are regulated by, the Commonwealth.

As of this blog’s publication, none of these proposals have been taken up for consideration in the Pennsylvania State Senate. Their introduction, however, does indicate one direction that the Keystone State’s legislature is looking to go in the wake of the Turnpike scandal.

>Another potential pathway to reform in Pennsylvania was launched earlier this week in the state House of Representatives by Representative George Dunbar (R-Westmoreland). His bill, HB 201, attempts to bring increased transparency and accountability to the state procurement process by incorporating a two-year “revolving-door” provision into Pennsylvania laws governing the competitive sealed bidding process. The legislation passed the House unanimously on Tuesday, but failed to include several amendments proposed by Rep. Brandon Neuman (D-Washington) and others, which would have implemented pay-to-play contribution reporting provisions akin to those seen at the state level in New Jersey.

Perhaps Keystone legislators were scared off by the recent words of New Jersey Election Law Enforcement Commissioner Jeff Brindle, which highlight the unwieldy nature of the Garden State’s pay-to-play framework? Or perhaps it was a pure political dodge? Their true motivations may never be known, but we will continue to keep our readers posted as the aforementioned bills make their way through the state legislative process and new proposals are introduced.

Rhode Island Legislative Activity

Further north on the Pay-to-Play Corridor, we are also beginning to see Rhode Island officials join the push for reform. At present, Rhode Island’s pay-to-play laws place limited, disclosure-only reporting obligations on state contractors. Under these obligations, vendors with contracts for goods or services valued at $5,000 or more are required to disclose on an affidavit all contributions to state officers, general assembly candidates and political parties in excess of $250 made within two years of the beginning of a state contract. These provisions do not, however, place any inherent limitations on the political giving of potential or actual state vendors.

Hoping to rectify this shortcoming, State Attorney General Peter Kilmartin and State Representative Michael Marcello have worked together to draft and introduce legislation that would prohibit state vendors, their owners, their executive officers, and the spouses and minor children of those owners and officers from making political contributions to state officials and state candidates who are or could be generally responsible for awarding state contracts. This ban would apply to all vendors with existing state contracts valued at over $5,000 (or aggregating to over $25,000), and would be effective for the duration of the officeholder’s term or for two years following the termination or expiration of the contract, whichever is longer.

The bill, H 5490, also places a similar restriction on the executives and family members of companies with pending bids for state contracts. This ban on contributions by vendors with pending bids or contracts would likewise apply in all situations where contract value exceeds $5,000 on any one bid or contract, or $25,000 on aggregate bids or contracts.

The language of the Kilmartin/Marcello bill is broadly drafted to cover contributions made to a wide range of state officials, including the Governor, and includes a low value threshold to ensure nearly universal application to all state contracts. Whether those particular elements survive the legislative process moving forward, however, is yet to be seen. So far, the bill remains in its introduced form and has been held over for further study by the Rhode Island House Judiciary Committee. As additional news on its progress becomes available, we here at Pay to Play Law Blog will keep everyone updated.

Just Call It The “Pay-to-Play” Corridor

Philadelphia Gets Into the Ring on January 3, 2012

Cue the obligatory training montage and iconic theme music…Like its best known fictional sports hero, the City of Philadelphia is looking to pick itself up off the ethical mat and take a first step toward regaining the public trust when it comes to political decision making and government action. Battered and bruised by an ongoing ethics investigations against its former mayor, allegations of improper political activity on the part of city council staff, and a sordid history of pay-to-play corruption, it appears as if Philadelphia and its Board of Ethics are finally working to change the culture of politics in the City of Brotherly Love, one reform idea at a time.

The newest Philly reform effort of note is the city’s lobbyist registration regulation, which was signed into law in June 2010 but will not go into official effect until January 3, 2012. This regulation, labeled as Regulation No. 9 by the Philadelphia Board of Ethics, will for the first time in the city’s history require individuals who attempt to influence legislative or administrative action, or who endeavor to obtain city contracts, to register as lobbyists. In addition, the rule will place significant disclosure requirements on most lobbyists, lobbying firms, and lobbying principals operating in Philadelphia. Specifically, the regulation will require most registrants (those expending more than $2,500 or lobbying more than 20 hours per quarter) to periodically report their lobbying expenditures on gifts, hospitality, transportation, lodging and other associated activities. In addition, the new rule will mandate that registered Philadelphia lobbyists publically divulge basic information about the nature of their lobbying contacts and communications with city officials and employees.

Beyond these fundamental disclosure requirements, Regulation No. 9 will also prohibit contingency fee lobbying among registrants, mandate lobbyist training, and impose a number of conflict-of-interest rules on city lobbyists. In addition, the regulation will prevent registered city lobbyists from serving as officers for the political committees and political action committees of candidates seeking elected office in Philadelphia. Also, interestingly, the new rule prohibits any registrant from transmitting, uttering, or publishing any false, forged, counterfeit or fictitious communication to a city official or employee for the purpose of influencing legislative or administrative action. How broadly the false statement provision will be enforced moving forward will be interesting to watch. All told, however, Regulation No. 9 appears to take significant steps toward bringing Philadelphia’s municipal lobbying rules up to speed with those in place in other major cities around the county.

Enactment of Philadelphia’s lobbyist registration regulation comes on the heels of another noteworthy reform put into place by the city council and Board of Ethics earlier this year. This reform, known as Regulation No. 8., went into effect in late March, and is designed to severely limit improper, partisan political activity on the part of city officers and employees. Like a mini-version of the federal Hatch Act, Regulation 8 seeks to prevent appointed Philadelphia officials and employees from using city resources to engage in partisan political activities. Likewise, the regulation seeks to prohibit city officials and employees from utilizing their status or title as a means of influencing or coercing participation in political activities. Along these same lines, Regulation 8 endeavors to prevent improper, partisan political behavior through the following mechanisms: (1) a ban on collecting, receiving, and soliciting political contributions for a partisan purpose; (2) a ban on membership in national, state, and local political party committees; (3) a ban on political campaigning and political management activities; (4) a ban on circulating nomination petitions or papers for political candidates; and (5) a ban on get-out-the-vote participation when such activities are organized or sponsored by a political party, candidate, or partisan political group.

In practice, these provisions are designed to preserve a proper separation between impartial policy making and partisan political activity by city government officials and employees … a line that has not always been so clear in Philadelphia. Whether Regulation 8 will accomplish this goal moving forward, however, remains to be seen. This is particularly the case in light of a few of the broad carve-outs contained within the regulation. Exceptions to the political activity restrictions discussed above exist for a wide range of partisan political behavior, including engaging in most political activities organized by civic, community, labor, and professional organizations, and campaigning for or against referendum questions and municipal ordinances. Likewise, the regulation also exempts city council employees from having to comply with several of the aforementioned prohibitions, including the exclusion on partisan political campaigning and management. It is doubtful that the loopholes in Regulation 8 are broad enough to swallow the entire rule, but how they affect overall compliance is certainly something to keep an eye on in the future.

For many, reforms like Regulation No. 8 and Regulation No. 9 might seem like too little, too late on the part of the Philadelphia city government and Board of Ethics. After all, over the past few decades, the City of Brotherly Love has become an environment more synonymous with appearances of cronyism and corruption than transparency and good governance. But in a city known for its comeback stories, I wouldn’t count out meaningful political reform quite yet.

Philadelphia Gets Into the Ring on January 3, 2012

California’s New “Habit” of Pay-to-Play Regulation in the Public Employee Pension Fund Arena

If it takes three times to make something a habit, it is safe to say that “pay-to-play” legislation in the State of California is getting to be a bit habitual.  For the third time in as many years, the California State Legislature has decided to ripple the “pay-to-play” regulatory waters by passing an “urgency” measure designed to clarify and modify the state’s existing restrictions on investment managers and investment placement agents who do business with California’s public employee pension funds, such as the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).  The new piece of legislation, Senate Bill 398 (SB 398), was signed into law on October 9, 2011 by Governor Jerry Brown, and is designed to complement two other recently-passed bills regulating the activities of pension fund investment managers.

The first of those recently-passed bills was Assembly Bill 1584 (AB 1584), which was passed by the state legislature in 2009 as part of an effort to increase transparency in the management of public employee pension fund assets.  Specifically, AB 1584 required all California pension funds to adopt disclosure policies that would require the reporting of all campaign contributions and gifts made to pension fund board and staff members by “placement agents” and external investment managers.  Likewise, the bill mandated that all outside investment managers disclose information regarding the fees they pay to placement agents for the purpose of securing asset management business opportunities with state and local pension funds across California.

The second of those complementary pieces of legislation was Assembly Bill 1743 (AB 1743), which was passed by the state legislature in 2010 as part of an effort to build on the transparency provisions of AB 1584 by explicitly restricting the ability of placement agents and external investment managers to engage in pay-to-play activities associated with California’s public employee pension funds.  As this blog highlighted at the time of the bill’s passage, AB 1743 placed a broad swath of placement agents, external investment managers, and external investment management firm staff under an obligation to register as lobbyists with the State of California.  In addition, AB 1743 banned these same individuals from making campaign contributions to the elected board members of California’s pension funds and prohibited them from setting up contingency fee arrangements to manage such pension fund assets.

While not as groundbreaking as either AB 1584 or AB1743, SB 398 does build upon each of those bills and make some noteworthy changes to California’s pay-to-play regulatory framework for pension fund placement agents and external investment managers.  Specifically, SB 398 modifies existing law in the following ways:

  • The bill revises the definition of the terms “external manager”, “placement agent”, “investment fund”, and “investment vehicle” to clarify that almost all managers of securities and assets for California public employee pension funds, whether directly or through managed funds, are subject to the disclosure and lobbyist registration rules put in place by AB 1743 for external managers and placement agents.  Despite this fact, however, SB 398 does exempt investment management companies that are registered with the Securities and Exchange Commission (SEC) pursuant to the Investment Company Act of 1940 and that make public offerings of their securities from having to comply with the statutory disclosure and registration standards.
  • The bill extends AB 1743’s “safe harbor” exemption from state-level lobbyist registration so that it also applies to local-level lobbyist registration requirements.  Under AB 1743’s safe harbor provision, investment managers of public pension funds need not pursue state-level lobbying registration if they meet three separate requirements: (1) they are registered with the SEC as investment advisers or broker-dealers; (2) they obtain their pension fund business through competitive bidding processes; and (3) they agree to be subject to the California fiduciary standard imposed on public employee pension fund trustees.  In turn, SB 398 extends a similar exemption to investment managers who would otherwise be required to register as local-level lobbyists on account of their management of local public employee pension fund assets.

Since SB 398 was passed by the state legislature and signed by the governor as an “urgency” measure, it is now the active law of the land in California.  It remains to be seen, however, what sort of impact it will actually have on the ethics of public pension fund asset management.  While its changes will certainly have some effect on investment managers and placement agents doing business with public employee pension funds in California, it will certainly not be as significant an effect as either AB 1584 or AB 1783.  After all, individuals working in the pension fund investment management business have to be slowly getting used to California’s growing pay-to-play regulation habit.

In light of this fact, perhaps the most interesting thing to watch in the wake of SB 398’s passage just might be the reaction of California localities to the extension of AB 1743’s safe-harbor exemption.  How will localities with a history of tackling pay-to-play issues (like Los Angeles) react to the state’s intrusion into municipal issues such as the regulation of local public employee pension fund management?  We shall see if any drama ensues in the Golden State… Stay tuned…

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California’s New “Habit” of Pay-to-Play Regulation in the Public Employee Pension Fund Arena

Transparency Advocates Look to the SEC to Accomplish What Congress, The White House, and the IRS To-Date Have Not

It has been almost exactly 19 months since the Supreme Court handed down its controversial decision in Citizens United v. Federal Election Commission, but the plot continues to thicken as those favoring mandatory corporate disclosure of political activities look for a non-judicial fix to the ruling.

To date, the fields are littered with detritus of failed efforts at identifying a mechanism that compels corporations and wealthy individuals to disclose all exercise of their newly-recognized First Amendment freedoms. This blog has previously reported on failed efforts to mandate such disclosure in Congress, as well as the Obama White House’s proposed executive order circumventing both Congress and the Supreme Court.  To achieve these same goals, groups such as Democracy21 and the Campaign Legal Center have promoted changes to the Internal Revenue Code, while the American Bar Association has encouraged Congress to make pertinent amendments to the Lobbying Disclosure Act.

Our latest contestants in this Sisyphean legal drama are a united band of like-minded law school professors looking to utilize the Securities and Exchange Commission (SEC) as a vehicle to counter the perceived negative impact of Citizens United. It appears this group has concluded that the imposing moniker “Committee on Disclosure of Corporate Political Spending” (the “Committee”) sounds more authoritative than “a united band of like-minded law school professors”. I think I agree with them on that.

Under either moniker, this group has filed a petition for rulemaking with the SEC requesting draft regulations that require public companies to disclose to shareholders information regarding the use of corporate resources for political activities. The main gist of its petition – stricter SEC disclosure rules are necessary to ensure that corporate political activities are subject to the appropriate level of shareholder scrutiny in the wake of Citizen’s United. The Committee bases this conclusion on the following contentions:

First, it asserts that there is strong data indicating that public investors have become increasingly interested in receiving information about corporate political spending. To support this statement, the like-minded professors reference a 2006 Mason-Dixon poll indicating that 85% of shareholder respondents held that “there is a lack of transparency surrounding corporate political activity.” They also make note of a FactSet Research Systems analysis that indicates 50 out of 465 shareholder proposals appearing on public-company proxy statements in 2011 involved political spending issues.

Second, the Committee grounds its request in the belief that there is increasing momentum toward political spending transparency in the corporate community, as evidenced by the growing number of large public companies that have voluntarily adopted policies requiring disclosure of their political expenditures. To this point, and perhaps undercutting the urgency of their call to action, the professors highlight a study by the Center for Political Accountability indicating that nearly 60% of S&P 500 companies voluntarily provide shareholders with information regarding corporate spending on political activities.

Third and finally, the Committee bases its request on the idea that stricter SEC regulation of corporate political disclosure will lead to better corporate oversight and accountability mechanisms. At present, the professors assert, shareholders are unable to hold directors and officers accountable when they spend corporate funds on politics in a way that departs from the interests of the company. From the Committee’s point of view, this is due to the fact that public information regarding corporate political activity is out of the average shareholder’s reach (because it is either dispersed among too many regulatory bodies or not gathered at all). By requiring companies to disclose to one central entity (the SEC), it is the professors contention that there will be better information available to shareholders, and in turn, a subsequent improvement in corporate accountability.

Based upon these assertions, the Committee’s petition recommends that the SEC initiate a rulemaking project to adopt a series of regulations that mandate periodic disclosure of corporate political spending. Whether the SEC will take heed of the Committee’s request remains to be seen, but the petition itself has already begun to draw a mix of criticism and support from members of the business, legal, and academic communities.

For example, just a few days after the Committee’s petition was submitted, Keith Paul Bishop – the former California Commissioner of Corporations and an adjunct professor at the Chapman University School of Law – filed a response letter with the SEC refuting the professors’ contentions and requesting that no such rulemaking project be initiated by the Commission. In his response, Bishop contends that the Committee’s proposal will only add to the already extensive public disclosure burden faced by reporting companies and that it is unnecessary in light of the growing trend toward voluntary corporate disclosure. He also argues that it is not the role of the SEC to mandate corporate expenditure on public disclosure of political activity when statistics show that not even a third of 2011 proxy proposals on the subject enjoyed shareholder support.

In contrast, official comments filed by Mark Latham, founder of VoterMedia.org, and executives from the International Corporate Governance Network expressed strong support for the Committee’s request. Specifically, both comments revealed a common respect for the Committee’s belief that the disclosure of corporate political spending is necessary to help stave off abuse or the breach of business ethics by officers and directors.

The debate over who has the better side of the argument will rage on in the coming months as the SEC weighs the proposal and determines whether to take any action. One would have to expect the Obama Administration to lend its support to the Committee’s cause in it’s typical “no fingerprints here, I don’t know what you’re talking about” approach. The response from the corporate community will undoubtedly be more mixed and more direct, but it will be interesting to see what reaction emerges from groups such as the U.S. Chamber of Commerce and The Conference Board’s newly formed Committee on Corporate Political Spending (to which, BIAS ALERT, I am an advisor). Stay tuned….

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Transparency Advocates Look to the SEC to Accomplish What Congress, The White House, and the IRS To-Date Have Not

GOP ‘legal defense’ plan raises disclosure issue

November 27, 2009, John O’Connor, The State

Stefan Passantino is quoted discussing the increase of legal defense funds at the state level, rather than just at the federal level. This concerns some, as the public is unaware of who is donating money to these funds or how much, since there is currently no contribution limit. There is debate about the ethics of this type of fund, however, candidates’ parties will often pick up the bill for things like unfounded accusations.

"Both sides of the aisle were using the ethics process as a weapon with some effectiveness," Passantino said. "That is a trend that has become exponentially more prevalent."

To read the full article click here.

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GOP ‘legal defense’ plan raises disclosure issue

Pay-to-Play Reform Enacted in Wake of Corruption Conviction

Trends regarding the enactment of pay-to-play legislation remain remarkably consistent and robust nationwide. Typically, pay-to-play legislation is passed in the wake of a corruption scandal that befalls a high-ranking public official. In such an instance, the political pressure on governing bodies is so tremendous to act, that pay-to-play reform is inevitable.

This trend has just played itself out once again in Dallas, where the Dallas City Council just yesterday passed a series of Ethics reform measures in the wake of the corruption conviction of former Mayor Pro Tem Don Hill. The entirety of the legislation, which exceeds some 1300 pages, can be found here.

The ethics package contains numerous changes to existing lobbyist registration and disclosure requirements, City Council zoning powers and the disclosure of gifts to Council members. Most relevant to the pay-to-play space is that anyone bidding on a city contract is now prohibited from making donations during the bid period. Additionally, “major” zoning applicants can no longer make contributions to Council members during the window which begins on the date of public notice of the zoning case, and which ends 60 days after the zoning case is resolved. Such changes are not too surprising in this instance, given that the scandal involving Hill revolved around favorable treatment for developers.

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Pay-to-Play Reform Enacted in Wake of Corruption Conviction