1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

SEC Gives Registered Investment Advisers More Time to Bring Themselves Into Compliance with the “Pay-to-Play” Ban on Third-Party Solicitation

For more than two years, this blog has been covering the Securities and Exchange Commission’s foray into the world of pay-to-play regulation and the Commission’s attempt to implement federal pay-to-play restrictions for registered investment advisers. The latest chapter in this long and winding saga occurred earlier this month, when the SEC formally extended the compliance date for the third-party solicitation ban imposed by the recently-crafted amendments to Rule 206(4)-5 under the Investment Advisers Act of 1940. As a result, the formal compliance deadline, which had been set for June 13, 2012, has now been reset to a indeterminate date nine months following the compliance date set forth in the Commission’s final rules for the registration of municipal advisors, which have been proposed but not yet adopted. To put it simply – the SEC has chosen to “kick the can down the road” for a second time on pay-to-play solicitation compliance.

By way of a quick refresher, the third-party solicitation ban, which officially went into effect on September 13, 2010, effectively prohibits SEC-registered investment advisers (and certain executives and employees of such advisers) from paying any third party for the solicitation of advisory business from any governmental entity unless the solicitor is an SEC-registered investment adviser, broker-dealer or municipal advisor. In the case of broker-dealers and municipal advisors, the ban also provides that any such solicitors must be subject to the pay-to-play restrictions that are purportedly due to be adopted  in the future by either the Financial Industry Regulatory Authority (FINRA) or the Municipal Securities Rulemaking Board (MRSB).

At the time of Rule 206(4)-5’s initial adoption by the SEC, the third-party solicitation ban’s compliance date was set for September 13, 2011, thus providing registrants with a so-called transition period in which to come into conformity with the rule. This transition period was intended to provide investment advisers and third-party solicitors with sufficient time to revise their compliance policies and procedures so as to prevent future regulatory violations. Likewise, the period was designed to provide an opportunity for FINRA and the MRSB to adopt analogous pay-to-play rules and for the Commission to assess how such rules would dovetail with Rule 206(4)-5’s provisions.

Due to delays in the adoption of a FINRA pay-to-play regulation and complications in the MSRB rulemaking process caused by various provisions of the Dodd-Frank Act, the SEC made the decision last summer to move the official third-party solicitation ban compliance deadline from September 13, 2011 to June 13, 2012. The additional nine months, the Commission posited, would provide registrants with sufficient time for an orderly transition under the rules.

Fast forward to present day and the same justification is again being put forth by the SEC – this time to explain this month’s indeterminate extension of the compliance deadline. According to the SEC’s explanation in Release No. IA-3418, an orderly regulatory transition under the solicitation ban can only be accomplished through the extension of the present transition period beyond the Commission’s finalization of the new Dodd-Frank-imposed registration requirements for municipal advisor firms and subsequent to the MSRB’s re-introduction and implementation of its draft pay-to-play proposals.

What are we to make of this second round of “can kicking” on the part of the SEC? From a practical perspective, registered investment advisers and third-party solicitors now have additional time to bring their corporate compliance policies and procedures up to speed with SEC standards. The benefit of this additional time, however, is partially undone by the fact that the present compliance standards are not yet set and will not be set until the pending mishmash of regulations makes its way out of the SEC, FINRA and MSRB sausage grinders.

From a policy and political perspective, the SEC’s action is equally as ambiguous. Do we take the SEC at its word and classify both compliance extensions as necessary steps to ease the transition of businesses into an unchartered regulatory environment? Or do we simply characterize the extensions as additional examples of the federal government “kicking the can down the road” when it comes to implementing difficult actions or decisions?

Our most cynical readers likely view it as the later – patchwork political punting on the part of a governmental agency in a highly-charged election year. By contrast, our less-jaded readers may attach a more innocent explanation to the delays in implementation – after all, the SEC is forced to operate in conjunction with other entities in this instance. Whatever your particular take on the Commission’s action, however, Pay-to-Play Law Blog will be here to keep you updated and to help potential registrants understand their full compliance obligations moving forward.

, ,

SEC Gives Registered Investment Advisers More Time to Bring Themselves Into Compliance with the “Pay-to-Play” Ban on Third-Party Solicitation

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….

, , , , , , ,

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

“Pay-to-Play” Restrictions Debated in Newark: Unfair Advantage for Popular Mayor?

Critics of “pay-to-play” restrictions have long come from throughout the political spectrum, raising concerns ranging from free speech to ballot access. But the recent “pay-to-play” proposals in Newark, NJ have been criticized by some public officials for a rather novel reason: they can’t pick up the phone and call Oprah for a contribution like their popular Mayor, Corey Booker, can.

While the proposed legislation in Newark is in its infancy and is likely to change, it appears to be aimed at limiting contributions from local redevelopment companies. Specifically, the Star Ledger reports that the legislation’s current language, “would bar contributions to city candidates from redevelopers, their subcontractors and their consultants starting the moment there is interest in an area for redevelopment.”

This concept is not a novel one, particularly in New Jersey, which has arguably the toughest “pay-to-play” laws in the country. In fact, numerous localities in New Jersey have similar laws on the books. And as we detailed previously, Governor Chris Christie has proposed a wave of robust reforms that would further regulate the political law environment in the Garden State.

What is unique here, however, are claims such as the ones contained in the Star Ledger article:

As “pay-to-play” legislation limiting campaign donations from local redevelopers wends its way through City Hall, some city leaders are saying the proposed fundraising restrictions would create an unfair playing field for candidates who don’t have Oprah Winfrey on speed dial.

“I am not a rock star councilwoman,” said at large council member Mildred Crump this week. “We have a rock star mayor.”

Indeed, candidates without nationwide networks would be more directly impacted by the current Newark “pay-to-play” proposals than a national figure like Mayor Booker. Yet another reason for some to dislike this sort of piecemeal “pay-to-play” regulation. Nonetheless, reports on the ground indicate that passage of some form of this legislation is likely.

In any case, New Jersey continues to be a focal point for developments in the “pay-to-play” arena. We will monitor such developments closely as the end of 2010 nears.

,

“Pay-to-Play” Restrictions Debated in Newark: Unfair Advantage for Popular Mayor?

NJ Governor Christie Proposes Sweeping Ethics Reform Package; Robust New “Pay-to-Play” Provisions On the Horizon

New Jersey Governor Chris Christie recently announced an ambitious proposal to overhaul New Jersey’s ethics regulations which takes aim at perceived campaign finance loopholes and conflicts of interest, while also significantly increasing disclosure requirements for legislators. Importantly, the proposals by Christie, who campaigned vigorously on ethics reform, also contain several new “pay-to-play” regulations.

Specifically, an announcement from the Governor’s office announced three proposals which would directly address New Jersey’s current “pay-to-play” regime.

First, Christie has stated that he will “impose a uniform set of contract award standards on all levels of government and all branches of state government” by ending the “fair and open contract” exception for businesses that make reportable campaign contributions at the legislative, county and municipal levels, but are currently still able to receive contract awards valued greater than $17,500 with local governments. As Christie correctly notes, this practice is not currently permitted at the state/gubernatorial level.

Christie also aims to restrict what is commonly known as “wheeling” by “imposing contribution limitations on county and municipal committees for committee-to-committee contributions and committee contributions to out-of-county or out-of municipality candidates.” If enacted, this proposal would have a significant impact primarily at the local level, where contributions are routinely “wheeled” between committees, making the original source of campaign contributions unclear.

Finally, and most controversially, Christie proposes to limit political contributions from labor unions which have contracts with the state. As you will recall, Christie previously signed an executive order setting forth such regulations, only to have the Executive Order overturned by a state appeals court, which stated that legislation was necessary in order to enact such restrictions. Given that Christie is a Republican taking aim at perhaps the largest source of campaign contributions to Democrats, it is certain that this proposal will be met with significant opposition in the Democratic controlled legislature.

While the specifics of the proposals are sure to change in substance throughout the legislative process, it appears as if at least some new “pay-to-play” provisions are on the horizon in the garden state. As we have indicated previously here with respect to pay-to-play regulation, structure and statewide uniformity are sorely needed within the Garden State. We will continue to monitor what is sure to be a dynamic situation in New Jersey.

, ,

NJ Governor Christie Proposes Sweeping Ethics Reform Package; Robust New “Pay-to-Play” Provisions On the Horizon

New Ethics Code in Broward County Indicative of Increased Legislation at the Local Level

As if keeping up with Federal and State rules and regulations wasn’t challenging enough for corporations and others seeking to do business on a national platform, there has recently been an uptick in the implementation and enforcement of ethics and “pay-to-play” regulations at the municipal and county level.

The latest such local jurisdiction to implement its own ethics legislation is Broward County, Florida. As the Sun-Sentinel reports, a new Ethics Code will go into effect this Friday. What makes the situation in Broward County unique is that after the County Commission unanimously approved a relatively tough new ethics policy, legislation was passed the same day which will likely put the reforms before the voters via a referendum in November. If passed, the referendum will significantly alter the implementation of what will be the law on Friday.

As is all the rage these days, the new legislation outlaws all gifts from lobbyists and County Commissioners and their families are barred from serving as paid lobbyists before the county and city boards. Commissioners are barred from accepting anything in their “official capacity” in a value in excess of $50.00.

So, in sum, Broward County now has new Ethics Legislation on the books, going into effect this week. But it is possible that the reforms will be completely gutted in November. And, as the reporting by the Sun-Sentinel indicates, there seems to be signficant confusion as to how the law will be applied even between now and November. Indeed, as can bee seen from the transcript of the last meeting of the Broward County Ethics Commission, tempers have been getting a bit frayed over the subject of ethics.

All of this means one thing for the regulated community: little certainty with high risks. We will continue to monitor the developments in Broward County (for our own amusement if nothing else) as well as throughout the country in an effort to help our readers manage the increasingly difficult playing field.

New Ethics Code in Broward County Indicative of Increased Legislation at the Local Level

Investigations in North Carolina Prompt Overwhelming Support for Ethics Reform; “Pay to Play” Provisions Excluded at Eleventh Hour

Reacting to investigations that have followed the administration of former Governor Mike Easley, the North Carolina legislature recently passed a sweeping package of ethics reform. The text of the bill was passed in the waning hours of the General Assembly.

Specifically, the new legislation strengthens fines for illegal campaign contributions, which were reportedly not uncommon in the Tarheel state due to weak penalties.  Additionally, the legislation subjects board and commission members, as well as state employees, to more robust disclosure requirements. As is typical in the area of ethics reform, all areas have been subjects of contention in recent North Carolina ethics investigations.

Notably, the legislation did not include “pay to play” provisions, which were advocated for by some in North Carolina. Rather, the legislation establishes a commission to study whether pay-to-play legislation is needed in North Carolina, as well as the scope of any such provisions.

Given the political climate in North Carolina at this juncture, and the likelihood that investigations will continue in the ethics realm, it is likely that the North Carolina legislature will readdress the issue in 2011. Of course, we at the pay-to-play law blog will continue to monitor the developments on the ground in Raleigh.

Investigations in North Carolina Prompt Overwhelming Support for Ethics Reform; “Pay to Play” Provisions Excluded at Eleventh Hour

Pay-to-Play Laws Stifling Campaign Contributions in New Jersey

A new report issued by the New Jersey Election Law Enforcement Commission (ELEC) is being cited as evidence that New Jersey’s pay-to-play laws, which are undoubtedly amongst the most robust in the nation, are reducing the amount of money entering New Jersey politics.

Specifically, ELEC’s analysis of contributions to candidates participating in the upcoming May 11 municipal elections in New Jersey indicate that total contributions are down 19% from fundraising totals at the same point four years ago. While current economic conditions would undoubtedly seem to have had some impact on these figures, a close examination of all campaign contributions in New Jersey indicates that pay-to-play laws are playing a significant factor in the reduced fundraising totals.

For example, ELEC is reporting that gross receipts for New Jersey state political parties, and House and Senate Leadership PACs, are down 36% from 2006 levels. Similarly, ELEC states that county party committees have reported 28% reductions in gross receipts over the same period.

Though municipal pay-to-play limits in New Jersey are generally very stringent by national standards, municipal candidates generally have more flexibility to accept contributions from municipal contractors than New Jersey state candidates do from state contractors. As the ELEC’s Executive Director states, this flexibility may be a significant factor as to why the reductions in municipal contributions are less dramatic than those that are being seen statewide.

In any case, pay-to-play laws are clearly having an impact on the political playing field in New Jersey. Click here for more insight on this trend.

We at the pay-to-play law blog will continue to monitor such developments nationwide.

,

Pay-to-Play Laws Stifling Campaign Contributions in New Jersey

Colorado Supreme Court Finds Pay-to-Play Law Unconstitutional

The below Colorado update was written and circulated today by Government Contracts attorneys C. Richard Pennington and Tyson Bareis out of McKenna Long & Aldridge LLP’s Colorado office.

The Colorado Supreme Court recently struck down a law that prohibited holders of sole-source state and local government contracts from making contributions to elected officials in Colorado. As we previously reported, this case is the latest episode in the continuing tension between a public that is increasingly skeptical of government contractors’ campaign contributions and the First Amendment rights, including the right to participate in the political process, that are afforded to all individuals and organizations. While the Colorado Supreme Court’s decision should rightfully be viewed as a victory for contractors and the First Amendment, the decision will not be the end of this tension or such laws.

In November 2008, Colorado voters narrowly passed Colorado’s Pay-to-Play law, which took the form of Amendment 54 to the Colorado Constitution. Citing a “presumption of impropriety between contributions to any campaign and sole source government contracts, “Amendment 54 prohibits holders of sole source state and local contracts from contributing to any political party or any candidate for elected office in the state. The law defines a sole source contract as “any government contract that does not use a public and competitive bidding process soliciting at least three bids prior to awarding the contract.”

The Colorado Supreme Court held that the Pay-to-Play law was unconstitutional in its entirety because, among other things, the law was not drafted narrowly enough to achieve its goal of eliminating the appearance of impropriety in the award of sole source contracts without significantly limiting constitutionally protected activity. The Court also noted that the cross-jurisdictional nature of the Amendment meant that fundraising in local governments would be limited by a donating entity’s contractual relationships with other, unrelated jurisdictions, like state government.

For contractors doing business in Colorado, the state’s Supreme Court decision means that they are no longer subject to the Pay-to-Play law’s prohibitions on political contributions. Importantly, however, the decision does not eliminate the possibility that Colorado may seek to enact laws similar to the “Pay-to-Play” law that was found to be unconstitutional. Instead, the Court’s decision implied that similar laws, even if they specifically target contractors, may be constitutional as long as the laws are drafted narrowly enough to address the laws’ stated concerns without significantly limiting constitutionally protected speech.

While it is impossible to predict future legislation, in light of the current anti-contractor sentiment and the political gains that can be had by proposing sweeping legislation to eliminate perceived “corruption,” contractors in Colorado and elsewhere should not expect the Colorado Supreme Court’s decision to prevent attempts to enact similar “Pay-to-Play” laws. MLA will continue to follow efforts to enact such laws, and contractors may wish to involve themselves in responding to such proposed laws by educating lawmakers and the public as to the ineffective and counterproductive nature of such laws.

,

Colorado Supreme Court Finds Pay-to-Play Law Unconstitutional

Major Ethics Reform Passes New Mexico House, But Dies on Senate Floor; Changes May Come During Special Session

Despite the numerous “pay-to-play” scandals that have rocked Sante Fe in recent years, numerous pieces of major ethics reform died on the floor of the New Mexico State Senate during the waning hours of the 2010 regular legislative session.

Specifically, HB 118, which would have placed significant restrictions on the activities of lobbyists and certain state contractors, passed the House less than 48 hours before the end of the session. Despite hope from supporters of HB 118 that it would find its way through the Senate, the legislation stalled in the upper chamber.

Had it passed, HB 118 would have arguably made New Mexico one of the toughest “pay-to-play” jurisdictions in the country. The legislation, which passed the House 46-24, broadly prohibited contributions from lobbyists, state contractors and principals of state contractors. Indeed, HB 118 placed total prohibitions on contributions from lobbyists, state contractors, principals of state contractors, and even “seekers of targeted subsidies” to any “candidate for nomination or election to a state public office or political committee established the candidate.” Contributions to certain political committees would have been similarly prohibited.

Notably, legislation which would have allowed for the creation of an Ethics Commission in New Mexico, as well as a series of other open government initiatives that were lauded by advocates of transparency also failed to pass the Senate.

Due to the failure to adopt any reforms, there is speculation that some package of legislation will be addressed during an upcoming Special Session.

Given the upcoming election season, it would seem as if New Mexico legislators would try to adopt some sort of legislation that can be sold to constituents as “good government reform” during the Special Session. We at the Pay-to-Play to Law Blog will continue to monitor this situation for any new developments.

Major Ethics Reform Passes New Mexico House, But Dies on Senate Floor; Changes May Come During Special Session

California Proposes Registration of Placement Agents as Lobbyists in Order to Regulate Pay to Play

New legislation in California, if passed, would prohibit a person acting as a placement agent in connection with any political investment made by a state public retirement system, unless the person is registered as a lobbyist and is in full compliance with California’s Political Reform Act of 1974 as that act applies to lobbyists. California’s law would not be as restrictive as New York, which has an outright ban on placement agents in this area.

The bill defines a placement agent as: “any person or entity hired, engaged, or retained by, or acting on behalf of, an external manager, or on behalf of another placement agent, as a finder, solicitor, marketer, consultant, broker, or other intermediary to raise money or investment from, or to obtain access to, a public retirement system in California, directly or indirectly, including, without limitation, through an investment vehicle.”

There is an exemption for employees of external managers who spends at least one-third of their time managing the assets of their employer.

The bill is sponsored by the California Public Employees’ Retirement System (CalPERS), state Controller John Chiang and Treasurer Bill Lockyer. Mr. Lockyer says “This legislation will help protect the integrity of those decisions by increasing transparency and reducing the ability of high-paid middlemen to use money and gifts to win favorable treatment,” he says. “And it will help make sure the interests of workers, retirees and taxpayers remain paramount.”

Our legislation puts the interests of taxpayers, public pension fund members, and retirees first,” Chiang said. “Subjecting placement agents to the same ethics rules as lobbyists will help safeguard public pension fund investments from individuals seeking questionable influence.”

, ,

California Proposes Registration of Placement Agents as Lobbyists in Order to Regulate Pay to Play