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No Good Deed Goes Unpunished: The SEC’s Recent $100K Penalty For Inadvertent and Self-Reported Pay-to-Play Violations Is A Not So Subtle Reminder of the Need for Compliance Vigilance

While many spent the final days of 2018 taking a much-needed break, the Securities and Exchange Commission (SEC) was busy trumpeting its dedication to holding the regulated community accountable for violations of the federal pay-to-play laws. Just a week before Christmas, the SEC announced the assessment of a $100,000 penalty as part of an administrative settlement it reached with Ancora Advisors LLC, a Cleveland-based investment advisory firm. Ancora neither admitted nor denied the allegations detailed in the associated SEC order announcing the settlement, but the description provided by the Commission alleged violations of Rule 206(4)-5, which limits covered associates of investment advisers from making certain contributions to state and local officials with influence over the award of public contracts for the provision of investment advisory services. 

The SEC’s levied penalty in this settlement is a stark reminder that investment advisory firms must be diligent in the implementation of robust internal compliance policies that pre-screen impermissible contributions before they are made. As Ancora found out, merely having a compliance system in place that allows for post-hoc remediation of inadvertent violations is insufficient from an SEC perspective – even if identified problems are self-reported in a timely fashion.

In this particular instance, the SEC asserted that a covered associate of Ancora Advisors made over $45,000 in campaign contributions to Ohio politicians from 2013 to 2017, including former Governor John Kasich and former State Treasurer Josh Mandel. The Commission’s order also alleges that a second company official contributed $2,500 to an unidentified gubernatorial campaign in the summer of 2017. Given that Ohio’s Governor appoints members to the Ohio Board of Regents (the board overseeing the Ohio state university system), and the Governor and State Treasurer appoint members to the Board of the Ohio Public Employee Retirement System – both purported Ancora clients – the firm found itself subject to the restrictions set forth in Rule 206(4)-5. Namely, by making contributions of over $350 to covered Ohio officials, Ancora could no longer legally receive compensation for providing investment advisory services to the two public funds within the officials’ spheres of influence.

Like the vast majority of registered investment advisors, it does not appear that Ancora was blind to its potential pay-to-play risk. Quite the opposite in fact – it appears that Ancora had a fairly robust internal compliance program that led to the initial discovery of the potential violating contributions during a routine audit of political activity. Upon discovery of the problematic donations, the firm alerted the SEC and ensured that the contributions in question were returned. 

Such remedial measures and cooperation, although reasonable and appropriate, did not convince the SEC to walk away from enforcement. To the contrary, the Commission pursued its pound of monetary flesh and signaled to all advisors that merely having an internal compliance program and self-reporting any identified problems is not enough to find safe harbor. To avoid getting caught up in the pay-to-play trap, firms must employ compliance policies and procedures that prevent problematic donations before they occur. 

While only a one-off enforcement action by the SEC, the Ancora matter provides an important reminder to all in the regulated community concerning the inherent risks associated with political engagement by firm executives. Even through Ancora successfully uncovered the alleged violations through its internal regulatory compliance program and brought the matter to the SEC’s attention, the company was still slapped with a six-figure penalty and is now forced to deal with the associated public relations blowback. In 2019, it thus remains crucial for registered investment advisers and other entities subject to federal pay-to-play provisions to ensure their internal compliance programs are designed to both pre-screen political activity by key employees and educate such individuals about the potential financial and reputational consequences of certain electoral engagement.  


No Good Deed Goes Unpunished: The SEC’s Recent $100K Penalty For Inadvertent and Self-Reported Pay-to-Play Violations Is A Not So Subtle Reminder of the Need for Compliance Vigilance

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…


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

Holiday “Gifts” from the Nation’s Capitol

A Contrasting Pair of Pay-to-Play Reprieves Emerge in the District

Just in time for the holiday season, an unexpected present from the U.S. Commodity Futures Trading Commission (CFTC) has found its way under the tree of a group that was most likely expecting to receive coal in its pay-to-play stocking. “Swap dealers”, the target of increased pay-to-play scrutiny from the CFTC over the past year, recently received the gift of thoughtful pay-to-play enforcement restraint from the Commission’s Division of Swap Dealer and Intermediary Oversight (DSIO). Meanwhile, a similar enforcement reprieve has also been given by the D.C. Council to the city’s municipal government contractors, a popular target among pay-to-play reform groups – although perhaps not for the same reason. The gifts brought to the manger might be the same, but the wisdom of the bearers … not so much.

The CFTC was the first to show its holiday spirit in the form of a no-action letter addressing the pay-to-play rules applicable to swap dealers who conduct business with certain “governmental special entities”. The CFTC pay-to-play rules in Commission Regulation 23.451, which this blog previously covered in detail, restrict a swap dealer from engaging in certain activities with a “governmental special entity” if the swap dealer (or a covered associate of the swap dealer) made or solicited contributions to an official of that governmental special entity during the two preceding years. Such rules were meant to be in regulatory harmony with similar pay-to-play provisions promulgated by the Securities and Exchange Commission (SEC) and Municipal Securities Rulemaking Board (MSRB). The DSIO, however, found them to be unnecessarily broader than their SEC and MSRB counterparts, particularly as they applied to political contributions associated with officials of federal or other non-state or non-local government agencies or instrumentalities.

As such, the DSIO issued its November no-action letter to provide swap dealers and their covered associates with relief from having to unnecessarily “expend significant resources to update their current policies and procedures to ensure compliance with Regulation 23.451’s prohibition” on contributions not otherwise covered by the SEC and/or MSRB rules. In its letter, the DSIO officially stated that “the Division will not recommend that the [CFTC] take an enforcement action against any [swap dealer] or covered associate of any [swap dealer] for failure to be fully compliant with Regulation 23.451” with respect to contributions not generally subject to restriction by the SEC and/or MSRB pay-to-play rules.

By implementing this limitation, the DSIO appears to be making an effort to provide swap dealers with clarity regarding the scope of the CFTC’s pay-to-play provisions and likewise to harmonize such regulatory requirements with the statutory directives of the Dodd-Frank Act and other federal law. In this sense, the CFTC reprieve is both well meaning and a sensible policy decision. The reprieve offered by the D.C. Council, however, appears to be more the product of bureaucracy and delay than sensibility.

As such, on the other end of the naughty/nice list, we have the D.C. Council’s foot dragging on pay-to-play reform. As detailed in the pages of this blog over the course of the past year, various elected officials in the District of Columbia have been “hard at work” pushing comprehensive ethics and pay-to-play reform proposals in front of the D.C. Council. Back in March, Councilman Tommy Wells introduced a piece of legislation containing a collection of pay-to-play reforms for the District that had been previously ignored by the Council in 2011. Similarly, in September of this year, Mayor Vincent Gray presented his own proposal, drafted by D.C. Attorney General Irvin Nathan, which would seriously restrict the ability of major Washington vendors to make political contributions to any District official or candidate involved in influencing the award of a contract or grant by the municipal government.  Shortly thereafter, Councilman Jack Evans also introduced his own “pay-to-play” proposal that seeks to entirely remove the D.C. Council from the municipal contract-approval process.

Despite the sound and fury associated with the introduction of these reform efforts, the council has yet to produce any results. In fact, none of these proposals has moved an inch in the D.C. Council’s legislative process, leaving many reform advocates wondering whether the push toward campaign finance and pay-to-play reform in the District is more about politicians seeking to score public relations points and less about serious legislative changes. As the Editorial Board of The Washington Post put it earlier this week:

            “[The fact] that the council didn’t have the time [to move forward on campaign finance and pay-to-play reform] – the excuse offered for inaction – speaks to a distressing lack of urgency in addressing this critical issue. Even more worrisome, it suggests a reluctance among those who benefit from the slack regulation of political dollars to fix a system that has helped perpetuate the District’s ‘pay-to-play’ culture.”

The excuse being referenced by the Post is a recent statement by D.C. Council Chairman Phil Mendelson indicating that no legislative progress will be made on campaign finance reform before the end of the Council’s yearly session. Similar comments have also been made by Councilwoman Muriel Bowser, the Chairwoman of the Government Operations Committee, who claimed that “most members [of the Council] … don’t want to rush” with regard to reform efforts. Can kicking at its best.

Long story short… don’t expect pay-to-play changes in the District any time soon. Nevertheless, should the D.C. Council decide to take action in the new year, Pay-to-Play Law Blog will be right here keeping our readers up to date.


Holiday “Gifts” from the Nation’s Capitol

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.

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

Taking Stock of The STOCK Act. . . . Wither “Political Intelligence”?

Proponents of ethics reform and increased political transparency in Washington don’t often see reform proposals pass through Congress by overwhelming margins, and rarely does anyone bemoan an excess of “political intelligence” in Washington, but that’s exactly what happened on Capitol Hill this past week. While the reform community can’t quite be sure what version of reform will survive the ongoing tug of war between the U.S. Senate and U.S. House of Representatives, it is clear that those trading on “inside political knowledge” are clearly in the transparency crosshairs.

If you are a consultant, a lobbyist, a law firm, or simply a person with inside knowledge of how Washington thinks, this post pertains to you (but you already know that, of course).

Two relevant reform proposals emerged in the wake of growing public outrage generated by CBS’ “Sixty Minutes” and other reports highlighting the ability of elected officials and their staff to trade on otherwise “non-public” information for personal investment gains. Near universal public outrage is about the only catalyst for Congressional action these days but, despite bipartisan grass-roots calls for reform, no singular solution is ever presented by Congress…. Instead, as many might have predicted, Congress produced two competing visions of what problems need to be addressed and how to go about it.

The Senate set forth its vision last Thursday when it passed the Stop Trading on Congressional Knowledge (“STOCK”) Act of 2012 in a lopsided, 96-3 roll call vote. In addition to tackling the fundamental problem not so subtly referenced in its title, the STOCK Act seeks to implement a number of aggressive ethics rules and revisions to the Lobbying Disclosure Act aimed at further restricting legislative and executive branch conflicts of interest and mandating more transparency in the area of non-lobbyist political consulting.

Most significantly for “Establishment Washington”, included within the Senate proposal’s ban on “insider trading” is a controversial obligation that all “political intelligence” consultants register and disclose their activities as if they were federal lobbyists, and a contentious legislative fix to the poorly-written “honest services fraud” statute that was recently-deemed unconstitutional by the U.S. Supreme Court in contexts outside of bribery and kickback schemes.

The language of the Senate bill would reach individuals and entities who engage in “political intelligence contacts” for the purpose of obtaining information from officials of the executive and legislative branches of government “for use in analyzing securities or commodities markets, or in informing investment decisions.” Any organization employing or retaining an individual who engages in one such contact would be required to register and report in the same fashion as if they were a lobbyist-registrant under the Lobbying Disclosure Act (LDA).  As such, they would be subject to the same quarterly and semi-annual disclosure requirements that lobbyist-registrants currently meet.

On a quarterly basis, via a Form LD-2, “political intelligence” registrants would need to disclose the “issue areas” their organizations are discussing, the legislative body or federal agencies they are contacting, the employee(s)/consultant(s) that engage in such contacts, and the total expenses incurred with regard to the intelligence-gathering activities. On a semi-annual basis, via a Form LD-203, political intelligence registrants would also need to disclose political contributions and contributions to events honoring or recognizing covered executive or legislative branch officials. Such contribution reports would be required of both individual consultants and their employing organizations, effectively opening up a new segment of the Washington political class to public scrutiny of its campaign and non-campaign donations. Certain limited exemptions to these disclosure requirements do exist under the Senate version of the bill, but they are not nearly as broad as those carved out under the LDA for current lobbyist-registrants.

Reform and transparency are all well and good, but these requirements proved too much for the House (and legions of the suddenly activated “political intelligencia”) to accept.

Yesterday morning, the House followed the Senate’s lead by passing its own amended version of the STOCK Act by a similarly enormous voting margin – 417 to 2 to be exact – but without the requirement that non-lobbyist “political intelligence” consultants register and report their activities. Likewise, the House version of the bill refrains from amending the honest services fraud statute to allow for its use in non-bribery and non-kickback scenarios.

House Majority Leader Eric Cantor (R-VA) articulated the House rationale when he commented that the Senate’s disclosure requirements were something “outside of what we do” and that they were not part of the original purpose of the STOCK Act legislation. Also criticized was the “vagueness” of the political intelligence provisions as pertains to anything that happens in Washington.

Thus, in as sure an effort towards “assisted suicide” as Congress has in its arsenal these days, the amended House STOCK Act calls for a federal study of the “political intelligence” industry for the purpose of making future legislative recommendations and additionally prohibits lawmakers from receiving access to initial public offerings of stock. THAT always results in action, right?

Looking to the future, many believe that the political intelligence requirements of the Senate’s STOCK Act are yet another reformulation of recent efforts attempting to compel increased disclosure, and thus disincentivize, political spending by corporations and wealthy individuals. This blog has discussed similar efforts by the SEC, Congress, the ABA, and the Obama Administration in the past. And as such, it is easy to understand the negative reaction that has come from these House Members and many on K Street. Particularly when coupled with the drastic effect the expansion of registration and reporting requirements would have on business activities in and around Washington, D.C moving forward.

In the end, it will be interesting to see whether the overarching goal of banning “insider trading” by Members of Congress and congressional staff becomes collateral damage in the battle over establishing political intelligence registration and reporting requirements. Stranger things have happened on Capitol Hill. Anyone selling information or access in Washington needs to be closely watching Congress in the coming weeks to see how this tug of war ends.

But you already know that.

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Taking Stock of The STOCK Act. . . . Wither “Political Intelligence”?

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

MSRB Files Rule Change with SEC

As we highlighted in our November 11, 2009 blog post, in June the Municipal Securities Rulemaking Board (“MSRB”) announced plans to file a rule change with the SEC to revise Rule G-37. The MSRB created Rule G-37 in 1994 to prevent municipal securities dealers from being awarded business based on political contributions. The rule prohibits dealers from engaging in municipal securities business with issuers for two years if they make certain contributions to the political campaigns of officials of such issuers. The proposed revision to Rule G-37 would require municipal securities dealers, their muni professionals, and political action committees to disclose the political contributions they make to bond ballot election campaigns. On December 4, 2009, the MSRB filed with the SEC amendments to Rule G-37 and Rule G-8. Rule G-8 pertains to books and records to be made by brokers, dealers, and municipal securities dealers. Below please find a link to the text of the proposed rule changes. The SEC must approve the rules before they would become effective.

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MSRB Files Rule Change with SEC

The SEC Has Been Busy With Pay-to-Play Compliance and Expects You To Be As Well

The Securities and Exchange Commission (SEC) has given notice that it intends to take a very active role with respect to pay-to-play issues in the securities markets and has put the regulated community on notice that it expects private corporate compliance training to be well under way as well.

As we have recently reported, the SEC has announced its intentions to take a significantly more aggressive regulatory posture with regard to the confluence of campaign contributions and public investing. Just last week, the House Financial Services Committee saw to it that the SEC has the tools for the job when it voted to double the SEC’s budget and awarded the Commission significantly greater regulatory powers.

The Municipal Securities Rulemaking Board (“MSRB”) has also gotten into the act by recently announcing plans to file a rule change with the SEC to revise Rule G-37 to prohibit dealers from engaging in municipal securities business with issuers for two years if they make certain contributions to the political campaigns of officials of issuers. The proposed revision to Rule G-37 would require municipal securities dealers, their muni professionals, and political action committees to disclose the political contributions they make to bond ballot election campaigns.

Meanwhile, in a case which should get the attention of compliance officers everywhere, the SEC has recently notified Southwest Securities Inc. that it plans to recommend “administrative and cease-and-desist proceedings” against the company based, in part, on the company’s failure to conduct compliance training for its financial services staff. In that case, the SEC initiated the action as a result of the company’s alleged use of political donations to win municipal bank work. Southwest’s (now former) employee at the center of the allegations maintained that he only unintentionally exceeded the MSRB cap of $250 donation per election and that the SEC was “more concerned about Southwest Securities and their lack of compliance training of their bankers.” According to FINRA records, Southwest said the employee had failed to report political contributions as required by MSRB and the employee, in turn, faulted the company for failing to adequately inform him of the MSRB rules.

In another, very significant action, the SEC announced last week that banking powerhouse JPMorgan has entered into a multi-million dollar settlement with the agency over allegations that company employees made unlawful payments to friends of county officials. Under the settlement JPMorgan agreed to cancel interest-rate swap contracts between it and Jefferson County, Alabama, pay $75 million in civil fines and payments, and forfeit $647 million in claimed termination fees under the swap contracts.

The allegations giving rise to liabilities in excess of $722 million for JP Morgan ultimately arose from allegations concerning the actions of just two (now former) managing directors of JPMorgan. “The transactions were complex but the scheme was simple,” SEC Enforcement Director Robert Khuzami said in a statement. “Senior JP Morgan bankers made unlawful payments to win business and earn fees.”

These federal enforcement developments highlight the importance of instituting a proper compliance training program. Firms should review and revise policies, practices, and procedures to stay current on the most recent versions of the rules and regulations promulgated by the SEC and MSRB. The SEC has put the regulated community on notice that failure to implement proper compliance policies and train employees adequately can have significant negative consequences. By undertaking the effort to develop a comprehensive compliance program before problems arise, companies can better protect themselves from potential liability and its related, potentially catastrophic, costs and expenses.

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The SEC Has Been Busy With Pay-to-Play Compliance and Expects You To Be As Well

New Mexico Chief Investment Officer Resigns after Investigation

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

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New Mexico Chief Investment Officer Resigns after Investigation

Blue Ribbon Panel Proposal

Amid the continued debate over the SEC’s proposed pay-to-play rules there are some proponents who argue that oversight of pay-to-play practices must reach beyond the agency’s current recommendations. So even while many commentators oppose the rules on grounds that they sweep too broadly and impair competition, (click here to read comment letters) the former head of the SEC, Arthur Levitt, has declared that President Barack Obama should empower a “blue ribbon” panel to investigate pay-to-play practices of public pension funds.

The call for a probe into the public pension fund practices comes at a time when certain pension funds are examining their own investment processes and making positive changes, such as the California Public Employees’ Retirement System. However, the general concern among regulators and funds is that choices about who should invest public monies are influenced by factors like money and politics rather than an investment manager’s merits and cannot be subject to self-regulation. Levitt said in an interview on Bloomberg Television that public pension fund boards should not make investment decisions, but should cede such power to a professional staff.

The SEC’s proposed rules are meant to address those concerns. The SEC proposal is modeled on the rules proposed by the agency in 1999, when Levitt was chairman. Levitt has explained, “We had a lot of pressure [against the proposal in 1999].” The pressure came from Congress, Levitt said. “When you talk about campaign contributions, Congress gets very sensitive. They feel that’s one step away from their own activities.” Levitt’s panel would go beyond the SEC proposal and would investigate the public officials who sit on boards of state pension funds, highlight conflicts and recommend “best practices.”

Blue Ribbon Panel Proposal