Pay to Play Law Blog : Pay to Play Lawyer & Attorney : Bribery, Campaign Contributions

As we previously reported, 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. On March 18, 2010, the SEC issued a report warning firms that municipal securities rules prohibiting pay-to-play apply to affiliated financial professionals, not just a firm’s employees. In the report the Commission made it clear that an executive who supervises the activities of a broker, dealer or municipal securities dealer is not exempt from the MSRB’s pay-to-play rule just because he or she may be outside the firm’s corporate governance structure.

The pay-to-play rule at issue is MSRB Rule G-37, which generally prohibits firms from underwriting municipal bonds for an issuer for two years after a municipal finance professional (MFP) involved with that firm makes a campaign contribution to an elected official of that municipality. The Commission clarified that an executive may be deemed an MFP if he or she is not part of a broker-dealer, but oversees the broker-dealer from the vantage of a holding company.

The SEC report was issued in connection with an Enforcement Division inquiry into whether JP Morgan Securities Inc. (JPMSI) violated MSRB Rule G-37. JPMSI underwrote municipal bonds issued by the state of California within two years after the Vice Chairman of JPMSI’s parent bank holding company, JP Morgan Chase & Co., Inc. (JP Morgan Chase), who also led JP Morgan Chase’s investment banking business, gave a $1,000 contribution to the Treasurer of the State of California. As quoted from the report: “On September 10, 2002, the Vice Chairman forwarded an invitation for the California Treasurer’s New York fundraising event to JP Morgan Chase’s executive committee and to its Vice President for Government Relations with a handwritten note stating that the California Treasurer is an important client and soliciting their help in raising $10,000 for the event.” Although the Vice Chairman of JP Morgan Chase was not a director, officer or employee of JPMSI, the Commission found he nevertheless was an MFP associated with JPMSI because he functionally supervised JPMSI and served on the executive committee that oversaw JPMSI.

One commentator observed of the JPMSI investigation: “That is exactly the sort of behavior that the SEC wants to prohibit with MSRB Rule G-37 and its proposed pay to play rule.” The SEC merely said its report should serve as a “warning” about mixing political donations and state banking business.

The SEC report serves to remind the financial community that placing an executive who supervises the activities of a broker, dealer or municipal securities dealer outside of the corporate governance structure of such broker, dealer or municipal securities dealer does not prevent the application of MSRB Rule G-37 to that individual’s conduct. “Firms cannot rely solely upon…organizational charts in determining whether a person is subject to those rules,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. The SEC will look to the activities, not merely the title, of an associated person in determining whether the person is subject to the pay-to-play restrictions. A key takeaway from this report is that pay-to-play remains a key focus of the SEC and the SEC is continuing to increase its involvement with respect to pay-to-play issues.

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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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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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As media reports of criminal misconduct by legislators hit the airwaves and the public is inundated with tales of various unseemly financial relationships between politicians and their campaign contributors, state legislatures have worked anxiously to show action - any action - by passing “Campaign Transparency” legislation at a fever pitch. While most actors in the regulated community have recognized some virtue to increased disclosure of campaign activities, a companion effort by several states to permit unlimited contributions along with that disclosure remains controversial - it certainly is in Illinois on the last day of the Fall Veto Session. Clearly, the unintended pitfalls inherent to unlimited contributions can manifest easily. Nonetheless, there is a growing trend afoot at the state level (although decidedly not within the Congress or the SEC) to address “pay to play” scandals with transparency rather than limited contributions. One example of this phenomenon can be found in a state earning one disclosure advocacy group’s “Most Improved” award: the State of Missouri.

The Campaign Disclosure Project (CDP) recently ranked Missouri’s campaign disclosure law  among its “top five” in 2008 and gave the state’s disclosure laws an “A-”. In so doing, the CDP pointed out several positive components of the Missouri campaign disclosure law: Candidates must disclose detailed information on contributions and expenditures in excess of $100; a reporting requirement of late contributions and independent expenditures before Election Day; and the requirement of detailed loan disclosures.

On the other hand, Missouri is among the growing number of states to repeal virtually all contribution limits to candidates. This has generated controversy as recent bribery cases, as they always do, have prompted calls to address past criminal behavior with increased “ethics reform” legislation. There is little doubt that some form of ethics reform legislation is on the docket for Missouri’s General Assembly in 2010 but Missouri’s Speaker of the House recently has indicated any ethics reform proposed in 2010 will focus on closing disclosure loopholes in the current law rather than revisiting the rights of individuals, corporations, unions, PACs, or associations to make unlimited contributions to candidates. An article dated October 26th in the Joplin Globe has quoted Speaker Ron Richard as saying “. . . people should be able to give what they want. It should be transparent and direct, to the campaign and not through committees.”

Should Missouri decide to broach ethics reform, and continue with its perfectly acceptable policy decision not to re-impose contribution limits, Missouri’s legislators will probably be well served in the current “pay to play” environment to examine the transparency of their own personal financial disclosures. This is because, while Missouri scores relatively well in campaign disclosure requirements, the Center for Public Integrity (CPI) awarded Missouri’s personal financial disclosure requirements with 70.5 out 100 points and a letter grade of “C”. Missouri’s personal financial disclosure laws were identified as failing to require the disclosure of: the legislator’s job titles; income amount from each employment interest; amount from each investment interest; identifying clients associated with filer’s outside interests; income amount for each client; spouses’ client information; and value amount of each real property interest. Further, the CPI identified the state as not publishing a list of delinquent filers on the Web or in printed document as well not making public a list of lawmakers who failed to file reports by the required deadline, or filed incomplete or inaccurate reports.

The public mood, if such a thing can ever be gleaned, is most distraught by concerns of “too cozy” relationships between legislators and donors in their financial activities outside the public system. Increased disclosure in that regard is likely to be perceived as a true “reform” more necessary than contribution limits.

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

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

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

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