- SEC Adopts Pay-to-Play Rules for Investment Advisers
After almost a year of deliberations, on June 30 the SEC approved a tough "pay-to-play" rule for investment advisers that seek business from public pension funds and similar government investment accounts. The SEC rule, which was proposed last August (See GPS August 6, 2009), has its origins in draft regulations dating back to 1999.
New rule 206(4)-5 prohibits investment advisers from providing compensated services to state or local government clients for two years if the adviser, key executives and employees, or the corporate PAC of the adviser make political contributions to public officials in a position to influence the award of advisory business. The rule contemplates that if this time out is triggered, the adviser may provide uncompensated advice for a reasonable time to allow the government client to replace the adviser. The law also prohibits investment advisers from “bundling” contributions for covered officials, and from funneling contributions through others, such as spouses, lawyers or affiliated companies.
The two-year ban may be triggered by contributions made under “look-back” and “look-forward” provisions. When an adviser hires a new covered employee, the rule requires the adviser to “look back” at the employee’s contributions for a two-year period. A prohibited contribution by the new employee will disqualify the adviser from receiving compensation for providing advisory services to the relevant governmental entity for two years from the date of the contribution. The “look-back” period is only six months for employees who are covered by the new rule but are not engaged in soliciting business for the adviser. Prohibited contributions by these employees disqualify the adviser for six months from the date of the contribution.
The “look forward” provision applies to contributions by covered employees who leave the adviser or cease to work in a covered status. The SEC also included de minimis exceptions for contributions up to $350 if the contributor is entitled to vote for the candidate, and up to $150 if the contributor is not entitled to vote for the candidate, such as an out of state candidate.
One of the thorniest issues during the rulemaking process concerned investment advisers’ use of third-party placement agents to solicit government business. The August 2009 proposal completely banned investment advisers from retaining such agents – an unpopular proposal with many in the advisory community. In a nod to smaller funds that are more dependent on placement agents, the final rule allows advisers to hire such agents so long as they are regulated entities subject to similar pay-to-play restrictions.
An effective compliance program is essential. Under the SEC rule, an adviser’s code of ethics must require compliance with the pay-to-play provisions, the adviser must adopt policies and procedures designed to prevent violation of the rule, and the adviser must maintain records regarding its political contributions, covered employees, government clients, and placement agents retained by the adviser. Moreover, while the SEC says that it “designed the rule to reduce its impact, investment advisers are best positioned to protect [their] clients by developing and enforcing robust compliance programs designed to prevent contributions from triggering the two-year time out.”
The SEC rule becomes effective on September 12, 2010, which is 60 days after the rule was published in the Federal Register (July 14, 2010). The placement agent ban will not take effect for a year, which will allow time for the Financial Industry Regulatory Authority (FINRA), a self-regulatory agency for all securities firms doing business in the U.S., to draft pay-to-play rules of its own.
- Court Hands Down Mixed Ruling on Connecticut’s Pay-to-Play Law
A three-judge federal court has upheld Connecticut’s ban on contributions by state bidders and contractors, their principals, and the spouses and dependent children of those individuals. But the court struck down the state’s ban on contributions by lobbyists and their families, and a prohibition on fundraising by contractors and lobbyists for candidates running for state office.
Connecticut’s pay-to-play law bans contributions by bidders and contractors, as well as by individuals associated with these entities: members of the board of directors; individuals who own more than 5% of the bidding or contracting entity; the president, treasurer and executive vice-president of the entity; and any officer or employee who has managerial or discretionary responsibilities with respect to a state contract.
The panel noted that the ban on contributions by individuals associated with a contractor “strikes us as bordering on overbroad,” but concluded that the legislature was entitled to leeway in attempting to curb corruption evidenced by the state’s recent corruption scandals. Similarly, the Court noted that “the record in support of the ban on contributions by contractors’ spouses and dependent children is by no means overwhelming,” but characterized such a ban as a reasonable anti-circumvention measure.
But not all provisions of the state law survived the court’s constitutional doubts.
The court overturned a ban on fundraising for state candidates by contractors and lobbyists, concluding that the law was not narrowly tailored to address a legitimate threat of corruption. The court wrote: “A state contractor, for instance, is prohibited under the [law] from advising his mother about whether she should contribute to a particular gubernatorial candidate.”
The panel also invalidated the state’s ban on contributions by lobbyists, noting that the state’s recent corruption scandals had nothing to do with lobbyists.
In response to the ruling, the Connecticut General Assembly on July 30 passed a bill that limits lobbyist contributions to $100 and prohibits state contractors (and their principals) from knowingly soliciting contributions from the contractor’s employees or from a subcontractor or principals of the subcontractor. On August 2, Gov. Rell vetoed the bill, not because of any complaint with the new provisions relating to lobbyists and contractors, but instead because of major increases the bill provides for public funding of gubernatorial elections.
- Yes Virginia. . . there is a Pay-to-Play Law
As of July 1, the Old Dominion joined the ranks of pay-to-play states. Under the new Virginia law, bidders and offerors for state contracts of $5 million and up are prohibited from providing a contribution or a gift greater than $50 to the Governor, his political action committee, or a Cabinet Secretary responsible for the contracting agency. The contribution and gift ban applies from the date of bid submission to the award of the contract, but it does not apply to contracts awarded through competitive bidding. Individuals and organizations that violate the law are subject to penalties up to two times the amount of the gift or contribution.
For further information about the SEC pay-to-play rule, click here to see our client alert.
FEC ALLOWS “INDEPENDENT EXPENDITURE” COMMITTEES TO RAISE FUNDS WITHOUT LIMITS
In two recent advisory opinions, the FEC ruled that registered PACs that only intend to make independent expenditures may raise funds in unlimited amounts from individuals and corporations, provided they adhere to disclosure and notice rules and do not contribute to federal candidates or coordinate regarding their communications. The FEC opinions follow on the heels of the Supreme Court’s Citizens United ruling, which held that corporations may spend unlimited funds on independent ads that urge the election or defeat of candidates for public office.
In one opinion (AO 2010-09), the FEC ruled that the Club for Growth may register a new committee with the FEC which will collect unlimited contributions from the general public to fund independent expenditures, but will not accept contributions from corporations, unions, candidates, political committees, government contractors or foreign nationals. The Club for Growth intends to cover the new committee’s administrative and solicitation costs, and the committee’s treasurer will also serve as treasurer of the Club’s pre-existing PAC. In the other opinion (AO 2010-11), the FEC concluded that a new non-connected committee – the Commonsense Ten – may accept unlimited contributions from individuals, political committees, corporations, and unions for the purpose of funding independent expenditures.
These ruling may prove to be highly beneficial to tax-exempt organizations, such as trade associations and advocacy groups. Historically, the IRS has not attributed the political activities of separate committees, such as PACs, to their sponsoring organizations, an approach that has preserved such organizations’ tax-exempt status. Under the FEC rulings, PACs affiliated with tax-exempts may accept contributions in unlimited amounts and solicit funds from outside their membership base.
The FEC noted that it may revise its registration and reporting requirements, and its forms, in an upcoming rulemaking proceeding to implement the Citizens United case. In the interim, committees should include a letter with their Statements of Organization stating their intent to accept unlimited contributions for the purpose of making independent expenditures. A sample letter is attached to the FEC opinions.
COURT REINSTATES CRIMINAL CHARGES FOR REIMBURSING CONTRIBUTIONS
The Ninth Circuit Court of Appeals has reinstated criminal charges against attorney, Pierce O’Donnell, who was indicted on charges that he reimbursed employees of his law firm (and others) who had contributed $26,000 to a presidential campaign. A federal district court judge had dismissed the charges, concluding that the law prohibiting “a contribution in the name of another person” applied only to the use of false names, and not a conduit or reimbursement scheme as was alleged here. The appeals court held this reading was too narrow.
Judge Raymond C. Fisher, writing for the three-judge appeals panel, wrote: “We hold that this law prohibits a person from providing money to others to donate to a candidate for federal office in their own names, when in reality they are merely ‘straw donors.’”
With the election season in full swing, this ruling should serve as a reminder that reimbursing friends or employees for making campaign contributions can lead to indictments and jail. The FEC has also imposed large fines when employers use bonuses or other compensation to reimburse employees for making campaign contributions.
HOUSE PASSES BILL AIMED AT TOUGHER ENFORCEMENT OF FEDERAL LOBBYING LAWS
The House of Representatives on July 28 passed the “Lobbying Disclosure Enhancement Act,” which the bill’s sponsor hopes will ramp up enforcement of federal lobbying laws.
The bill requires the U.S. Attorney General to establish a task force, which would have primary responsibility for investigating and prosecuting violations of lobbying registration and disclosure requirements.
The bill’s sponsor, Rep. Mary Jo Kilroy (D-Ohio), says that the task force “will go after lobbyists who engage in shoddy reporting practices and hide behind ignorance of the law.”
Provisions of the bill that would have imposed an annual filing fee of $50 and assessed a $500 penalty against late filers were dropped during debate.
In sharp contrast to the intense media coverage concerning the DISCLOSE Act, a bill which seeks to blunt the effect of the Supreme Court ruling allowing for corporate funding of campaign ads, the lobbying bill moved to passage quickly and with little fanfare. Indeed, it came to the House floor just two weeks after it was introduced. There is no indication at this time as to the bill’s prospects in the Senate.
LOBBYISTS BARRED FROM FEDERAL ADVISORY BOARDS . . . AND THIS TIME WE REALLY MEAN IT!
In a June 18 memorandum, the President barred the heads of executive departments and agencies from appointing federally registered lobbyists to advisory committees and other boards and commissions. The new policy does not require the removal of currently-serving lobbyists, but it does prohibit their reappointment when their terms expire if they continue to be registered federal lobbyists. This new policy follows the President’s aspirational announcement last September that federal agencies' should try to keep their advisory boards free of federally registered lobbyists. The Director of OMB will issue proposed guidance to implement this new policy within 90 days, which will become final after public comment.
PAC POINTER – WHO CAN BE ASKED TO CONTRIBUTE?
Corporate PAC administrators may be able to find a few more potential contributors thanks to a recent FEC Advisory Opinion (AO 2010-4,Wawa, Inc.). According to the FEC, corporate managers who supervise hourly employees may qualify as “executive and administrative personnel” and be solicited by the corporate PAC.
FEC regulations currently prohibit corporations from soliciting “salaried foreman and other salaried lower level supervisors” who supervise hourly employees. The FEC found that the managers – Payroll Manager, the Retail Accounting Manager, and the Retail Accounting Assistant Manager – oversee departments or sections that have permanent status and function in Wawa’s corporate hierarchy and that in many organizations are managed by salaried executive employees. As such, the Wawa managers qualify as “executive and administrative personnel” and may be solicited for PAC contributions.