The Obama Pay-to-Play Initiative

The White House is circulating a draft executive order to require federal government contractors to disclose contributions or expenditures made within the two years prior to submission of their offer by the bidding entity, its directors or officers, and affiliates or subsidiaries within its control. As drafted, the disclosure would also extend to contributions made to third parties “with the intention or reasonable expectation that parties would use those contributions to make independent expenditures or electioneering communications,” arguably capturing donations to IRC 501(c)(4) organizations that are not currently disclosed to the public. Certification of disclosure would be required as a condition of award. Reports suggest that the draft executive order was drafted in response to the Citizens United decision and the failure of the DISCLOSE Act to pass Congress last year.

The precedent for executive action to implement pay-to-play standards was famously set by New Jersey Governor James McGreevey in 2004 after he announced his pending resignation from office. Indeed, there are striking echoes of the 2004 McGreevey EO in the draft Presidential order. For example:

• McGreevey: political contributions “to obtain a contract awarded by a government agency … raise[] legitimate public concerns about whether the contract was awarded on the basis of merit”

• White House: the “Federal Government must ensure that its contracting decisions are merit-based in order to deliver the best value for the taxpayer.”

• McGreevey: “it has long been the public policy of this State to secure for the taxpayers the benefits of competition, to promote the public good by promoting the honesty and integrity of bidders for public contracts … and to guard against favoritism, improvidence, extravagance and corruption”

• White House: “When the public lacks confidence that the contracting system works fairly, it may deter participation and deprive the government of the most robust competition and the best providers”

• McGreevey: “I must … impos[e] restrictions on State agencies … to insulate the negotiation and award of State contracts from political contributions that pose the risk of improper influence, purchase of access, or the appearance thereof”

• White House: “additional measures are appropriate and effective in addressing the perception that political campaign spending provides enhanced access to or favoritism in the contracting process”.

When a legislature fails to act, executives may tests the limits of their constitutional authority, as current New Jersey Governor Chris Christie unsuccessfully attempted last year with an executive order limiting labor union contributions. Given that the draft EO would seemingly extend the reach of pay-to-play disclosure to encompass independent expenditures, despite the U.S. Supreme Court’s conclusion that such expenditures pose no risk of quid pro quo corruption, one might conclude the draft EO is a bit of an odd mix, such that other constitutional boundaries may also be tested.

 

NY Commission on Public Integrity Revises Proposed Regulations

The NY Commission on Public Integrity (CPI) recently announced that it had revised proposed two sets of regulations regarding gifts, including those made by lobbyists and those received by State officers and employees.  The CPI initially proposed the regulations last summer.

For example, by law, complimentary attendance, food or beverages offered by the sponsor of an event that is “widely attended” and related to the attendee’s duties or responsibilities as a public official are not considered gifts.

Pursuant to the proposed regulation, a “widely attended event”  would now be defined as “an event that is intended to be open to a large number of persons, a substantial number of which must include invitees who are not members, employees or agents of the sponsoring organization, their spouses or public officials.”   Previously, the proposed definition would have required that the attendees must “represent a broad and diverse range of interest in a given subject matter” and that the “event must provide the opportunity for an exchange of ideas and opinions among those in attendance.”

Another change related to the widely attended event exception is in the standard for whether the event is related to the public official’s duties or responsibilities: under the proposed rules for lobbyists, the answer would be “yes”, if the event “includes a presentation of information and an exchange of ideas and opinions among those in attendance about an issue or issues that are related to the public official’s official duties.”  The previous, much briefer rule would have required “as its principal purpose promoting the exchange of information about an issue or issues of public interest.”

Additionally, food and beverage of a nominal amount, which is permissible, would expressly allow “non-alcoholic beverages such as regular coffee, tea, water and soft drinks” and “snack items such as cookies, crackers, or pretzels.”  Query: the beverages are enumerated conjunctively (“and”), whereas the snacks are enumerated disjunctively (“or”).  Does the proposal mean that the exception for nominal value would allow provision of multiple beverages, but only one kind of snack?

Since these changes are considered “substantial changes” an additional comment period is required.  The CPI has, however, indicated that it will use the proposed regulations as the basis for staff guidance.

A Pay-to-Play Platypus

Pay-to-play laws are generally designed to curb the risk that a political contribution would be made as a quid pro quo for a government contract. Thus, limits and prohibitions are generally made applicable both to business entities that seek and to those that receive government contracts.

In Citizens United v. FEC, the U.S. Supreme Court reaffirmed its longstanding view that, unlike political contributions, independent expenditures do not pose a risk of quid pro quo corruption. Thus, one might think that pay-to-play type restrictions would not be a means of restricting independent expenditures.

Yet legislation sometimes yields surprising amalgamations. (Hence, Platypus.)  Exhibit A: a bill in the New York State Legislature, S.1565/A.5907, described in press reports as “eliminating pay to play.”  The stated purpose of this bill “is to ensure that business entities receiving or renewing state contracts cannot directly or indirectly make expenditures for political purposes, which could influence their ability to receive such a contract or renewal, and would in effect involve the use of public funds to buy such influence.”

Oddly, the bill lets prospective contractors off the hook; prior to a contract award, a business entity’s right to make contributions in the hope of influencing a contract award remains unhindered. This seems like an unintended loophole, until you parse the bill’s purpose and discover it’s really not a pay-to-play restriction at all. The bill is actually a restriction on the indirect use of public funds for political purposes, a familiar feature of government grants and tax exemptions.

There is potential danger in mixed-up motives, however. The recent oral argument before the Supreme Court in the Arizona public financing case is a reminder that judges may not take kindly to a law founded on intentions of questionable constitutionality. In other words, if you are looking to curb quid pro quo corruption, your pay-to-play law should cover both prospective and actual contractors (so as to be effective) but not prohibit independent expenditures (so as to be constitutional).

New Jersey School Board Elections are Around the Corner

Most New Jersey school districts will be holding their annual school board elections on Wednesday, April 27th. The New Jersey Election Law Enforcement Commission reports in White Paper #21 that overall spending on school board elections has doubled during the past decade to $9.6 million.

Without regard to pay-to-play restrictions, an individual or corporation may contribute up to $2,600 per election to a candidate running for school board in New Jersey.  Vendors are required to disclose contributions greater than $300 per election to a school board candidate on certain pay-to-play disclosure forms. 

Although contributions to school board candidates are generally beyond the scope of New Jersey’s statewide pay-to-play prohibition laws, school boards are authorized to adopt local pay-to-play ordinances.  Thus, before writing a check (in any amount) to a school board candidate, vendors should determine whether a local ordinance is in effect.

ELEC Business Entity Annual Disclosures Due Today Will Be Publicly Available on April 6

As discussed here, today is the filing deadline for ELEC’s 2010 Business Entity Annual Report.  Forms must be filed electronically on ELEC’s website

In a press advisory issued today, ELEC advised that 2010 reports will be publicly available on ELEC’s website on Wednesday, April 6.  

ELEC’s website provides the public with the opportunity to manually search the 2010 Form BEs by entering business information, contract information, contribution information or recipient information into a series of fields.  ELEC also provides the public with the opportuntity to view and search all records by using the quick data download option.

Oral Arguments in McComish v. Bennett Today

Today the Supreme Court hears oral argument on the constitutionality of Arizona’s public financing system, a case with  implications both local and nationwide.   The question presented:

Under the First Amendment is a state prohibited from giving additional money to a candidate who accepts state funding for her campaign where: (a) a group makes independent expenditures over a certain amount against the candidate; or (b) the candidate’s opponent refuses public funding and spends more than a certain amount on the campaign.

UPDATEHere is the oral argument transcript.

SEC Releases Staff Responses on Pay-To-Play Rule

On Tuesday the Securities and Exchange Commission issued staff responses to questions about Rule 206(4)-5, the pay-to-play rule which went into effect on March 14, 2011 as we described here and here.

There are several notable responses that provide additional guidance on the rule.  For example, in response to a question regarding contributions made by an adviser or a covered associate to a trade association PAC, which then makes a contribution to a candidate, the staff states that:

The PAC is a covered associate only if the adviser or any of its covered associates has the ability to direct or cause the direction of the governance or the operations of that PAC (see section II.B.2(a)(4) of the Adopting Release).  However, a chain of contributions through PACs made for the purpose of avoiding the pay to play rule, would violate the rule’s, and section 208(d) of the Advisers Act’s, general prohibitions against doing anything indirectly which would be prohibited if done directly (see rule 206(4)-5(d)).

Additionally,  the response to question V. I states that the SEC rule does not preempt state and local pay-to-play rules.

While the staff responses are not official regulations of the SEC, they nevertheless provide useful guidance.

SEC Pay-to-Play Rule Takes Effect Today

The Securities and Exchange Commission’s (SEC’s) new pay-to-play rule takes effect today.  The rule restricts the state and local political activities of investment advisers who work with state and local pension funds.  See this post for more information on the new rule.  Given the number of local pay-to-play laws and ordinances already in place around the country, in addition to amendments already proposed for these new rules, compliance with the SEC’s new rules requires careful preparation.

The new rule covers a broad spectrum of employees.  “Covered Associates” include the adviser’s general partners, managing members, executive officers, and other individuals with a similar status or function.  Any employee of the adviser who solicits government entity clients for the investment adviser and any supervisor of any such employee are also covered associates.  Additionally, any PAC controlled by the investment adviser or any of the adviser’s covered associates are included in the definition of “covered associates.”  Note that the SEC proposed rules in November 2010 that may ultimately change the scope of individuals covered by the rule.  Nevertheless, the first step for compliance is identifying employees covered by the rule.  We also recommend making sure any affiliated PAC contribution policies are amended accordingly.

Covered employees also need to be aware of which officials are covered by the rules.  “Covered officials” include an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for or can influence the outcome of the selection of an investment adviser.  Accordingly, creating awareness of the restrictions applicable to employees through a corporate political activity policy and in-house seminars is crucial to compliance.  And since the rule requires registered advisers to maintain records of the political contributions made by advisers or covered executives and employees, it is also important to set-up a vetting policy to make sure the advisor is able to maintain proper records.

NYC Campaign Finance Board Holds Hearing Today on Independent Expenditures

As we previously noted, last November NYC voters  passed an amendment to the City Charter requiring disclosure of independent expenditures .  Today the CFB is holding a hearing on the topic to inform its future rulemaking.  Here is testimony submitted by Laurence D. Laufer.

Update: New York Times coverage.

Paterson Transitional Aid Pay-to-Play Ordinance Goes Into Effect

Earlier this year, a number of New Jersey municipalities were required to begin the process of adopting stringent pay-to-play ordinances because they accepted transitional aid from the State of New Jersey.

Over the past two months, several ordinances have gone into effect. Most recently, on March 6, 2011, the City of Paterson’s transitional aid pay-to-play ordinance went into effect. Like most of the transitional aid ordinances, the City of Paterson’s Ordinance covers no-bid contracts with the City. No exception exists for contracts awarded pursuant to a “fair and open process”. The ordinance contains reduced limits during the 12 months prior to a contract award and an absolute ban on contributions (in any amount) during the term of a no-bid contract with the City.

In addition to covering contributions to Paterson recipients, the ordinance also covers contributions to Passaic County party committees and PACs/CPCs that regularly engage in the support of Paterson and/or County of Passaic elections. The ordinance covers contributions by the vendor itself and certain individuals associated with the vendor. Contributions by a vendor’s affiliates, subcontractors and consultants may also be covered. Paterson’s new transitional aid ordinance is more stringent than the pay-to-play ordinance which the City enacted last spring. Unlike the North Arlington transitional aid pay-to-play ordinance, the Paterson ordinance does not contain a Sunset provision.

As transitional aid pay-to-play ordinances, like the one enacted in the City of Paterson, begin to roll out across the state, vendors that contract with and/or wish to contract with covered municipalities should become familiar with the ordinances to preserve their eligibility for municipal contracts.

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