Political Contributions and Pay-to-Play

Transcription

1 Political Contributions and Pay-to-Play September 19, 2018 Senior Practice Fellow: K. Susan Grafton, JD, LLM, Partner, Dechert LLP Guest Lecturers: Brenden Carroll, JD, Partner, Dechert LLP Cynthia Friedlander, Senior Director, Fixed Income Regulation, Member Supervision, Financial Industry Regulatory Authority Erik Strom, JD, Director, Government & Community Relations, Russell Investments

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15 Overview of the Regulatory Landscape of Pay-to-Play MSRB Rule G-37 Pay-to-play generally refers to an impermissible quid pro quo arrangement where political contributions are exchanged for the opportunity to do business with state and local governments. Pay-to-Play SEC Rule 206(4)-5 FINRA Rule

16 Introduction to Pay-to-Play Practices & Regulation * MSRB Rule G-37 (Adopted in 1994) Covers certain political contributions made by brokers, dealers, municipal securities dealers, and municipal advisors and certain associated persons SEC Rule 206(4)-5 (Adopted in 2010) Covers certain political contributions made by investment advisers and certain associated persons FINRA Rule 2030 (Adopted in 2016) Covers certain political contributions made by brokerdealers and certain associated persons * Many states, counties, and other localities also have pay-to-play laws. 16

17 MSRB s Pay-to-Play Rule General Consequences of Contributions Two-year prohibition from engaging in municipal securities/advisory business with municipal entities if certain political contributions have been made to officials with selection influence by: Municipal dealers/advisors Municipal finance/advisor professionals (MFPs and MAPs) Political action committees (PACs) controlled by any of the above Officials with Selection Influence Any person who was, at the time of the contribution, an incumbent, candidate, or successful candidate for municipal elective office which is directly or indirectly responsible for, or can influence the outcome of, the hiring by the municipal entity of a member firm (including authority to appoint such person) for: Municipal securities business Municipal advisory business Investment advisory services 17

18 MSRB s Pay-to-Play Rule Prohibited Conduct During Time-Out Municipal Securities Business Purchase of a primary offering of municipal securities from a municipal entity on a non-competitive bid basis (e.g., negotiated underwriting) Offer or sale of a primary offering of municipal securities on behalf of any municipal entity (e.g., private placement) Provision of financial advisory, consultant, or remarketing agent services to or on behalf of a municipal entity with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on a non-competitive bid basis Municipal Advisory Business Provision of advice to or on behalf of a municipal entity or an obligated person with respect to municipal financial products or the issuance of municipal securities Direct or indirect communication with a municipal entity or obligated person made by a person, for direct or indirect compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment adviser 18

19 MSRB s Pay-to-Play Rule Covered Persons Representative - Any associated person that primarily engages in municipal securities/advisor representative activities Solicitor - Any associated person who solicits municipal securities/advisory business Municipal Finance/Advisor Professionals Principal - Any associated person who is both a municipal securities/advisor principal or a municipal securities sales principal and a supervisor of any Representative or Solicitor Supervisory chain person - Certain supervisors, up to and including the CEO or similarly situated official or the officer(s) of a bank designated by the board of directors as responsible for day-to-day conduct of municipal securities dealer/advisor activities Executive officer - Any associated person who is a member of the firm s executive or management committee or similarly situated official, if any. 19

20 MSRB s Pay-to-Play Rule Solicitation & Filing Soliciting and Coordinating Contributions and Payments Payments and Contributions May not solicit any person or PAC to contribute or coordinate payments or contributions to certain officials and political parties Payments to Third Party Solicitors (MSRB Rule G-38) No broker, dealer, or municipal securities dealer may provide or agree to provide, directly or indirectly, payment to any nonaffiliate for solicitation of municipal securities business Filing Requirements MSRB requires quarterly reporting on Form G-37, including: Contributions greater than $250 to municipal officials and state and local political parties Contributions greater than $250 to a bond ballot campaign Municipalities with which the entity has engaged in business 20

21 FINRA s Pay-to-Play Rule Purpose & Prohibitions Purpose Investment advisers use broker-dealers to engage in distribution and solicitation activities. SEC Rule 206(4)-5 requires that thirdparty solicitors hired by advisers be regulated persons and subject to a substantially equivalent rule. Rule 2030 (as well as MSRB Rule G-37) is substantially equivalent Prohibitions for Broker-Dealers May not engage in distribution or solicitation activities for compensation with a government entity on behalf of an investment adviser within two years of a contribution to an official of such entity by the broker-dealer or a covered associate May not solicit or coordinate contributions and payments to certain officials and state or local political parties in which jurisdiction(s) the broker-dealer is engaging in, or seeking to engage in, distribution or solicitation activities on behalf of an investment adviser 21

22 FINRA s Pay-to-Play Rule Covered Associates Covered Associates Any general partner, managing member, or other individual with a similar status or function; Any associated person who engages in distribution or solicitation activities with a government entity; Any associated person who supervises, directly or indirectly, the government entity distribution or solicitation activities of another associated person; Any controlled PAC; and Any executive officer (e.g., president, VP in charge of principal business unit, other person with policy-making functions). 22

23 FINRA s Pay-to-Play Rule Covered Investment Pools Covered Investment Pool Definition Any SEC-registered investment company that is an investment option of a plan or program of a government entity and certain private funds Covered Investment Pool Provisions Any distribution or solicitation activities on behalf of a covered pool in which a government entity invests or that is solicited to invest will be treated as if such activities were done on behalf of the pool s adviser 23

24 SEC s Pay-to-Play Rule Who is Covered? Investment advisers that are registered (or required to be registered) with the SEC Foreign private advisers and exempt reporting advisers Consequences of Contributions For two years following a contribution by an investment adviser or its covered associates to an official of a government entity, the adviser is prohibited from providing advisory services for compensation to the government entity Other The SEC s rule contains similar definitions and prohibitions as MSRB Rule G-37 and FINRA Rule

25 Common Questions What is a contribution? How are contributions to PACs, political parties, or other political groups treated? How are contributions by spouses treated? Do the rules apply to candidates for federal office? Can I do indirectly what I cannot do directly? 25

26 Common Questions Can I volunteer for a candidate or official? What about participating in or coordinating fundraising for a candidate or official? Can my spouse contribute from a joint checking What about account? contributions by spouses? Wat Do about the rules contributions apply to contributions to candidatesmade for federal before office? I became associated with a dealer? What about contributions of corporate resources and other in-kind contributions? 26

27 Pay-to-Play Enforcement Notable FINRA/NASD Rule G-37 Actions Fifth Third Securities (2002) Executives allegedly directed a PAC contribution of $1,000 and directly contributed $15,570. Penalty was $1M (corresponding to earned underwriting fees from 24 transactions). Commerce Capital Markets Inc. (2005) Allegedly created and used a dealer-controlled PAC to bundle contributions totaling $15,000 to a state issuer official running for federal office. The firm was censured and fined $600,000 and a senior individual faced penalties. Kane McKenna Capital (2011), Alluvion Securities (2013) Allegedly failed to file Form G-37 in a timely manner. Fines up to $20,000. Goldman Sachs (2012) Vice president allegedly used work time and resources for campaign activities. First SEC pay-to-play enforcement action involving in-kind non-cash contributions. Notable Early SEC 206(4)-5 Action TL Ventures (2014) Allegedly contributed up to $2500 Pennsylvania and Philadelphia officials. Both could appoint members of public retirement boards that had invested public pension funds with TL Ventures. 27

28 SEC Settlements Investment Advisory Firms Investment Advisers 1 Exempt Reporting Adviser Allegedly, firms accepted fees from city or state pension funds after their associates made campaign contributions to elected officials or candidates with adviser selection or appointment power over those pension funds Allegedly, firms accepted fees from city or state pension funds after their associates made campaign contributions to elected officials or candidates with adviser selection or appointment power over those pension funds Smallest contribution was $400. Most contributions were $500. Penalties ranged from $35,000 - $100,000. Encap: Multiple large contributions totaling $90,200. Penalty = $500,000. Oaktree: Contributions totaling $2,900. Penalty = $100,000. Sofinnova: One contribution of $2,500. Penalty = $120,

29 De Minimis Contributions, Exemptive Relief & Other Exceptions De Minimis Contributions by Natural Persons MSRB: Up to $250 per election to an official for whom the MFP/MAP is entitled to vote FINRA and SEC: Up to $350 per election to an official for whom the covered associate is entitled to vote Up to $150 per election to an official for whom the covered associate is NOT entitled to vote Automatic Exception Certain Returned Contributions* Self-discovered within four months of the contribution Not more than $250 (MSRB) or $350 (FINRA and SEC) Returned within 60 days of discovery Contributions Before Becoming an MFP/MAP or Covered Associate Generally, the rules have a look back component whereby contributions made within two years before becoming an MFP/MAP or covered associate could trigger the applicable rule s prohibition on doing business. However, the rules contain exceptions that may limit this look back period to 6 months (or, in the case of Rule G-37, eliminate this look back period altogether) *There are limits on the number of times one can rely on this exception. 29

30 De Minimis Contributions, Exemptive Relief & Other Exceptions (cont) Exemption by Application for Rule G-37, Rule 2030 and Rule 206(4)-5 FINRA and the SEC may provide exemptive relief after considering (among other things): Public interest and protection of investors Existence and effectiveness of policies and procedures Timing and amount and nature of the election Contributor s intent *No more than twice in a 12-month period or more than once for the same contributor. 30

31 Hypothetical #1 LIBCO, a registered broker-dealer and FINRA and MSRB member, is the underwriter of River City s new $500 million bond offering, which is scheduled to price in October. Sam Rogers is the head of LIBCO s public finance division. He is also running to become a member of the City Council of River City. It is now October and Sam s campaign is short funds for the last batch of signs that his volunteers are to post that weekend, so Sam contributes $625 of his own funds to pay for the signs. Is this a campaign contribution covered by the rules? Does LIBCO have any reporting obligations regarding Sam or his campaign contribution? Does Sam have any disclosure obligations related to running for office? 31

32 Hypothetical #2 John Tuld, the President of FinCo, attends a $10,000-a-plate dinner for the probusiness presidential candidate. One of FinCo s subsidiaries is Manager, LLC, an SEC-registered investment adviser. Does Manager, LLC have to treat Mr. Tuld as a covered associate for purposes of Rule 206(4)-5? What if Mr. Tuld allows the candidate to use FinCo s Little Rock office for campaign activities? 32

33 Hypothetical #3 It is June 1 st and Sarah Robertson just moved from Ohio to Pennsylvania to become head of investment banking at MuniCo, a municipal securities dealer It is now September and Sarah is asked to contribute $250 to the campaign of a candidate for mayor of her former hometown. Can Sarah contribute $250 to the mayoral candidate s campaign under Rule G-37? What if Sarah s husband stays behind in Ohio until the house sells and he makes the contribution from their joint checking account? Can Sarah contribute $250 to the mayoral candidate s PAC? What if the candidate loses the election? 33

34 Hypothetical #4 John Tuld, the President of LIBCO, holds a party for a candidate for the River City Comptroller of the Currency. Is this a political contribution subject to the SEC, MSRB, or FINRA pay-to-play rules? What if, in passing, Mr. Tuld discusses contributions to the candidate s campaign? What if Mrs. Tuld hosts the party at her private club? Her home? 34

35 Hypothetical #5 Seth Bregman, a sales trader in LIBCO s retail division, contributes $500 to the campaign of a candidate for Comptroller of River City. Is LIBCO prohibited from engaging in municipal securities business with River City? What if, instead of the political contribution, Sam Rogers, the head of LIBCO s public finance business, asks Seth to attend a dinner for the candidate at a table paid for by LIBCO? 35

36 Hypothetical #6 Will Emerson, the head trader on LIBCO s muni desk, reported to LIBCO s Chief Compliance Officer that he made a $300 contribution to the Committee to Save the Big Apple, without realizing that it was the political action committee of the candidate for River City Comptroller. If six months later, Will arranges for the PAC to return his $300 check, can LIBCO act as underwriter for River City s next bond issuance? What if one and one-half years later Will moves to another municipal securities dealer, BIBCo, and makes a $300 contribution to a candidate for the River City Bridge Authority? If Will arranges for a return of that check, can BIBCo underwrite bonds for a new River City bridge? 36

37 Hypothetical #7 Eric Dale, BIBCO s head of municipal underwriting, is a resident of River City and contributes $300 to his favorite candidate for U.S. Senate from River State. The candidate is currently the governor of River State. He reports the contribution to BIBCO s Chief Compliance Officer. Does this contribution raise any issues under FINRA, MSRB, or SEC rules? 37

38 Compliance Programs & Other Considerations Policies and Procedures Frequently Asked Questions Pre-clearance of Contributions and Political Activities Quarterly Questionnaires Periodic Surveillance 38

39 Compliance Programs & Other Considerations (cont) Periodic Reminders and Training Employee Screening (for new hires & internal promotions) M & A and Lift Out Due Diligence Item Consider State and Local Pay-to-Play Laws Consider Employment Laws and Sensitivity of Information 39

40 K. Susan Grafton, JD, LLM, Partner, Dechert K. Susan Grafton is a partner in the Washington, DC and New York offices of Dechert LLP where she focuses her practice on advising broker-dealers, investment advisers, and other financial services firms on their business, regulatory, and compliance issues. Ms. Grafton also represents clients in connection with regulatory exams and enforcement investigations. She counsels clients on a variety of cutting edge legal and compliance issues, including the SEC s proposed Regulation Best Interest, equity and fixed income market structure, and Blockchain technology and digital asset initiatives. Previously, Ms. Grafton was Vice President and Associate General Counsel at Goldman, Sachs & Co., where she advised the Securities Division on a variety of sales and trading issues, including electronic trading, market structure, and soft dollars. She began her career in the SEC s Division of Trading and Markets. 40

41 Cynthia Friedlander, Senior Director, Fixed Income Regulation, Member Supervision, Financial Industry Regulatory Authority Cynthia Friedlander is Senior Director, Fixed Income Regulation within FINRA Member Supervision. Ms. Friedlander is responsible for directing FINRA s policies and national programs related to fixed income securities, including related regulatory matters in FINRA District Offices. Specifically, she is responsible for the design, development and delivery of fixed incomerelated guidance to staff throughout FINRA, as well as to member firms, and is one of FINRA s primary representatives in fixed income regulatory matters with the Municipal Securities Rulemaking Board (MSRB) and the Securities and Exchange Commission (SEC). Ms. Friedlander represents FINRA at government agency, SRO, and industry and advisory meetings and is a staff liaison to FINRA s Fixed Income Committee. She holds a B.A. in government from the University of Virginia and an M.B.A. with a concentration in finance from George Mason University. 41

42 Brenden Carroll, JD, Partner, Dechert Brenden Carroll represents U.S. registered investment companies and investment advisers in a wide variety of regulatory, transactional and compliance matters. These matters include complex fund merger transactions, the development and launch of new funds, the preparation of registration and proxy statements and seeking exemptive, interpretive and no-action relief (including novel relief) from the U.S. Securities and Exchange Commission (SEC). He also advises boards of directors/trustees of U.S. registered investment companies on fund governance and fiduciary oversight matters. Mr. Carroll also has extensive experience in matters relating to the SEC s pay-to-play rule, which imposes special restrictions on the political activities of investment advisers that seek to do business with state and local pension plans. He has assisted clients with obtaining exemptive relief from the SEC from the rule s two-year time out provision. 42

43 Erik Strom, JD, Director, Government & Community Relations, Russell Investments Erik Strom is the Director of Government and Community Relations for Russell Investments. He also oversees Russell's community relations and outreach priorities around civic involvement, corporate giving, sponsorships, matching gifts and board involvement. 43

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