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Last November, the Washington, DC area was somewhat titillated by news reports that Prince George’s County Executive Jack B. Johnson and his wife, Prince George’s County Councilwoman-Elect Leslie Johnson had been arrested by the FBI in connection with an investigation into allegations that certain real estate developers in Prince George’s County, Maryland were bribing public officials in exchange for official acts benefitting the developers and their companies. The FBI moved in, it was reported, when their wiretaps overheard Johnson instruct his wife to flush a developer’s check for $100,000 down the toilet and to conceal another $79,600 in cash in her bra.
Regardless of where the money went, the result was inevitable - pay-to-play legislation.
In an interesting symbiotic pairing, corrective legislation is moving through the Maryland General Assembly at precisely the same pace as Prince George’s County Council member Leslie Johnson moves through the Maryland criminal justice system. On March 25, 2011, the very day the Justice Department filed new criminal charges against Johnson for conspiracy to commit witness and evidence tampering, Maryland’s House of Delegates passed House Bill 614 in response to the Johnson episode.
What makes the Maryland legislation unique is the approach taken to remedy the harm inflicted on public confidence in local government. The easy approach would have been to enact feel-good prohibitions against developer interactions with county executives. Such legislation is easy to pass but is exceedingly difficult for well-meaning citizens to comply with and often does little to prevent the truly nefarious bad actors who simply “find another way”. As the team at CityEthics.org correctly observed, the problem in Prince George’s County was not as much with the private sector but rather an inadequate ethics program and unique powers to hold up development unless a payoff is made:
But there can be no pay-to-play without special powers. Developers only pay when they have to. And there can be no special powers without a very poor ethics environment. It's a vicious circle, and it appears that Prince George's County is caught up in it.
House Bill 614 goes a long way towards addressing these issues, and does so by placing limitations where they belong, on the county executives who are perceived to have abused their far-reaching powers for personal gain. According to the Washington Post the County has long housed “complaints that past councils have operated secretively, threatening developers that their plans would be held up indefinitely unless they offered concessions or hired an associate of a council member.” If signed into law, the current legislation will severely curtail the County Council’s ability to shelve development deals and enhance the County’s ethics commission by installing a full time executive director and require regular meetings.
This strikes us a sensible approach, targeted to address a clearly identified problem, that does not place undue hardships on the honest 99% in the private sector who have succeeded in keeping their knickers clean.
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As proposed, the ballot measure put before the public read:
Shall the Charter be amended to (1) restrict campaign contributions and fundraising by bidders on certain City contracts; require increased disclosure for bidders; and provide for bans on future contracts for violators; and (2) build upon the city's voter-approved campaign trust fund, which provides limited public matching funds for qualified city candidates who agree to spending limits, by lifting the maximum balance in the fund while allowing the LA City Council by a two-thirds vote to not make the annual appropriation and temporarily transfer funds to meet City budgetary obligations in certain emergency conditions?
Language like that is difficult to vote against. The Devil, as they say, is in the details. Specifically, as passed, the measure restricts contractors holding or seeking City contracts in excess of $100,000 from making campaign contributions to, or fundraising for, City officials (including the Mayor, the City Attorney, the Controller or a member of the City Council) or candidates to those offices. Second, the ordinance lifts the maximum balance on the City’s public finance vehicle - the Campaign Trust Fund.
This contribution ban extends not just to those authorized by the company to represent it in seeking or negotiating the contract, but also to the contractor’s Board Chairman, President, Chief Executive Officer, Chief Operating Officer, and anyone who holds more than a 20% ownership stake in the contractor.
As if these compliance challenges are not imposing enough for the well meaning corporation that might not have absolute control over the campaign contributions of its 21% minority owners, the new ordinance extends the ban to subcontractors and their officers if the subcontractor has a $100,000 interest in the City contract. While it is easy to perceive the logic that leads to such a prohibition, one can anticipate that the unintentional violations of this ordinance - and dramatic negative consequences - will be legion.
On the other hand, many argued against the measure on the ground that it does not go far enough in banning contributions and will simply drive unscrupulous contractors to measures that will evade disclosure altogether. A good example of such an argument can be found here.
Interestingly, the City taketh away just as it giveth. A third element of the ordinance provides that the City may, during “financial emergencies” (when do you anticipate LA won’t be laboring under a “financial emergency”?), borrow money from that trust fund without appropriating funds back in. Now that’s playing without paying!
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Recent commentary has generally focused on the lack of certainty to the business community on how these rules will be applied, as well as the administrative difficulties that will likely arise as the rule first goes into effect. RealClearPolitics has an interesting new take on the regulations, which focuses on how this could impact the 2012 Republican Presidential Primary.
More on that later. As a reminder, the SEC’s new rule has three key elements:
1) It prohibits investment advisors from providing advisory services for compensation—either directly or through a pooled investment vehicle—for two years, if the advisor or certain of its executives or employees have made prohibited political contributions to an elected official in a position to influence the selection of the advisor;
2) It prohibits advisory firms and certain executives and employees from soliciting or coordinating campaign contributions from others (a practice referred to as “bundling”) for any elected official in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business; and
3) It prohibits investment advisors from paying third parties, such as placement agents, from soliciting a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment advisor or broker/dealer subject to similar pay to play restriction.
Importantly, for the purposes of campaign fundraising, it doesn't matter whether a state official directly oversees a fund or can appoint someone who does. In either situation, investment advisers interested in obtaining contracts for those funds cannot donate more than $150 to their campaigns in a cycle. The limit goes up to $350 if the investment adviser lives in the state of the elected official.
National political reporter for RealClearPolitics, Erin McPike, writes in "SEC 'Pay to Play' Rule Could Inhibit Barbour, Daniels" that:
Daniels has a direct role on a board that oversees some public funds in the Hoosier State, and Barbour appointed his chief of staff to sit on a board that oversees the public retirement fund in Mississippi, meaning both potential presidential contenders’ campaign accounts could take a hit from the new rules.
In the presidential race, they appear to be the only two politicians in the still-forming field who could be affected by the rule. President Obama is not affected, and the rest of the GOP field is populated by former officials and a senator, none of whom have to worry about the rules.
It remains to be seen how deeply the rules will shape the money chase in the impending GOP presidential primary. A number of sources say that while the giving trends of investment advisers have tended to favor Democrats, there's a growing interest in the industry for two potential Republican candidates: [Mitt] Romney, who isn't affected by the rules, and Daniels, who is.
Interestingly, the SEC’s rules are also impacting other races nationwide. McPike further explains:
Of course, the rules affect candidates down the ballot and across the country, so Barbour and Daniels are not alone. Take Indiana, for example. Indiana Treasurer Richard Mourdock plans to challenge Republican Sen. Dick Lugar in a primary, so Mourdock's role on the same board on which Daniels sits that oversees a state fund impairs the treasurer's ability to raise money from this part of the financial services industry. If Republican Rep. Mike Pence runs for governor, he'll face the same complication given the governor's role on the board and the fact that candidates for affected offices are included.
In neighboring Ohio, Treasurer Josh Mandel has the authority to appoint an investment designee to the Ohio Public Employees Retirement System Board of Trustees. Mandel, a Republican, is a potential opponent for Democratic Sen. Sherrod Brown, and investment advisers would be subject to penalty if they donated substantial contributions to him for the Senate race.
Chalk this up as another unintended consequence of pay-to-play regulations. While it is still unclear just how much these restrictions will limit an impacted candidate’s fundraising prowess, what is clear is the need for comprehensive compliance programs in order to proactively address these challenges prior to March 14.
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