A History of Pay to Play Enforcement

A History of Pay to Play Enforcement


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Welcome, thank you all for joining our webinar today hosted by MyComplianceOffice and Cipperman Compliance Services. With that I'll hand it over to Todd. Thank you.


Polling question two, "Does your firm permit campaign contributions?" Wow, 70 percent. That's more than, and this is really going the other direction. I will tell you based on where things are going from a compliance perspective a lot of firms are actually starting to prohibit, because these rules are so esoteric, because they're afraid of losing out on planned business. Now if you don't do public planned business, it doesn't matter, it's not relevant.


Welcome, thank you all for joining our webinar today hosted by My Compliance Office [inaudible 00:27:29] Compliance Services. With that I'll hand it over to Todd. Thank you.


This whole thing arose from the Rattner Quadrangle scandal. The Rattner Quadrangle scandal back in 2010. This was in New York state they were paying a solicitor. What was interesting is, and he was the managing principal of a private equity firm, he was buying six million plus. What was interesting is this was not under 20645, because it didn't exist back then. They brought the case under section 1782 of the Exchange Act for basically fraud in  the sale of the security, which is not really ... It was a reach. There was no sale of security here in the traditional sense, but so a lot of firms it's really interesting the SEC still has [inaudible 00:35:20] outside of 20645. What was interesting about the Rattner Quadrangle case a lot of people ask this why is the SEC even involved before 20645? Isn't this really a function of New York state law, and state lobbying laws? The answer is it might've been, and just because you satisfy the advisors [inaudible 00:35:37], and even if you get around [1782 00:35:40] it doesn't mean you're avoiding the state lobbying laws. If you actually are paying a solicitor in a particular state you should find out what their laws are as well. They can be more restrictive, or less restrictive.


There's been a bunch of cases under 20645. One of the first ones was the TL Venture's case. A guy was making political contributions for mayor, and governor. Clearly one of the government entities, and one of the officials that are numerated they tried to argue, that it was a PE firm, and that this guy worked for an affiliate, and they tried to argue that his activities were for the affiliate not for the registered entity, and essentially the SEC said that's, as they say, [inaudible 00:36:17] by half, and they fined TL Ventures. Very recently the SEC brought 10 cases together against 10 firms with various violations of 20645 mostly with making unlawful campaign contributions, and they fine these 10 firms anywhere from 30,000 to 100,000 dollars. Essentially they're all the same, essentially they didn't observe the two year timeout for taking fees after the payment. Sometimes it was a covered associate that was not covered when they made the contribution. Sometimes their compliances wasn't in place. What was really important about these 10 cases that the SEC made was look, this is not an intent case, these are strict liability cases. If you make the contribution to a covered associate that contributed a government official in that two year period you're banned, there's no I didn't mean to do it, or it was an accident, these are strict liability cases.


Another interesting case which came up, which gets into the value concept was the Goldman Sachs case, one of the first cases. Essentially a guy who worked for Goldman Sachs worked for a campaign for a guy who was state treasury, and I think he was trying to be governor he didn't get paid anything, but he actually worked for the campaign, and that was considered something of value that he delivered, so it's not just cash money if you worked for a campaign under Goldman Sachs you can also be charged with violation of the 20645. I do draw your attention to the office of compliance and inspections actually put out a risk alert back in 2012, which was not really applicable to 20645, because I believe it was prior to the rule being adopted, I could be wrong, but it was around the same time. But it was under a MSRBG37, so it has all the same elements.


If you take a look at that OC risk alert they talk a lot about some elements that you should have in your compliance program to avoid any problems. One, make sure you train all your people in the rules, so they understand what they can, and can't do. Two, you should do some email surveillance on political contributions, and also as a side note there are websites you can use, and in fact a little note we were involved in an SEC exam, and it turns out one of the people that we were working with had actually made political contributions, and actually had lied in the certifications, or just forgot it. The SEC had done some web sources, there was a bunch of websites that track political contributions, and they plugged in a couple of people, and found that one of our, not our folks but one of our clients folks had actually made political contributions. It didn't result in much other than a deficiency, but there are sites you can go to and you're expected to do a level of due diligence. Be very careful when people are promoted, or when you hire people if you allow political contributions, and make sure that they didn't make a contribution to a potential client.


Most firms now require some form of pre clearance for any political contribution because the rules are so arcane you want someone like the CCO, Chief Compliance Officer to sign off on it, so something to think about as you're dealing with it. As we're talking about these cases there's been some other kick back schemes that I've seen out there that are not sort of straight payments. There's a classic brokers case, [inaudible 00:39:36] case at the SEC [inaudible 00:39:37], a couple of brokers were paying a public plan's fixed income director, they paid him over 180,000 dollars, and this is a, if you like salacious enforcement cases the allegations he was receiving gifts of jewelry, prostitutes, cocaine, tickets, the whole nine yards to direct trades to their two firms. It was not under 20645 per se, but it was sort of a public planned kickback scheme. Also, this sort of echoes the fidelity case, and the bachelor parties, where they were accused of throwing bachelor parties to get trading. Also, another sort of kick back scheme which was not under 20645 was the [inaudible 00:40:25] case where they were charged with using a lawyer lobbyist to funnel payments to get custody business from public plans. Again, this was a 10B5 case. Again fraud in the sale security, not necessarily 20645, do it can go broader than that.


This webinar was co-hosted with Cipperman Compliance Services, LLC

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