Pay-to-Play, Lobbying, and Ethics

Transcription

1 Skadden, Arps, Slate, Meagher & Flom LLP January 18, 2012 Pay-to-Play, Lobbying, and Ethics Institutional Investor Institute by Ki P. Hong

2 Advisers to Mutual Funds Recordkeeping Effective date: September 13, 2011 Recordkeeping requirement includes Government entities to which IA provides (or has provided within past 5 years but not prior to Rule's effective date) advisory services, or invests in a CIP IAs to mutual funds are required to keep records of government entities that have selected the fund as an option in a participant-directed government program or plan (e.g., 403(b), 457, or 529 plan) Raises practical difficulty for IAs using a 3 rd -party brokerdealer Due diligence required on the part of the IA to get this information question is what level is needed to satisfy SEC ICI No Action Letter 2 Skadden, Arps, Slate, Meagher & Flom LLP 2012

3 State Officials Running for Federal Office They are covered, e.g., Governor Rick Perry Beware of in-kind contributions resulting from volunteer activity By company and Covered Associate, personally Beware of serving on finance committee or other fundraising How about Super PACs? 3 Skadden, Arps, Slate, Meagher & Flom LLP 2012

4 Contributions to Political Organizations and Non-Profits Indirect issue MSRB has set forth vague standard and SEC appears to have adopted it Steps in analysis to determine if/when to permit contribution Figure out the organization's tax status Level of due diligence will vary depending on tax status 4 Skadden, Arps, Slate, Meagher & Flom LLP 2012

5 Implementing Look-Back Procedures When to survey new hires/covered associates What to do if look-back uncovers a contribution 5 Skadden, Arps, Slate, Meagher & Flom LLP 2012

6 Other SEC Rule 206(4)-5 Issues Employee involvement with political party committees and PACs (e.g., trade association PACs) Role in governance of PAC vs. giving to a PAC Possibility of one adviser's ban bleeding over to affiliate adviser Making sure affiliated advisers feel comfortable with compliance plan 6 Skadden, Arps, Slate, Meagher & Flom LLP 2012

7 SEC Rule 206(4)-5 Final Placement Agent Rule IA may not pay anyone other than the following to solicit investment advisory business from a government Entity: IA's own member, GP, executive officer, or employee; or "Regulated Person": SEC-registered adviser that has not (along with its covered associates) made a banned contribution A broker-dealer registered with the SEC and a member of FINRA that is subject to FINRA's pay-to-play rule Municipal Advisor registered with SEC and MSRB under Dodd-Frank, and subject to the MSRB's pay-to-play rule (MSRB Proposed Rule G-42). Effective date: June 13, Skadden, Arps, Slate, Meagher & Flom LLP 2012

8 SEC Rule 206(4)-5 Final Placement Agent Rule Final Rule permits IA to pay affiliated adviser or broker-dealer to solicit a government entity for investment advisory business without having to register as a Municipal Advisor 3 rd party that solicits covered business from government entity will likely have to register as a Municipal Advisor, under Dodd-Frank Extended effective date so pay-to-play rules for Municipal Advisors and Broker-Dealers can be finalized (FINRA has yet to propose its pay-to-play rule). 8 Skadden, Arps, Slate, Meagher & Flom LLP 2012

9 Covered Official Status Representations by candidates & committees DO NOT rely on them Being a covered official vs. determining the scope of a ban Impractical? Developing a comprehensive list of covered entities 9 Skadden, Arps, Slate, Meagher & Flom LLP 2012

10 Overlaying State and Local Pay-to-Play Laws May cover outside directors and consultants May not have de minimis (e.g., Illinois) May cover spouses and dependent children (e.g., Kentucky and Illinois) May cover a broader set of candidates 10 Skadden, Arps, Slate, Meagher & Flom LLP 2012

11 State and Local Lobbying Laws Three categories of activities may trigger lobby registration and reporting requirements at state and local levels. Attempt to influence legislation. Attempt to influence legislation or formal rulemaking by executive branch agency. Attempt to influence legislation or any decision of executive branch agency, including financial arrangements and contracts (e.g., seeking business from agency). Thresholds: Even if activity is considered lobbying activity, must meet thresholds (e.g., $2,000 compensation in Connecticut; 2 contacts for executive lobbying in Kentucky; and 25 hours or $2,500 compensation in Massachusetts). Special issues when lobbying on behalf of an outside client 11 Skadden, Arps, Slate, Meagher & Flom LLP 2012

12 Trend Toward Category 3 Lobbying Laws Beyond "traditional" lobbying, trend toward regulation of Category 3 lobbying (including financial arrangements and contracts) Alabama Arizona (underwriting business only) Arkansas California (placement agents only) Connecticut Delaware Florida Georgia Idaho Illinois Indiana Kansas Kentucky Louisiana *Metropolitan governmental units only Maryland Massachusetts Michigan Minnesota* Mississippi Missouri New Hampshire New Jersey North Carolina Ohio Oklahoma Pennsylvania Tennessee Texas 12 Skadden, Arps, Slate, Meagher & Flom LLP 2012

13 Contingency Fee Bans Contingent fee restrictions under the lobbying laws (e.g., restriction in California, Florida, Massachusetts, New York, and Connecticut). Types of compensation that may be permissible under a contingency fee ban: Retainer or flat fee Target-based compensation Discretionary bonus Has to be based on a number of factors Cannot be formula-based No dollar of compensation should be traceable to a particular contract All carry risk to some degree 13 Skadden, Arps, Slate, Meagher & Flom LLP 2012

14 Enforcement and Penalties Civil fines to criminal penalties. Losing business in Category 3 states. There are increased certification requirements. Requirement that company certify in RFP that it is in compliance with lobbying laws. Mandatory under law in Kentucky and L.A. County. Matter of practice in Ohio, Florida, and Dade County. 14 Skadden, Arps, Slate, Meagher & Flom LLP 2012

15 Recent Developments Alabama becomes a procurement lobbying state, effective January 1, 2011 Inconsistency in language of legislation AO issued February 2, 2011 California becomes category 3 for placement agents, effective January 1, 2011 State and City announce coverage of local pension fund work under their respective lobby laws Philadelphia passes a lobby law, effective July 1, 2011 Implementation delayed to January 3, 2012 Effective January 1, 2011, Illinois requires semimonthly reporting Effective January 1, 2011, Louisiana creates registration and reporting requirements with respect to local lobbying Georgia eased the registration threshold and created a salesperson exemption under its lobbying law Increase in RFP certifications such as in Indiana, Kentucky, Louisiana, Maryland, New Jersey, and 15 Skadden, Arps, Slate, Meagher & Flom LLP 2012

16 Increased Scrutiny of Investment Adviser Industry under Procurement Lobbying Laws California (AB 1743): Effective January 1, 2011 Covers those who solicit for External Managers Those who solicit State retirement systems must register and report under state lobbying law Those who solicit Local retirement systems must register and report under local lobbying law, if any External Managers Those who manage portfolio of securities or assets Those who invest, hold or trade securities and sell/offer securities to retirement system Exemptions In-house employees who spend one-third of time managing assets Certain limited competitive bids Recent Amendment Exemption for 40 Act Funds (mutual funds) that publicly offer its securities Creates a competitive bid RFP exemption regarding local retirement systems Law no longer covers brokers who sell securities 16 Skadden, Arps, Slate, Meagher & Flom LLP 2012

17 Increased Scrutiny of Investment Adviser Industry under Procurement Lobbying Laws City Lobbying Law No change under the law City Clerk s Office obtained confirmation from City Legal Department that attempts to get business from City retirement system is lobbying City Clerk s Office sent notice to many investment advisers of the above Exemption: In-house employees who as a regular part of their duties (no special hitters ) communicate with City contracting officers/employees (not elected officials or deputies) regarding contract 17 Skadden, Arps, Slate, Meagher & Flom LLP 2012

18 State and Local Placement Agent Policies Many state and local retirement systems have policies regarding use of placement agents Some ban placement agents outright, in some cases even if the placement agent is affiliated with the adviser e.g., ISBI; NYSTRS Others impose certain non-ban restrictions along with disclosure CA: Requires SEC/FINRA registration for placement agents Illinois: contingent fee ban for state and local pension systems; many systems treat as placement agent ban Other policies merely require disclosure 18 Skadden, Arps, Slate, Meagher & Flom LLP 2012

19 Recent Enforcement City sweep based on State lobby filings After failing to file an amended report disclosing a change in compensation, a lobbying firm was required by the Commission on Public Integrity to hire an outside monitor. Also fined related lobbying and consulting firms for multiple violations, including failing to report as expenses or compensation certain charges that were paid by their clients, as well as providing impermissible meals. In total, the firms were fined $60,000 for these violations. In another case, the Commission imposed a $500 fine in a settlement agreement with a company that had accepted a check for lobbying prior to registering with the state. Connecticut State Ethics Commission filed a complaint against and fined an individual for failing to register as a communicator lobbyist, failing to file lobby reports, and violating the contingent fee ban. 19 Skadden, Arps, Slate, Meagher & Flom LLP 2012

20 Types of State and Local Gift Laws Absolute ban regardless of value (e.g., Florida lobbyist law). Dollar limits Some are per occasion (e.g., Florida non-lobbyist law $100 per occasion) and some are per year (e.g., California $420 per 12-month period). Prohibition on gifts that may reasonably tend to influence an official (Contrast: New Jersey and Virginia). 20 Skadden, Arps, Slate, Meagher & Flom LLP 2012