Alert: New "Pay to Play" Restrictions Take Effect In Pennsylvania and New Jersey; New York, California and SEC Proposals Revised

As we discussed in our October 2009 Client Alert, many states have enacted or are proposing restrictions on political contributions in the wake of the “pay-to-play” scandals of the past two years. This Client Alert updates the status of these laws and proposals in Pennsylvania, New Jersey, New York and California and by the U.S. Securities and Exchange Commission (“SEC”).

Restrictions in Pennsylvania

Effective as of December 17, 2009, a person or affiliated entity is prohibited from entering into a professional services contract, or receiving fees for services provided to a municipal pension system[1], if the person or affiliate made a political contribution or gift within the prior two years[2] to a municipal officeholder or candidate for office who is – or if elected would be – in a position to influence decisions to retain service providers for the pension system. These laws also require detailed disclosure of direct and indirect political contributions by, and fees paid to, placement agents for procuring municipal pension system investments. Pennsylvania also requires disclosure of political contributions by persons entering into non-bid contracts with a state authority.

In addition to state-level laws, the Philadelphia Code & Home Rule Charter imposes annual limits on contributions from individuals, businesses and political committees to candidates for mayor, city council and certain other elective municipal offices, together with annual limits on the aggregate amount of political committee contribution receipts for any year in which a primary, general or special election for city office does not occur. Under the charter, individuals contributing greater than $2,600 in any calendar year to an officeholder (or candidate for office) are prohibited from entering into a non-competitively bid contract having a contract value in excess of $10,000 for the remainder of the officeholder’s term. For businesses, an aggregate contribution of more than $10,600 results in a similar ban for any such contract having a value in excess of $25,000.

Restrictions in New Jersey

New Jersey pay-to-play laws provide that a for-profit business entity may not enter into a contract with a state authority exceeding $17,500 in value if it or its principals, officers, partners or equity owners (or their spouses or unemancipated children) (each, a “NJ Covered Donor”) has contributed more than $300 to the governor or lieutenant governor, a candidate for governor or lieutenant governor, or any state or county political party committee during the prior 18 months, during the term of the governor or lieutenant governor or within the 18-month period prior to the last day of the term of office of the governor or lieutenant governor. The laws also provide that a NJ Covered Donor may not enter into a contract with a municipal or county government contract exceeding $17,500 in value that has not been awarded pursuant to a “fair and open” process if the NJ Covered Donor or a person who owns more than 10% of a NJ Covered Donor’s equity has contributed more than $300 to a candidate that is ultimately responsible for the award of the contract (or to the candidate’s political party) during the one year prior to the award of the contract. By Executive Order No. 7 issued by Governor Chris Christie on January 20, 2010, labor unions and labor organizations (including any political committees they form with the intent of making political contributions) are now included in the group of donors barred from having state contracts exceeding $17,500 in value if they have donated more than $300 to the governor or lieutenant governor, a candidate for governor or lieutenant governor, or any state or county political party committee during the specified time periods. It has been widely reported, however, that Executive Order No. 7 is likely to be challenged in court as unconstitutional.

An entity seeking to enter into a public contract also must comply with certain pre-contract certifications and disclosure obligations as well as various reporting obligations following the award of the contract. New Jersey has also enacted regulations specifically prohibiting investment management firms from providing advisory services to state pension and annuity funds if they, their affiliated professionals or third party solicitors engaged to act on their behalf made reportable political contributions within the two-year period prior to the firm’s engagement by the state.  

Proposals in New York and California

As mentioned in our October 2009 Client Alert, legislation has been proposed in the New York state legislature that would limit or ban political contributions to officeholders or candidates for office who control or influence state pension systems by persons who manage the investments made by those pension systems. The legislative proposal would also limit or ban the use of placement agents and impose detailed disclosure obligations related to these types of contributions. Governor David Paterson recently proposed additional legislation and regulations that would, among other things, reduce maximum campaign contribution limits to $1,000, ban corporate contributions and create a state ethics commission with advisory and enforcement powers regarding campaign finance, ethics and lobbying.  

In California, legislation has been introduced in the state assembly that would prohibit the use of placement agents in connection with any investment made by a state public retirement system unless the placement agent is registered as a lobbyist in compliance with California’s Political Reform Act. Under the Political Reform Act, placement agents would be subject to gift limits, campaign contribution prohibitions and would be prohibited from receiving compensation contingent upon any public retirement system investment decision. The placement agents would also be subject to regular reporting requirements with respect to fees and other compensation received.  

While no timetable has been set for a vote on these proposals in New York and California, they remain a top priority.

Proposals by the SEC

As mentioned in our October 2009 Client Alert, the SEC proposed a regulation in August 2009 that would limit or ban political contributions to officeholders or candidates for office who control or influence state pension systems by persons who manage the investments made by those state pension systems. The regulation also would limit or ban the use of placement agents and impose detailed disclosure obligations related to political contributions. Recently, the SEC indicated that it would consider an exemption to the ban for registered broker-dealers if FINRA implements rules that would prohibit pay-to-play activities for such persons. No timetable has been set to vote on or finalize the regulations, but the SEC has indicated that finalizing its regulations on this issue is a high priority.

For More Information

This area of law is rapidly changing, and we will continue to monitor the legislative and regulatory proposals to further regulate pay-to-play activities and communicate pertinent information to you. This Client Alert addresses pay-to-play laws and proposals only in the states referenced. Other states have similar restrictions and reporting obligations. If you have any questions about the status or details of enacted or proposed pay-to-play laws and regulations or other political contribution reporting requirements, please contact:  

This Client Alert is prepared for the general information of our clients and other interested persons.  This Client Alert is not, and is not intended to be, comprehensive in nature.  Due to the general nature of its content, this Client Alert is not and should not be regarded as legal advice.

[1] Municipal pension systems are county, city and other municipal level authorities and do not include state pension authorities such as PSERS and SERS.

[2] The law does not apply retroactively to contributions made prior to December 17, 2009.