From PLI’s Course Handbook
Corporate Political Activities 2009: Complying with Campaign Finance, Lobbying & Ethics
Laws
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STATE AND LOCAL PAY-TO-PLAY LAWS:
LEGISLATION AND COMPLIANCE
Edward E. Biddle
Steven Tomasic
JPMorgan Chase & Co.

To avoid the potential for conflicts of interest, state and local governments have recently passed laws and introduced legislation which attempt to limit the connection between political contributions and government contracting. These pay-to-play laws vary greatly and present an increasingly complicated challenge for in-house legal and compliance teams. This article will address: 1) what is meant by pay-to-play laws, 2) their primary features, 3) various compliance strategies, 4) recent developments, and 5) observations on the effectiveness of these measures.
1. What is Meant by “Pay-to-Play” Laws
Pay-to-play refers to the practice of seeking to influence the award of contracts by soliciting or making contributions to candidates who would be in a position to award business.
Contributions do not always result in business, but the failure to contribute may result in the disqualification of a contractor. To end this practice, state and local governments prohibit or restrict the amount of contributions which a potential or current contractor, certain employees, and affiliated Political Action Committees ("PACs") can make to a candidate running for public office. In certain instances, contribution reporting and certification requirements for contractors are also established. Such laws are intended to limit the use of the procurement process for political gain. They also represent another attempt to restrict the perceived influence which political contributions have on the electoral process and they mark a serious step toward improving the process of government contracting.
1
The notion of limiting certain kinds of corporate contributions from the electoral process began in 1907.
2 The modern effort to address the influence of campaign contributions started with the Federal Election Campaign Act of 1972 (FECA), and amendments in 1974 which established the concept of limits and reporting requirements for individuals.
3 The role of segregated funds, which later became known as PACs, was also codified at that time. As a way to improve the transparency and integrity of the contracting process, Congress also passed the Office of
Federal Procurement Policy Act.
4
In the 1990’s, concern over political contributions made by the municipal bond underwriting industry led the Municipal Securities Rulemaking Board (MSRB) to enact Rule G-37, which placed very broad and strict limits on the ability of municipal finance professionals to make contributions and carried strong penalties to secure enforcement.
5 Surprisingly, it was not until
1 An increase in procurement costs and a lack of integrity and confidence in the procurement system represent other concerns.
2 The Tillman Act prohibited corporate contributions but failed to close many loopholes.
3 2 U.S.C. 431 et seq.
4 41 U.S.C. 1 et seq.
5 The MSRB is a self-regulatory organization which governs the underwriting industry for public finance projects.

1996 that the Supreme Court weighed in on the issue and prohibited officials from hiring or firing contractors based solely on whether the contractors had made contributions.
6
These federal developments signaled the way for state and local governments to address the pay-to-play issue and their efforts have led, in turn, to a patchwork of compliance regulations on political contributions that government contractors must be aware of and follow.
2. Primary Features of the Laws
The laws, which vary between a laissez faire reporting approach to measures including outright prohibitions, caps, and registration have expanded, as of mid-2009, to cover at least 36 major jurisdictions in the United States.
7 The restrictions follow the one-sided model established under MSRB Rule G37, which focuses regulation on the behavior of the contractor, rather than campaign committees. New York City is the only jurisdiction which has adopted the unique approach of putting the onus of responsibility upon committees.
8
Prohibited contributions and inaccurate or missing reports in many cases constitute actions described in the “material breach” language of state contracts, thereby permitting a public entity to void an agreement with a vendor. Penalties for violations include a contracting ban on the entity for a significant period of time. Daily fines are also very common for initial violations or the failure to keep reporting information up-to-date. Repeated violations of the restrictions or reporting requirements can even lead in some circumstances to criminal sanctions.
The laws usually apply to specific candidates for office (ie Governor, Treasurer, City Council
Members, procurement officers) whose official duties include oversight or decision-making authority on contracts. Other relevant criteria include the amount ($) and nature of the contract (non-competitive versus bid), and a specific time period (RFP and/or dates of contract).
The laws generally apply to the contracting entity, but may include subsidiaries and/or parents as well. In some cases, they also capture affiliates (such as PACs), percentage owners (5-7%), and various employees, such as key contracting personnel, senior executives, their spouses and children.
RFP certifications are the standard method for demonstrating compliance with the law.
Depending on the complexity of the pay-to-play restrictions, signing these will often require a thorough information-gathering process and a well-designed compliance program prior to the bidding process. Where governments utilize public databases for registration, vendors are presented with the additional problem of ensuring that the information which has been
6 See O’Hare Truck Service, Inc. v. City of Northlake, 518 U.S. 712. The argument for pay-to-play here is striking.
7 These include California (all counties and 7 other jurisdictions), Colorado (Denver), Connecticut, Florida, Hawaii,
Illinois (Chicago and Cook County), Kentucky, Louisiana (Jefferson Parish), Missouri, New Jersey, New Mexico, New
York City, Ohio, Rhode Island, Philadelphia, Salt Lake County, South Carolina, Texas (Houston, San Antonio),
Vermont, and West Virginia.
8 New York Charter § 1052(a)12-13, New York Admin. Code § 3-702, 3-703 (1-a), (1-b)

collected and submitted remains up-to-date during the entire period of the contract and even beyond in some circumstances.
9
3. Compliance Strategies
For a compliance program to successfully handle the variability and rigors of pay-to-play restrictions, the first step is to engage the relevant parties at the firm. This includes the business units bidding on and handling government contracts, legal and compliance departments, and government relations groups. Understanding the legal and political environment and sharing knowledge regarding business practices will create the most responsive program and ensure buy-in on all levels at the firm. A good partnership of course, will also lessen the compliance burden, make government interactions routine, and compliment political outreach. The following is a summary of some useful strategies which can be implemented.
A. Interactive Training Programs and Internal Websites
Educating employees is one of the best ways for contractors to develop effective and responsive compliance programs. Online training courses can introduce the basics of pay-toplay laws to employees who work in key government contracts areas. Legal definitions can be substituted with plain language to describe the nature and scope of these laws. Scripted scenarios with multiple choice answers can be used to depict the compliance process at the firm and the circumstances under which violations occur.
Another useful step which any firm can take is the creation of a self-service website.
Information is presented and updated in a simple fashion and employees are required to check the site before making any state or local contributions. For each jurisdiction, a series of straight-forward questions can be crafted to quickly determine whether there may be an issue regarding an employee's contribution. Employees whose contributions may be subject to the rules can then be steered to appropriate personnel to resolve inquiries.
By focusing resources on where they are needed most and training employees on the nature of the risks involved, these tools are an excellent first step in the compliance process.
B. Pre-Approval Process
State labor law concerns echoing 1 st Amendment protections appear to limit overly restrictive programs which completely prohibit employee contributions. Most firms, therefore, have adopted some form of pre-approval process. Generally speaking, there are three schools of thought. The surgical approach limits pre-approval to employees who are subject to
9 Many certifications have look-back provisions on contributions which can reach back, as in the case of New Jersey and Connecticut, as much as 5 years. Some states, such as Illinois for example, also require contractors to keep track of contributions for 2 years following termination.

jurisdictional limits. The preventive approach requires pre-approval for certain classes of employees (such as those with managerial or discretionary authority over contracts). The blanket approach requires pre-approval for all employees in every jurisdiction.
A surgical approach has the benefit of affecting the fewest number of employees. This approach, however, not only requires a thorough knowledge of the pay-to-play laws but also a solid grasp of the firm's government procurement practices. For such a program to be successful, a highly effective coordination effort is necessary to know where the firm has contracts, to establish the number, size and nature of such contracts, to determine the relevant employees involved in the contracting process, and to keep this information up to date.
Such an approach faces the challenge of ever-increasing restrictions combined with the fact that many have not been written or interpreted with respect to the structure or nature of large national firms (organization, job titles, # of entities). Determining whose contributions at a firm may be subject to the restrictions creates information-intensive demands on both the legal and business sides and makes a surgical approach increasingly difficult to apply as the number of pay-to-play jurisdictions within a firm's scope increases.
Under a preventive approach, a company requires pre-approval for certain classes of employees (officers or SVPs, those with managerial authority over contracts, etc.) in every jurisdiction. Much of the benefit from this kind of program comes from training the relevant employees on different aspects of contribution restrictions. Such a benefit is not available under the surgical approach, since only those employees clearly implicated are required to preclear. Legal and compliance requirements remain manageable and effective by applying measures to the same employees across the board regardless of variations in state and local pay-to-play laws.
Except for financial institutions with municipal securities practices (where such restrictions are commonplace), companies may find resistance to pre-approval as a new compliance concept.
Questions about employee confidentiality, constitutionally protected freedoms, and concerns about bundling and other electoral law issues increase as the number of employees subject to pre-clearance grows. However, both the surgical and preventive approaches carry the benefit of allowing employees to continue making contributions without chilling political participation.
The blanket approach, which requires all employees to have state and local political contributions pre-approved, is easy to accommodate and may make sense for smaller companies and broker dealers who are already subject to MSRB Rule G-37. Challenges to such an approach include the volume of inquiries that would need to be resolved, assuming of course that employees fully comply with the policy.
10 Firms that have established such blanket pre-approval policies should compare the number of inquiries they receive against predictable
10 According to a Harris Poll (R) conducted online in May, 2008, 11% of US adults aged 18 and up made a state, local or federal political contribution during the current election cycle (see Harris Interactive (R)/Center for the
Study of Elections and Democracy (CSED)).

volumes to adequately benchmark the effectiveness of their programs. Given the current state of pay-to-play laws, such a program may be difficult and costly. However, when effectively deployed under appropriate circumstances, it can be an excellent way to protect a firm’s business.
Clearly, there is no “one size fits all” approach based upon the complicated nature of pay-toplay laws and the size and organization of each contractor. Before implementing, review the benefits and drawbacks of each program. Also, consider training, the use of a website, and limiting contribution pre-clearance to only those jurisdictions where it is necessary.
4. Recent Developments
The push to root out any conflict of interest in government, whether it comes in the form of gifts, lobbying or political contributions, continues to gain momentum despite a few setbacks.
In 2009, two sweeping pay-to-play laws went into effect while several others were challenged in court. In addition, several pension fund investigations have led to an increased interest in federal and state regulation.
Following several high profile convictions, Illinois passed legislation which prohibits contractors, bidders, their affiliates and executives from making contributions to state-wide candidates with decision-making authority over contracts.
11 It also requires contractors to annually register with the State Board of Elections. The state’s new Governor, however, repealed an Executive
Order which had extended the ban on contributions to state legislators with no role in procurement.
In Colorado, voters narrowly approved a ballot measure (51- 49%) which prohibits contributions by state contractors with sole source contracts and requires publication of their names.
12 The contribution ban applies broadly to any candidate for any elected office in state or local government. Under the provision, sole source contracts also include RFPs with less than three bids and collective bargaining agreements. The prohibition applies not only to contractors but executives and their extended family members as well.
Less than a month after this new law went into effect, two lawsuits were filed seeking to invalidate its provisions, one by union members and another by a Denver city council member and several businesses and non-profit groups.
13 The challengers claim that because the law eliminates their ability to make contributions, it violates their constitutional rights of free speech and equal protection. On June 23, the court issued a preliminary injunction against implementation of the law, with Judge Lemon stating, ”in my mind, it’s not a close case.” 14
11 P.L. 095-0971.
12 Colorado Ballot Amendment 54.
13 Wendy Norris, Suit Charges Amendment 54 Violates Free Speech, Colorado Independent, January 28, 2009.
14 Lynea Hanson, Preliminary Injunction Granted in Lawsuit against Amendment 54, Colorado Pols, June 23, 2009.

These cases come on the heels of several other pay-to-play court cases which were recently decided.
An appellate court in Ohio upheld a lower state court’s ruling which invalidated the state ban on contributions by contractors, labor unions and the PACs associated with them.
15 The court based its ruling upon specific procedural violations which occurred when the two pieces of legislation were initially passed rather than constitutional arguments. Since the Ohio Attorney
General has decided not to appeal the ruling, pre-2006 contribution restrictions against partners, trustees and owners of 20 percent or more of a corporation and their spouses go back into effect. Bidders and holders of competitive contracts remain exempt.
In Pennsylvania, campaign contribution restrictions that were passed in 2004 and targeted against the gaming industry were successfully challenged and struck down by a 5-1 majority of the state’s Supreme Court.
16 Though the justices thought the ban served a legitimate goal of preventing undue influence, they decided that the application was overly broad and “clearly, palpably and plainly” violated rights of political expression and association guaranteed under the state constitution.
17 The law applied to all state and local candidates regardless of any connection to state gaming industry. In the decision, the justices suggested that a statute limiting “the size of contributions, rather than absolutely prohibiting any contributions, would be more narrowly drawn to accomplish the stated goal.”
In contrast to these decisions, a federal district court recently upheld Connecticut’s 2007 payto-play law requiring registration and restricting contributions from contractors, affiliates, executives, and their families.
18 The court acknowledged that the intended targets of the new law, i.e. lobbyists, state contractors and their families, accounted for less than 1% of contributions. It also noted that the most recent spate of corruption cases in the state involved gifts and bribes. However, the court stated that contributions restrictions need only be
“reasonably calculated to prevent actual and/or perceived corruption…” Though the ban placed a restraint on speech, the court felt that the people affected could continue to engage in other ways of expressing political support. An appeal of this ruling is pending in the 2 nd circuit.
In New Jersey, the Supreme Court unanimously affirmed a lower court’s ruling upholding the state’s recently enacted pay-to-play law. The law had been applied against an asphalt company which made a prohibited contribution, then asked for a refund within the 30 day safe harbor but failed to receive it until 41 days had elapsed.
19 Though counsel for the contractor argued both timeliness as well as constitutional issues, the court felt the current law was “closely drawn to avoid unnecessary abridgement of freedoms” and considered the risk of improper influence sufficiently important to justify the state limits. The court also held that the plain
15 United Auto Workers,Local Union 1112 v. Brunner, 2009-Ohio-1750.
16 Depaul v. Commonwealth, 969 A.2d 536 (Pa. 2009)
17 Id at 25.
18 Green Party of Connecticut v. Garfield, 590 F.Supp.2d 288 (D.Conn, 2008).
19 In re Earle Asphalt Co., 198 N.J. 143, 966 A.2d 460 (2008).

language of the statute concerning reimbursement within 30 days trumped any argument employing constructive receipt or substantial compliance.
20
New York City’s Campaign Finance Act, which extended its “doing business with the city” contribution restrictions to LLCs and partnerships, was recently challenged for burdening free speech and associational rights more heavily than justified by anti-corruption interests.
21 The federal court, however, considered the limits, which excluded family members and individual employees, to be closely drawn and sufficiently important to justify such an expansion. An appeal is pending.
In light of several recent investigations regarding pension fund management practices in New
York, New Mexico, California, and elsewhere, the Securities and Exchange Commission is considering the establishment of a federal rule originally proposed in 1999 which would ban contributions by investment advisors to officials in the pension fund’s chain of command.
22 The
New Mexico State Investment Council, in the meantime, adopted a policy banning contributions from investment firms, their principals, employees and family members.
23 The policy also prohibits the use of private placement agents as another way to stop potential payto-play activity. An unintended effect of this provision may restrict the use of private placement agents registered and specifically authorized by the SEC to commingle and invest the accounts of different clients to achieve economies of scale.
Obviously, such laws, policies and regulations will continue to flourish as legislators and officials attempt to address the pay-to-play issue. And courts will continue to review the varying provisions to determine whether they are appropriately drawn to avoid the actual or perceived harm.
5. Effective Pay-to-Play Laws
The most effective pay-to-play laws have certain characteristics which, when employed together, create a robust government procurement ethics program that is not unduly burdensome for government agencies or business contractors. A few of these characteristics are outlined below:
1.
Funding Mechanism. Making sure the law contains a provision that properly funds implementation will insure that there is an effective regulatory organization to provide resources, interpretative advice, and aid in enforcement. Where reporting requirements exist, the department responsible for maintaining the information must be adequately funded and prepared to take on the responsibilities of electronic filing and public access.
20 This ruling appears to put pay-to-play laws in the same company with other violations subject to strict liability standards, such as the ultrahazardous activity of transporting radioactive materials.
21 Ognibene v. Parkes, 599 F.Supp 2d, 434 (S.D.N.Y. 2009)
22 SEC Proposed Rule IA-1812, Political Contributions by Certain Investment Advisors, FR 99 FR 20489 (1999).
23 Transparency and Disclosure Policy, New Mexico State Investment Council (May 26, 2009).

2.
Establishing an Interpretive Body or Commission. Such a feature is particularly useful for the proper administration of the law. First, interpretive regulations can fill in gaps where the law is silent. Second, advisory and other informal opinions provide real-time guidance for contractors and regulators. Third, such a body can effectively carry out the day-to-day activity of tracking company reporting, assessing fines, etc. Such features are the critical first line of an effective and sophisticated ethics program. It also greatly improves government expertise, saves on litigation costs and creates a business friendly environment, all of which provide significant benefits to the procurement process.
3.
Electronic Filing and Public Access. These two aspects go hand in hand. Both are particularly useful to ease the burden of filings for regulators and contractors. For contractors, it helps to confirm the timely receipt of information. For the public, transparency and readily available information instills confidence in officeholders and the government bidding process. In many states, such electronic information is already available on lobbyists who interact with government.
4.
Removing Pay-to-Play Regulation from Circumstances which do not Require Heightened
Scrutiny a) Contracts below a threshold amount. Several existing laws currently employ this exception. Concern over the undue influence of contributions where de minimis contract amounts are involved is not very significant. By removing small contracts from the law, the cost of administration will be lower for both the regulator and the contractor. b) Competitively bid contracts. Several existing laws also have exceptions for competitively bid contracts. It is less likely a conflict of interest will arise in competitively bid situations. When measures are taken to insure that the bidding process remains competitive, such as black-out periods and one point of contact for bidders, considerable savings can be achieved without sacrificing integrity or confidence. c) Restrictions on contributions to offices unrelated to procurement activity.
Enacting a pay-to-play law which covers legislators, for example, who have little or no impact on the procurement process, is excessive and unwarranted. It may also create adverse impacts, such as hindering the operation of competitive politics and blunting the voice of important business constituencies whose contract involvement is limited. d) State overlay of federal regulation. Adding state or local laws to the regulatory framework where federal law already exists can create uncertainty and a complicated environment for businesses and regulators to operate. Enhancing penalties can also result in extreme outcomes such as a ban on business for technical violations.
5.
Simplified Reporting for Public Companies. Several state and local governments currently take advantage of the federal reporting done by public companies without

sacrificing the operation of their pay-to-play laws on smaller companies. SEC 10 K and
10 Q reports contain significant amounts of information. At the least, it would be helpful if state and local laws employed reporting cycles consistent with federal law.
6.
Flexible Penalties. Regulators should have the flexibility to issue penalties which distinguish between actual circumstances of pay-to-play and inadvertent technical violations of the law. Penalties should also be graduated to take into account the nature and frequency of the violation. Safe harbors such as 30 day grace periods to request refunds for inadvertent contributions can be implemented where errors are harmless and firms have numerous employees.
7.
Public Database for Registering Minors. Public safety concerns outweigh the use of such a regulatory device to monitor possible contributions by employees of contractors through their children.
8.
Individual Campaign Contribution Limits. In lieu of creating a complex regulatory framework, several states rely upon individual limits as a general approach to curb payto-play activity. Such universally applicable, standard limits are easy to understand and less burdensome to administer. When combined with the transparency created by public access to contribution information, such basic restrictions can be a simple, effective means of addressing the harm which political contributions pose to the procurement process.
24 In jurisdictions where patronage and pay-to-play is entrenched, however, this approach may not be adequate.
Authors of this Article:
Edward E. Biddle is an Executive Director of JPMorgan Chase’s Legal and Compliance
Department. He is responsible for the company’s compliance with US gift, lobby, pay-to-play and electoral laws. He is a graduate of Dartmouth College (AB) and the Wharton School of
Business at the University of Pennsylvania (MBA).
Steven Tomasic is a Vice President and Assistant General Counsel of JPMorgan Chase’s Legal and Compliance Department. He is a graduate of Oberlin College (BA) and the University of
Illinois School of Law (JD). He is admitted to practice in Illinois and served as Assistant Counsel to the Speaker of the Illinois House of Representatives.
The authors would like to thank Ki Hong and Mark Renaud as well as several JPMorgan Chase colleagues for graciously reviewing and offering constructive comments for this article.
24 Ciara Torres-Spelliscy, Kahlil Williams, Thomas Stratmann, “Electoral Competition and Low Contribution Limits,”
Brennan Center for Justice at the New York University School of Law (2009).