Fri April 25, 2014
Pay-To-Play Laws Celebrate 20th Anniversary
Originally published on Fri April 25, 2014 6:15 pm
While the Supreme Court this month took another step in freeing up big political donors, another set of federal restrictions on political money is celebrating its 20th anniversary. The so-called pay-to-play rules — enforced by the Securities and Exchange Commission — are a narrow but powerful way to control political cash.
Think "pay to play" and you might think of video games or high school sports. But in politics, "pay to play" refers to something totally different — a particular kind of political corruption.
"Pay-to-play practices reward corrupt business dealings," says Ciara Torres-Spelliscy, a law professor at the Stetson University law school in Florida.
Specifically, if campaign contributions or other largesse are involved in getting lucrative government contracts, "the people who lose out on those deals are the people who were trying to get the business through honest means," she says.
The federal pay-to-play rules target the investment firms that handle public pensions, and the banks and brokerage houses that underwrite municipal and state bonds.
These are multitrillion-dollar industries that operate in every state. So if a governor runs for federal office, the pay-to-play rules shut down contributions from financial players.
In 2012, pay-to-play rules affected Texas Gov. Rick Perry in the Republican primaries and New Jersey Gov. Chris Christie as he was vetted as a possible running mate for Mitt Romney.
For 2016 the rules could affect Christie again, and New York Gov. Andrew Cuomo. Both are said to be considering White House bids.
But so far, one of the biggest pay-to-play cases has to do with state politics in Massachusetts. Back in 2010, the state treasurer, Tim Cahill, ran for governor. A Goldman Sachs vice president was helping his campaign and also lobbying the treasurer's office for underwriting deals on some state bonds.
Cahill lost. After the election, the Securities and Exchange Commission subpoenaed records from Cahill and Goldman Sachs. Under a negotiated settlement, Goldman Sachs paid out $14 million.
"The fact that a penalty of that size can be imposed or consented to by a bank really shows that the SEC's very serious about enforcement," says Stefan Passantino, a lawyer who also tracks pay-to-play laws at PayToPlayLawBlog.com.
"I really treated that Goldman Sachs penalty as the warning bell for the regulated community," Passantino says.
Goldman could have fared worse. Washington campaign finance lawyer Ken Gross says the SEC could have barred it from doing business with Massachusetts for two years.
And Gross says it doesn't take much at all to trigger the rules. "I mean, literally, a $500 or $1,000 contribution can have that effect," he says.
A $1,000 contribution might be a stretch for a typical household, but it's not much at all in the financial world. And that's just one way the pay-to-play rules spotlight the huge disparity between Wall Street money and ordinary campaign money.
Another part of that disparity: The Federal Election Commission has never under the campaign finance laws penalized anyone even a third as much as the SEC penalized Goldman Sachs.
But attorney Jacob Frenkel says the pay-to-play rules aren't really necessary. Bribery is already illegal. "In our society, campaign contributions for the purpose of gaining access to candidates is lawful," Frenkel says.
No matter if those candidates already hold office.
The pay-to-play rules have faced only one constitutional challenge. They survived. But as the Supreme Court narrows the scope of campaign finance laws, lawyers say another challenge is likely.
It just probably won't come from any of the big Wall Street firms. They don't want to get out front in a fight with the SEC.