When the history of the Securities & Exchange Commission’s pay-to-play rule is written, 2014 could be the inflection point.  Developments this year suggest two dramatically different paths for the rule in the years to come: either the rule will unravel from court challenges or it will become an increasingly prominent enforcement weapon in the SEC’s arsenal.

In August, two state Republican party committees sued the SEC, alleging that that the pay-to-play rule unlawfully restricted the ability of Republicans in those states to contribute to some federal candidates and unlawfully limited the ability of some federal Republican candidates to receive contributions to which they were otherwise entitled.  The complaint alleged that the pay-to-play rule exceeded the SEC’s authority under the Adviser’s Act, conflicted with the Federal Election Campaign Act, and violated the First Amendment of the United States Constitution.  In September, a federal district court in Washington, D.C. dismissed the case on procedural grounds, arguing that it had been filed in the wrong court and expressed skepticism as to whether the political parties had standing to bring the lawsuit in the first place.  That case is now on appeal before the federal appeals court in Washington, D.C.  Despite the setback, if litigation is ultimately successful, the constitutionally dubious rule would be dealt a major blow.

At around the same time the state parties were attempting to chip away at the rule, the SEC was ramping up enforcement.  In June, the SEC hit a Philadelphia-area private equity firm with a major penalty in the first case involving alleged violations of the pay-to-play rule.  In that enforcement action, two political contributions from an employee of the private equity firm totaling less than $5,000 helped lead to an order requiring the firm to pay a $35,000 penalty and disgorge almost $260,000 in profits, plus interest.   The immediate aftermath of the case was even more significant because it became clear that the SEC is ramping up enforcement in this area.  In the press release that accompanied the SEC’s order, the director of the SEC’s Enforcement Division stated: “We will use all available enforcement tools to ensure that public pension funds are protected from any potential corrupting influences. … [W]e will hold investment advisers strictly liable for pay-to-play violations.”  And, a few days later, the director told Dow Jones & Company: “Our concern is that [these types of violations] could be prevalent, but it’s hard to say how prevalent.  We are actively looking for it.  We rely on tips and whistleblowers, and we do our own surveillance.”

With pressure mounting to find cases to justify the draconian rule in the face of court challenge, it is clear that the SEC is making a real effort to flush out pay-to-play enforcement cases.  It has a number of tools at its disposal to do this including soliciting tips from whistleblowers, its own surveillance and data analysis using publicly available campaign finance reports, and inspections of existing investment advisers.  Because these matters fall at the intersection of election and securities laws, Covington’s cross-disciplinary team of political and SEC lawyers is uniquely situated to help clients navigate pay-to-play enforcement matters and investigations to a successful resolution.

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Photo of Zachary G. Parks Zachary G. Parks

Zachary Parks advises corporations, trade associations, campaigns, and high-net worth individuals on their most important and challenging political law problems.

Chambers USA describes Zachary as “highly regarded by his clients in the political law arena,” noting that clients praised him as their “go-to outside…

Zachary Parks advises corporations, trade associations, campaigns, and high-net worth individuals on their most important and challenging political law problems.

Chambers USA describes Zachary as “highly regarded by his clients in the political law arena,” noting that clients praised him as their “go-to outside attorney for election law, campaign finance, pay-to-play and PAC issues.” Zachary is also a leading lawyer in the emerging corporate political disclosure field, regularly advising corporations on these issues.

Zachary’s expertise includes the Federal Election Campaign Act, the Lobbying Disclosure Act, the Ethics in Government Act, the Foreign Agents Registration Act, and the Securities and Exchange Commission’s pay-to-play rules. He has also helped clients comply with the election and political laws of all 50 states. Zachary also frequently leads political law due diligence for investment firms and corporations during mergers and acquisitions.

He routinely advises corporations and corporate executives on instituting political law compliance programs and conducts compliance training for senior corporate executives and lobbyists. He also has extensive experience conducting corporate internal investigations concerning campaign finance and lobbying law compliance and has defended his political law clients in investigations by the Federal Election Commission, the U.S. Department of Justice, Congressional committees, and in litigation.

Zachary is also the founder and chair of the J. Reuben Clark Law Society’s Political and Election Law Section.

Zachary also has extensive complex litigation experience, having litigated major environmental claims, class actions, and multi-district proceedings for financial institutions, corporations, and public entities.

From 2005 to 2006, Zachary was a law clerk for Judge Thomas B. Griffith on the United States Court of Appeals for the District of Columbia.