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SEC Issues Fines for Pay-to-Play Violations That Predate Pay-to-Play Rule

A $12 million settlement announced last week by the Securities & Exchange Commission suggests that the SEC will aggressively pursue alleged schemes connecting political contributions to government contracts even if the political contributions do not violate its 2010 pay-to-play rule.  According to the settlement order, in 2010, the head of Public Funds at State Street Bank and Trust Company arranged to make payments, through an intermediary lobbyist, to the Ohio deputy state treasurer “in exchange for several lucrative subcustodian contracts awarded by the Office of the Treasurer of the State of Ohio.”  In addition to these cash payments, the executive also allegedly arranged for others to make at least $60,000 in political contributions to the Treasurer’s election campaign.  Based on these allegations, the SEC and State Street entered into a settlement order requiring State Street to disgorge $4 million and pay penalties of $8 million.  The conduct, the SEC alleged, “violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities.”

In announcing the settlement, the SEC provided more evidence that schemes connecting the award of public contracts to political contributions and fundraising are an enforcement priority: “Pay-to-play schemes are intolerable, and lobbyists and their clients should understand that the SEC will be aggressive in holding participants accountable.”  The case follows on the heels of its first major pay-to-play enforcement case in 2014.

Importantly, the conduct at issue in this case took place before the SEC pay-to-play rule was effective.  The settlement therefore suggests that even if a political contribution is not technically covered by the SEC’s specialized pay-to-play rule, it still might lead to an enforcement action under the Exchange Act’s general anti-fraud provisions.  Some of the contributions made in the State Street case, for example, were not made by “covered associates” who are subject to the SEC pay-to-play rule.  Nevertheless, the SEC apparently believed that the contribution scheme still violated general statutory and regulatory prohibitions on fraudulent conduct.  When reviewing contributions for pay-to-play compliance, compliance departments should therefore pay careful attention to the surrounding facts.  Even if the SEC pay-to-play rule technically does not apply, if facts suggest the contribution was intended to secure or retain public contracts, the contribution could still result in potentially crippling penalties.

© 2020 Covington & Burling LLPNational Law Review, Volume VI, Number 19


About this Author

Zachary Parks, Election, Political Law Attorney, Covington Burling, Law firm
Special Counsel

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

At the federal level, Mr. Parks' 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.