What went wrong? Pay-to-play laws can have serious consequences

We often get questions about boilerplate provisions from clients who wonder whether they need to worry about the long litany of statutes, rules and administrative directives they must agree to when accepting a government grant or contract. The answer, almost always, is “yes.”

One such provision involves both federal and state “pay-to-play” laws that impose sanctions on contractors that make certain political contributions. Under state law, the sanctions include ineligibility for future contracts. Various pay-to-play provisions in federal law can contain serious financial penalties in addition to ineligibility for future business.

The U.S. Securities and Exchange Commission recently announced its first case brought under the new pay-to-play rules applicable to investment advisers. A private equity firm in Pennsylvania was charged with violating the pay-to-play rules because it continued to receive advisory fees from city and state pension funds after a senior employee made relatively modest campaign contributions.

The contributions, which totaled $4,500, were made to the mayor of Philadelphia and to the governor of Pennsylvania, each of whom made appointments to their respective pension boards. The firm was fined almost $300,000, which included forfeited profits and a penalty.

This case highlights the importance of understanding — and making sure that your employees understand — all of the regulations that could affect your company’s bottom line.

Reprinted from the Summer 2014 Compliance Connections Newsletter. Download the complete Summer 2014 issue here.