Pay-to-Play and the Federal Government

Pay-to-Play and the Federal Government

Click here to see a chart comparing federal and state pay-to-play laws.
Click here to read about state pay-to-play laws.

Stories of the appearance of business entities buying government contracts through campaign contributions have been commonplace through much of American history. Efforts to regulate pay-to-play began as early as 1940 at the federal level. When Congress first amended the Hatch Act, a provision was included that prohibited persons who enter into a contract with the federal government from making campaign contributions. This provision, known as the “Brown Amendment,” was the Democratic response to the Republican provisions in the same bill to prohibit partisan activity by federal employees (presumably, “New Deal” federal employees). Senator Prentiss Brown proposed applying the same test to banks, stockholders and other business interests. A compromise provision was finally accepted to ban contributions from government contractors.

Although the Hatch Act was poorly enforced, the pay-to-play statute itself was weakened in the Federal Election Campaign Act of 1971, as subsequently amended. The pay-to-play restriction was incorporated into the federal campaign finance law and prohibited federal government contractors from contributing money or anything of value to candidates for public office from the “commencement of negotiations” through termination of the contract. However, the Act permits such contractors to establish PACs for the purpose of making campaign contributions.

In the 1970s and early 1980s, several states followed suit. Most of these states have since repealed their laws or amended them into simple anti-bribery laws or “little Hatch Act” provisions which bar non-elected government employees from soliciting contributions.

Ethics regulations against pay-to-play gained renewed momentum over the last decade with the efforts of Securities and Exchange Commission Chair Arthur Levitt. In 1993, making the end of pay-to-play practices a priority, Levitt originally convinced 17 investment banking firms to voluntarily ban contributions by their employees to state and local officials responsible for issuing securities contracts. The following year, the SEC approved Rule G-37, which prohibits brokers, dealers, municipal securities dealers and their PACs from making campaign contributions to issuer officials for two years prior and through termination of the securities contract. In addition, the rule requires regular disclosure of campaign contributions from these business entities to allow public scrutiny.

William Blount, a securities broker and chair of the Alabama Democratic Party, challenged Rule G-37 on the grounds that the regulation sought to restrict speech based on content by prohibiting contributions to campaigns. The courts did not agree. In Blount v. SEC, a federal appellate court determined:

  1. that pay-to-play practices in the municipal securities market were a persistent problem that warranted regulation;
  2. that disclosure and record-keeping requirements alone “would not likely cause market forces to erode ‘pay-to-play’”;
  3. that the prohibition on contributions from executives and brokers within a securities firm helped prevent an evasion of the contribution limits; and
  4. that the regulation was closely drawn by constraining relations between underwriters and their employees on the one hand, and officials who might influence the award of the contract on the other. The U.S. Supreme Court declined to review the decision.
    [Blount v. SEC, 61 F.3d 938 (D.C. Cir.), cert. denied 517 U.S. 1119 (1996)].

After his success in banning pay-to-play practices for broker dealers, Levitt encouraged the American Bar Association to follow suit, particularly for bond lawyers. The ABA fiercely debated the issue for years, and finally settled upon a watered-down pay-to-play restriction in 2000. Known as Rule 7.6, the ABA Model Code prohibits a lawyer or law firm from accepting a government contract if that lawyer or firm made a campaign contribution “for the purpose of” obtaining such contract – a caveat that makes the rule closer to an antibribery statement than a prohibition on pay-to-play.

February 3, 2004