UK: Pay-To-Play: New York City Lobbying Registration Requirements For Placement Agents And Investment Advisers

Last Updated: 21 April 2011
Article by Edward L. Pittman and Sean R. Murphy

The City of New York's Office of the City Clerk ("City Clerk") has circulated a letter to investment advisers and placement agents advising them that the New York City lobbying law1 (the "Lobbying Law") applies to any attempts to influence the investment decisions of New York City's ("City") five retirement systems and pension funds (the "Pension Funds").2 The letter announced that third-party placement agents, and in some cases advisers and their employees, who are seeking investments from the Pension Funds are required to register with the City as lobbyists and make periodic filings. In addition, they may be subject to limitations on the receipt of contingent compensation.

With the announcement, New York City joins California and other jurisdictions that have laws requiring registration of persons offering investment services to public pension plans.3 The announcement potentially affects advisers and placement agents that currently have investments with, or are seeking investments from, the New York City Police Pension Fund; the New York City Fire Department Pension Fund; the New York City Employees' Retirement System; the New York City Teachers' Retirement System; and the New York City Board of Education Retirement System. Many questions remain, however, about application of the Lobbying Law to advisers and their employees. This update discusses the pronouncement, and some of the unanswered questions.4

Background

The new registration requirement announced by the City follows a high-profile pay-to-play scandal involving the New York State Common Retirement Fund. As a result of the scandal, in April 2009 the Comptroller of the State of New York placed a ban on investments introduced through third-party placement agents. The State's ban on placement agents was quickly followed by a similar ban imposed by the City with respect to investments by its own Pension Funds. An investigation conducted at the time revealed that many of the third-party finders or placement agents who received fees for soliciting pension funds in New York State and the City were not registered as broker-dealers under federal or state securities laws.

In February 2010, the newly elected City Comptroller lifted the City's ban with regard to placement agents that provide "value-added services" to prospective investors, but continued to ban payments to those who provide "finder" services.5 In March 2010, the City Clerk received guidance from the City's Law Department indicating that the term "lobbyist," as defined under the Lobbying Law,6 would encompass third-party placement agents and personnel of advisers that are hired by advisers to private equity firms, hedge funds, and other investment vehicles, if they seek to influence investment decisions by the five Pension Funds.7 Accordingly, they are subject to the provisions of the Lobbying Law.8

Application of the Lobbying Law to Placement Agents and Investment Advisers

The Lobbying Law provides for two classes of persons who must be registered: the "lobbyist" and the "client." Anyone who engages in "lobbying" must register with the Lobbying Bureau of the City Clerk ("NYC Lobbying Bureau"). Persons who engage the lobbyist (who may be internal employees) also must register with City Clerk as a "client." Thus, an investment adviser who retains a placement agent to engage in lobbying, or has internal sales staff that meet the definition of a lobbyist and do not have an exception (discussed below), will qualify as a client and be required to register and comply with the Lobbying Law.

Exception for Certain Officers and Employees of the Adviser

Most provisions of the Lobbying Law were designed either for legislative lobbyists or traditional procurement lobbyists. Moreover, at this time, there has not been any significant guidance on application of the Lobbying Law to either placement agents or the internal staff of the adviser.9 Nevertheless, portions of the Lobbying Law that exempt personnel of a contractor that communicate with non-elected officials are likely to be applicable to many officers and employees of investment advisers.

In order to qualify for the exception from the definition of "lobbyist," the officer or employee of the adviser must have ongoing responsibilities within the adviser, or subadviser, that either are part of the "selection process [or] the administration of a contract," and be "charged with the performance of functions relating to [the investment]."10 As noted above, solicitation efforts must be limited to "city contracting officers or employees" who are part of the selection or administration process. Contacts may not be made with "elected officials or their deputies."11

Some important questions remain about how the exemption should be interpreted with respect to advisers and their employees. Among those questions are whether all officers and employees may rely on the exemption and how the exemption should apply to dual hatted employees of advisers and affiliated placement agents. In addition, there are questions about the involvement of "elected officials or their deputies" in the adviser selection process.12

Ban on Contingent Compensation: Effect on Existing Contracts

As in many jurisdictions, the Lobbying Law prohibits the payment of contingent compensation to persons who are lobbyists.13 This policy presents significant problems in light of current practices in the financial services industry, with respect to the manner in which both third-party placement agents and internal sales staff are compensated. In prior guidance, in 1986, the City Clerk refused to permit continued payment of contingent fees in multi-year contracts.14 However, there is a possibility that trailing payments will be permitted, provided all of the lobbying activity already has occurred. More specific guidance is likely to be provided by the City Clerk.15

Additional Restrictions on Deceptive Statements and Political Activities

As in many jurisdictions, the Lobbying Law prohibits a lobbyist from knowingly deceiving a City official charged with making decisions concerning local laws. In addition, the City's campaign finance regulations restrict the political activities of investment managers who seek to do business with the Pension Funds.16 The campaign finance laws limit the ability of high-level employees of entities that seek to do business with the City from contributing to the campaigns of the City's elected officials.

Compliance with Registration and Filing Requirements under the Lobbying Law

The Lobbying Law imposes very specific filing requirements. The requirements vary depending on whether the filer is a lobbyist or a client. With some limited exceptions, lobbyists are required to file a statement of registration each calendar year and to file six bi-monthly periodic reports disclosing, among other things, their clients, and the nature of their representation, their compensation, and expenses. Those who have not determined prior to the beginning of the year whether or not they will solicit the City's Pension Funds, must do so within a limited window of time, which for many firms will be the 15th day following actual contact with the Pension Funds, unless an exemption is available.17 In addition, the lobbyist must disclose certain activities related to fundraising or political consulting, including whether the lobbyist solicited contributions for an elected official or candidate, or if the lobbyist was retained as a political consultant by a campaign.

Clients of lobbyists also are subject to certain disclosure requirements. Each calendar year, clients must file a Client Annual Report. The report discloses the contact information of any lobbyists retained by the client, compensation paid or owed to the lobbyists, and a description of the matters for which the lobbyists were retained. Penalties for failing to comply with the Lobbying Law may include criminal sanctions (Class A misdemeanor), as well as a monetary fine of up to $30,000.

Conclusion

The abrupt announcement that the lobbying registration requirements of the City apply to placement agents and advisers is fall-out from the recent pay-to-play scandals involving public pension plans. In some cases, as in California, there have been new laws adopted that require lobbyist registration. However, in many jurisdictions throughout the United States the existing lobbying laws already are broad enough to encompass the solicitation of public pension plans. Both the ambiguity of the registration requirements, and the difficulty in complying with the unique laws in each jurisdiction, will present significant challenges to the investment management industry. As local governments consider the application of their laws to the industry, it will be important for advisers to stay abreast of current developments.

Footnotes

1 New York City Administrative Code §§3-211 – 3-223.

2 Letter from the City Clerk dated December 28, 2010, available at http://www.cityclerk.nyc.gov/ downloads/pdf/cc-lobbyinglawletter.pdf.

3 See e.g., CAL. CODE REGS. tit. 9, §9100 (requiring placement agents and others who solicit a state public pension plan in the State of California on behalf of investment advisers to register as lobbyists). See also 30 ILL. COMP. STAT. 500/50-11 (requiring procurement lobbyists in Illinois to register as lobbyists and comply with an annual and semi-annual disclosure regime). For further information regarding the California lobbyist registration laws, see Pay-to-Play: New Restrictions for Placement Agents Soliciting Public Pension Funds in California, available at http://www.dechert.com/library/FS_28-11-10- Pay-to-Play-New_Restrictions.pdf.

4 An extension notice has been published on the City Clerk's website, available at http://www.cityclerk.nyc.gov/downloads/pdf/ex tensionnotice01.pdf.

5 Press Release, New York City Comptroller, Comptroller Liu Announces Major Reforms to Pension Fund Investments (Feb 18, 2010) available at http://www.comptroller.nyc.gov/press/2010_releases/pr 10-02-023.shtm. The New York State ban remains in place.

6 New York City Administrative Code §3-211(c) (1) states that:

The term "lobbying" or "lobbying activities" shall mean any attempt to influence...(iii) any determination made by an elected city official or an officer or employee of the city with respect to the procurement of goods, services or construction, including the preparation of contract specifications, or the solicitation, award or administration of a contract, or with respect to the solicitation, award or administration of a grant, loan, or agreement involving the disbursement of public monies.

7 Guidance from the City of New York Law Department to the Clerk of the City of New York, March 10, 2010, available at http://www.cityclerk.nyc.gov/downloads/pdf/ placmentagents.pdf (hereinafter, "Law Department Letter").

8 New York City Administrative Code §3-211(c)(1)(viii).

9 Very limited guidance is provided in the form of advisory opinions that are available on the City Clerk's website.

10 New York City Administrative Code §3-211(c)(1) provides, in relevant part:

The following persons and organizations shall be deemed not to be engaged in "lobbying activities":

(vi) (A) contractors or prospective contractors who communicate with or appear before city contracting officers or employees in the regular course of procurement planning, contract development, the contractor selection process, the administration of a contract, or the audit of a contract, when such communications or appearances are made by such contractors or prospective contractors personally, or through: (1) such officers and employees of the contractors or prospective contractor who are charged with the performance of functions relating to contracts; (2) subcontractors or prospective subcontractors who are or will be engaged in the delivery of goods, services or construction pursuant to the contract of such officers and employees of the subcontractor or prospective subcontractor who are charged with the performance of functions relating to contracts; or (3) persons who provide technical or professional services, as defined inclause (B) of this subparagraph, on behalf of such contractor, prospective contractor, subcontractor or prospective subcontractor.

(vi) (B) For the purposes of clause (A) of this subparagraph: 1. "technical services" shall be limited to advice and analysis directly applying any engineering, scientific, or other similar technical discipline...

11 New York City Administrative Code §3-211(c)(3) states that:

"city contracting officers or employees" shall not include elected officials or deputies of elected officials or any person not duly authorized to enter into and administer contracts and make determinations with respect thereto.

12 The Comptroller of New York City is delegated authority by the boards of the Pension Funds to invest their assets. This function is carried out by the professional staff of Bureau of Asset Management. See Law Department Letter. Nevertheless, the Comptroller, or representatives selected by the Comptroller, and elected officials who serve on the boards of the Pension Funds, may attend certain presentations made by advisers.

13 New York City Administrative Code §3-218 states that:

No client shall retain or employ any lobbyist for compensation, the rate or amount of which compensation in whole or part is contingent or dependent upon legislative, executive or administrative action where efforts by a lobbyist to influence such action are subject to the jurisdiction of the city clerk, and no person shall accept such a retainer or employment.

14 At the time provisions of the New York City Administrative Code addressing lobbying activities first became effective in 1986, the City Clerk issued an Advisory Opinion, 1987-16, refusing to permit preexisting fee arrangements to continue. However, the opinion did not address specifically situations in which all of the lobbying activity had occurred, and only the payment obligation remained. In contrast to the abrupt notice provided to placement agents, in examining potential U.S. Constitutional issues under the "Contract Clause" (Art.1, Sec. 10 of the U.S. Constitution), the City Clerk noted the lengthy period that lobbyists had prior to the effective date of the law to adjust their payment arrangements.

15 Based on discussions with representatives of the NYC Lobbying Bureau, it is unclear at this time whether the same limits on contingent compensation will apply to internal employees who must register as lobbyists.

16 New York City Administrative Code § 3-703(2)(a) as amended by Local Law No. 34 of 2007.

17 New York City Administrative Code §3-213(a)(2). A lobbyist must register after such time as it may "reasonably anticipate combined reportable compensation and expenses in excess of such amount, [and] such filing must be completed within fifteen days thereafter, but in no event later than ten days after the actual incurring or receiving of such reportable compensation and expenses."

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