Does your company hold contracts or otherwise do business with state or local governments? If so, do you have in place a system for monitoring and approving not only corporate and political action committee (PAC) contributions to state and local candidates but also the personal political contributions of company executives, board members and even their families?

If you think such a system sounds like a logistical headache, an administrative nightmare and potentially in conflict with First Amendment principles, you are not alone in holding such fears.

So-called “pay-to-play” laws have proliferated in recent years and brought with them a tangle of complex questions and issues for corporate counsel. Approximately 20 states have such laws in place, along with numerous local jurisdictions.

The state and local efforts are based, in large part, on rules adopted more than 15 years ago by the Municipal Securities Rulemaking Board which restrict the political contributions of municipal securities dealers. The Securities and Exchange Commission this year adopted a similar regulation that will apply to contributions from investment advisors beginning in 2011.

In general, the new state and local laws are designed to combat both corruption and the appearance of corruption in the awarding of government contracts. Although the details vary considerably, a typical statute will: 1) require a prospective contractor to disclose certain political contributions in the course of seeking a contract; and 2) prohibit the company from receiving a contract if contributions of a certain amount have been made to or solicited for particular candidates and committees during a specified time period.

Federal law has long included a prohibition on political contributions by federal government contractors. What sets these new state and local laws apart is their application not just to corporate contributions but also to PAC and personal contributions by those affiliated with a potential contractor. Furthermore, some have a “lookback” provision for contributions made long before a contract has been posted or sought.

For example, consider a hypothetical company seeking a multi-million dollar contract with the state of New Jersey. The husband of a corporate officer, who resides in Pennsylvania, contributed $350 to a candidate for New Jersey governor. Although his wife, the corporate officer, may have been unaware of his contribution at the time, that contribution could prevent the company from receiving any contract of greater than $17,500 from New Jersey during the four-year term of the governor.

These harsh ramifications underscore the importance of careful planning and close oversight. The laws are not always intuitive, and their application can turn on seemingly insignificant facts. If the couple had lived in New Jersey, for instance, the spouse's contribution would have been permissible under an exception.

In reviewing state and local pay-to-play statutes, certain elements of the laws will be of particular importance:

• What contracts or other activities are covered? Some jurisdictions have applied pay-to-play principles across the board, to all government contracts valued at over a certain amount and to applicants for licenses, permits or other entitlements. Certain statutes have limited the restrictions to sole source or “no-bid” contracts, or they have included exceptions for certain types of contracts. Still other laws have targeted particular categories of government business such as investment services, bond underwriting and redevelopment agreements.
• What candidates or committees are covered? Many of the pay-to-play laws focus on candidates for a position that would be responsible for awarding the state contracts at issue. Others have a broader application and will often prohibit contributions to gubernatorial or mayoral candidates, as well as candidates for lower offices. In some cases, contributions to political party committees are also included.
• Whose political contributions are covered? Under some regimes, only corporate contributions are relevant, while others extend the coverage to PAC expenditures and to expenditures by individuals associated with the company.
• If individuals are covered, how extensive is the list? These laws may cover some or all of the following: directors; officers; partners; those with a specified ownership interest (5 percent or higher); employees with managerial or discretionary responsibilities regarding the contract; and the spouses, parents, in-laws, and children of such individuals.
• Is there a de minimis exception? Some jurisdictions apply the pay-to-play provisions only to political contributions over a certain amount. One state looks not at individual contributions but instead bars contracts to any company if the aggregate contributions from the company's officers and employees exceed $5,000 to the campaign of an elected official with authority over the contract.

All of these laws and rules have forced attorneys familiar with campaign finance laws to reconsider long-held positions on corporate oversight of personal political contributions. For many of us, the very idea of corporate approval of individual contributions is anathema. We have long preached that companies should have nothing to do with personal contributions because they must, by definition, be personal.

Yet pay-to-play laws have forced a change in that approach. And they have prompted in-house counsel to develop policies and implement procedures designed to mitigate the risk. While the temptation may be to bar employees from making political contributions at all, such an approach may strike employees as draconian and is prohibited by some state labor laws.

Instead, a thoughtful pre-approval process is the most appropriate response, along with clear policies and effective training. The trick is crafting the process, policies and training with an eye to the requirements of the relevant jurisdictions, the contracts at issue, the scope of covered personnel and the nature of the company. A tall order? Certainly, but one that is necessary in this era of pay-to-play rules.

[This is the second in a series of articles on the intersection of corporate compliance, lobbying, and political activities.]

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