More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
The Securities and Exchange Commission (SEC) announced Thursday that it charged Goldman, Sachs & Co. and one of its former investment bankers with “pay-to-play” violations involving undisclosed campaign contributions to then-Massachusetts state treasurer Timothy P. Cahill while he was a candidate for governor.
In what the SEC says is the biggest fine it has levied for Municipal Securities Rulemaking Board (MSRB) pay-to-play violations, Goldman Sachs agreed to settle the charges by paying $12 million—$7,558,942 in disgorgement, $670,033 in prejudgment interest and a $3.75 million penalty.
The SEC coordinated this enforcement action with a related action filed by the Massachusetts Attorney General against Goldman Sachs.
Pay-to-play schemes involve campaign contributions or other payments made in an attempt to influence the awarding of lucrative public contracts for securities underwriting business. This marks the first SEC enforcement action for pay-to-play violations involving “in-kind” non-cash contributions to a political campaign.
The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert in late August noting that SEC examiners have observed practices that raise concerns about firms’ compliance with their obligations under MSRB Rule G-37, which clamped down on so-called “pay-to-play” practices.
The SEC says that the case against Neil M.M. Morrison, the vice president in the Goldman’s Boston office who solicited underwriting business from the Massachusetts treasurer’s office beginning in July 2008, continues. Morrison, according to the SEC, also was “substantially engaged” in working on Cahill’s political campaigns from November 2008 to October 2010, and at times conducted campaign activities from the Goldman Sachs office during work hours and using the firm’s phones and e-mail.
“Morrison’s use of Goldman Sachs work time and resources for campaign activities constituted valuable in-kind campaign contributions to Cahill that were attributable to Goldman Sachs and disqualified the firm from engaging in municipal underwriting business with certain Massachusetts municipal issuers for two years after the contributions.”
But Goldman Sachs subsequently participated in 30 prohibited underwritings with Massachusetts issuers and earned more than $7.5 million in underwriting fees, the SEC says.
Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement announcing the fine that “the pay-to-play rules are clear: municipal finance professionals that use their firm’s resources to campaign on behalf of political candidates compromise themselves and the firms that employ them.”
According to the SEC’s orders against Morrison and Goldman Sachs, among the campaign activities that Morrison engaged in for Cahill were fundraising, drafting speeches, communicating with reporters, approving personnel decisions, and interviewing at least one possible running mate. “Morrison at times referenced his campaign work while soliciting underwriting business in an apparent attempt to curry favor during the selection process,” the SEC says.
According to the SEC’s orders, in addition to his direct campaign work for Cahill, Morrison made an indirect cash contribution to Cahill by giving cash to a friend who then wrote a check to the Cahill campaign. Morrison’s campaign work and his indirect financial contribution “created a conflict of interest that was not disclosed by Goldman Sachs in the relevant municipal securities offerings in violation of pay-to-play rules,” the SEC says.
The SEC goes on to say that “Morrison himself acknowledged the existence of this conflict in an e-mail to a campaign official, saying, ‘I am staying in banking and don’t want a story that says that I am helping Cahill, who is giving me banking business. If that came out, I’m sure I wouldn’t get any more business.’”