The 2016 elections pose potentially significant set of compliance challenges for swap dealers subject to CFTC Rule 23.451, the pay-to-play rule established by the U.S

​Commodity Futures Trading Commission ("CFTC").  Presidential aspirants are raising historic sums through a variety of fundraising vehicles and non-profit entities, and many individuals in the financial services sector are regularly being solicited for political contributions.

Rule 23.451 contains three central elements.  First, the Rule prohibits a swap dealer ("SD") from soliciting or entering into a swap or a trading strategy involving a swap with a U.S. state or local government entity for two years if either the SD or certain of its officers and employees (covered associates) make particular political contributions to specific candidates or officeholders associated with the government entity. Second, the Rule limits the ability of an SD and its covered employees to fundraise on behalf of U.S. state or local candidates, officeholders, and political parties. Finally, the Rule places restrictions on whom an SD may pay to solicit a U.S. state or local government entity to enter into a swap. Similar to the federal pay to play rules for municipal securities dealers and investment advisers, Rule 23.451 is a strict liability rule, and therefore, even if a covered employee of an SD makes a contribution out of personal funds for entirely personal reasons (e.g., his or her college roommate is running for office), the contribution could result in the SD being banned from engaging in swap activities with a particular U.S. government entity for two years.

The pay-to-play compliance challenges for SDs are heightened by a number of notable trends and features of the 2016 election cycle. As an initial matter, the 2016 presidential elections will potentially involve more "covered officials" – essentially, candidates covered by Rule 23.451 – than ever before. A presidential candidate only can be a covered official if he or she is a state or local officeholder at the time of the presidential campaign, and this year the ranks of "covered officials" running for President include New Jersey Governor Chris Christie, Ohio Governor John Kasich, and Louisiana Governor Bobby Jindal.

In addition, the 2016 election cycle has been marked by a proliferation of new campaign-related vehicles and giving patterns.  As a result of recent Supreme Court decisions and other factors, potential donors are being asked to give to Super PACs, joint fundraising committees, special political party funds and accounts, and 527 or 501(c)(4) organizations.  Many of these organizations, in turn, contribute to or have relationships with "covered officials." The application of Rule 23.451 to these vehicles can be complex, and donors may not fully realize the consequences of donating to such entities or how to mitigate associated pay-to-play examination and enforcement risks.

Charles Borden, the head of Allen & Overy’s Political Law Practice, and Lee Michel, the Chief Counsel for Global Political Law at JPMorgan Chase & Co., recently co-wrote a chapter on the impact of the rule for the 2015 Edition of OTC Derivatives Regulation Under Dodd-Frank: A Guide to Registration, Reporting, Business Conduct, and Clearing.  The chapter details the issues that are likely to affect how individual SDs develop and implement their Rule 23.451 compliance programs.

For additional information, please review Chapter 5 (link below) in OTC Derivatives Regulation Under Dodd-Frank: A Guide to Registration, Reporting, Business Conduct, and Clearing. You can also find information on the related Securities and Exchange Commission pay-to-play rule for investment advisers (Rule 206(4)-5) in our recent article in The Investment Lawyer.

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