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CALIFORNIA CORPORATE & SECURITIES LAW

Pay-To-Play Meets The California Labor Code

In 2010, the Securities and Exchange Commission adopted a rule (17 CFR § 206-4(5)) prohibiting an investment adviser from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates.  The rule applies to any investment adviser registered (or required to be registered) with the SEC, or unregistered in reliance on the exemption available under section 203(b)(3) of the Advisers Act (15 U.S.C. 80b-3(b)(3)).

In a post earlier this week, Doug Cornelius discusses some of the intricacies of Rule 206-4(5) and concludes with the following:

CCOs [Chief Compliance Officers] across the country are telling their employees they can contribute fully to the Clinton-Kaine ticket but are limited in donating to the Trump-Pence ticket.

That may be what CCOs are saying, but is it legal in California?  It seems to me that at least two provisions of the California Labor Code could be implicated:

Section 1101.
No employer shall make, adopt, or enforce any rule, regulation, or policy:
(a) Forbidding or preventing employees from engaging or participating in politics or from becoming candidates for public office.
(b) Controlling or directing, or tending to control or direct the political activities or affiliations of employees.

Section 1102.
No employer shall coerce or influence or attempt to coerce or influence his employees through or by means of threat of discharge or loss of employment to adopt or follow or refrain from adopting or following any particular course or line of political action or political activity.

Last year, U.S. District Court Judge Lawrence J. O’Neill considered both of these statutes in Couch v. Morgan Stanley & Co., 2015 U.S. Dist. LEXIS 104021 (E.D. Cal. Aug. 6, 2015), aff’d 2016 U.S. App. LEXIS 13341 (9th Cir. Cal. July 21, 2016).  That case involved the termination of a financial adviser after his election to public office.  Judge O’Neill found no violation because the termination was for legitimate, apolitical reasons, namely the elected position was full time and created potential conflicts of interest.  Before considering the question asked and answered, it is important to remember that a California court might see the issue differently.

Motivation Matters

The purpose of these statutes is to prevent employers from misusing their power to interfere with the political activities of their employees.  Gay Law Students Ass’n v. Pacific Tel. & Tel. Co., 24 Cal. 3d 458 (1979).  Judge O’Neill believes that neither statute was intended to prohibit employer any and all employer actions that infringe on employees’ political activities.  Thus, a fundamental question is what motivated the employer’s action?  In this regard, I’m reminded of Justice Oliver Wendell Holmes, Jr.’s observation in The Common Law: “even a dog distinguishes between being stumbled over and being kicked”.

 

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