The Securities and Exchange Commission is wrestling with one of the most complex problems in investment management regulation: How to ensure money management firms do not buy business from public pension funds through political contributions. It sounds simple, but the SEC has to avoid infringing on anyone's freedom of speech and freedom of participating in the electoral process.
The SEC has proposed prohibiting a money management firm from taking investment management fees from a public pension fund for two years after the firm has made a contribution to the election of any official with influence over the fund.
Others have suggested that instead the SEC should just mandate full and immediate disclosure of any such contributions.
We say do both. Discourage and disclose. The key issue is: What is best for the pension plan and its fund assets?
What is best is the hiring of the finest available money managers without fear or favor. They should be hired for being most likely to achieve the investment goals set by the pension executives, not because they have contributed to a political campaign.
Also, the selection of these managers must not only be solely based on merit, but also must be seen to be solely based on merit.
That is not the case now. There exists an undercurrent of suspicion in the public fund sector, rightly or wrongly, that no management firm will make it into the selection process if the its executives have not contributed to officials' election campaigns.
The suspicion alone distorts the selection process because firms not willing to pay might choose not to seek selection by funds where pay-to-play is suspected.
Also, the suspicion might lead money managers to contribute to many election campaigns around the country to enhance their chances of gaining business, raising costs and, perhaps, causing fees to be higher for all clients than they otherwise would have been.
Who does this proposal hurt? People trying to raise money for political campaigns. Some argue it hurts minority politicians the most because they have fewer potential sources of campaign financing. But even if this is true, which is by no means clear, it cannot be a concern of the SEC or those seeking the best practices for pension funds.
One also could argue pay-to-play hurts minority firms more than other firms because they generally are newer, smaller, less established and have fewer resources, and so can contribute far less than other firms, if they can afford to contribute at all.
The SEC's proposal might not end the pay-to-play practice. Some firms might be willing to contribute to an election campaign and then work for free for two years if selected, seeing it as an investment in gaining a prestigious assignment. Indeed, some fund executives might find two years of free management an added incentive to hire a contributing money management firm.
That's why we also favor full and immediate disclosure of any political contributions by money managers to elected officials overseeing pension assets.