A federal limit on political contributions by money managers doing business with public pension funds is working so well that some political groups are continuing to challenge it in court.
After being rebuffed Oct. 1 in U.S. District Court on procedural grounds, Republican state committees in New York and Tennessee asked a federal appeals court in Washington Oct. 6 to expedite the case and to overturn the Securities and Exchange Commission's pay-to-play rule, arguing it is both unconstitutional and that it gives an unfair advantage to federal candidates, who do not have the same constraints.
For money managers, the rule also is providing an easy way to rebuff requests for political contributions.
“There was a lot of pressure for them to say yes,” said Lawrence Manson Jr., chairman and CEO of NexTier Capital Solutions LLC, Chicago, a consultant to institutional investors and money managers on reducing business risk. “Being able to say no is a comfortable place to be. I think they all are worried that they're going to trip, and ... would like to have their lives easier.”
There is plenty to trip over.
SEC Rule 206(4)-5 joins other pay-to-play bans enacted by the Commodity Futures Trading Commission to deal with derivatives and by the Municipal Securities Rulemaking Board to control corruption among brokers/dealers in municipal securities. MSRB officials now are working on a rule for advisers to the issuers of municipal bonds to complement a similar SEC rule that became effective this July. The latest actions are part of a larger effort by Congress and regulators to increase transparency and campaign contribution limits, particularly in municipal finance.
The SEC's pay-to-play rule, which became effective in 2011, prohibits investment advisers from taking compensation for services provided to a government client or through a pooled investment vehicle if anyone from the firm makes political contributions to someone who could influence the awarding of the advisory contract. Managers eligible to vote for a candidate may contribute up to $350 per election while others may give up to $150. Anything above those limits triggers a two-year ban on getting paid for the services, but the investment firm is also prohibited from severing the relationship.
The rule also prohibits money managers and their covered associates from coordinating or soliciting any person or political action committee to make any payment to a political party, or doing anything to circumvent the rule.