The SEC’s Restrictions on Campaign Contributions are Under Attack
A couple of months ago the SEC concluded its first enforcement action against a money manager for violating its “pay-to-play” rule. The rule forces money managers to choose between forfeiting business with public pension plans or making campaign contributions to any politician in a position to influence those hiring decisions. In a blog post (“The First Pay-to-Play Case: A Rule that Casts a Wide Net [June 24, 2014]”), I wrote that the SEC appeared to be taking an expansive approach to the rule.
Ever since the SEC enacted the rule in 2011, I’ve been waiting for a legal challenge. The SEC rule doesn’t prohibit all campaign contributions to candidates. “Covered” employees (read as senior executive or portfolio manager) can still make small contributions. However, the firm is not allowed to provide advisory services for two years if a covered employee makes any more than the de minimis contribution. If a covered employee violates the rule, the firm forfeits two years of management fees.
The Republican parties in New York and Tennessee have filed suit against the SEC claiming that the rule forces money managers to make a “an impermissible choice” between “exercising a First Amendment right and retaining the ability to engage in professional activities.” The suit asserts that the SEC’s core rationale is flawed because campaign contributions by money managers are not quid pro quos. Moreover, the plaintiffs contend that there are plenty of federal and state laws that prohibit vendors or contractors from bribing officials or buying influence.
While I’d like to see strict limits on campaign contributions and have huge reservations about Citizens United v. Federal Elections Commission, I’ve never been a fan of the SEC’s rule. In my view, the rule provides more benefits to money managers than it does to the integrity of the investment process. As a result of the SEC’s restrictions, money managers have an excellent excuse when governors or treasurers attempt to solicit contributions. They no longer have to take out their checkbook. Of course, that doesn’t mean that political influence isn’t imbedded in many public pension plans.
Various critics charge that placement agents are the real culprits. Indeed, there have been numerous cases where politically influential people have created or joined placement agents in order to create a convenient conduit to receive payments in exchange for an investment mandate. In a recent article in the Atlantic, David Frum cites a series of examples in California, Texas, and New Mexico for this proposition. So yes, a few placement agents have exercised undue influence. However, the vast majority of placement agents only wish they had the kind of influence that wins mandates instead of just opening doors.
By Mr. Frum’s logic, lawyers and investment consultants ought to be cast in the same category and subjected to all sorts of disclosures and restrictions. In my experience as a money manager and as CIO for the North Carolina Retirement System, I had to parry many more attempts at peddling influence from law firms and consultants than placement agents. However, I certainly did not conclude from those experiences that all lawyers, consultants, or placement agents are suspect. Unfortunately many critics have little or no experience in either seeking or evaluating a potential investment mandate. Thus they’ve jumped to broad conclusions based on a handful of anecdotes.
Moreover, by pointing fingers at placement agents the critics have missed the biggest source of undue influence. Money managers are deeply entwined in party politics at the national and state levels. They don’t need to contribute directly to a governor’s or treasurer’s campaign to wield influence. By contributing to political parties, PACs, or national races, money mangers can get the meetings and the edge they need in the investment process. Moreover, many money managers can be far more helpful to pension officials by helping to push through legislation or making referrals to bankers or other money managers.
Pension plans dole out hundreds of millions of dollars in fees. Inevitably those fees are going to attract political influence. Clearly a healthy dose of transparency is warranted. However, the SEC’s restrictions on campaign contributions and the broad attacks on placement agents aren’t changing a thing.