Yard Signs and Pay to Play

I was fortunate to be able to attend the Securities and Exchange Commission’s CCO Outreach in Boston yesterday. I’ll post more later, but today I wanted focus on one topic that one panel discussed: the pay to play rule.

The CCO Outreach stated that they were not trying to play “gotcha” as part of the exam process. Personally, I find the pay to play rule to be one of the biggest “gotchas” in the Investment Adviser Act’s regulatory environment.

It was clear that the panelists were very focused on political contributions as part of the exam process. They slowly turned the screws.

They wanted firms to have policies and procedures around campaign contributions. Of course.

They wanted compliance to be verifying contribution disclosures against the records of campaign contributions. This is easier said than done. They noted the ease of using OpenSecrets.org. They were going off tracks. OpenSecrets has very little state information and is focused largely on federal money on federal campaigns. It is not federal candidates that are subject to the rule. The only time a federal candidate is implicated by the pay to play rule is when a state elected official is running for a federal office. Those instances are a gotcha cases. It’s the state and local campaigns that are directly in the cross-hairs of pay-to-play rule. State and local camapign contribution records vary widely from state to state.

Then a panelist said you need apply the prohibition across the whole firm. That’s a broader statement than required by the rule. The rule applies the limitation to “Covered Associates”, not all employees of an investment adviser. Perhaps the panelist misspoke. Or maybe it was a further indication that the panel had gone off the tracks.

Then, the big bang. Several of us in the audience were shocked when a panelist said yard signs were covered by the pay-to-play rule. The panelist stuck to this after some push back. Perhaps the panelist misspoke and was trying to indicate that fundraising for a Official is subject to the pay-to-play rule. Or maybe it was a further indication that the panel had gone off the tracks.

We met with the some senior SEC officials after the panel, who stated very clearly that the rule does NOT interfere with the Constitutional right to plant a political sign in your yard. [So the panelist misspoke? But now there is the specter of an examiner looking at yard signs. Are signs over a certain size covered?]

I understand the corrupting influence of money in politics. I recognize that several political officials have been convicted or accused of demanding political contributions in exchange for an assignment to invest government money.

[Begin the airing of grievances.]

But the SEC’s pay-to-play rule does little to stop that and is overreaching.

Bribing political officials is already illegal. The pay-to-play rule removes the need to prove the illicit intent and makes it a violation merely for making a contribution.

The contribution limits are absurdly low. Candidates raise tens of millions of dollars to run for governor. A contribution of $150 or $350 is meaningless. The SEC should raise the limit.

I still question the pay-to-play rule’s ability to protect investors. The decision to make the investment may be tainted, but the investment itself is not necessarily harmful to the financial returns for the pension plan. The plan is not getting the best investment choice because of an illicit bribe. What politician is going risk violating the bribery law for taking a $1000 campaign contribution to influence government pension money?

The pay-to-play rule is written overly broad and implicates failed candidates and PACs that may or may not have anything to do with state pension money. An investment adviser was trapped by the pay-to-play rule for an employee giving a $500 donation for a failed candidate for governor. That’s even though the state pension plan had already made the commitment to the private fund.

My impression from the panel is that the examiners are using the rule as a “gotcha” to trap investment advisers in foot faults that do nothing to harm or put the investing public at risk.

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