Tag: Political contributions

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.

Sources:

Another Pay-to-Play Case

There are few among us who think the high cost of getting elected and fundraising that it requires is good for American politics. The SEC took a moral high ground and passed Rule 206(4)-5. That rule effectively prohibits investment managers from making political contributions to politicians who control pension money, other than small token amounts. The SEC brought another pay-to-play case last week for egregious behavior. State Street was charged with funneling campaign contributions to a state treasury official.

Politician: Holding Out a Stack of Money

When I first saw this case I thought it would be a Rule 206(4)-5 case since State Street is a big money manager. In this circumstance, the relationship was a custodial relationship and outside the Advisers Act.

The deputy treasurer of a state pension fund arranged for illicit political contributions and improper payoffs through a fundraiser/lobbyist for State Street.

According to the SEC’s complaint against the fundraiser/lobbyist, Robert Crowe, he met the state official’s demand for campaign contributions by illegally filtering cash through his personal bank account and reimbursing individuals for contributions made in their own names. Crowe made additional illicit campaign contributions in response to the official’s threats that State Street would lose the business.

The State Street employee who headed it’s public funds group was also charged for participating in the pay-to-play scheme. According to the complaint against Vincent DeBaggis, he arranged for payments through a strawman as lobbying services, knowing that a large portion of that fee would be going to the state official. The lobbying agreement called for a success fee if the state pension funds became clients of State Street. DeBaggis’ conduct was in violation of State Street’s Standard of Conduct.

“Pension fund contracts cannot be obtained on the basis of illicit political contributions and improper payoffs,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “DeBaggis corruptly influenced the steering of pension fund custody contracts to State Street through bribes and campaign donations.”

The state official, Amer Ahmad, has already been convicted of misconduct and is currently in federal prison.

This case was more egregious than the first case the SEC brought against a Philadelphia firm for making a $2000 contribution, with no showing that it was designed to buy influence.

Sources

Pay to Play Rule In Effect on July 31

The Securities and Exchange Commission announced the compliance date for the ban on third-party solicitation pursuant to the Pay-to-Play rule: July 31, 2015. Rule 206(4)-5 prohibits an investment adviser from providing compensated services to a government entity, following a political contribution to certain officials of that entity.

pay to play.

Rule 206(4)-5 became effective on September 13, 2010 and the compliance date for the third-party solicitor ban was set to September 13, 2011.

The third-party solicitation ban, prohibits an investment adviser from paying a third-party to solicit advisory business from any government entity, on behalf of the adviser, unless the third party is a regulated entity:

  • Registered Investment Adviser;
  • Registered Broker-Dealer; or
  • Certain Registered Municipal Advisers.

When the Commission added municipal advisors to the definition of regulated person, the Commission also extended the third-party solicitor ban’s compliance date to June 13, 2012. However, at the time the final municipal advisor registration rule was not in effect. So, the SEC extended the third-party solicitor ban’s compliance date from June 13, 2012 to nine months after the compliance date of the final rule. That date is now set at July 31, 2015.

Sources:

Some Relief for a Fund Manager Under the Political Contributions Rule

Politician: Holding Out a Stack of Money

SEC Rule 206(4)-5 for investment advisers and fund managers limits the ability of a firm’s employees to make political contributions. It’s a nasty rule. Violation of the rule does not require any bad intent. The breadth of affected political candidates is long, diverse, and hard to discover.

Anthony Yoseloff worked at Davidson Kempner Capital Management which ran a private investment fund. Three of the investors in the fund were Ohio public pension plans. Under the SEC Rule, Yoseloff would be limited in making political contributions to politicians who could directly or indirectly influence the decision to invest in the private investment fund.

Yoseloff gave a $2500 donation to the federal senate campaign of Joshua Mandel. Yoseloff though federal elections were exempt from the political contributions limit. He was wrong. Mandel was the Ohio Treasurer and had the power to appoint trustees to the Ohio pension plans. Yoseloff had violated the rule and the firm was at risk of losing two years worth of management fees from Ohio pension plans.

The firm applied for exemption from the SEC, hoping the innocent mistake would not cost them thousands of dollars. (tens of thousands? hundreds of thousands?)

The rule does provide for exemptive relief. This case may be the first such relief.

Here’s what the SEC said mattered in the ruling granting the relief:

  • The Ohio pension plans established the investment relationship on a arms’ length basis prior to the date of the contribution
  • Only one investment was made after the contribution
  • The firm had pay-to-play policies and procedures compliant with the rule’s requirements and implemented compliance testing
  • After discovering the contribution, the firm requested it’s return from the candidate
  • The firm set up an escrow account to hold the fees.
  • The contribution was consistent with Mr. Yoseloff’s past contributions.
  • Mr. Yoseloff mistakenly thought the contribution policy was not applicable to federal candidates.

Thankfully, the SEC is showing some relief from this oppressive rule that distorts political campaigns. Mr. Yoseloff could have given the $2500 to Sherrod Brown, the other candidate in the election, and there would have been no problem. In the 2012 republican presidential primaries, of the 10 candidates only Rick Perry was limited by the SEC rule.

On the other hand, there was a long history of pay-to-play in the municipal finance industry that was snuffed out by the MSRB rules. (This SEC rule was based on those.) We have several instances of politicians and investment advisers/fund managers doing bad things to steer investments. I understand the need.

Clearly the firm is trying to run tests on political contributions. It found the contribution because the federal database allows you to search by “employer name.” The Ohio state database does not. If the contribution was made to the treasurer’s state campaign, the firm may never have discovered it. Most of the state election finance databases that I’ve reviewed do not allow you to search by employer. This effectively limits the ability to monitor contributions. Yet another problem with the rule.

References:

Controls on Political Contributions

In the face of some pay-to-play scandals involving investment advisers and government sponsored investment fund officials, the Securities and Exchange Commission slapped restrictions on the ability of investment advisers and fund managers to make political contributions. Rule 206(4)-5 prohibits an investment manager or fund manager from collecting fees for two years if the firm or “covered associates” make a political contribution to certain elected officials. The ban applies to politicians who can directly or indirectly influence the decision to hire or can directly or indirectly appoint the person who can make the decision.

In talking with other compliance officers, firms are all over the place on how they are putting restrictions and controls in place to prevent the disastrous results that come from violating the rule.

  1. Complete ban on political candidates
  2. Pre-clear all political contributions
  3. Pre-clear any contributions in excess of the de minimis amount of $350/$150
  4. Here’s the rule don’t break it

Regardless of the restrictions, the SEC Rule also imposes a record-keeping obligation on the compliance program. “Covered associates” must report all political contributions.

You can do a periodic certification of the contributions they have made. Since political contribution are in the public records, theoretically you can check the records to make sure that they are not failing to report.

I decided to try some public record searches to see if this was a realistic control.

I assumed the federal databases would be the best so I went to the Federal Election Commission’s Advanced Transaction Query By Individual Contributor. It allows you to search by company name. That makes it easy to run a broad search to find who in the organization has made campaign contributions.

That was a good start, but the least relevant. For the most part, federal elected officials do not control government-sponsored retirement funds. The big exception is if the candidate is currently a state or local official looking to go to Washington.

I turned next to Massachusetts Office of Campaign and Political Finance. Their OCPF Searchable Campaign Finance Database & Electronic Filing System makes it easy to search by employer.

Then I tried California, New York, and Virginia. They were both terrible and I could not find a way to search by employer.

Washington State’s Public Disclosure Commission allows you to search by employer.

The SEC rule just went into effect in March, so I get the sense that compliance programs are evolving as they work with the restrictions and controls. I’m interested to hear you are doing, whether you are searching campaign databases, and the resources you are using. Feel free to leave a comment (anonymous if you like) or send a confidential email to [email protected].