SEC Public Fund ‘Pay-To-Play’ Rule Upheld

A federal appeals court has upheld the Securities and Exchange Commission’s rule to thwart “pay-to-play” activity in the public pension market, defeating a challenge by the New York and Tennessee Republic Parties.

The DC Court of Appeal ruled Tuesday the SEC has the authority to pass a pay-to-play rule regulating brokers who solicit government business after donating to political campaigns.

The 2016 rule requires financial industry members to wait two-years after donating to a particular campaign before they may solicit jobs as investment advisors to manage public funds, such as pension funds and tuition plans.

The appeals court rejected the Republican state committees’ argument that the SEC lacked authority to enact the rule, that the rule was arbitrary and violates the First Amendment.

Pay-to-Play With Public Funds

Local and state government officials responsible for holding and managing public funds, such as pension funds and tuition plans, are also responsible for choosing investment advisors to manage the assets.  By 2010, an increasing number of SEC enforcement actions found that some elected officials chose investment advisors based on whether the would-be advisor had given them money or donated to their campaign.

To prevent this activity from distorting the market for investment advisor services, the SEC adopted a rule in 2010 regulating political contributions of firms and individuals registered as investment advisors.

The rule created a time-out, by barring solicitation of business for two years after a political donation was made. Firms then began to use placement agent to drum up the business and thus skirt the ban on direct contributions.

In 2016, this rule was expanded to cover “placement agents” who help investment firms secure contracts as advisors.

Judge Douglas Ginsberg wrote the rule was “justified based on specific instances of quid pro quo corruption and upon the inherent tendency toward and appearance of corruption arising from the targeted contributions of placement agents.”

Case: NY Republican State Committee v. SEC, No. 18-1111

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