SEC “Pay to Play” Rule Could Inhibit Barbour, Daniels

February 6, 2011

Posted by Erin McPike, Real Clear Politics

If investment advisers have any intention of getting paid to advise public pension plans in either Indiana or Mississippi over the next several years, many of their employees will have to be careful about how much campaign money they give to Republican Govs. Mitch Daniels of Indiana and Haley Barbour of Mississippi.

The Securities and Exchange Commission’s new, so-called “pay to play” restrictions that penalize investment advisers for donating money to certain politicians have election lawyers wondering how much candidate fundraising will suffer in 2012 – particularly when it comes to the potential presidential efforts of Daniels and Barbour. The scope of the rules is broad and extends to the indirect activities of investment advisers. However, some interested parties highlight the fact that investment advisers represent only a small portion of the fundraising pool from which candidates can draw.

Under the new rules, investment advisers will be prohibited from managing a state’s public funds for two years after they or their influential employees make high-dollar campaign contributions to officials in that state who have any power over its funds. It doesn’t matter whether a state official directly oversees a fund or can appoint someone who does; either way, investment advisers interested in obtaining contracts for those funds cannot donate more than $150 to their campaigns in a cycle. The limit goes up to $350 if the investment adviser actually lives in the official’s state.

“The reason this is a big deal is because the penalty is such a disincentive that it creates a chilling effect,” said Charlie Spies, a Republican attorney who has advised former Massachusetts Gov. Mitt Romney, a potential presidential candidate. As a former governor, Romney’s fundraising will not be affected by the SEC’s new rules.

The SEC passed the new rules unanimously in June in response to scandals rooted in New York in which officials accepted kickbacks for awarding government contracts.

The rules, which take effect in March, also apply to announced candidates who are seeking those state offices. And even when state officials are seeking federal office, if they have direct or indirect control over their state’s public funds at the time, they’re still out of luck.

Daniels has a direct role on a board that oversees some public funds in the Hoosier State, and Barbour appointed his chief of staff to sit on a board that oversees the public retirement fund in Mississippi, meaning both potential presidential contenders’ campaign accounts could take a hit from the new rules.

In the presidential race, they appear to be the only two politicians in the still-forming field who could be affected by the rule. President Obama is not affected, and the rest of the GOP field is populated by former officials and a senator, none of whom have to worry about the rules.

It remains to be seen how deeply the rules will shape the money chase in the impending GOP presidential primary. A number of sources say that while the giving trends of investment advisers have tended to favor Democrats, there’s a growing interest in the industry for two potential Republican candidates: Romney, who isn’t affected by the rules, and Daniels, who is.

Of course, the rules affect candidates down the ballot and across the country, so Barbour and Daniels are not alone. Take Indiana, for example. Indiana Treasurer Richard Mourdock plans to challenge Republican Sen. Dick Lugar in a primary, so Mourdock’s role on the same board on which Daniels sits that oversees a state fund impairs the treasurer’s ability to raise money from this part of the financial services industry. If Republican Rep. Mike Pence runs for governor, he’ll face the same complication given the governor’s role on the board and the fact that candidates for affected offices are included.

In neighboring Ohio, Treasurer Josh Mandel has the authority to appoint an investment designee to the Ohio Public Employees Retirement System Board of Trustees. Mandel, a Republican, is a potential opponent for Democratic Sen. Sherrod Brown, and investment advisers would be subject to penalty if they donated substantial contributions to him for the Senate race.

The reason why fundraisers and attorneys are uncertain about how big of an impact the new rules will have is because no one knows yet how many potential donors it may limit.

Under the rules, investment advisers and their employees cannot solicit contributions for candidates from others. Any employee who manages money for an investment adviser cannot attach his or her name to a host committee for a large fundraising event to support an affected candidate.

Spies explained, “It affects the ability of these people to act as bundlers.”

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