Who manages a public pension fund should be decided on skill, not political donations. A rule meant to enforce that idea is about to get softer.
The Office of Management and Budget's website noted on Wednesday that the SEC had submitted proposed revisions for review by the White House. The revisions would ease the agency's "pay-to-play" rule.
That rule restricts investment advisers from doing business with public pension systems after they contribute to elected officials at the state or local level. It is unclear whether the plan would adjust the current limits or drop them entirely.
Donations to federal candidates are outside the rule, but it covers state or local candidates running for federal office and federal officeholders seeking state or local posts.
The rule exists because public pension funds got burned before. Some pension board members faced SEC investigations or charges over alleged kickback schemes connected to managing local-government money.
State Street Bank and Trust Co. paid $12 million in 2016 to settle SEC claims that donations helped it land Ohio pension-fund business. Four years earlier, Goldman Sachs Group Inc. paid $12 million in a matter tied to accusations about donations to a Massachusetts candidate for governor.
Highland Capital Partners paid $95,000 in 2022 to resolve SEC charges that an associate contributed $1,000 to a candidate who lost a governor's race.
These cases show the kinds of conflicts that can arise when public retirement money is treated as a political prize. The SEC has long argued that a strict restriction is needed to prevent campaign donations from influencing which managers handle public pension assets.
The pay-to-play rule was designed to stop a specific kind of corruption: investment advisers winning public pension business through campaign contributions rather than merit. The enforcement cases against State Street, Goldman Sachs, and Highland Capital show the pattern the SEC has been trying to stop. Public pension funds manage money for teachers, police officers, firefighters, and other public employees, making them attractive targets for firms willing to play politics with their investments.
SEC Chairman Paul Atkins has faulted the rule because people can break it without knowing. The two-year ban can reach contributions made before someone joined an investment adviser.
The SEC says the current rule is needlessly burdensome and too restrictive for investment advisers. The changes target compliance problems it has identified.
An SEC spokesperson said, "The current 'pay-to-play' rule creates unnecessary compliance burdens and overly restricts investment advisors. The commission is heeding years of complaints from across the political spectrum and will consider a proposal to address these issues and reform the rule."
The SEC currently has three Republican commissioners, and soon will have two once Commissioner Hester Peirce departs for academia. The commission must vote before it can release the proposal to the public.
If the proposal passes that vote, the agency will take public comments, write a final rule, and vote again. That process usually takes 18 to 24 months, so any change likely would not take effect before next year.
The move also comes as the Trump administration has blurred the boundary between business and politics.
Public pension money is your money, even if it never sits in your wallet. States and cities invest those funds for public employees.
Those pensions pay retirees their monthly checks, and Wall Street firms compete hard for the job of managing them. The pay-to-play rule tries to keep that competition focused on fees and performance, not checkbooks.
A softer rule could open more pension business to more advisers. More competition can sometimes bring fees down, but it also raises questions about whether donations played a role in winning public money.
Wednesday's move is just one step in a process that could take 18 to 24 months.
The SEC wants a looser rule, and the process is now officially underway. If you rely on a public pension, this is a story worth following.