The SEC on Thursday unveiled a proposal that would let investment advisers keep serving public pension clients even if they have recently given money to state or local officeholders. If adopted, it would unwind a 2010 safeguard that followed scandals where campaign contributions were linked to winning pension management work. The existing restriction sidelines firms from state and local fund business for two years when specified employees contribute between $150 and $350 to public officials per election. It does not apply to donations in federal contests.
SEC Chairman Paul Atkins said carrying out the 2010 policy has been tough in practice and can trigger outsized penalties for small checks. "Advisers' implementation of the rule has effectively resulted in the suppression of political speech," he said, adding, "Ultimately, matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations - not by the SEC." The commission also emphasized that other protections remain in force, including anti-fraud provisions and fiduciary obligations, and argued those are sufficient to police pay-to-play behavior. Atkins has previously faulted the rule for penalizing advisers who did not know they were running afoul of it, and in 2022 Commissioner Hester Peirce called the measure "an exceedingly blunt instrument."
Criticism is already lining up from Democrats and watchdog groups. Benjamin Schiffrin of Better Markets said, "Chair Atkins says the SEC is proposing to rescind the rule because it 'has effectively resulted in the suppression of political speech,"' adding, "Not so. It has resulted in the suppression of corruption." Senator Elizabeth Warren, a Massachusetts Democrat, called the plan "another example of how Donald Trump and his administration are rigging our markets to work for the wealthy and well-connected while working people pay the price." Industry voices are welcoming the shift. The Investment Company Institute, which represents the fund industry, backed the move as a win for free speech. Tom Quaadman, who leads the group's government relations team, said, "The wide array of robust federal, state, and local safeguards in place ensures public integrity and make the current rule obsolete."
The SEC also noted it had brought several pay-to-play cases even before the 2010 framework existed. More recently, in 2016, State Street Bank and Trust Co. paid $12 million to settle SEC allegations that contributions helped it secure business from Ohio public pensions. Four years before that, Goldman Sachs Group Inc. paid $12 million in a case linked to purported donations connected to a Massachusetts gubernatorial candidate.
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Nothing changes overnight. The SEC will solicit public comments and fold that input into a final version, which would still need to pass a commission vote before it takes effect. The agency says these proceedings usually take 18 to 24 months. If you own funds that manage public pension mandates, this is a rules-of-the-road shift worth watching because it affects how those advisers interact with state and local plans.
