On Thursday, the Securities and Exchange Commission floated a rule change that would lift a prohibition on advisers serving state and local pension funds if they had made recent political contributions to officials in those jurisdictions. The restriction, created in 2010 after scandals in which fund managers made political donations to secure pension-management contracts, currently sidelines firms for two years when specified employees contribute between $150 and $350 per election to state or local officeholders. Federal races are outside the rule's scope.
SEC Chairman Paul Atkins said applying the restriction has proved difficult and can impose steep consequences for small donations. "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 agency said other investor protections would remain in force, including anti-fraud bars and fiduciary duties. In its proposal, the SEC argues those safeguards already curb pay-to-play behavior, so the political contribution limits are unnecessary. Atkins has previously faulted the rule for penalizing advisers who do not realize they are violating it. And in 2022, SEC Commissioner Hester Peirce labeled the measure "an exceedingly blunt instrument."
The SEC also noted it pursued several pay-to-play cases before the 2010 rule existed.
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Even under today's framework, enforcement has yielded notable penalties. In 2016, State Street Bank and Trust Co. resolved SEC accusations for $12 million amid claims that political contributions were used to secure business with Ohio pension funds. Four years before that, Goldman Sachs Group Inc. agreed to a $12 million payment in a case involving alleged contributions to a Massachusetts gubernatorial candidate.
The proposal is expected to face pushback from Democrats and market watchdogs. Benjamin Schiffrin, who serves as Better Markets' director of securities policy, said, "Chair Atkins says the SEC is proposing to rescind the rule because it 'has effectively resulted in the suppression of political speech,"'. "Not so. It has resulted in the suppression of corruption." Senator Elizabeth Warren, a Massachusetts Democrat, called it "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."
Others are backing the move. The Investment Company Institute, which represents the fund industry, applauded the proposal for safeguarding the free-speech rights of financial services professionals. "The wide array of robust federal, state, and local safeguards in place ensures public integrity and make the current rule obsolete," said Tom Quaadman, who leads the group's government relations, in a statement.
From here, the SEC will solicit public feedback and incorporate it into a final rule, which must be approved by a vote before taking effect. The agency says that process typically lasts 18 to 24 months.
