Pension funds and Wall Street clash over whether SEC pay-to-play rule should survive

Pension fund leaders are cautioning the Securities and Exchange Commission against rescinding its investment adviser pay-to-play rule, warning that removal would invite corruption scandals and governance problems. According to Pensions & Investments, the financial services industry contends the rule is flawed and has produced a series of unintended consequences. The SEC's 2010 rule bars an adviser from working with a government entity for two years after the adviser or a covered associate makes a political contribution above a set threshold, currently $350 where the contributor can vote for the candidate and $150 where they cannot. The commission proposed scrapping the rule on Sept. 3. The 60-day comment period ended Nov. 9, and SEC staff are reviewing submissions, with a final rule possible next year. Scrapping it would shift responsibility to advisers to design their own policies under existing state, local and federal fraud and bribery laws.

Public pension leaders have been among the most vocal opponents. Allyson Tucker, CEO of the Washington State Investment Board, which oversees $244 billion in state assets including the $196.2 billion commingled trust fund, said in a Nov. 6 comment letter that rescission "could lead to a steady erosion of existing ethical standards and conduct." She warned that without a common federal standard, governmental clients would have to evaluate individual adviser compliance programs and renegotiate numerous contracts. New York City Comptroller Mark Levine, whose office oversees the New York City Retirement Systems with $324.5 billion in combined assets, made a similar argument in a Nov. 9 letter, warning of increased monitoring complexity and a higher likelihood of violations. Marcie Frost, CEO of the $653.8 billion California Public Employees' Retirement System, urged withdrawal of the proposal in a Nov. 2 letter, arguing it would undermine governance and increase corruption risk.

SEC Chair Paul Atkins has been a prominent advocate for elimination. In September he said the rule is overly prescriptive, has penalized small, impulsive donations in both parties, and punishes firms for employee contributions made before joining. He also said its implementation has effectively suppressed political speech. A coalition of 13 trade groups, including the Investment Adviser Association, the Investment Company Institute, the Managed Funds Association and SIFMA, made similar arguments in a Nov. 9 joint letter, contending that other rules, such as the anti-fraud provisions, fiduciary duty requirements, compliance rule and code of ethics rule, would continue to apply and adequately address misuse of client assets. The groups also said the rule has blocked advisers from hiring or promoting candidates because of past contributions, and warned that this harms public pensions by limiting access to the best available advisers. Gilbert Garcia, managing partner at Garcia Hamilton & Associates, a $24 billion employee-owned firm, said in a Nov. 9 letter that the rule burdens political speech, citing his own difficulty raising donations when he ran for mayor of Houston in 2023.

Enforcement history adds context to the debate. According to a brief from Simpson Thacher & Bartlett, the SEC has brought more than 20 enforcement actions under the rule since 2014, including a 2022 sweep in which four advisers settled charges for continuing to collect advisory fees from government entities after covered associates made contributions to officials or candidates.