Employees of investment advisers must consider whether their employer is managing or seeking to manage public funds in Minnesota before donating to the Harris-Walz campaign this election season. Vice President Harris’ selection of Minnesota Governor Tim Walz as her running mate this week implicates federal pay-to-play rules. Governor Walz’s status as a state officeholder means that individuals associated with companies engaged in certain business activities may be subject to contribution limits significantly lower than the $3,300 that an individual may contribute to a presidential candidate’s general election campaign under federal election laws.
The Rules
Contributing to a political campaign of a state or local officeholder implicates various federal pay-to-play rules, including:
- Securities and Exchange Commission Rule 206(4)-5 (the “SEC Rule”), which covers certain investment advisers who provide investment advisory services to state and local government entities, such as state retirement systems;
- Municipal Securities Rulemaking Board Rule G-37 (the “MSRB Rule”), which covers broker-dealers who underwrite municipal securities (e.g., government bonds) and advise state and local government entities regarding the issuance of securities;
- Commodity Futures Trading Commission Rule 23.451 (the “CFTC Rule”), which covers swap dealers who engage in commodities-based swap transactions with state or local governmental entities; and
- Financial Industry Regulatory Authority Rule 2030 (the “FINRA Rule”), which covers FINRA members who solicit investment advisory services from state or local government entities.
Who Is a Covered Official?
Violations of the rules are triggered when a covered person, such as an employee of an entity providing investment advisory services to a public pension plan (in the case of the SEC Rule), makes a prohibited contribution to a “covered official.” For purposes of the SEC Rule, a “covered official” is a holder of, or a candidate for, an elective office that has the requisite amount of control or influence over the hiring of an investment adviser by a government entity. The MSRB and CFTC Rules contain similar prohibitions regarding contributions to a candidate or officeholder with authority over the award of municipal securities and commodity-based swaps business, respectively. The FINRA rule is also similar to the SEC Rule, which it was modeled after.
Although federal incumbents seeking re-election to federal office, such as Vice President Harris, are not subject to these rules—sitting governors seeking federal office could be. These rules apply equally to a vice-presidential candidate, even if the presidential candidate atop the ticket is not herself a covered official. Governors are often covered officials for purposes of federal pay-to-play rules due to their broad authority over the management of state funds. For instance, Governor Walz is covered by the SEC Rule because he sits on the Minnesota State Board of Investment, which oversees three statewide retirement systems. As governor, he also has the authority to directly appoint members of Minnesota’s retirement systems’ boards. In 2016, financial industry participants were confronted with similar challenges regarding contributions to the Trump-Pence ticket before Mike Pence resigned as governor of Indiana.
Compliance Considerations: What You Need to Know
- Determine now whether your company is doing or seeking covered business with government entities in Minnesota. It is critically important that investment advisers and other financial industry participants consider whether a contribution to the Harris-Walz campaign is prohibited by federal pay-to-play rules. Violations result in a two-year ban on providing covered financial services for compensation to a government client. Moreover, the SEC has recently imposed substantial monetary fines upon individual donors and investment firms whose employees made contributions prohibited by the SEC Rule. Obtaining a refund of an excessive contribution does not absolve a violation, though federal regulators have the discretion to issue a waiver in the event of an excessive contribution. The waiver process can be long, however, and there is no guarantee a waiver will ultimately be granted.
- Covered individuals may contribute up to the de-minimis limits. All four federal pay-to-play regimes permit any covered individual in the United States to contribute up to the applicable de minimis amount: $350 per election to a presidential campaign under the SEC, CFTC and FINRA Rules and $250 to a presidential campaign under the MSRB Rule. For non-presidential campaigns, the applicable de minimis limits vary depending on whether the contributor is entitled to vote for the candidate. Covered associates should be advised that purchases of campaign merchandise (e.g., t-shirts, hats, coffee mugs and yard signs) and tickets to events are campaign contributions that count toward an individual’s contribution limit.
- Hosting fundraisers for a covered official may violate a federal pay-to-play rule. In addition to making contributions, federal pay-to-play rules also cover soliciting contributions. A covered individual who hosts a fundraiser for the Harris campaign or asks friends and family to contribute to the ticket could therefore violate an applicable rule.
- Corporate PACs may be prohibited from contributing to the Harris-Walz ticket. The pay-to-play rules also apply to contributions made by political action committees controlled by a covered entity or its covered associates. Investment advisers and other financial services companies should take note that the de-minimis limits described above apply to natural persons only. Accordingly, investment firms’ corporate PACs may be prohibited from donating to the Harris-Walz campaign if they are doing or seeking covered Minnesota business.
Investment advisers and other financial industry participants contracting for government services should review political contribution compliance procedures to mitigate the risk of violations of SEC Rule 206(4)-5, MSRB Rule G-37, CFTC Rule 23.451, FINRA Rule 2030 or any of the numerous state and local pay-to-play laws. Before donating or soliciting funds to the Harris-Walz campaign, contributors must assess whether their employer is doing or seeking government business in Minnesota that is covered by a rule. Pre-clearance of all political contributions by covered associates is recommended to avoid an inadvertent violation.
