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The Perils of Donating to Perry

The SEC’s curious role in campaign finance.

Oct 17, 2011, Vol. 17, No. 05 • By MARK HEMINGWAY
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Last week, the Rick Perry campaign announced with great fanfare that the Texas governor had raised $17 million for his presidential campaign in the July-September quarter. That’s more than any other GOP hopeful, and since Perry was a recent entrant to the presidential race, he raised that sum in just 49 days.

Photo of a Rick Perry campaign event

Financiers need not apply: a Rick Perry fundraiser in Bakersfield, California.


But here’s why Perry’s fundraising achievement is really impressive: In March, the SEC enacted “pay-to-play” rule 206(4)-5. The regulation prohibits investment advisers who contribute more than $350 to state or local officials who can influence their state’s investment decisions from receiving payment from that state government for two years.

According to the Los Angeles Times, in 2008 securities firms alone gave Republican presidential candidates $20 million. Thanks to the new rule, that fundraising reservoir may remain largely untapped by the Perry campaign, for fear that donating to the Texas governor would prevent financial professionals from doing business with the second-largest state in the country.

Perry’s campaign admits this has made fundraising more difficult. “As the only sitting governor in the race for the White House, Perry is much more negatively impacted by the SEC rules than anyone else in the race,” says campaign communications director Ray Sullivan. “It has and will continue to hamper our efforts to raise money, especially from the financial sector. It has made things quite challenging in New York, for example.”

And while this new ruling primarily affects Perry at the presidential level, it could have far-reaching consequences going forward, since it applies to every state office holder seeking federal office from here on out.

The new SEC regulation comes on top of an existing Municipal Securities Rulemaking Board (MSRB) regulation of the financial service industry​—​known as rule G-37​—​that restricts campaign donations to state office holders by those dealing in municipal bonds. (The MSRB is subject to SEC oversight.)

“Its genesis goes back to 1994 when the SEC began to regulate political contributions made to officials of issuers, who are basically mayors and governors and others who appoint people who select those who write or underwrite municipal bonds,” says Kenneth A. Gross, an expert on campaign law compliance at the law firm Skadden, Arps, Slate, Meagher & Flom. “There were many scandals in the late ’80s, early ’90s involving Orange County and other places where big firms on Wall Street were getting underwriting business because they made contributions to the right people in the right amounts.”

Like the association of scandal with municipal bonds, a regulatory crackdown on the cozy relationships between state politicians and investment advisers is not without precedent. In 2010, the Quadrangle Group agreed to pay $12 million to the state of New York after it emerged that Quadrangle cofounder Steve Rattner had paid significant sums to an adviser of New York State comptroller Alan Hevesi. Quadrangle subsequently received a $150 million investment from the state’s pension fund. (Rattner went on to serve in the Obama administration as the White House’s “car czar,” helping broker bailouts for U.S. auto companies.)

According to Gross, former SEC chairman Arthur Levitt had proposed extending pay-to-play rules to cover investment advisers back in 1999, but the regulations weren’t pursued by Bush administration SEC appointees. The idea was revived by the Obama administration after the Quadrangle arrangement drew public scrutiny to the ties between state officials and investment advisers.

Nobody really disputes that the new SEC pay-to-play rules have the potential to clean up the political process. The perceived problem, however, is that the new rule makes it unduly difficult for state officeholders to raise money to challenge federal incumbents.

Between those dealing in municipal bonds and the hedge funds, private equity firms and other financial institutions restricted by the new SEC regulations​—​the gatekeepers of nearly $5 trillion of America’s wealth​—​are now severely restricted from donating to the campaigns of state officeholders.

The fact that these regulations apply to some presidential candidates and not to others is not lost on the Perry campaign. “It does seem curious and unbalanced to heavily regulate and undermine the ability of state officials to legally raise funds and leave federal officials comparatively exempt from those regulations,” says Sullivan.

In the era of Dodd-Frank legislation, Congress and the White House have taken a great interest in banking regulations, and they have been lobbied heavily in response. It’s hard to argue that cracking down on financial industry donors to state officeholders is warranted but that Congress shouldn’t be subject to similar regulations.

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