The SEC Pay-to-Play Rule, the 2016 Elections and the Indiana Public Employee Retirement System

The nomination of Indiana Gov. Mike Pence for vice president of the United States raises potential issues with respect to political contributions by investment advisers under Rule 206(4)-5 under the Investment Advisers Act of 1940 (commonly referred to as the Securities and Exchange Commission, or SEC, “pay-to-play” rule). Under that rule, a contribution to Republican nominee Donald Trump by an investment adviser or its covered associates may bar the investment adviser from receiving compensation for two years from the Indiana public employee pension system.

SEC “Pay-to-Play Rule”
As governor, Pence appoints the trustees of the Indiana pension system. The rule’s two-year ban on providing investment advisory services for compensation is triggered by a “contribution to an official” of a “government entity” such as a “pool of assets sponsored” by a state or political subdivision “including, but not limited to a defined benefit plan.” Under the rule, Gov. Pence is an “official,” which is defined as “any person (including any election committee for the person) who was, at the time of the contribution, an incumbent, candidate, or successful candidate for elective office … if the office: (i) … can influence the outcome of the hiring of an investment adviser … or (ii) [h]as authority to appoint any person … responsible for … the hiring of an investment adviser….” Thus, contributions to Gov. Pence or “any election committee for the person” would be subject to the SEC pay-to-play rule.

Federal campaign laws do not permit any candidate to accept contributions personally. Instead, a candidate must declare his or her candidacy by filing a Federal Election Commission (FEC) Form 2 and designating an authorized campaign committee. A candidate for vice president who is nominated by a political party, however, is not permitted to file an FEC Form 2 or designate an authorized committee. Instead, the candidate for president typically amends his or her declaration of candidacy and the statement of organization of the presidential candidate’s authorized committee to add the nominated candidate for vice president. As a result, a contribution to the authorized committee of the presidential candidate is also a contribution to the candidate for vice president. Once the FEC Form 2 and statement of organization for the Donald J. Trump for President Inc. committee are amended to add Gov. Pence, a contribution to Trump will be a contribution to Gov. Pence.

Other Authorized Committees
Contributions to other political committees included in these documents also will be contributions to Gov. Pence for purposes of the pay-to-play rule. Trump’s FEC Form 2 currently lists the Make America Great Again Committee and Trump Victory, a joint fundraising committee that includes the federal accounts of 13 state Republican parties, as authorized committees. If Gov. Pence is added to Trump’s FEC Form 2, these committees also will be the authorized committees for Gov. Pence.

Contributions Not Subject to the Rule
Not all committees that support Trump are subject to the SEC pay-to-play rule. For example, the SEC staff has stated that independent expenditures are not subject to the pay to play rule. 75 Fed. Reg. at 41024 (July 14, 2010). Contributions to Super PACs — which by definition may not make direct contributions to candidates or political parties — are likely independent expenditures that would not trigger the rule’s two-year ban on providing advisory services to a particular government entity for compensation.

Contributions to the Republican National Committee, to Republican state political parties or to PACs unrelated to Trump authorized committees also may not be subject to the SEC pay-to-play rule, but caution should be exercised and some investigation may be appropriate. When asked whether a contribution to a political party, PAC or other committee would be subject to the rule, the SEC staff stated that such contributions would not trigger the rule unless it was a means to do indirectly what the rule prohibits if done directly. For example, a contribution “earmarked” for Trump to a committee that is known to support the candidate could be problematic. Moreover, coordinating or soliciting contributions to a political party in a state in which an adviser is doing business or seeking to do business is prohibited under the pay-to-play rule.

“At the time of contribution”
If Gov. Pence resigns as governor, contributions to Trump after the resignation may not violate the SEC pay-to-play rule because the rule’s definition of “official” focuses on the status of Gov. Pence “at the time of the contribution.” Thus, contributions after the date of his resignation as governor arguably would have no significance for Indiana’s public employee pension system. This also suggests that a contribution to Trump before Gov. Pence was nominated should not violate the rule, because at the time of the contribution, a donation to Trump had no connection to Gov. Pence.

Other Federal Elections
Contributions to Hillary Clinton or Tim Kaine, the Democratic candidates for president and vice president, are not subject to the SEC pay-to-play rule because neither candidate holds state office. However, in other federal 2016 campaigns, contributions to candidates from either party are subject to the SEC pay-to-play rule. For example, current New Hampshire Gov. Maggie Hassan is running for senator. Because the governor appoints the trustees of the state pension plans, a contribution to Hassan’s Senate campaign is subject to the SEC pay-to-play rule.