Pay-to-Play Rules and the 2024 U.S. Presidential Campaign

U.S. Vice President Kamala Harris, the 2024 Democratic nominee for President, announced Minnesota Gov. Tim Walz as her running mate. Gov. Walz is the ex officio chair of the Minnesota State Board of Investment and has the authority to appoint members to boards of other government entities, including the Minnesota State Retirement System and the Minnesota Public Employees Retirement Association. This makes him a government “official” under the Securities and Exchange Commission (SEC) pay-to-play rule.¹

As a result, under the SEC pay-to-play rule (Rule 206(4)-5 of the Investment Advisers Act of 1940, as amended), any contributions by an investment adviser or its covered associates to the Harris-Walz campaign above the de minimis thresholds will trigger a two-year timeout from providing advisory services for compensation to relevant government entities in Minnesota.²

General Overview of Pay-to-Play Limits

The SEC pay-to-play rule restricts political contributions by investment advisers and certain of their employees, partners, executive officers, and related political action committees within scope of the rule (collectively, Covered Associates). The rule aims to prevent advisers from seeking to influence the awarding of advisory contracts by making political contributions to officials in a position to influence those awards.

Among key provisions:

1. Two-year ban: Contributions above de minimis limits trigger a two-year ban on receiving compensation for providing advisory services to a government entity if the recipient of the contribution can influence the entity’s selection of an investment adviser or appoint individuals who can do so. The de minimis thresholds are $350 per election if the contributor is entitled to vote for the candidate on the date of the contribution and $150 if not.
2. Look-back provision: The rule includes a look-back provision that attributes contributions by new hires to the hiring firm, covering the period of six months before they became Covered Associates for smaller firms and two years for larger firms.
3. Solicitation and coordination bans: Investment advisers and their Covered Associates cannot coordinate or solicit any person or political committee to (1) contribute to an official of a government entity to which the investment adviser is providing or seeking to provide services or (2) make a payment to a state or local political party in a locality where the investment adviser is providing or seeking to provide investment advisory services to a government entity.
4. Recordkeeping requirements: Advisers must keep detailed records of political contributions made by the firm and its Covered Associates

Our Take

Investment advisers who do business with Minnesota state entities should refrain from contributing (or permitting Covered Associates to contribute) to the Harris-Walz campaign in excess of the applicable de minimis limit. Investment advisers who do not do business with Minnesota state entities should consider whether they may wish to do so in the next two years and, if so, should refrain from contributing (or permitting Covered Associates to contribute) to the Harris-Walz campaign in excess of the applicable de minimis limit. For persons who are eligible to vote in the U.S. presidential election, the de minimis limit for contributions to the Harris-Walz campaign would be $350.

In the context of this election season, advisers should consider reminding their covered associates of the restrictions under the pay-to-play rule, perhaps with detail relating to the Harris-Walz campaign and others of potential significance for the adviser. Advisers should similarly consider informing their covered associates of the restrictions on the solicitation or coordination of campaign contributions. Additionally, firms should seek to leverage their existing monitoring systems to carefully check approved political contributions and ensure compliance with the pay-to-play rule.

Firms should also be mindful of other campaign-contribution-related regulations that could apply to them, including from the Municipal Securities Rulemaking Board (broker, dealers, municipal advisors), Financial Industry Regulatory Authority (broker, dealers), and U.S. Commodity Futures Trading Commission (swap dealers).

¹ Earlier this year, the SEC settled a pay-to-play enforcement action against an investment adviser linked to a contribution to a member of the Minnesota State Board of Investment (SBI). https://www.sec.gov/enforcement-litigation/administrative-proceedings/ia-6590-s. The settlement involved a $60,000 penalty and censure. This case highlights that SBI board members are government “officials” under the SEC pay-to-play rule and the potential for contributions to Gov. Walz to trigger the two-year timeout.
² None of Vice President Harris, former President Donald Trump, nor Sen. J.D. Vance, Republican of Ohio, are government “officials” under this rule.