- Key insight: The Securities and Exchange Commission is proposing to lift a ban on investment advisors receiving government compensation for services within two years of making political contributions.
- Supporting data: Large investment advisors with $100 million or more are generally regulated by the SEC.
- Forward look: Ethics advocates are likely to raise concerns during the public comment period, which will remain open for 60 days upon publication in the Federal Register.
The Securities and Exchange Commission on Thursday proposed rescinding an ethics rule that discourages quid-pro-quo arrangements by barring investment advisors from receiving government contracts within two years of donating to elected officials or candidates.
The proposal would also eliminate related recordkeeping requirements related to the ban.
Chairman Paul Atkins said in a statement the rule was "overly prescriptive and has produced a host of unintended consequences." The SEC also argues that firms have responded by broadly prohibiting employees from making political contributions, effectively discouraging political "speech."
"Beyond operational implementation challenges, it has imposed serious penalties for small, often impulsive donations to candidates in both parties, and routinely punishes and handicaps advisory firms for an employee making a donation even before joining the business," Atkins said in a statement. "Ultimately, matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations — not by the SEC."
A coalition of financial industry groups, including the Institute of Management Accountants, American Free Enterprise Chamber of Commerce, American Securities Association, Investment Adviser Association, Investment Company Institute, Managed Funds Association, Partnership for New York City, and Securities Industry and Financial Markets Association said rescinding the rule would "level the playing field" and that existing federal, state and local safeguards make it obsolete.
"The SEC's proposal will level the playing field so all Americans can participate in our democratic process," the group said in a statement supporting the proposal. "The wide array of robust federal, state, and local safeguards in place ensure public integrity and make the current rule obsolete. We look forward to working with the SEC on this important proposal."
But at least one politician is not thrilled with the proposal. Senate Banking Committee ranking member Elizabeth Warren, D-Mass., said it would allow elected officials to reward wealthy campaign donors with government investment contracts.
"President Trump's SEC just proposed to rescind a 15-year-old rule that prevents elected officials from rewarding wealthy campaign donors with lucrative contracts to advise government investments," Warren wrote in a statement. "Another example of how Donald Trump and his Administration are rigging our markets to work for the wealthy and well-connected while working people pay the price."
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Concerns are likely to continue into the public comment period, which will remain open for 60 days after the proposal is published in the Federal Register. Consumer advocates like Better Markets — who are likely to weigh in — argued that the rule is necessary to prevent advisors from winning public-pension business through political contributions.
"The SEC had excellent reasons for adopting this rule in 2010, and there are no reasons for the SEC to rescind it now," Benjamin Schiffrin, director of securities policy for Better Markets wrote. "[The rule] has resulted in the suppression of corruption. The rule was intended to, and does, 'combat pay-to-play arrangements in which advisers are chosen based on their campaign contributions to political officials rather than on merit.' Chair Atkins apparently believes that such arrangements should be promoted."
