Overview
Today, Vice President Kamala Harris, the Democratic nominee for president, announced that Governor Tim Walz of Minnesota will be her running mate. Due to the fact that Governor Walz is a current governor, the Democratic ticket will now be subject to various pay-to-play rules, including:
- Securities and Exchange Commission Rule 206(4)-5 for investment advisers
- Municipal Securities Rulemaking Board Rule G-37 for municipal securities dealers and municipal advisors
- Commodity Futures Trading Commission Rule 23.451 for swap dealers
Contributors who are subject to pay-to-play rules (specifically those in the financial services sector) may be limited in how much they can contribute to the Harris-Walz ticket.
Securities and Exchange Commission Rule 206(4)-5
SEC Rule 206(4)-5 prohibits investment advisers from providing compensatory services for two years to a jurisdiction if it, or a covered associate, makes a contribution (above a de minimis) amount to certain covered officials, including the Governor of Minnesota. A violation of the rule occurs when the two-year ban is violated, or when the solicitation or anticircumvention provisions are violated.
As a general matter, an "official" covered under the rule is defined by the office the person seeks or holds. If the office is responsible for or can influence the selection of an investment advisor, or has the authority to appoint an individual with such power, then the holder of that office – or any candidate for that office – is considered an "official" covered under the rule. Given the powers of the governor's office, Governor Walz would be considered to meet this classification. If Governor Walz were to resign, he would no longer qualify as an "official," thus alleviating pay-to-play concerns under the rule.
Those in the donor community may be restricted under the rule if they are considered "covered associates" of investment advisers. A "covered associate" includes general partners, managing members, and executive officers (or others with similar functions or status); employees who solicit government entities for the investment adviser, and their supervisors (direct or indirect); and any political action committee controlled by the advisor or any of the previously mentioned individuals.
Covered associates are limited to $350 per covered official per election (primary and general), provided that the covered associate is eligible to vote for the official. Note that this de minimis limit drops to $150 per covered official per election if the covered associate is not eligible to vote for the covered official (i.e., if that individual lives in State A, and therefore is ineligible to vote in State B, but wants to contribute to a gubernatorial candidate for State B). These limits are significantly less than the Federal Election Commission individual limits of $3,300 per candidate per election. For practical purposes here, the de minimis limit would be $350 since all covered associates eligible to vote would be eligible to vote for Harris-Walz.
Municipal Securities Rulemaking Board G-37
MSRB G-37 prohibits brokers, dealers, and municipal securities dealers from engaging in municipal securities business and municipal advisors from engaging in municipal advisory business with a municipal entity "within two years after a contribution to an official of such municipal entity" that is made by (1) the dealer or municipal advisor; (2) a "municipal finance professional" (MFP) associated with the dealer or "a municipal advisor professional" associated with the municipal advisor (MAP); or (3) a political action committee controlled by the dealer, advisor, MFP, or MAP. If a prohibited contribution is made, the firm is banned from engaging in any municipal securities business with that issuer for a two-year period. Contributions of $250 or less are considered de minimis and do not trigger the two-year ban.
The terms "municipal finance professional" and "municipal advisor professional" are defined broadly to include (A) any associated person that primarily engages in municipal securities or advisor representative activities; (B) any associated person who solicits municipal securities or advisor business; (C) any associated person who is both a municipal securities or advisor principal or a municipal securities sales principal and supervises any of the persons in provisions (A) or (B) above; (D) certain supervisors designated as responsible for the day-to-day conduct of the municipal securities dealer or advisor activities; and (E) any associated person who is a member or the firm's executive or management committee.
This rule differs slightly from the pay-to-play rule for investment advisors (Rule 206(4)-5). For example, the de minimis limit for contributions under G-37 is $250, while the de minimis limit for contributions under Rule 206(4)-5 is $350.
Commodity Futures Trading Commission Rule 23.451
CFTC Rule 23.451 applies to commodities-backed swap dealers. The rule for swap dealers is triggered by contributions from (1) "swap dealers" and (2) "covered associates" of "swap dealers" to (3) elected officials of most government bodies (referred to as "special entities"). Governor Walz would be considered a "special entity."
A "covered associate" of a swap dealer includes (1) central leadership; (2) employees who deal in swaps with government entities and their supervisors; and (3) political action committees. Further, a covered associate includes "[a]ny general partner, managing member, or executive officer, or other person with a similar status or function [of the swap dealer]." Covered political action committees include any "political action committee controlled by the swap dealer or by any" covered associate.
A campaign donation by a covered associate to an official results in a two-year ban during which the swap dealer may not "offer to enter into a swap or a trading strategy involving a swap" with a special entity over which that official exercised direct or indirect influence over the selection of a swap dealer. Similar to SEC Rule 206(4)-5, total donations of $350 or less to a candidate for whom a covered associate is entitled to vote, and $150 or less to a candidate for whom the covered associate is not entitled to vote, are de minimis and will not trigger the two-year ban.
Best Practices
Companies should have in place compliance policies and procedures to safeguard against the negative consequences resulting from prohibitions that can be triggered by certain contributions (including bans on business), and employees should be aware of the actions that could lead to violations of the rules.
We have previously analyzed this issue for Corporate Counsel in the context of New Jersey Governor Chris Christie's presidential run, which can be found here, and when Former President Trump selected then-Governor Mike Pence as his running mate, which can be found here. Further, we have taken a look at various campaign-related issues in our article “How Companies Can Avoid Campaign Finance and Pay-to-Play Pitfalls.”
Steptoe’s Campaign Finance and Political Law practice is ready to assist you and your entity during this election season.
