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Competitive Disadvantage’?: Pay-to-Play Rules and the 2016 Stakes

Image: Chris Christie

New Jersey Gov. Chris Christie attends a gathering to announce that Seton Hall University and the parent company of Hackensack University Medical Center are planning to build a private medical school, Thursday, Jan. 15, 2015, in Nutley, N.J. The school, which will open in 2017, will be hosted at the former Nutley campus of Swiss medical products firm Roche Holding that closed in 2013. The state has four public medical schools. Two are affiliated with Rutgers University and two are aligned with Rowan University. (AP Photo/Julio Cortez) Julio Cortez / AP

Governors have plenty of advantages when it comes to a potential run for the White House. They can boast of executive experience and bipartisan cooperation; they can talk plenty of trash about the much-despised Congress; and they usually don’t have the trail of thorny legislative votes that so often dog presidential wannabes on Capitol Hill.

But they may face a unique challenge when it comes to raising the big cash it takes to be president from some of the most generous donors out there: Wall Streeters.

That’s because of federal pay-to-play rules put into place by the Securities and Exchange Commission that effectively bar many state officials from receiving substantial political contributions from financial advisers interested in the often-lucrative business of state contracts – particularly the management of huge state pension funds.

The possible 2016 candidate likely to be most dramatically affected by them: New Jersey Gov. Chris Christie, a sitting governor with deep Wall Street ties in a state where the governor is subject not only to the SEC rules but to a plethora of state and local level restrictions as well.

The SEC rules can be fuzzy and even experts say it’s not always entirely clear which donations trigger a violation. Determining which officials are covered by the rules requires a deep reading of state law. And while donations to outside groups -- like the leadership PAC Christie is reportedly launching – could be kosher, lawyers warn that the nuances of the rules remain the subject of much debate.

It all means that big-dollar Wall Street donors are playing it safe.

“In the donor community, donors are scared to get off the sidelines,” says Stefan Passantino, who leads the political law team at law firm McKenna Long & Aldridge. “If you are a sitting governor, you definitely are at a competitive disadvantage.”

That’s largely because the cost of violations can be steep, says Jason Abel, a campaign finance and ethics lawyer for law firm Steptoe and Johnson.

“The penalties can range into the tens of millions of dollars, loss of business, and disgorgement (forfeit of revenues,”) said Abel.

It’s complicated, but the basic idea is this: A state official with influence over the selection of the state’s financial advisers can’t receive campaign cash (with some exceptions for low-dollar contributions) from the broad swath of investment professionals who might be involved in related state business like managing pension funds or underwriting loans.

The most impactful of the guidelines is an SEC rule, passed unanimously by regulators in June 2010 and drafted largely in response to a sprawling corruption scandal around New York’s former comptroller. That rule, focused on pensions, mandated a two year time-out period between when an adviser can contribute to a state or local government official (who has some input about which investment advisers to contract) and when that adviser can be paid for giving investment advice to the same “government entity.”

Without such a ban, regulators and good government advocates argued that politicians and Wall Street honchos could enter into a quid pro quo that would impact the financial futures of scores of state employees.

“There is such a high degree of corruption when you actually have someone who wants a specific contract from you handing over a wad of campaign cash,” says Craig Holman, a lobbyist for good-government nonprofit group Public Citizen. “The link of possible corruption is right there, right in your face.”

The pension pay-to-play rule was modeled on a 1994 SEC guideline that applied to firms that do municipal securities – or bond underwriting. The securities regulation impacted some Wall Street donors, but the newer pension law captures a much bigger portion of the banking community.

With a broad range of financial advisers affected, there’s also no shortage of confusion about exactly how the rules might apply. Abel notes that there aren’t black and white answers about how the SEC rule applies to super PACs, for example.

Passantino says that the confusion, the pricey potential costs and anxiety about jeopardizing lucrative state business is more than enough disincentive to make donors keep their distance from governors’ campaign coffers.

“There’s just way too much money to be made in doing your job relative to the payoff you might get from a campaign donation,” he said. “The default is not to make the contribution.”

Opponents of the rules hope to beat them eventually in court.

In August, the New York Republican State Committee and the Tennessee Republican Party filed a joint lawsuit alleging that the requirements violate the First Amendment and step on the FEC’s authority. The following month, a federal district court dismissed the case on procedural grounds.

Now, the case is on appeal before the D.C. federal appeals court. But any clarifications are unlikely to come in time to alter the calculation for potential 2016 donors.