Pay-to-play rules generally prevent businesses from receiving government contracts (the “play”) if executives and employees have made campaign contributions to, or raised money for, certain candidates (the “pay”).  Although a complicated patchwork of federal, state, and local pay-to-play laws, regulations, and policies exists, the Securities and Exchange Commission’s pay-to-play rule is the most consequential.  Under the rule, if an investment company executive makes just one political contribution to a covered candidate, the company could potentially lose out on lucrative contracts to manage the investments of public pension funds and university endowments.  Candidates are typically considered “covered” if their current office or the office they seek has authority to directly or indirectly influence the award of the state or local investment contract.  

To avoid inadvertently sacrificing the income from major contracts—or being rendered ineligible for a contract in the first place—financial institutions generally put in place rigorous compliance programs, typically including pre-clearance of political contributions and solicitations.  Because the overlapping web of pay-to-play laws is riddled with ambiguity, it is often easier and cheaper to decline to make a contribution or solicitation that is arguably legal than to deal with the fallout if a watchdog group takes a different view.

{mosads}The rules therefore cause potentially covered candidates to miss out on massive amounts of hard money contributions from the rolodexes of politically active Wall Street donors.  The net result is that, all things being equal, candidates not covered by the pay-to-play rules have a better shot at raising funds and winning than those who are covered.

Take, for example, presidential elections.  Sitting governors, state treasurers and comptrollers, and big-city mayors are often covered by the rules because they can influence contracting decisions.  U.S. Senators and Representatives, business leaders, and former government officials, in contrast, are not covered.  As a consequence, it will be easier for candidates like Marco Rubio and Hillary Clinton to raise finance industry funds than it will be for Chris Christie and Martin O’Malley.  The rules may also disadvantage presidential candidates from certain states.  Candidates from northeastern states, many of which have their own complex state level pay-to-play rules, would be disadvantaged against candidates from regions lacking state-level pay-to-play rules.  Even if both candidates are covered by pay-to-play rules, executives may decide they can deal with potential lost contracts in smaller states but not in more populous states.  This would give Colorado Governor John Hickenlooper, for example, an advantage over New York Governor Andrew Cuomo.      

Pay-to-play rules are also changing how campaigns operate.  Most famously, pay-to-play considerations reportedly factored into the Romney campaign’s decision not to ask Chris Christie to join the ticket.  Similar considerations will almost certainly weigh on future presidential candidates as they make their own Vice Presidential picks.

On the day-to-day level, the necessity of complying with pay-to-play rules can also complicate fundraising structures.  Political committees increasingly team up with parties and leadership PACs to form joint fundraising committees that host high-dollar fundraisers.  The inclusion, in a joint fundraising committee, of candidates or parties covered by the pay-to-play rules, however, can amount to a poison pill.  Hedge fund and other financial industry professionals may avoid joint fundraising committee events altogether if one of the joint fundraising committee members is subject to pay-to-play rules.  Indeed, these concerns reportedly threw a wrench into the Romney campaign’s original plans to include various state parties potentially subject to pay-to-play issues within its joint fundraising committee.

These pay-to-play challenges are by no means insurmountable for covered candidates.  Covered candidates may, for example, end up having to rely more on outside Super PACs (which are generally not covered by the SEC pay-to-play rules) than they otherwise would.  Nevertheless, the often overlooked obstacles pay-to-play rules impose on covered candidates are real.  In a world where the slightest fundraising advantage can make the difference between winning and losing, these rules matter.

Parks and Glandon are lawyers at Covington & Burling’s election and political law practice, advising corporations, trade associations, campaigns, political parties, and high-net worth individuals on election and political law challenges.