It’s not often that I open The Boston Globe and see a front page story about compliance with Security and Exchange Commission’s Rule 206(4)-5: Patrick stays quiet as his former aide runs for governor. Jay Gonzalez was the former Secretary of Administration and Finance for the state of Massachusetts under Governor Deval Patrick. Mr. Gonzalez is now running for governor.
Former Massachusetts Governor Deval Patrick states that he is barred under federal “pay-to-play” rules from saying anything about any candidates for state or local office because he now works a firm that is registered with the Securities and Exchange Commission as a registered investment adviser. I’m sure the firm has many investors that are state or local pension funds. That makes the firm subject to the pay-to-play rule.
Rule 206(4)-5 was put in place to prevent political support from driving investment choices made by government investors. In that article, the reporter cites a lawyer and professor that both take a much tighter interpretation of the rule. They both say that the rule is limited to monetary contributions. They both say that the rule should not prohibit the ability of someone to voice his or her preference for a candidate.
In the release for Rule 206(4)-5, the SEC states in footnote 154 that:
“it is our intent that, under the rule, advisers and their covered associates ‘are not in any way restricted from engaging in the vast majority of political activities, including making direct expenditures for the expression of their views, giving speeches, soliciting votes, writing books, or appearing at fundraising events.'”
That would seem to fall in favor of the legal experts and conclude that Mr. Patrick and his firm are being too conservative in their interpretation of the rule.
But let’s take a closer look at the rule. A contribution is defined to include a “gift, subscription, loan, advance, deposit of money, or anything of value made for the purpose of influencing an election for a federal, state or local office…” Contributions are limited to the de minimis amounts of $150, or $350 if you can vote for the candidate.
Certainly, my endorsement of a candidate has little to no value. I don’t have a following of political supporters and campaign backers. But Deval Patrick does. I don’t know the value of his endorsement. But I would say that it is worth much more than $350. The SEC rule does not anticipate a high profile person like Deval Patrick at a firm subject to the pay-to-play rule.
You can also credit the “further prohibition” section of the rule that prohibits a covered associate from doing “anything indirectly which, if done directly, would result in a violation of” the rule. Would Deval Patrick’s endorsement be an indirect call for giving campaign contributions to Jay Gonzalez?
I have heard an SEC official state that putting a yard sale on your lawn is a violation of the pay-to-play rule. She was wrong and other senior SEC officials emphatically stated that she was wrong. But we all heard that there is a willingness of the SEC to take a hard position under the pay-to-play rule.
I think the position of Deval Patrick and his firm is correct under the rule. It’s the rule that has problems.
Sources:
- Patrick stays quiet as his former aide runs for governor by Michael Levenson
- Rule 206(4)-5
