It was the best of times, it was the worst of times. For investment advisers and others subject to the pay-to-play rules, that is. Although both vice presidential picks have gubernatorial experience, because Mike Pence is a sitting governor and Tim Kaine is a former governor, there are certain pay-to-play rules that apply to contributions to Trump/Pence that do not apply to Clinton/Kaine. Thus, the Pence pick has important implications for many companies and firms engaged in the financial services industry.

As reported by various news outlets, Governor Pence’s role with the Indiana Public Retirement System subjects contributions to the Trump/Pence ticket to the SEC’s and other pay-to-play rules. Violations of these rules can carry significant penalties. And the shadow of the pay-to-play fundraising restrictions has even caused some to speculate that Pence should resign as governor.

What Are the Rules?

The SEC’s pay-to-play rule imposes a two-year time-out from providing investment advice to a “government entity” if certain contributions are made by:

  • an investment adviser;
  • a covered associate; or
  • a PAC controlled by a covered associate.

Only contributions to an officeholder who controls the selection of the adviser or appoints the board that does, or to a candidate for that office, trigger the SEC’s rule. Municipal securities firms and their professionals who do certain bond work for government agencies are subject to similar restrictions.

Thus, if an investment adviser wants to do business with the Indiana Public Retirement System (or entities in Indiana for which the governor appoints the board or management who will make decisions about investing funds managed by the entity) or if a municipal securities dealer wants to do bond work for an agency with a board appointed by the governor, they will have to impose restrictions on their covered associates and municipal finance professionals giving to the Trump/Pence campaign. No similar restrictions would apply to the Clinton/Kaine campaign.

Covered associates include partners, managing members, and executive officers, as well as employees who solicit government entities for the adviser, and their supervisors, any PAC controlled by the adviser or any of the above-mentioned individuals. Covered associates may give up to $350 to a covered official for whom the covered associate is eligible to vote and $150 if the covered associate is not eligible to vote for the official.

The Rules Cover Fundraising — and May Apply to Social Media, Too

A bigger worry, though, is a sometimes overlooked provision that prohibits investment advisers and covered associates from coordinating or soliciting contributions. These rules do not just apply when an adviser personally solicits contributions; the prohibition also covers situations where an adviser consents to the use of its name on fundraising literature for a candidate. It can even extend to other activities such as bundling. And unlike direct contributions, solicitations are not covered by the de minimis exception. So even soliciting $20 to the Trump/Pence ticket could subject an individual or company to penalties.

Given the potential breadth of this prohibition, investment advisers should exercise extreme caution with respect to how they engage in political activities, particularly when referencing the Trump/Pence ticket.

For example, Donald Trump’s selection of Mike Pence for Vice-President, which he posted on Facebook. That post did not include a solicitation, but when Pence shared the post, he included a direct link to donate to the Trump/Pence ticket. That share by Pence received over a half million “likes” on Facebook. If an investment adviser who has or is seeking business with Indiana “liked” this post, does that constitute a prohibited solicitation under the SEC rules?

That’s an open question, and one that the SEC has not addressed. But other federal agencies, like the Office of Special Counsel, have warned that for some federal employees, even “liking” such a post would violate the Hatch Act.

Whether the SEC wades into the swamp of regulating social media remains to be seen. But this example demonstrates that regulations affecting political activities can often reach farther than anticipated. At this point, all investment advisers likely have a compliance program in place to vet political contributions (if contributions are permitted in the first place). But how many address political speech in their social media policy (if they even have one in the first place)? Probably not many, though that number could change if the SEC starts scouring Facebook and other social media sites.