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As SEC Investigates Hartford, It Cracks Down On "Pay to Play" Nationwide

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Whatever the commission is looking into rests at the intersection of securities law and elections.

When the U.S. Securities and Exchange Commission subpoenaed campaign finance filing records for Hartford Treasurer Adam Cloud, investigators didn't say what they were looking for. But the commission has recently stepped up its enforcement of a rule that governs how investments advisors contribute to public campaigns. 

We don't know what the commission is investigating. We don't even know whether Cloud himself is the subject of the investigation.

But we do know this: whatever it is the commission is looking into rests at the intersection of securities law and elections. There's a relatively new rule that has shaken up some in the investment world. It's known as "pay to play."

Former SEC Chairman Mary L. Schapiro.
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Former SEC Chairman Mary L. Schapiro.
Victims of pay-to-play schemes are municipal retirees, their families, and taxpayers, according to the former chairman of the SEC.

"Pay to play is a practice of making campaign contributions and related payments to elected officials in order to influence the awarding of lucrative contracts for the management of public pension plan assets," said Mary Schapiro, the then-chairman of the SEC. She made these comments back in 2010 when the commission approved the new rule. Schapiro said the victims of pay-to-play schemes are municipal retirees, their families, and taxpayers. 

"The selection of investment advisors to manage public plans should be based on the best interests of the plans and their beneficiaries -- not kickbacks and favors," Schapiro said.

The rule is pretty simple. If you invest city pension dollars, you are an investment advisor. Under the rule, you aren't allowed to contribute to campaigns, solicit contributions, or get people to solicit contributions. If you do, and you get paid for your advising services, you could be in trouble. 

"The SEC is going to great lengths to signal to the regulated community that it is not so much interested in whether the campaign activity actually led to the award of the services," said Stefan Passantino, a lawyer who writes the Pay to Play Law Blog. He said the SEC is signaling to people that it takes this rule very seriously.

"It is prepared to enforce its laws regardless of whether the campaign activity in any way led to the award of the services, or even if it was potentially possible for the campaign activity to influence the activity," Passantino said. "That does not matter to the Securities and Exchange Commission." 

Passantino said that the rule has nothing to say about the conduct of the elected official -- just of the investment advisor.

Jeff Cohen started in newspapers in 2001 and joined Connecticut Public in 2010, where he worked as a reporter and fill-in host. In 2017, he was named news director. Then, in 2022, he became a senior enterprise reporter.

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