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Welcome to Popular Information, a newsletter dedicated to accountability journalism.
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On September 3, the U.S. Securities and Exchange Commission (SEC) made a quiet announcement: the commission, which oversees Wall Street, is proposing to rescind a 16-year-old rule enacted to prevent “pay-to-play” schemes involving investment advisers and pension funds for public employees.
The rule, officially known as Advisers Act Rule 206(4)-5, prohibits investment advisers from managing money for state or local government entities for two years after they have made campaign contributions to elected officials within those entities. In other words, the rule is meant to stop investment advisers from enticing elected officials with campaign cash. It was adopted in 2010 in response to pay-to-play scandals in New York and California.
Pension funds are massive pools of money that are invested to provide for the retirement of public employees such as teachers, firefighters, and police officers. In the United States, there are over 5,000 publicly run pension funds that hold a collective $6.5 trillion in assets. Millions of public employees rely on these funds to be managed in their best interest.
Yet SEC Chairman Paul S. Atkins and the two other Republican SEC commissioners (the two Democratic seats on the commission have been left vacant by the Trump administration) are arguing that prohibiting investment firms and their employees from giving money to officials who control pension funds is an attack on political expression.
In a statement, Atkins said that the rule has “effectively resulted in the suppression of political speech” because many firms prohibit their employees from making political contributions to state and local candidates. “People should not have to choose between their political speech rights and a job in a particular industry,” he said.
This sentiment about the rule being a free speech issue has been echoed by many investment adviser interest groups. For example, the president of the Investment Adviser Association (IAA) — an organization which has lobbied the SEC on various finance issues — issued a statement saying, “We have long raised concerns that the rule imposes severe consequences without regard to whether a political contribution was actually intended to influence the award of advisory business.” (The rule does allow individual investment advisers to donate up to $350 to candidates they are eligible to vote for and up to $150 to any other candidates.)
Both the SEC and interest groups like IAA argued that the rule is unnecessary because state and local laws would be sufficient to prevent pay-to-play schemes. But when the SEC initially proposed the rule, it reasoned that “pay to play practices are rarely explicit and often hard to prove.” For this reason, the SEC determined that a broad, preventative approach was “particularly appropriate.”
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What were the pay-to-play scandals that inspired the SEC’s rule?
In October 2009, the California Public Employees’ Retirement System (CalPERS) revealed a massive pay-to-play scandal: one of its former board members, Alfred Villalobos, had accepted over $40 million in fees for acting as a middleman to help billionaire Leon Black’s private equity firm Apollo Management secure investments from CalPERS.
As a part of the scheme, Villalobos delivered $200,000 in cash bribes, stuffed in paper bags and a shoe box, to then-CalPERS CEO Fred Buenrostro on behalf of firms including Apollo Management. In exchange, Buenrostro pushed investments toward Villalobos’ clients and provided him insider information on CalPERS. According to the Wall Street Journal, CalPERS employees felt pressured by Buenrostro to accept investment opportunities brought by Villalobos. In 2013, Villalobos and Buenrostro were indicted on criminal fraud charges.
As a result of Villalobos’ scheme, CalPERS invested over $3.5 billion in various Apollo funds.
The investments that Villalobos and Buenrostro directed to Apollo Management were among CalPERS’ worst-performing during its worst fiscal year ever. In 2009, amid the nationwide financial crisis, CalPERS lost $50 billion. This shrank the fund by 23%, while the median pension fund that year shrank by 19%. CalPERS’ investments in three different Apollo funds were each down between 50% and 60%.
In New York, former state Comptroller Alan Hevesi began accepting campaign donations from Elliott Broidy, chairman of Markstone Capital Group, and his wife in 2002. In exchange, from 2003 to 2005, Hevesi approved $250 million of investments in Markstone Capital Group from New York’s Common Retirement Fund. Over several years, Hevesi eventually took a total of $500,000 in campaign contributions and roughly $500,000 in gifts and travel expenses from Broidy. In October 2010, Hevesi pleaded guilty to a state corruption charge and was later sentenced to up to four years in prison.
Broidy’s wife also donated to Hevesi’s California counterpart, Controller Steve Westly, as Westly helped secure investments from the CalPERS pension fund for Markstone. As state controller, Westly was an influential member of the CalPERS board. In addition to Markstone, he also helped two other private equity firms — Perseus and Healthpoint — secure investments from CalPERS.
Markstone, Perseus, and Healthpoint donated over $200,000 combined to Westly’s campaigns between 2002 and 2006. The firms received a total of $80 million in investments from CalPERS. In the case of Healthpoint, for example, the firm had already pitched CalPERS without success. Then, in March 2003, Healthpoint executives began