Wall Street Campaign-Cash Restrictions Face Legal Attack

New Jersey Governor Chris Christie’s chances to be the 2012 Republican vice-presidential nominee were hampered by a U.S. regulation that could have an even bigger impact on the next race for the White House.

The three-year-old rule from the Securities and Exchange Commission effectively bars governors and other state officials from raising money from Wall Street for state or federal elections. Having Christie on the ticket would have complicated Mitt Romney’s presidential campaign, which took in more money from securities and investment firms than any other industry.

Now, with governors including Christie, Scott Walker of Wisconsin and Bobby Jindal of Louisiana contemplating a White House run in 2016, two state Republican committees have filed a lawsuit to overturn the regulation.

“We see this as something that has been a great detriment to our ability to help out candidates,” said Jason Weingartner, executive director of the New York Republican State Committee, which brought the case along with the Tennessee Republican Party. “This is something that needs to change.”

The legal challenge comes amid a general loosening of U.S. campaign finance rules. Over the past seven years, U.S. Supreme Court decisions have steadily eroded limits on contributions. Meanwhile the Federal Election Commission hasn’t updated its regulations. Together, those developments have opened new avenues for corporations to support candidates.

If the SEC ban were eliminated, Wall Street firms and their employees would be an even larger potential source of campaign cash.

John Nester, an SEC spokesman, declined to comment.


The SEC’s rule took effect in 2011 after disclosures that investment advisers were raising money for politicians who in turn helped them win business from state pension funds. In one of the largest of the so-called pay-to-play scandals, former New York State Comptroller Alan Hevesi served 20 months in prison after pleading guilty to steering $250 million in pension funds to an investment firm in exchange for travel, gifts and more than $500,000 in donations.

The probe was led by Andrew Cuomo, the current Democratic New York governor who was then state attorney general. The SEC also participated in the investigation, which ensnared high-profile individuals and companies including Carlyle Group LP and Steven Rattner and the private equity firm he co-founded, Quadrangle Group LLC.

‘Clamp Down’

In response, the SEC decided that if a financial firm or certain of its executives make more than a nominal campaign donation to a state official with a say over contracts for investment plans, the firm should be barred from managing the state’s assets for two years. The regulation covers current office-holders and candidates in state races as well as state officials running for a federal office.

Many banks, hedge funds and private equity firms, which profit from their work for state pension and college savings plans, decided to forgo giving to any state officials to avoid the possible consequences.

“The idea was to try to clamp down on these kinds of practices, where certain investment advisers were trying to buy access or influence,” said Scott Kimpel, a partner at the Hunton & Williams law firm who worked at the SEC when the rule was passed by a 5-0 vote.

“Ultimately, the commissioners were persuaded that the potential threat to investor confidence and the integrity of the markets was greater than any cost to the political process,” Kimpel said.

Goldman Donations

Romney had stepped down as Massachusetts governor by the time he ran for president and thus wasn’t covered by the SEC rule. It was a factor, though, in his selection of a running mate, according to an account in “Collision 2012: Obama vs. Romney and the Future of Elections in America” by Dan Balz. The campaign considered Christie but decided it couldn’t get around the ban unless he resigned -- a step the New Jersey governor wasn’t willing to take.

In the end, Romney raised $21.5 million from securities and investment firms, nearly five percent of his total, according to the Center for Responsive Politics. Employees at Goldman Sachs Group Inc. were the campaign’s top contributors, followed by workers at Bank of America Corp., Morgan Stanley, JPMorgan Chase & Co. and Wells Fargo & Co. Obama got $6.3 million from the industry, less than one percent of his total.

William Palatucci, a lawyer who was chairman of Christie’s 2013 gubernatorial re-election campaign, said in an interview that “life would be easier” without the regulation.

“As it pertains to New Jersey and Governor Christie, we have simply learned to live with it,” said Palatucci.

Perry Bid

The rule also affected Texas Governor Rick Perry’s bid for the 2012 Republican nomination, according to Balz’s book. When lawyers for Goldman Sachs told Perry its employees couldn’t donate, he hired ex-SEC Chairman Harvey Pitt to explore the issue. Perry’s campaign, Balz wrote, “wrote off any efforts to raise money from the financial community in New York.”

Pitt didn’t return a call or e-mail seeking comment.

Perry, who isn’t seeking another term as governor, may be exploring a 2016 White House run.

The SEC rule has the widest impact of the pay-to-pay regulations that candidates and investment firms have to navigate. Some states have similar restrictions governing state elections. There are also U.S. rules that regulate contributions by firms in the municipal bond and swaps businesses.

The SEC rule “is a very big deal” for Wall Street firms, said Kenneth Gross, a partner at Skadden, Arps, Slate, Meagher & Flom who counsels investment advisers on the matter. “It affects corporate giving, political action committee giving and individual giving. Companies have to grapple with it across the board.”

Lawsuit Filed

Violations are often inadvertent, Gross said, and tend to involve donations given to a friend or neighbor rather than massive kickbacks or bribes. That is little comfort to a financial firm that can lose millions of dollars of business because of a mistake by one employee, he noted.

The SEC rule doesn’t prevent Wall Street from giving to super-PACs, committees independent of a candidate that can spend money to promote a campaign.

Still, direct contributions can help individuals and companies build a more personal connection with candidates that can translate into access later. Obama has named more than 25 top fund raisers to ambassador posts, according to data compiled by Bloomberg. They include technology entrepreneur Matthew Barzun in the U.K. and John Phillips, a lawyer, in Italy.

First Amendment

The lawsuit, filed yesterday in U.S. District Court for the District of Columbia, seeks to capitalize on Supreme Court decisions loosening the legal limitations on political contributions.

The suit argues that the Federal Election Commission, not the SEC, has authority to regulate campaign contributions for federal candidates. It also contends that the rule violates constitutional protections for freedom of speech, the legal reasoning that the high court under Chief Justice John Roberts has invoked in other campaign finance cases.

Led by two attorneys who worked in the White House counsel’s office under President George W. Bush, the suit takes aim at the part of the SEC rule that pertains to state officials running for federal office. While the plaintiffs and their lawyers are Republican, overturning the regulation would aid politicians of both parties. Cuomo, for example, is one Democratic governor who may be contemplating a White House run.

‘Silent Cheering’

“I suspect there will be a lot of silent cheering going on if we win,” said one of the lead lawyers, H. Christopher Bartolomucci, a partner at the Bancroft PLLC law firm in Washington.

Bartolomucci’s firm argued the winning side of the Supreme Court case this year that struck down limits on the total amount of money that donors can give to federal candidates and parties. He is bringing the SEC case with Jason Torchinsky, who was deputy general counsel to the Bush-Cheney 2004 campaign and is now a partner with the law firm Holtzman Vogel Josefiak PLLC in Warrenton, Virginia.

One potential legal hurdle to the challenge is that the federal appellate court in Washington in 1995 upheld the rule imposed by the industry-sponsored regulator that oversees the municipal bond markets, restricting contributions from bond brokers.

Bartolomucci and Torchinsky said they don’t think the precedent will impede their case, in part because of the Roberts court’s recent decisions. They plan to ask the district court to issue an injunction against the regulation in hopes that it would aid candidates in the 2014 mid-term elections.

2016 Impact

Torchinsky said the SEC regulation is holding back donations in some campaigns, giving certain candidates an unfair advantage. One example, he said, is the tight U.S. Senate race in North Carolina between Thom Tillis, the Republican speaker of the state House, and incumbent Democrat Kay Hagan.

The rule could be felt more widely in 2016. At least five Republican governors are believed to be considering bids: Christie, Walker and Jindal, as well as Ohio’s John Kasich and Indiana’s Mike Pence. On the Democratic side, Cuomo could fall under the restrictions.

Speaking generally about the implications for 2016, Palatucci said New Jersey’s experience shows that a campaign has to adapt.

“There is no way around it and there are no loopholes,” he said. “It’s a big country and you have to go find donors who aren’t covered by it.”

That is harder for the New York State Republican Committee, said Weingartner, the executive director.

“Wall Street is a major industry for us,” he said.

Before it's here, it's on the Bloomberg Terminal.