Under President Donald Trump, the U.S. Securities and Exchange Commission has proposed eliminating the so-called "pay to play" rule.
The anti-corruption rule prevents private equity firms from buying access to multi-billion-dollar public pension funds. The rule, which has been in place since 2010, was created after a series of political scandals, including in New York.
To explain the proposed change and how corruption in the Empire State led to the creation of the rule in the first place, Lucas Willard spoke with Hannah Levintova, a reporter for Mother Jones.
Hannah Levintova: The basics of the rule are that if an investment manager, for example, a private equity fund, makes a donation to a government official, an official that oversees a big pot of government money, so a pension fund, maybe a sovereign wealth fund, then for two years after that donation, that pot of money can't invest with the investment firm. And the idea is to prevent people saying, "Hey, I'm going to donate a lot of money to you, wink, wink," and then you give me your business. You invest 40 million, 50 million, 60 million with me, which comes with huge fees and is, you know, a huge source of business for the firm.
Lucas Willard: And so, now there are proposed changes. There's a public comment period that's currently open, and is the time on that is ticking down as we speak. But what does the Trump administration want to actually do with the pay-to-play rule under the SEC?
Hannah Levintova: So, this is a good question, and it's the reason that this caught my eye because the comment period opened basically the day before Labor Day weekend, kind of a quiet news time.
Lucas Willard: Yeah, when not a lot of people are tuning into TV. They'd rather be eating hot dogs and sitting outside.
Hannah Levintova: I mean, me too. Yeah. So, there has been criticism over the years of the rule that says, hey, this is really strict, because what a lot of private equity firms end up doing is saying to their employees: you can't donate at all. Which the rule actually does have a carve out to allow people to contribute politically. You know, usually up to about $350 per election, per candidate. But to just not get in trouble, they just stop all donations. And there are other complaints that it kind of hamstrings business somehow. So the administration, instead of saying let's tweak it, let's revise it, let's maybe get rid of some of these pain points, the administration is proposing to just get rid of this rule completely, just erase it, and is basically saying, hey, there's this other law that exists that was passed after the Great Depression, that's fine. That's good enough, and it will prevent these problems. But we know that's not true, because before pay-to-play passed, there were all these huge pay-to-play scandals that, you know, with private huge private equity funds like Apollo and Carlyle that came to light. Which was, you know, this original law didn't stop those, so the administration is saying just totally, completely get rid of the rule.
Lucas Willard: In your most recent piece, Hannah, you dug into a little bit of the history in New York State scandals around the pension fund in New York. New York is a big state with a lot of public sector employees. There's a lot of people who pay into this fund, and a lot of these scandals came to light before the this 2010 pay-to-play rule was actually enacted. So, how do these stories from New York State, these scandals, play into the initial development of the rule?
Hannah Levintova: So the initial scandals — there were several in New York as well, there was one in California, a couple other places — were the impetus for the rule because basically the Justice Department and prosecutors in New York uncovered a number of these scandals all at the same time within about a year of each other. So in one, the private equity giant Carlyle had made more than $13 million in payments to a top aide for the New York comptroller, and in return they got about $730 million in investments from New York pension funds, so got quite a bit of business, quite a few management fees. Another firm, Quadrangle, had to settle with the SEC because one of its executives paid more than a million dollars, again, to an aide of the New York comptroller, and got $100 million invested from New York pension funds, and these are the teacher pension funds and things like that. So this was all happening within months of each other. These settlements with the SEC, the New York attorney general was uncovering these stories, and that was absolutely part of the impetus for the SEC passing this rule.
Lucas Willard: So, Hannah, I want to ask you about this proposed change to rescind the pay-to-play rule, and how does this fit into maybe a broader pattern of rollbacks from either the SEC or the Trump administration as a whole, when it comes to financial oversight of, in this case, moving really large amounts of money around.
Hannah Levintova: So, there has been a pattern of the SEC both shrinking enforcement, so going after essentially white collar crime, as well as trying to undo long standing corporate guardrails like the pay-to-play rule. So yeah, in this I wrote about this 16-year-old rule, the pay-to-play rule. But there's an 80-something-year-old rule that the administration is also now trying to rescind. That is essentially like a transparency rule for public companies, where when they issue their proxy statements, they have to include you know certain kinds of shareholder concerns and this would get rid of that. It's existed for over 80 years so across Republican, Democrat administrations. It has stayed because that's good. Transparency is good for a public company. Back in April, the SEC very quietly released a bunch of data that showed that enforcement of white-collar crime by the agency had gone down by more than 30%. They've lost about a quarter of their staff. So overall, the proposal to rescind the pay to play rule is part of a pattern of the financial oversight of the administration trying to shrink both their enforcement arm as well as long-standing corporate guardrails.
This transcript was generated by artificial intelligence and then edited and reviewed for accuracy by WAMC staff.
