We'll stipulate that pay-to-play system in which money managers give campaign contributions to public officials who then invest public pension funds with the money managers is problematic. But the Securities and Exchange Commission's new proposal to deal with it by imposing an outright ban on campaign contributions by money managers of public pension funds is an overreaction. It basically repeals the First Amendment rights of political participation for those engaged in the profession of managing money.
The SEC chairman, Mary Schapiro, cites as an example the ban on campaign contributions by municipal bond underwriters. But that rule, known as MSRB Rule G-37, is imposed by the Municipal Securities Rulemaking Board, which, while created by Congress, is essentially a self-regulatory body. Of the 15 members of the board, five come from bank-dealers and five from securities firms. The SEC is a more conventional government regulator.
Meanwhile, no one we know of is proposing to do anything about the campaign contributions from trial lawyers who then earn huge fees for filing class action securities lawsuits with public pension funds as lead plaintiffs. For a description of such contributions and how they work, see the New York Sun editorial "Hevesi's Haul." Banning money manager contributions while allowing trial lawyer contributions amounts to an uneven political playing field in favor of the left wing.
There is, of course, a way to end pay-to-play other than going after the First Amendment rights of hedge fund and private equity fund managers and of other money managers whose customers include state and local pension funds. That would be, as I wrote about in this Forbes.com article, to take the money and power out of the hands of a few powerful public pension fund officials and distribute it to the millions of individual state and local government employees, allowing them to make their own investment decisions. When President Bush proposed to do private retirement accounts as part of Social Security he met with a political defeat. The subsequent stock market decline has seemed to make such accounts even less likely. But it sure would be a way to reduce the pay-to-play problem without trampling the First Amendment.