Financial firms rein in donations under SEC pay-to-play rule

Tom Stemberg, the Staples founder turned venture capitalist, has over the years given tens of thousands of dollars to support candidates for local and statewide offices. Not this year.

The best he can do for his man, Republican gubernatorial candidate Charlie Baker, is a bumper sticker on his Acura MDX.

“The law is ridiculous,” said Stemberg, who gave Baker the maximum contribution of $500 in 2009 and 2010, during his first run for the top office in Massachusetts.


What Stemberg is talking about is a Securities and Exchange Commission rule designed to reduce “pay to play” — using campaign contributions to influence the awarding of lucrative government contracts, such as those to manage public pensions. The 2011 rule restricts financial service firms’ giving to municipal office holders and candidates.

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But many companies, from mutual fund managers to private equity firms, have simply banned political donations or created so many obstacles for employees (such as preapprovals) it has had the same effect.

“It’s much easier to outright ban contributions than to worry what is and isn’t permitted under the rules,” said Stefan Passantino, a Washington lawyer who advises companies and candidates and blogs on the topic. “It’s a great source of frustration for candidates.”

Consider the penalties, and you’ll understand why companies don’t think it’s worth the risk. If certain employees violate the pay-to-play rule, the firm is put into a “timeout” box and can’t receive money for services to that government entity for two years.

Local campaigns are for the first time feeling the full impact of the SEC regulation. Employees in the financial industry are typically prolific donors, but these days some fund-raisers are avoiding folks in this sector because they know the answer will be no.


Political types say that’s one reason why business seemed to be on the sidelines of last year’s Boston mayoral race.

“The pay-to-play rule definitely put a wet blanket on fund-raising,” said Rob Gray, the longtime Republican political operative who advised Baker in 2010.

Just take a look at what’s happened at Bain Capital, the private equity firm Mitt Romney founded. From January 2009 through February 2010, Bain employees gave over $80,000 to state and municipal races, according to a state database. In a comparable period over this election cycle, contributions totaled $100. In the similar period, Fidelity workers pulled back from about $62,000 to about $34,000.

Perhaps no one stands to suffer more than Steve Grossman, who is running for governor. In his current job as state treasurer, the Democrat oversees the Massachusetts pension fund and works with financial firms.

Grossman called the rule “the right thing to do” to win public confidence in the political process. His camp started to notice financial firms cutting back at the end of his 2010 treasurer campaign, when the SEC said it would put pay-to-play rules in place. It’s meant casting a wider net for donations and tapping other networks, such as young professionals and environmentalists. So far, the strategy is working for the savvy fund-raiser: He has $1 million in cash on hand, more than any other candidate.


The issue has been a thorny one for General Catalyst, the Cambridge venture capital firm where one of its own, Baker, is running for governor. Can you imagine his colleagues not being able to give to the campaign?

The firm, in a statement, said it made a “conscious decision” to allow employees to give in Massachusetts races, because of the number of employees here and the firm’s “deep relationships and interest in the local community.”

To avoid conflicts with the pay-to-play rules, General Catalyst won’t pursue investments from Massachusetts government agencies or public pension plans.

Yes, you read that right. A firm putting employees’ constitutional rights over profits.

Stemberg believes the SEC has crossed a line and should refine its rules. “I would not be giving to curry favor with Charlie Baker to get pension money,” he said. I love Charlie Baker. I’ve known him since he was a high school senior.”

But Stemberg, now at Highland Capital Partners, admits he was a frustrated donor even before the SEC got involved — most of the candidates he supported haven’t won.

“That’s the life of a Republican in Massachusetts,” he said.

Of politics and profits, the SEC is just following the money.

Shirley Leung is a Globe columnist. She can be reached at Follow her on Twitter @leung.