While Super PACs and million dollar contributions have dominated the campaign finance headlines this election year, as with every election, there are trends developing just below the surface that the media have yet to focus on clearly.  This year, one of those emerging trends is the increasing bite of so-called “pay to play” laws.  These are laws (actually, more often they are rules or mere policies) that restrict both contributions and fundraising activity by specific categories of donors who are presumed to be contributing in order to attract government contracts.  And they apply even when the contributions and solitations have absolutely nothing to do with business.  Sometimes they even apply to spouses and children — innocent bystanders who wind up as constitutional collateral damage in the campaign finance reform wars.

For example, municipal securities dealers have, since the mid-1990s, been subject to a pay to play rule established by the Municipal Securities Rulemaking Board (MSRB) and enforced (sometimes) by the SEC.  In 2010, the SEC adopted a much more significant pay to play rule for “investment advisers.” This new rule, which did not actually take full effect until after the 2010 election, is more consequential than most observers have realized.  It is complex, but boiled down to its basics, it effectively prohibits key employees of hedge funds, private equity funds, and many banks and other financial institutions from making political contributions to certain candidates and committees.  It also prohibits them from “soliciting” or “coordinating” contributions from others to those candidates and committees.

In theory, currently, the SEC’s rules and similar rules at the state and local level apply only to contributions made to state and local candidates and office holders.  But the impact on federal elections is much greater than that suggests.  Most obviously, some federal candidates currently hold state and local office.  Less obviously, some of the committees that are set up to help fund federal candidacies nonetheless touch state and local elections.  For example, a federal PAC, including a leadership PAC, might be heavily active in state races.  Or, as the Romney and Obama campaigns discovered this year, federal “joint fundraising committees,” which are proliferating rapidly this cycle (another quietly developing trend), may include state party participants.  The SEC’s pay to play rule bans soliciting or “coordinating” funds for state parties.  Complicating matters, the rule does not define the term “coordinate” but seems to be using it to mean something other than what the election law term-of-art “coordination” means.  That’s helpful.

What has been the practical effect of all this in this year’s federal elections?  Thousands of financial professionals have had to clear their contribution and fundraising activity through compliance departments that often are inclined to say “no” rather than spend time and money figuring out where exactly to draw the line.  Some firms have adopted actual or implicit policies of simply banning contribution and fundraising activity altogether.  And in some cases that has meant effectively banning contributions by spouses as well.

Much of this action is playing out in private, where it is not yet garnering much media attention.  But candidates, political parties and PACs are starting to notice.  The impact would have been more obvious and explosive had either Presidential candidate named a Governor as the Vice Presidential running mate.  Until that happens in some future election, this story may continue to percolate in obscurity.  But there are more and more pay to play laws, rules, and policies with each passing year — sometimes with each passing month.

There is a very serious question whether pay to play laws are constitutional, especially insofar as they ban or restrict mere soliciting of contributions.  The SEC’s pay to play rule is itself highly vulnerable to a constitutional challenge based on the First Amendment.  While the MSRB’s pay to play law was upheld by the DC Circuit in Blount v. SEC, other circuits may have a different view, and the Supreme Court’s view of the relevant First Amendment terrain has changed significantly since Blount.  All that is missing at the moment is a plaintiff with the will and resources to bring the case.