The New York Times, in a recent article, called attention to the “paltry” sums contributed by the hedge fund industry to New York City mayoral candidates.  The article explains that hedge fund political contributions are limited—noting that some of the hedge fund industry’s “biggest personalities” are absent from the donor list, while others have contributed as little as $100—“largely because New York law caps individual contributions to mayoral candidates at $4,950.”

There is another reason.  Two, actually.  And both are pay-to-play laws.

A hedge fund seeking to do business with a public pension fund must abide by pay-to-play laws.  As we recently noted in The Hill, pay-to-play laws can dramatically impact political contributions by employees of investment advisers, including hedge funds and private equity funds.  Under pay-to-play restrictions, certain people in the hedge fund and private equity fund industries are subject to lower contribution limits (as little as $150) to covered public officials and may be prohibited from acting as fundraisers or bundlers for a campaign or party.

For example, hedge funds that manage (or would like to manage) the assets of City public pension funds are subject to two separate, overlapping pay-to-play laws:  The Securities & Exchange Commission’s pay-to-play rule, which caps contributions to covered officials (those with influence over pension fund decisions), and New York City’s Doing Business rules.

Mayoral candidates are expressly covered by the City’s Doing Business rules.  This means that anyone in the hedge fund or private equity fund industries “doing business” with the City may only contribute up to $400 per year to a mayoral candidate.   Mayoral candidates are also considered covered officials under the SEC’s rule with respect to multiple municipal pension funds.  The SEC’s rule imposes a separate limit of  $350 per election if the contributor is eligible to vote for the candidate, and $150 per election if not.  The SEC rule also prohibits fundraising or bundling on behalf of the candidates.

A hedge fund seeking to manage public assets (whether pension fund, endowment, or otherwise) must determine who the covered officials are under the SEC’s rule for each public asset, and which other pay-to-play laws apply.  Given the complexity of often overlapping pay-to-play restrictions, it is not surprising to find that some hedge funds and private equity funds discourage or even bar employees from making contributions that could prevent the hedge fund or private equity fund from seeking contracts to manage the assets of prominent public investment funds.