The Pecan Pie Theory of Public Contributions
An Overview of Public Pensions, Fundraising, and Pay-to-Play Rules
Do you guys remember former Ohio governor John Kasich? He kind of fumbled his chance at the US presidency back in 2016 when people caught him eating pizza with a knife in New York.
“It [the pizza] was so hot,” Kasich later remarked in an interview, “that I made a terrible mistake.”
“I picked up a fork.”
For those familiar with New York pizza culture, this was a social faux pas. In a city where folding your slice is second nature, using utensils is almost an affront to the idea of pizza.
Though, there are types of pies you can eat with a fork—and, as some of you know, I’m currently perfecting one of them this autumn: pecan pie. As an aspiring (yet far-from-professional) baker, I’ve found that pecan pie isn’t just an autumn favorite—it also offers a peek into the world of public pension funds and private fund capital raises.
For Kasich, eating pizza with a fork was a gaffe. For certain investment professionals, it can be criminally fatal.
No Pie For Me
In private equity, particularly when fundraising for a new fund, professionals often interact with public pension investment officers. These are some of the people responsible for managing the financial assets of pensions, and they have very strict rules about what they can and can’t accept as gifts from others in their official capacity. In some cases, a seemingly innocent gesture—like offering a slice of pecan pie—could cross an ethical or even legal line.
I’ll call this the Pecan Pie Theory of Public Contributions.
The basic idea is that public pension officials are prohibited from accepting anything of value—whether it’s cash, gifts, or food—that could influence their professional decisions, such as which private equity firm they decide to invest in.
It’s a simple premise: if you’re trying to raise capital from a public pension fund, you cannot offer gifts or benefits to the people who control those funds. And while the notion of offering someone a piece of pecan pie might seem trivial, it can easily be seen as a form of bribery if it’s part of a quid pro quo arrangement (i.e., offering the pie in return for their business).
Applying the Litmus Test
Let’s take Texas as an example. The state has rules regarding what public officials can and cannot accept from anyone seeking a business relationship with the government. Texas law, specifically Section 572.001, states that a state employee—especially one involved in managing public funds—cannot engage in transactions that could conflict with their official duties. This includes accepting gifts that could influence their decisions.
State officers and employees are prohibited from engaging in activities or transactions that conflict with their public duties. This includes having financial or other substantial interests in business entities that could influence their decisions. Texas also requires these individuals to file detailed financial statements disclosing personal assets, investments, and gifts to ensure transparency and prevent conflicts of interest.
So, if you’re a private equity professional trying to raise capital from a Texas public pension, offering a slice of pecan pie could be seen as a direct violation of these rules.
The key theoretical takeaway is, if you’re a capital raiser, and you approach a pension fund officer at a conference with a gift (even something as simple as a slice of pie), you’re putting them in a legally precarious position. To keep it simple, if you offer someone a slice of pecan pie while you’re discussing a potential investment deal with them, chances are they cannot accept it, even if it’s a genuine gift with no strings attached.
However, there is a grey area. If the pie (or other snacks) is simply available during a networking hour—say, at a conference tea break where everyone is helping themselves—that’s generally fine. The key here is that the gift (or food) is not specifically directed at the pension officer in exchange for their business. It’s a more neutral setting, where the gift is available to all attendees, not just one individual.
This is why things can get murky. There’s a fine line between offering a gift in a way that could be interpreted as bribery and offering it as part of a larger, more casual networking opportunity.
Ultimately, the point is that under certain circumstances, pecan pie could indeed be a legal minefield for public pension officials in Texas. Offering a slice of pie for investment capital—however innocent it may seem—could violate state anti-bribery laws.
I can’t claim that all 50 states have this exact type of law (this would require more research), but I am confident that they have some permutation thereof.
The $2700 Gamble
Back to Kasich: our story doesn’t end with the pizza thing.
In January 2016, Mark Wiedman, an executive at BlackRock (and now a member of the firm’s global executive committee), made a $2,700 donation to Kasich’s presidential campaign, which sparked concerns about violating the U.S. Securities and Exchange Commission’s (SEC) pay-to-play rules, specifically Rule 206(4)-5 of the Investment Advisers Act of 1940, which prohibits investment advisers—paid entities or persons who have discretionary authority over the investable assets of a fund. Generally, these rules prevent investment advisers from receiving compensation from government entities for two years after public contributions are made to officials who can influence such contracts.
Kasich, as Ohio’s then-governor, had significant influence over the Ohio Public Employees Retirement System (OPERS)—a key BlackRock investor—because state governors often play a pivotal role in appointing board members and influencing decisions about public pension fund investments.
BlackRock sought an exemption, arguing that the contribution was purely personal and not intended to influence business. Wiedman also worked to return the donation. Though the SEC didn’t impose sanctions, BlackRock faced the risk of losing $37 million in fees if the exemption was denied.
Pay-to-Play Contributions: A Primer
Public contributions, as defined by the SEC, refer to monetary donations made by investment advisers and their associated personnel to candidates for public office or political parties (or public employees more broadly). The SEC’s focus on these contributions stems from concerns that such donations may influence the awarding of advisory contracts for government investment accounts, particularly public pension funds.
The SEC’s Pay-to-Play Rule, formally known as Rule 206(4)-5 of the Investment Advisers Act of 1940, was established in 2010 to combat corruption in public finance. This rule arose from a historical context where contributions could lead to conflicts of interest, particularly in the management of state and local government assets.
Here are a couple of points worth noting on 206(4)-5:
Two-Year Ban: investment advisers are prohibited from providing advisory services for compensation to a government entity for two years after making a contribution to an official who can influence the selection of investment advisers.
De Minimis Limits: contributions are restricted based on thresholds.
$350 per election if the contributor can vote for the candidate.
$150 per election if not entitled to vote.
Look-Back and Look-Forward: the look-back applies to employees who become covered associates—individuals tied to an adviser, subject to rules, including partners, officers, and employees—attributing contributions made within two years prior to their association with the firm. If the individual wasn’t employed at the time of the donation, the firm is still held accountable for those contributions. For covered associates who don’t engage in client solicitation, the look-back period is reduced to six months. The look-forward ensures that contributions made by covered associates, even after they leave the firm, still subject the firm to the rule's restrictions for two years from the contribution date.
Solicitation Prohibition: advisers cannot solicit or coordinate contributions from others to influence government officials.
Anti-Circumvention: this provision prohibits any indirect actions that would violate the rule if done directly, such as funneling contributions through friends or family
Along with the de minimis amounts mentioned above, a notable exception to the rule is if a contribution is returned promptly after being made—exempting the adviser from penalties under certain conditions (kind of like what happened in the BlackRock example).
SEC Enforcement in 2024: A Brief Fund Regulatory Roundup
In the spirit of further building our regulatory knowhow, below is a short summary of investment adviser/private funds-related SEC activity for 2024 that I have pulled from an SEC release the agency published last week:
Marketing Rule Violations: The SEC has continued its focus on the Marketing Rule (Rule 206(4)-1 of the Investment Advisers Act if 1940), which governs how fund managers market their services. This rule prohibits misleading performance claims, including unsubstantiated statements, and mandates that advisers ensure their advertisements, such as hypothetical performance data, are relevant to the intended audience’s financial situation. The SEC brought charges against managers who failed to comply with these standards, including those using testimonials or endorsements without proper disclosures.
Failure to Disclose Securities Holdings: The SEC charged eleven investment managers for failing to disclose their securities holdings as required by Section 13(d) and 16(a) of the Securities Exchange Act of 1934.
Off-Channel Communications: The SEC’s off-channel communications initiative ensures investment advisers comply with record-keeping requirements, emphasizing the importance of maintaining accurate records for investor protection.
Fraud and Mismanagement: The SEC also addressed fraud cases involving misused client funds, false statements, and cherry-picking schemes.
That was a lot to take in, and I am hopeful that illustrating the pay-to-play rules through a lighthearted, if occasionally far-fetched example has been helpful.
Hope you got to eat some good pie for Thanksgiving!