Executives at investment firms that manage Chicago pension funds have since 2011 poured more than $600,000 in contributions into Mayor Rahm Emanuel's campaign operation and political action committees (PACs) that support him, according to documents reviewed by International Business Times. These contributions appear to flout federal rules banning companies that manage pension funds from financing the campaigns of officials with authority over pension systems, say legal experts.

The contributions also potentially conflict with an executive order Emanuel himself signed in 2011 prohibiting city contractors and subcontractors from making campaign donations to city officials.

A former chief of staff to President Obama, Emanuel, a Democrat, was elected Chicago mayor three years ago with a substantial boost from financial services executives. Since 2011, at least 31 executives at firms that harvest fees by managing city pension funds have contributed to his campaign and associated PACs. That list of donors includes Kelly Welsh, a Northern Trust executive who was recently appointed by President Obama to the top legal position in the U.S. Commerce Department. (See related story here.)

Former prosecutors, corporate compliance attorneys and erstwhile officials at the Securities and Exchange Commission describe the donations as a clear breach of the spirit -- and perhaps the letter -- of the SEC's so-called pay-to-play rule, which seeks to prevent pension investments from being doled out as a form of patronage to those who contribute to campaigns.

"The management of municipal pensions should be totally transparent and free of political influence,” former SEC chairman Arthur Levitt told IBTimes after the Chicago contributions were described to him. “The acceptance of contributions by city officials from advisers managing city funds, in my book, smells like bribery.”

Emanuel did not respond to a request for comment.

Former prosecutors and SEC lawyers say the Chicago situation exemplifies a troubling national trend: Mayors and governors are taking office through, in part, the largesse of financial services companies that bankroll their campaigns, then using their newfound authority over pension systems to put public money into the hands of their donors.

“It looks like these contributions to Rahm Emanuel violate the pay-to-play prohibitions,” Melanie Sloan, a former federal prosecutor in the Clinton administration who now runs the group Citizens for Responsibility and Ethics in Washington, said. “This is looking like a more significant problem throughout the country. Politicians are treating these rules as if they are meaningless and it is time for regulators to take action against all the violators. The SEC needs to step in and shut this down.”

The contributions to Emanuel from financial firms that manage municipal pension funds -- the retirement savings for city teachers, police, firefighters and other municipal employees -- appear to conflict with the objectives of the SEC's pay-to-play rule, which the commission enacted three years ago after a major pension corruption scandal in New York.

"Elected officials who allow political contributions to play a role in the management of these assets and who use these assets to reward contributors violate the public trust," the agency declared in announcing the rule. "They undermine the fairness of the process by which public contracts are awarded... They can harm pension plans that may subsequently receive inferior advisory services and pay higher fees. Ultimately, these violations of trust can harm the millions of retirees that rely on the plan."

The rule specifically prohibits financial firms from earning fees from public pension funds if their executives make campaign donations to the public officials who can exert influence over pension investments.

Emanuel qualifies as such an official, legal experts told IBTimes, because he and his administration appoint trustees to the boards that manage the $23 billion in Chicago's six municipal pension funds.

The rule applies to contributions to officials like Emanuel both before and during the term of an investment, even if -- as in Chicago’s case -- the original decision to invest in the firms was made before the public official took office. In its first enforcement action under the rule, in June, the agency explicitly said the rule applies even when there is no proof that campaign contributions were part of a "quid pro quo or actual intent to influence an elected official or candidate.” The prosecution of that first enforcement action involved contributions totaling just $4,500 -- far smaller than the amount of money that has flowed to Emanuel.

"The SEC could not be more clear: They don't care about intent or the actual ability to affect public activity -- it is purely a relationship-based penalty," Stefan Passantino, who runs the political law team at McKenna, Long & Aldridge LLP, said. "The entire reason these laws exist is because legislators can't always prove there is a direct linkage between the giving of money and the request for official favors as is the case with bribery, so they ban the conduct entirely."

The SEC’s chief of enforcement told a conference of financial executives this week that the commission is intensifying its scrutiny of the relationship between campaign contributions and public pension investments. In addition to the June enforcement action, SEC documents revealed this week that the agency is investigating the relationship between the public pension business of financial firm State Street and that firm’s political contributions and lobbying activities.

What the SEC rules mean, according to Jay Dubow, a former attorney in the SEC’s division of enforcement, is this: "You can either influence elections, or you can run funds that manage money for public entities. You cannot do both."

It appears that some companies did.

In Chicago, the John Buck Co. is currently listed as a real estate investment manager for two city pension funds. In all, the firm has managed $54 million of city pension money and has earned hundreds of thousands of dollars in fees from those funds since 2011. Executives of the company, which has various business interests before the city government, recently gave more than $47,000 to Emanuel’s campaign. A firm executive also gave $10,500 to a political action committee that the Chicago Tribune notes Emanuel “uses for political activities that support his policy initiatives at City Hall.”

The company declined IBTimes’ request for comment.

Madison Dearborn Partners, a private equity firm, manages Chicago pension money as one of a group of managers in a set of pooled investments. Company executives have contributed more than $52,000 to Emanuel's campaign since 2011. The firm's executives also gave more than $456,000 to two political action committees set up by Emanuel associates to support the mayor.

Though the SEC rule and Emanuel's executive order seem on their face clear and unambiguous, the contributions from Madison Dearborn executives highlight one legal ambiguity that companies managing pension money may be relying on to continue directing cash to campaigns: The firm argues that it is essentially exempt from the restrictions because Madison Dearborn does not directly manage Chicago pension money. Rather, it manages Chicago money that is invested in a pooled investment vehicle known as a fund of funds. Madison Dearborn is one of a handful of companies in a pair of fund-of-funds that get Chicago pension cash.

“Madison Dearborn Partners is in full compliance with all SEC rules and legislation,” the company said in a written statement.

Public pension systems typically do not release the identities of a fund of funds managers -- sub-advisers, in the relevant legal parlance. They are usually known only by pension officials and the investment firms themselves. The public, meanwhile, can see only the identities of the firms running the entire fund of funds. But documents obtained by IBTimes reveal that one piece of the Chicago pension system, the $5.3 billion Municipal Employees Annuity and Benefit Fund, invests in an Adams Street Partners fund of funds in which Madison Dearborn entities comprise 9 of the 16 total funds.

In other words, Madison Dearborn manages a significant slice of Chicago pension investments.

The SEC has explicitly decreed that managers of a fund of funds are governed by its pay-to-play rules. "It is not appropriate to exclude subadvisers from the rule," the commision said, because otherwise the rule would be compromised by a gaping loophole: Firms “that sought to avoid compliance” with the rule's strictures could make campaign contributions as they pleased while handling their public pension business exclusively through fund of fund relationships. The agency included provisions barring financial firms from doing "indirectly what [they] could not do directly under the rule."

In an emailed statement, Adams Street CEO T. Bondurant French told IBTimes, "Madison Dearborn Partners is not a sub adviser to Adams Street Partners." When asked about the municipal document showing that 9 of the 16 funds in Adams Street’s fund of funds are run by Madison Dearborn Partners, French did not respond.

Attorneys for the law firm Cohen and Milstein, which advises clients on SEC compliance, recently told retirement system trustees gathered at a conference in New Orleans that executives at companies managing public pension money through fund of funds are covered by the rule.

Madison Dearborn maintains it is not obligated under the rule to determine whether it is managing Chicago pension money. But former SEC attorney Dubow says that argument is not good enough.

"You can't just put your head in the sand and say I don't want to know,” said Dubow, now a lawyer at the Pepper Hamilton law firm . “The onus is going to be on the subadviser to show they didn't know they were managing pension money."

Asked about Mayor Emanuel’s ban on contributions from municipal subcontractors, Madison Dearborn said it is not a municipal subcontractor, and contended that the executive order does not apply to the city’s pension system.

Chicago Alderman Scott Waguespack took issue with that interpretation.

“The executive order should apply to the contractors and subcontractors across the board, including in the pension funds,” he told IBTimes. “That's one of the most lucrative areas where these guys can make money. They are given a large chunk of change to play with and there's little oversight of these financial contracts from any legislative body or organization. Firms doing business with Chicago pension funds are clearly contractors -- trying to say otherwise is splitting hairs to try to say these contributions are legal.”

In the John Buck case, city documents show the firm directly manages city pension money -- and earns hundreds of thousands of dollars in fees -- through its own real estate equity funds. At the same time, its executives have contributed tens of thousands of dollars to Emanuel’s campaign.

John Buck and other real estate firms managing public pension money may be assuming they are not regulated by the SEC or any of the agency’s rules.

SEC documents show that while an affiliate of the John Buck Co. had in 2008 been a registered SEC investment adviser, that registration has expired. If the company is not actually managing real estate securities, and is only buying and selling buildings, it may not have to register and therefore may not be subject to SEC rules, said former SEC counsel Scott Kimpel of Hunton & Williams law firm. But a close reading of SEC guidance suggests the rule is designed to cover all investment firms doing business with public pension systems.

David Hoffman, a former Chicago inspector general who served on the Illinois anti-corruption panel formed after the prosecution of Gov. Rod Blagojevich, told IBTimes that while the nuances of pay-to-play laws can be debated and parsed, their intent is obvious.

“The purpose of these limitations on campaign contributions is to try to ensure that the city's decisions about who should manage its money are made on the merits, and without regard to any influence that could come from a campaign contribution,” Hoffman, who is currently an Emanuel administration appointee, said. “It makes sense to understand the rules in light of that purpose -- and especially in light of the problematic history that we've seen in the state and city in that regard."