SEC Proposes To Curtail Pay-To-Play Practices

by Glen Shapiro, LawAndTax-News.com, New York

31 July 2009

The Securities and Exchange Commission (SEC) proposed on July 22 measures to curtail "pay to play" practices by government investment advisers, namely to prevent advisers from making political contributions or hidden payments to influence their selection by government officials. Government investment funds of all varieties total about USD2.2 trillion, according to estimates published in the New York Times.

The proposals relate to money managed by state and local governments under important public programs, including public pension plans that pay retirement benefits to government employees, retirement plans in which teachers and other government employees can invest money for their retirement, and numerous plans that allow families to invest money for college. To help manage this money, state and local governments often hire outside investment advisers who may directly manage this money and/or provide advice. The investment advisers typically charge fees that come out of the assets of the funds for which the advice is provided. Fairness can be undermined if advisers seeking to do business with state and local governments make political contributions to elected officials or candidates, hoping to influence the selection process.

The selection process also can be undermined if elected officials or their associates ask or appear to ask advisers for political contributions, implying that it is a condition of being considered for selection – hence the term "pay to play".

"Pay to play practices can result in public plans and their beneficiaries receiving sub-par advisory services at inflated prices," said SEC Chairman Mary Schapiro. "Our proposal would significantly curtail the corrupting and distortive influence of pay to play practices."

The rule being proposed for public comment by the SEC includes prohibitions intended to capture not only direct political contributions by advisers, but other ways advisers may engage in pay to play arrangements.

Restricting Political Contributions

Under the proposed rule, an investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.

Banning Solicitation of Contributions

The proposed rule also would prohibit an adviser and certain of its executives and employees from coordinating, or asking another person or political action committee (PAC) to:

• Make a contribution to an elected official (or candidate for the official's position) who can influence the selection of the adviser.
• Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.

Banning Third-Party Solicitors

The proposed rule also would prohibit an adviser and certain of its executives and employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser.

Restricting Indirect Contributions and Solicitations

Finally, the proposed rule would prohibit an adviser and certain of its executives and employees from engaging in pay to play conduct indirectly, such as by directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser.

New York State Comptroller, Thomas P. DiNapoli, who has actively promoted these reforms after having to deal with an investment scandal involving New York State pension funds, said: "I’ve already implemented a number of reforms to address the transgressions committed in New York under the Hevesi administration. Chairman Schapiro is taking reform to the national level. The SEC proposal will help restore public confidence and trust in the management of public pension funds." The New York Times also supports the proposals strongly and feels they should be extended to include lawyers who make huge fees negotiating contracts for the state.

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