SEC Votes to Propose Rules That Will Ban 'Pay to Play'

Wall Street Journal
2009/07/27
By SARAH N. LYNCH
WASHINGTON -- The Securities and Exchange Commission voted unanimously to propose rules that would bar investment advisers from managing public pension programs for two years if they make political contributions.
The proposal, which seeks to curb so-called pay-to-play practices in which people make political contributions in exchange for public contracts, is similar to one the SEC considered in 1999 but never approved.
"There should be no place for such practices in an investment-advisory industry comprised of fiduciaries that are subject to high standards of ethical conduct," SEC Chairman Mary Schapiro said.
The SEC has said in recent months it wanted to dust off that 1999 proposal, which was modeled after a rule put in place by the Municipal Securities Rulemaking Board, the self-regulatory group for the municipal-securities industry.
Its resurrection comes a few months after the SEC filed civil lawsuits accusing New York's former deputy comptroller, David Loglisci, and political adviser Hank Morris of getting kickbacks from investment-management firms seeking to oversee the assets of the New York State Common Retirement Fund. They have denied the allegations and are fighting the charges.
The proposed rule would bar advisers from offering advisory services on pension plans and other programs for two years if they make a contribution to an elected official in a position to hire money managers. Advisers covered under the rule include those registered with the SEC as well as certain advisers of hedge funds and other private pools of capital.
Additionally, it would pertain to certain executives and employees of the money manager, and it would place those restrictions on contributions made to political incumbents as well as candidates.
Executives and employees, however, would be allowed to make contributions of as much as $250 per election per candidate if those individuals are entitled to vote for the candidate.
The proposal is similar to the 1999 proposal. Among the differences is that this one seeks to prevent some of the more sneaky types of pay-to-play practices in which advisers can steer contributions through third parties, such as a spouse. The commission estimates a total of $2.2 trillion in assets are held in public pension plans, representing one-third of all U.S. pension assets.