SEC Adopts Pay to Play Curbs

A news release said the rule includes prohibitions intended to curtail influence over the awarding of investment management mandates because of direct political contributions by investment advisers as well as attempts to exert influence more indirectly. 

“The selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors,” said SEC Chairman Mary L. Schapiro, in the agency news release “These new rules will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service.”

According to the agency, the new rule:

• prohibits an investment adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years if the adviser or certain of its executives or employees make a political contribution to an elected official who can influence the adviser’s selection.
• prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as “bundling” — for an elected official who can influence the adviser’s selection. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.
• prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

The SEC announcement said the new rule becomes effective 60 days after its publication in the Federal Register. Compliance with the rule’s provisions generally will be required within six months of the effective date. Compliance with the third-party ban and those provisions applicable to advisers to registered investment companies subject to the rule will be required one year after the effective date, the SEC said.

Pay to play issues have been the subject of federal probes and numerous state investigations around the country in recent years, prompting lawmakers in many states to adopt their own curbs on the practice (see Cuomo Garners Five Pension Probe Settlements).