Alert July 28, 2009

SEC Proposes Rule to Curtail “Pay to Play” Practices by Investment Advisers Seeking to Manage Money for State and Local Governments

The SEC voted to propose a rule intended to curtail “pay to play” practices where an investment adviser makes political contributions or hidden payments to influence government officials to select the adviser to manage money on behalf of public pension plans, retirement plans and 529 plans.  This summary is based on the SEC press release announcing the proposed rule.  A future edition of the Alert will discuss the proposing release once it becomes available.

The proposed rule would, among other things:

  • Prohibit direct political contributions by investment advisers (including certain of their executives and employees) to elected officials or candidates (or their associates), subject to certain de minimis exceptions;
  • Bar an investment adviser who makes a political contribution to an elected official (or candidate) in a position to influence the selection of the investment adviser from providing advisory services for compensation, either directly or through a fund, for two (2) years;
  • Prohibit an investment adviser from soliciting contributions to an elected official (or candidate) who can influence the selection of the investment adviser and from soliciting payments to a political party of the state or locality where the investment adviser is seeking to provide advisory services to the government;
  • Prohibit an investment adviser from paying a third party (e.g., a solicitor or placement agent) to solicit a government client on behalf of the investment adviser; and
  • Prohibit an investment adviser from directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the investment adviser if that conduct would violate the rule if the investment adviser engaged in such conduct directly.