11/11/2009 08:18:53 AM EST
The SEC’s Proposal of "Pay-to-Play" Rules for Investment Advisers
SEC proposed Rule 206(4)-5 (the "Proposed Rule") under the Investment Advisers Act of 1940 (the "Advisers Act") addresses perceived "pay-to-play" practices by certain investment advisers providing advisory services to state, county and municipal public employee retirement plans or other government programs, such as transportation, children's services, arts and environmental reclamation programs.
The authors write: The Securities and Exchange Commission (the "SEC" or "Commission") released proposed Rule 206(4)-5 under the Investment Advisers Act of 1940 to address perceived "pay-to-play" practices by certain investment advisers providing advisory services to state, county and municipal public employee retirement plans or other government programs, such as transportation, children's services, arts and environmental reclamation programs. The Proposed Rule is modeled on, and draws on the SEC's experience regarding, MSRB Rules G-37 and G-38, which are intended to prevent "pay-to-play" practices among municipal securities dealers. The Proposed Rule is similar to the SEC's 1999 proposal to address advisers' "pay-to-play" practices, with certain changes, which the SEC abandoned in the face of widespread opposition by public officials and the advisory industry.
In the proposing release, the SEC cites a number of recent enforcement actions brought by the SEC and criminal authorities related to "pay-to-play" practices, and the SEC argues that these practices have the potential to compromise the adviser selection processes of government clients as well as investment advisers' fiduciary standards. The SEC also points out that it is hard to prove that a contribution has been made expressly to influence the selection process, as a way to justify the broad prophylactic prohibitions of the Proposed Rule.
The Proposed Rule seeks to protect government clients by preventing certain investment advisers from making contributions or payments to public officials responsible for overseeing those government assets as a "quid pro quo" for directing business to the adviser. The Proposed Rule would apply to all investment advisers registered with the SEC, as well as all investment advisers excepted from such registration by Section 203(b)(3) of the Advisers Act, the "private adviser" exception. The Proposed Rule also would apply to investment advisers to "covered investment pools," which includes registered investment companies (such as mutual funds) as well as certain private funds. [footnote omitted]