On July 22, the Securities and Exchange Commission voted unanimously to propose measures intended to curtail “pay to play” practices by investment advisors seeking to manage money for state and local governments, including public pension and retirement plans for government employees and 529 plans (which allow families to invest money for college). The proposals are designed to prevent investment advisors from making political contributions or hidden payments to influence their selection by government officials.

The fairness of the selection process can be undermined if elected officials or their associates ask advisors for political contributions or otherwise make it understood that only advisors who make contributions will be considered for selection. The proposed rule, which has not yet been released by the SEC, would prohibit an advisor who directly or indirectly makes a political contribution to an elected official in a position to influence the selection of the advisor from providing such advisory services (either directly or through a fund) for compensation for two years. The proposal also contains a de minimis provision that permits an executive or employee of an advisor to make contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.  

It would also prohibit an advisor and certain of its employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the advisor and prohibit an advisor from doing indirectly what it could not do directly (e.g., by having a third party make political contributions on its behalf in order to circumvent the rule).  

Click here for a full transcript of the SEC Chairman’s remarks at the open meeting at which the vote was taken. More information on recent state legislation prohibiting pay to play practices is available in the May 1, 2009, edition of Corporate and Financial Weekly Digest.  

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