In response to a flurry of recent enforcement actions and investigations of "pay-to-play" practices involving pension funds and placement agents in a number of jurisdictions, the Securities and Exchange Commission (the "SEC") has announced that it expects to propose certain pay-to-play rules sometime in July.
SEC spokesman John Nester said the SEC is "seriously considering" reintroducing a 1999 proposal under the Investment Advisers Act of 1940 (the "Advisers Act") that would have required an investment adviser to give up any compensation received for managing public funds for two years after making a campaign contribution to a state official or candidate who could have influenced the selection of the adviser. The 1999 proposal would have also required registered investment advisers with government clients to keep records of their political contributions.
Some industry participants believe, however, that the pay-to-play concerns would be better addressed through disclosure, particularly given that Rule 206(4)-3 of the Advisers Act requires all registered investment advisers to disclose to clients any compensation paid in exchange for solicitation activity. In light of pending legislation, it is expected that most investment advisers will be required to register with the SEC in the near future and will therefore be subject to these disclosure requirements.
In a letter to SEC Chairman Mary Schapiro dated May 13, New York City Comptroller William C. Thompson Jr. urged the SEC to reintroduce the 1999 proposal, as well as to tighten federal regulation of entities or individuals acting as placement agents in connection with investments by public pension funds. Thompson noted that many placement agents are not registered with any federal agency and engage in fee-splitting arrangements with undisclosed parties. He stated that this, along with recent SEC and other governmental pay-to-play related enforcement actions, underscores the need for additional transparency in the activities of public pension funds.
The SEC is currently engaged in a massive investigation into pay-to-play practices involving pension funds in New York, California and New Mexico. The SEC filed civil charges in late April against Aldus Equity Partners LP and one of its founding partners, Saul Meyer, over an alleged kickback scheme involving New York state's largest pension fund. The SEC also charged Julio Ramirez Jr., a former affiliate of DAV/Wetherly Financial LP, on May 12 with involvement in the scheme.
The New York state government is conducting parallel investigations. As part of the settlements with New York Attorney General Andrew Cuomo to resolve their respective roles in the investigation, The Carlyle Group agreed on May 14 to pay a US$20 million penalty and Riverstone Holdings, a private equity firm and Carlyle's joint venture partner, agreed on June 11 to pay a US$30 million penalty. Both firms also agreed to enact a code of conduct that bars their employees from making campaign contributions to pension officers and prohibits the use of middlemen to win business from public pensions. In addition, New York is implementing regulations that bar the involvement of paid intermediaries in state pension fund decisions.
Regulators disagree over whether placement agents should be registered as lobbyists or with the SEC as broker-dealers. According to New York Attorney General Cuomo, between 40 and 50 percent of all placement agents and other intermediaries involved in transactions with New York pension funds are neither registered as broker-dealers nor as lobbyists. The current investigations place great scrutiny on any such unregistered intermediaries.
We will continue to monitor these developments.
Story: SEC to Propose, as Early as July, Pay-to-Play Rules for Investment Advisers, 41 Sec. Reg. L. Rep. 899 (May 18, 2009)
Proposed 1999 Rule: Political Contributions by Certain Investment Advisers, SEC Rel. No. IA-1812 (Aug. 4, 1999)
Related Story: Cuomo Issues Subpoenas, Expands Pension Fund Pay-to-Play Investigation, 41 Sec. Reg. L. Rep. 880 (May 11, 2009)
Press Release: Cuomo Announces Landmark Agreement with The Carlyle Group to Eliminate Pay-to-Play in Public Pension Funds Nationwide (May 14, 2009)
Thompson Letter: available here (PDF)