At a public meeting on July 22, 2009, the Securities and Exchange Commission (the "SEC") unanimously voted to propose a rule intended to curtail "pay to play" practices by investment advisers that seek to manage money for state and local governments. The proposed rule is intended to prevent an investment adviser from making political contributions or other payments to influence their selection by government officials who oversee public pension funds. SEC Chairman Mary Schapiro first mentioned the proposal in late April, after NY Attorney General Andrew Cuomo unsealed indictments following a two-year investigation into alleged kickbacks related to the use of unregistered placement agents for the US$122 billion New York State Common Retirement Fund.

Under the proposed rule, an investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation to the particular government entities for which triggering contributions have been made. The proposed rule would also apply to certain executives and employees of the investment adviser and to candidates for a position that can influence the selection of an investment adviser. The de minimis provision in the proposal would permit an executive or employee of an adviser to make contributions of up to US$250 per election per candidate if the contributor is entitled to vote for the candidate.

The proposed rule would prohibit an investment adviser and certain of its executives and employees from (A) coordinating or asking another person or political action committee to make (i) a contribution to an elected official, or candidate for the official's position, who can influence the selection of the adviser or (ii) a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government; (B) paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser; or (C) directing or funding contributions through third parties such as spouses, lawyers or affiliated companies, if that conduct would violate the proposed rule were the adviser to do so directly.

Comments on the proposed rule must be received by the SEC by October 6, 2009.

Press Release: SEC Proposes Measures to Curtail "Pay to Play" Practices (July 22, 2009) (HTML)

Proposed Rule: available here (August 3, 2009) (PDF)

Related Update on Placement Agent Investigations: available here (June 17, 2009) (HTML)

Text of SEC Chairman Schapiro's Speech: available here (July 22, 2009) (HTML)