New York State Comptroller Thomas P. DiNapoli issued an executive order on September 23, 2009 prohibiting the $116.5 billion New York State Common Retirement Fund ("Fund") from doing business with any investment adviser who has made a political contribution to the State Comptroller or a candidate for State Comptroller.
Any investment adviser (as well as certain executives and employees of the adviser) that makes any such contribution will be barred for two years from the date of the contribution from providing advisory services to the Fund, either directly or indirectly. Comptroller DiNapoli characterized the ban as an "interim" policy that will remain in effect until the Securities and Exchange Commission ("SEC") adopts a final rule pertaining to "pay-to-play" political contributions. At the beginning of August, 2009, the SEC issued a similar proposed rule on political contributions under the Investment Advisers Act of 1940, as amended, and the comment period for that proposed rule will be open until October 6, 2009.
Comptroller DiNapoli has been active in curtailing pay-to-play practices ever since an alleged kickback scheme was uncovered involving the state's former deputy comptroller and certain placement agents that solicited Fund assets on behalf of investment managers. The Comptroller, earlier this year, banned the use of placement agents by investment managers seeking investments from the Fund. The SEC subsequently included the prohibition on the use of placement agents in its proposed rule.
Both Comptroller DiNapoli's executive order and the SEC's proposed rule on political contributions are patterned after restrictions imposed on underwriters of municipal bonds by the Municipal Securities Rulemaking Board ("MSRB") under MSRB Rule G-37. As with Rule G-37, there is a de minimis provision contained in the executive order that would permit a covered executive or employee to make contributions of up to $250 per election per candidate for State Comptroller if the contributor is entitled to vote for the candidate.
The enforcement mechanism of the executive order requires the investment adviser to provide a certified political contribution "representation" that no such contribution has been made after the effective date of the policy to the incumbent or candidate for State Comptroller, within the two-year time period immediately preceding the date of the representation. In the event the investment adviser fails to comply with the representation requirement, no investment by the Fund shall occur and/or no agreement between the Fund and the adviser shall be entered into. Further, if it is later determined the investment adviser has made a material misstatement or omission in such representation, the Fund shall have the option, in its sole discretion, to terminate its relationship with the adviser.
Finally, exemptions to compliance with the order may be granted by the Inspector General and the Special Counsel for Ethics, both of the Office of the State Comptroller, in appropriate cases, including where the adviser in good faith took steps to (i) comply with the policy before a contribution resulting in a violation was made and (ii) remedy the violation after awareness of the prohibited contribution.