SEC Proposes Measures to Curtail “Pay to Play” Practices


At yesterday’s Open Meeting, the SEC voted unanimously to propose measures intended to curtail “pay to play” practices by investment advisers that seek to manage money for state and local governments. In 1999, the SEC considered a proposal to curb adviser pay to play practices modeled on MSRB Rule G37 that applies to underwriters of municipal bonds. This new proposed rule is both broader in its coverage and narrower in its applicability that the 1999 proposed rule.

The new proposed rule has four primary aspects:

1. Restricting Political Contributions

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, either directly or through a fund.

The contribution prohibition would also apply to certain executives and employees of the  investment adviser.

Additionally, the range of restricted officials would include political incumbents and candidates for a position that can influence the selection of an adviser.

There is a de minimis exception that permits contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

2. Banning Solicitation of Contributions

The proposed rule also would prohibit an adviser from coordinating, or asking another person or political action committee to:

  1. Make a contribution to an elected official (or candidate) who can influence the selection of the adviser.
  2. Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.

3. Restricting Indirect Contributions and Solicitations

There would be prohibition on engaging in pay to play conduct indirectly, if that conduct would violate the rule if the adviser did it directly. That would include directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser.

4. Banning Third-Party Solicitors

There is prohibition on paying a third party, such as a placement agent, to solicit a government client on behalf of the investment adviser.

Comments and Publication

The full text of the proposed rule is not yet available. There will be a 60 day comment period.




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