Originally published in Political Activity Law Bulletin, June 11 2009
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In response to allegations of "pay-to-play" in the award
of contracts to manage New York pension funds, the Securities and
Exchange Commission ("SEC") plans to propose at the end
of July new restrictions on firms subject to the Investment
Advisors Act of 1940. The SEC intends to propose a rule modeled
after MSRB Rule G-37 (a municipal bond rule) that would restrict
investment advisors from managing state and local governments'
money if the firm or its executives make certain state or local
political contributions.
This is not the first time the SEC will take up a review of these
concerns – in fact, the rule the SEC intends to
re-propose was first considered in 1999. If enacted, the rule would
parallel the restrictions currently imposed by G-37 and impose
those limits on investment advisers. Specifically, the rule would
prohibit investment advisers from providing advice for compensation
to a government entity within two years following a political
contribution to an official of the government entity from (i) the
adviser, (ii) any of its partners, executive officers, or
solicitors, or (iii) any PAC controlled by the adviser or its
partners, executive officers, or solicitors. The rule would exempt
contributions of $250 or less in the aggregate to candidates for
whom the donor is entitled to vote. The rule also would impose a
record-keeping obligation on investment advisers.
As mentioned, the rule's prohibitions would be triggered by a
contribution to an "official of a government entity."
"Government entity" would include all state and local
governments, their agencies and instrumentalities, and all
government pension plans and other collective funds. An
"official" would include incumbent candidates or
successful candidates for office if the office (or the office's
appointee) is directly or indirectly responsible for, or can
influence the outcome of, the selection of an investment
advisor.
This proposed rulemaking arises out of allegations that money
managers and their placement agents have used ties to public
officials and kickbacks to buy and sell access to the $2 trillion
currently invested in and on behalf of U.S. public pension systems.
New York state has already banned the use of placement agents
outright, and other states may follow suit. In the most recent
example, the California Public Employees' Retirement System
("CalPERS") adopted a new policy on May 11, 2009, which
does not impose an outright ban but instead requires external
managers to disclose fees and other information about the placement
agents they hire to seek CalPERS business.
This area of law is rapidly developing and various state
governments and other regulatory agencies can be expected to add
different approaches to these concerns in the months ahead.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.