This article was originally published 23 July, 2009
On July 22, 2009, the U.S. Securities and Exchange Commission (the "SEC") held an open meeting, during which it voted to propose new rule 206-4(5) (the "Proposed Rule") under the Investment Advisers Act of 1940 (as amended, the "Advisers Act") designed to eliminate "pay-to-play" practices. Under the Proposed Rule, an investment adviser seeking to provide investment advisory services to a government entity would be prohibited from making or soliciting political contributions or related payments to or for elected officials or candidates in exchange for the award of an investment advisory services contract with such government entity.
This Client Update is based solely on statements made at the July 22 open meeting; the SEC's proposing release should provide additional details and clarifications with respect to the Proposed Rule.
In her opening remarks, SEC Chairman Mary Schapiro stated that the SEC's decision to address "pay-to-play" practices is based on a number of factors, including the significant amount of public pension assets currently managed by investment advisers, who should be selected based on merit rather than the payment of kickbacks, and recent criminal and regulatory actions relating to inappropriate payments to public officials. She indicated that "pay-to-play" practices distort competition among investment advisers and cause investment advisers to compromise their fiduciary obligations and violate applicable anti-fraud provisions. She noted that "pay-to-play" practices are often structured in a manner designed to be hidden, thus requiring prophylactic rules rather than disclosure requirements.
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This article has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.