SEC Proposes Rules on Pay to Play Practices

July 23, 2009 ( - The Securities and Exchange Commission (SEC) has 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.

An SEC news release says the measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials. 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, either directly or through a fund.

The rule would apply to the investment adviser as well as certain executives and employees of the adviser. Additionally, the rule would apply to political incumbents as well as candidates for a position that can influence the selection of an adviser, according to the news release.

There is a de minimis provision that permits an executive or employee to make contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

The proposed rule also would prohibit an adviser and certain of its executives and employees from coordinating, or asking another person or political action committee (PAC) to:

  • Make a contribution to an elected official (or candidate for the official’s position) who can influence the selection of the adviser; or
  • Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.

Under the rule an adviser and certain of its executives and employees would also be prohibited from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser. Finally, the proposed rule would prohibit an adviser and certain of its executives and employees from engaging in pay to play conduct indirectly, such as by directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser, if that conduct would violate the rule if the adviser did it directly.

Public comments on the proposed rule must be received by the Commission within 60 days after publication in the Federal Register . The SEC said the full text of the proposed rule will be posted to its Web site at as soon as possible.

Probes into pay to play practices in New York by New York Attorney General Andrew Cuomo and the SEC expanded to other states (see Cuomo Announces Multi-state Effort on Pension Abuse ), and led some states to adopt new rules of their own (see NJ Adopts New Placement Agent Standards ).