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SEC 'Pay-to-Play' Proposal May Stem Pension-Industry Abuses


Posted on 24 Jul 2009

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The U.S. Securities and Exchange Commission's plan to restrict investment advisers from giving politicians money to win pension business may help stem abuses in an industry that oversees more than $2.2 trillion of public retirement funds, former regulators said.

The SEC's five commissioners unanimously backed a proposal yesterday that would bar managers of hedge funds and private- equity firms from paying so-called placement agents to solicit pension investments. The measure would also bar firms from managing a pension fund’s assets for two years if its executives gave money to an elected official with sway over contracts.

“It’s generally understood that the way you get a ticket to compete for the management of public money is to make political contributions,” said Mercer Bullard, a former SEC attorney who’s now a law professor at the University of Mississippi. “This will shut down that business.”

The SEC and New York Attorney General Andrew Cuomo are probing whether money managers illegally paid placement agents for access to New York retirement funds. Indictments and civil complaints depict officials who let political and personal ties trump merit in deciding which firms should be entrusted with taxpayer money.

The proposal “is a long time coming,” said Christopher “Kit” Taylor, who implemented similar rules for the municipal bond market in the 1990s, when he led the Municipal Securities Rulemaking Board. “It will change the process on how money is given to the private-equity firms and other money managers.”

Employees Barred

Investment advisers pay placement agents for access to pension-fund money. The SEC proposal would bar money managers and some of their “executives and employees” from making such payments, according to an agency statement.

The SEC proposal would also keep investment advisers from asking another person or a political action committee to make contributions to officials with influence over pension assets. Investment managers would also face restrictions on directing their spouses, attorneys or affiliated companies from donating to campaigns.

Individuals who would face restrictions on contributions include owners of money-management firms, general partners and employees whose responsibilities include soliciting pension-fund business.

The SEC recommendations resemble rules proposed by the agency in 1999 that were never adopted. In the 10 years since the SEC considered the restrictions, it has seen “a number of criminal and regulatory actions that suggest the need to act to finally address these practices,” SEC Chairman Mary Schapiro said yesterday at a meeting in Washington.

‘Sub-Par’ Advice

“Pay-to-play practices can result in public plans and their beneficiaries receiving sub-par advisory services at an inflated price,” she said. “There should be no place for such practices in an investment-advisory industry comprised of fiduciaries that are subject to high standards of ethical conduct.”

To ensure the rules are enforced, money managers would face new record-keeping requirements and inspections by SEC staff.

The SEC will seek public comment on its proposal for 60 days before the agency’s staff determines whether to make any changes. The rule requires a second vote by the SEC commissioners to become binding.

Not as Brazen

“One question is whether state treasurers will come out of the woodwork the way they did last time around to shoot down the rule,” Bullard said. “They won’t be as brazen as they were in the 1990s,” because of scrutiny by regulators, he said.

In March, the SEC and Cuomo accused former New York Deputy Comptroller David Loglisci of arranging for the state pension fund to invest $5 billion with money managers who had paid kickbacks to former Democratic adviser Henry “Hank” Morris, who ran a placement agency.

Private-equity firm Carlyle Group agreed to pay $20 million in May and stop using placement agents to resolve an investigation by Cuomo.

The New York attorney general praised the SEC’s proposals. “These reforms are essential to eliminating the corruption in the current system,” Cuomo said in a statement yesterday.


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