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SEC Adopts Rules Combating Adviser Pay to Play

At its June 30, 2010 open meeting, the SEC adopted rule amendments intended to curtail pay to play practices by investment advisers.  According to the Commission:

Pay to play is the practice of making campaign contributions and related payments to elected officials in order to influence the awarding of lucrative contracts for the management of public pension plan assets and similar government investment accounts. The rule adopted by the SEC today includes prohibitions intended to capture not only direct political contributions by investment advisers, but also other ways that advisers may engage in pay to play arrangements. 

The new SEC rule has three key elements:

  1. It prohibits an investment adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the adviser.
  2. It prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as "bundling" — for an elected official who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.
  3. It prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

The text of the adopting release will be published in upcoming weeks.  The rules become effective 60 days from the date the rules are published in the Federal Register.  

The full text of the final rule release is available at: http://sec.gov/rules/final/2010/ia-3043.pdf

The Commission's announcement and fact sheet about the new rule is available at:  http://www.sec.gov/news/press/2010/2010-116.htm