FINRA Steps in to Regulate Pay-to-Play Rules

(March 30, 2010) – The Financial Industry Regulatory Authority (FINRA) is ready to make a move on a proposal that would prevent brokers from helping investment funds win business deals with government pension funds.

Following investigations of pension funds nationwide that have showed investment firms paid millions of dollars in fees to placement agents, FINRA’s decision highlights the increased pressure on regulators to be more aggressive prohibiting pay-to-play.

“We have indicated a willingness to put pay-to-play rules in place,” FINRA Chairman and Chief Executive Richard Ketchum said to Reuters.

At New York’s $110 billion pension fund, for example, a pay-to-play scandal has led to six people pleading guilty so far, including the former chief investment officer for the fund who described the fund as having a “culture of corruption.” At California Public Employees’ Retirement System (CalPERS), the nation’s largest public pension fund, Justice Department officials in Los Angeles are examining potential influence-peddling after documents showed middlemen reportedly earned $125 million in fees for helping funds get business with CalPERS. The fund’s transactions are under investigation by the U.S. Securities and Exchange Commission (SEC).

Already, the SEC has proposed heightened regulation as opposed to an outright ban of pay-to-play activities, or the practice of exchanging political contributions to pension fund officials for profitable investment contracts.

“What is needed is not a ban, but a level playing field, where all investment sales activity to public pension funds is regulated, along with the introduction of disclosure requirements relating to any compensation received,” Donald Steinbrugge, founding partner of placement agent Agecroft Partners, said, according to Global Pensions. “In addition, there should be a prohibition on campaign contributions and limitations on travel and entertainment expenses to reduce any political influence in the selection process.”