SEC Ruling Curtails Political Contributions From Managers

(July 1, 2010) — On Wednesday, all five members of the Securities and Exchange Commission approved tightening restrictions against “pay-to-play” practices.

While the ruling does not ban political contributions outright, money managers will be restricted from making campaign contributions in hopes of winning business from pensions. The SEC’s decision curtails unfair influence in the selection process when picking investment advisers to oversee various U.S. pension plans. The measure was another effort to erase loopholes that agency officials say have led to political corruption of the $2.6 trillion public pension business.

“The selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors,” SEC Chairman Mary Schapiro said at an open meeting, according to Reuters. “This approach should effectively eliminate the opportunity for abuse that currently exists from third-party placement agents,” she said.

Under the new rule, investment managers who make political contributions to officials with influence over public pension funds would be banned from managing those funds for two years. Additionally, the ruling sets limits on political contributions by an adviser, banning advisers from paying third parties, such as placement agents or family members, to make contributions for business.

Efforts by the commission to address pay-to-play abuses started as early as 1999. Since then, the commission has charged investment advisers involved with pay-to-play schemes around the country. Earlier this year, the SEC charged a top aide to former state comproller Alan Hevesi of leading a $35 million fraud scheme at the $129.4 billion New York State Common Retirement Fund, the nation’s third largest public pension fund. Other charges by the commission focused on pay-to-play schemes in California, Illinois, Ohio, and Florida, among other states.