SEC Proposes Rescinding Adviser Pay-to-Play Rule
Commentary by Steven Lofchie
The SEC proposed to rescind the investment adviser "pay-to-play" rule, which bars advisers from providing compensated services to a government client for two years after making a political contribution to certain elected officials or candidates.
The SEC said the rule, adopted in 2010, has caused unintended consequences, including some advisers barring their employees from making any state or local political contributions. The agency also called the rule operationally difficult and a strict-liability trap that can trigger large penalties for small donations.
The proposal would fully rescind Advisers Act Rule 206(4)-5 ("Political contributions by certain investment advisers") and amend the recordkeeping rule to remove related provisions.
Chair Paul Atkins and Commissioners Hester Peirce and Mark Uyeda each issued statements supporting rescission. Commissioner Uyeda acknowledged that quid pro quo arrangements can distort municipal investment priorities and leave public pensions paying a premium for sub-par performance but added that the automatic two-year ban swept far beyond its intended target. Chair Atkins called the rule overly prescriptive and said it routinely punishes firms for an employee's pre-hire donation. Commissioner Peirce said the rule is broad, its exceptions are narrow, and the SEC rarely uses its exemptive authority. All three said the rule chills political speech and noted that antifraud provisions elsewhere in the Advisers Act would still prohibit actual pay-to-play conduct. Commissioner Peirce also asked whether other rules should be rescinded too, namely MSRB Rule G-37 ("Political Contributions and Prohibitions on Municipal Securities Business and Municipal Advisory Business"), Exchange Act Rule 15Fh-6 ("Political contributions by certain security-based swap dealers"), and FINRA Rule 2030 ("Engaging in Distribution and Solicitation Activities with Government Entities").
Nine trade groups backed the proposal in a joint statement. Among the signatories were the Alternative Investment Management Association, the Investment Adviser Association, the Investment Company Institute, the Managed Funds Association, and SIFMA. Senator Elizabeth Warren (D-MA) opposed the proposal, warning it would let officials reward campaign donors with lucrative contracts.
Comments are due 60 days after publication in the Federal Register.
Commentary
There is some irony in Senator Warren, who is always supportive of giving government regulators more authority, arguing that they are so readily susceptible to corruption. Perhaps she is mindful of Mr. Will Rogers' famous remark that "America has the best politicians money can buy."
It is also reasonable to observe that there are other organized groups, such as unions serving employees who work for the relevant government entities, that are permitted to provide political contributions. If Senator Warren is not concerned about these other groups, it is not clear why she should be more concerned about investment advisers, who are likely to be less able to provide material political support and who are arguably less conflicted.