More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
The Securities and Exchange Commission (SEC) approved a new rule on Wednesday, June 29, to curtail what's called "pay-to-play" practices by investment advisors, in which advisors make campaign contributions to elected officials to win lucrative contracts to manage public pension plans and similar government investment accounts.
The SEC says the new rule 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."
In her comments before adopting the rule, SEC Chairman Mary Schapiro said that "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." These new rules, she said, "will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service."
Schapiro said that "pay to play can also favor large advisers over smaller competitors, reward political connections rather than management skill, and--as a number of recent enforcement cases have shown--pave the way to outright fraud and corruption."
The SEC says the new rule has three key elements:
- It prohibits an investment advisor from providing advisory services for compensation--either directly or through a pooled investment vehicle--for two years, if the advisor 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 advisor.
- 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.
- It prohibits an advisor 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 advisor or broker/dealer subject to similar pay to play restrictions.