The Securities and Exchange Commission voted July 22 to curtail “pay to play” practices used by investment advisors that seek to manage money for state and local governments’ pension plans. The SEC says its proposal is designed to prevent an advisor from making political contributions or hidden payments to influence their selection by government officials.

The public programs that fall under the proposal include public pension plans that pay retirement benefits to government employees, 457 retirement plans for teachers, and 529 plans.

“Pay to play practices can result in public plans and their beneficiaries receiving sub-par advisory services at inflated prices,” said SEC Chairman Mary Schapiro. “Our proposal would significantly curtail the corrupting and distortive influence of pay-to-play practices.”

“These practices are almost always harmful,” said Buddy Donohue, director of the SEC’s Division of Investment Management. There’s been a “troubling increase in the number of advisors who are involved in pay-to-play practices,” he said, adding that advisors who are involved in such practices “violate their fiduciary duties and fraud provisions.”

Under the proposed rule, an investment advisor who makes a political contribution to an elected official in a position to influence the selection of the advisor would be barred for two years from providing advisory services for compensation, either directly or through a fund.

According to the SEC, the rule would apply to the investment advisor as well as certain executives and employees of the advisor. Additionally, the rule would apply to political incumbents as well as candidates for a position that can influence the selection of an advisor.

The SEC states that there is a de minimis provision that permits an executive or employee to make contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

The proposed rule also would prohibit an advisor and certain of its executives and employees from coordinating, or asking another person or political action committee (PAC) to:

1. Make a contribution to an elected official (or candidate for the official’s position) who can influence the selection of the advisor.

2. Make a payment to a political party of the state or locality where the advisor is seeking to provide advisory services to the government.

The proposed rule also would prohibit an advisor and certain of an advisory firm’s executives and employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment advisor.

Finally, the SEC states that the proposed rule would prohibit an advisor and certain of its executives and employees from engaging in pay-to-play conduct indirectly, such as by directing or funding contributions through third parties such as spouses, lawyers, or companies affiliated with the advisor, if that conduct would violate the rule if the advisor did it directly.