SEC Cracks Down on Pay-to-Play Practices

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.