Tag Archives: pay to play rules

Public Comments on SEC Proposed “Pay to Play” Rules

SEC Proposed Pay to Play Rules Draw Many Comments

Earlier this year the SEC proposed so-called “pay to play” rules which would restrict SEC registered investment advisers from managing money from state and local governments under certain circumstances.  According to the SEC press release, “the measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials.” The rule would do four major things:

  1. Restricting Political Contributions
  2. Banning Solicitation of Contributions
  3. Banning Third-Party Solicitors
  4. Restricting Indirect Contributions and Solicitations

The comment period, which ran for 60 days, produced some very good points.  As a general matter most groups opposed the proposed rules for some reason or another.  Below I have gathered some of the more interesting or important points which were raised in the comments which are publicly available here.  All of the following quotes are directly from the comments of the submitters which are identified.


Joan Hinchman – Executive Director, President and CEO, of NSCP (National Society of Compliance Professionals Inc.)

  • The practical result of the ban will be that an adviser will be economically compelled to end its relationship with a governmental entity.
  • The ban will deprive participants and beneficiaries of public funds of well qualified advisers and drive up the cost of investment advisory services due to higher compliance costs.
  • The Rule will affect at a minimum all registered investment advisers that not only advise governmental public pension funds, but also may cover investment companies in which governmental pension funds choose to invest.
  • Advisers lacking capital to hire employees to obtain government clients or the experience and sophistication to do so would be placed at a material competitive disadvantage.

These comments can be found here.


Jeffrey M. Stern and Robert W. Schwabe – Managing Partners of Forum Capital Securities, LLC

Forum Capital Concurs wholeheartedly with those persons and entities that have commented on the Proposed Rule to date that banning investment advisers from compensating third-party placement agents for securing capital commitments from public pension fund investors would:

  • Unfairly advantage private investment firms large enough to employ an internal marketing and investor relations staff over those firms that cannot afford to employ such a staff internally;
  • Limit the universe of investment opportunities presented to public pension funds for their consideration;
  • Deprive private investment firms of the services of legitimate placement agents that have contributed to the success of many investment advisers already existing and thriving prior to the promulgation of the Proposed Rule, thereby limiting the opportunities of new private investment firms to successfully raise funds, execute their investment strategies and grow into market leading investment firms;
  • Reduce competition within the investment advisory business in general and the various alternative investment asset classes in particular; and
  • Reduce the amount of capital available to companies that rely on private investment firms for their financial support.

These comments can be found here.


Sue Toigo – Chairman of Fitzgibbon Toigo Associates in Los Angeles California

  • Without placement agents, the ability of emerging asset management firms, the majority of which are minority- and women-owned firms, to gain the business of the large public pension funds becomes virtually impossible.
  • Under the proposed regulation, small emerging companies will find it increasingly challenging to market their investment products to pension funds.

These comments can be found here.


William J. Zwart – BerchWood Partners, LLC

  • Emerging managers would not be able to effectively access or approach the public entity investment community without the support of the placement agent community.

These comments can be found here.


R. Dean Kenderdine – Executive Director and Secretary to the Board of Trustees of State Retirement and Pension System of Maryland

  • The strict outright prohibition of investment management firms’ use of placement agents to implement their marketing efforts to public pension funds would result in increased costs to the investment firms and a reduction in viable investment opportunities being presented to public pension funds.
  • Public funds will not be presented with the broadest array of investment opportunities and hinder the competitiveness of the investment management marketplace.
  • Placement agents being prohibited would have an adverse impact on our return potential and increase our cost of operations.

These comments can be found here.


Fernando Ortiz Vaamonde – Managing Partner of ProA Capital de Inversiones

  • An outright ban on placement firms would unfairly disadvantage small- and mid-size firms, many of which are unlikely to be able to recruit and retain significant in-house fund-raising capabilities.

These comments can be found here.


Keith Breslauer – Managing Director of Patron Capital Limited

  • With the new rule, Patron would not be able to without great difficulty, expand its investor base to include public pension plans.
  • The effect of the new rule is to harm the fund raising abilities of funds like Patron and materially impact the investing opportunities of public pension plans.

These comments can be found here.


Brian Fitzgibbon – CEO of Fitzgibbon Toigo & CO., LLC

  • Without placement agent assistance, some of the best fund managers may never get to market.
  • A ban on placement agents is unfair, irrational and harmful to Private Equity. There will always be some corrupt public officials and organizations that want to game the system.

These comments can be found here.


B. Jack Miller – General Motors Asset Management

  • Many partnerships are too small to have their own marketing staff and rely on third party PA’s to introduce them to investors.

These comments can be found here.


Jake Elmhirst – Global Co-Head Private Funds Group of UBS Securities, LLC

USB strongly believes that:

  • Registered placement agents play a beneficial role in the capital markets;
  • The proposed ban would be detrimental to both private equity managers and their public pension plan investors;
  • The proposed ban in lA-291O is unnecessary and overbroad, and the Commission can regulate registered broker-dealer placement agents through other means;
  • The placement agent ban in IA-2910 purports to be modeled on MSRB Rule G-38 but is in fact inconsistent with that rule and the policies supporting it; and
  • The Commission should consider alternatives to a ban on all intermediaries, including an exemption for registered broker-dealer placement agents, and increasing regulation of properly registered placement agents.

These comments can be found here.


Thomas P. DiNapoli – State Comptroller

  • Under the proposed SEC rule, it is not clear if the investment adviser would subsequently be prohibited from earning compensation for advisory services provided to the Fund.
  • It is important that the final rule adopted by the SEC clearly articulate what behavior is prohibited in making contributions or soliciting or coordinating payments to state or local political parties.

These comments can be found here.


Melinda Gagyor – Fulcrum Financial Inquiry, LLC

The proposed placement agent ban should be eliminated because:

  • It will devastate the placement agent business and cause severe job losses in an already troubled economy;
  • The vast majority of emerging, small and middle-market investn1ent managers will simply not survive or be forced to operate at a huge disadvantage;
  • Pension funds will see a significant reduction in their access to potential investment opportunities; and
  • Pension funds will no longer be able to use placement agents to help them pre-screen potential investment manager candidates

These comments can be found here.


Ron S. Geffner – Partner of Sadis & Goldberg, LLP

While we strongly support the SEC’s efforts to eliminate corruption in connection with “pay to play” practices, the proposed ban on placement agents’ solicitation of government investors is overreaching and will:

  • Deprive government investors of the benefits provided by placement agents, namely access to a broader range of potential investment opportunities and assistance with due diligence efforts, and
  • Hinder smaller advisory firms in their efforts to attract government investors, as smaller firms generally have less in-house resources and rely more on the use of placement agents in soliciting government investors.

These comments can be found here.


Fred Gortner – Managing Director of Paladin Realty Partners, LLC

  • Without quality placement agents like Triton Pacific, emerging small and mid-cap investment management firms like ours would be forced to operate at a significant and inequitable disadvantage to larger investment managers that have the financial resources to employ large, experienced teams of investor relations and in-house placement professionals.

These comments can be found here.


Drew Maxwell

  • Your proposed ban on placement agents will unjustly penalize a huge percentage of emerging, small, minority-owned and middle-market investment managers, as these firms rely extensively on placement agents to help them.

These comments can be found here.


Joseph M. Velli – Chairman and Chief Executive Office of BNY ConvergEx Group, LLC

  • While we believe that the general ban on third-party solicitors is unnecessary, we are concerned in particular about the vagueness of the rule’s definition of “related person”.
  • We believe it is critical for the SEC to clarify the test for control included in the definition of “related person”.

These comments can be found here.


Frode Strand-Nielsen – Managing Partner of FSN Capital Partners A.S.

  • It would be highly challenging for us to raise capital from international in institutions unless we had the assistance of a legitimate placement agent.
  • If you take away the role of a placement agent, you will deprive firms like ours of the ability to raise capital in the United States, and you will also seriously impair the pension funds’ capacity to invest with the best private equity firms internationally.

These comments can be found here.


Mark G. Heesen – President of National Venture Capital Association

  • It is in the interest of the entire venture capital community if firms retain the option of using placement agents for marketing to all potential investors, including public pension funds.

These comments can be found here.


Richard H. Hurd, Jr. – President of Strategic Capital Partners

  • We know first hand the value that qualified placement agents can provide particularly to emerging, small and mid-cap investment management firms. Without such services, smaller firms have limited access to the institutional market. Likewise, pension fund will be prohibited from participating in the entrepreneurial strategies and success of companies like ours.

These comments can be found here.


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Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs Hedge Fund Law Blog.  If you are a hedge fund manager who is looking to start a hedge fund or if you have questions about your investment advisor compliance program, please contact us or call Mr. Mallon directly at 415-868-5345.

Investment Adviser Pay to Play Rules

SEC Proposal Would Ban Third Party Solicitors from Seeking Public Monies

Back in July there was much discussion about new “pay to play” rules proposed by the SEC.  The proposed “pay to play” rules would limit the ability of investment managers (including hedge fund managers) to make political contributions and would also limit the ability of third party marketers to raise capital for managers from state and federal pension plans.

There have been many interesting comments on these proposed rules so far, and, as some have noted, it seems to me that these rules may hinder the first-amendment rights of these money managers.  The comment period ends October 6, 2009 and the SEC may choose to vote on the rule thereafter, but I would not expect for any rule to be finalized before the end of this year.  However, hedge fund managers may want to review their investment advisory compliance manual to make sure they have discussed this issue.  Hedge fund managers who are not yet registered with the SEC as investment advisers will likely deal with this issue when they register.

I have included below (i) a definition of pay to play below, (ii) the SEC press release announcing the proposal, and (iii) a discussion of pay to play from 1999, the last time the SEC had a proposal to regulate these activities.

Mallon P.C. will be commenting on the proposal so please let us know your opinions below.


Pay to Play Definition (see old SEC release, reprinted below)

When I refer to pay-to-play, I am talking about the practice of requiring, either expressly or implicitly, municipal securities participants to make political contributions to municipal officials in order to be considered for an award of underwriting, advisory, or related business from the municipality. In most cases these practices do not amount to outright bribery – which is already prohibited under state and federal law, since there is no express quid pro quo – but it is simply an understanding that if you don’t give, you don’t get business.


SEC Proposes Measures to Curtail “Pay to Play” Practices


Washington, D.C., July 22, 2009 — The Securities and Exchange Commission today voted unanimously to propose measures intended to curtail “pay to play” practices by investment advisers that seek to manage money for state and local governments. The measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials.

The proposals relate to money managed by state and local governments under important public programs. Such programs include public pension plans that pay retirement benefits to government employees, retirement plans in which teachers and other government employees can invest money for their retirement, and 529 plans that allow families to invest money for college.

To help manage this money, state and local governments often hire outside investment advisers who may directly manage this money and provide advice about which investments they should make. In return for their advice, the investment advisers typically charge fees that come out of the assets of the pension funds for which the advice is provided. If the advisers manage mutual funds or other investments that are options in a plan, the advisers receive fees from the money in those investments.

Investment advisers are often selected by one or more trustees who are appointed by elected officials. While such a selection process is common, fairness can be undermined if advisers seeking to do business with state and local governments make political contributions to elected officials or candidates, hoping to influence the selection process.

The selection process also can be undermined if elected officials or their associates ask advisers for political contributions or otherwise make it understood that only advisers who make contributions will be considered for selection. Hence the term “pay to play.” Advisers and government officials who engage in pay to play practices may try to hide the true purpose of contributions or payments.

“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.”

Andrew J. Donohue, Director of the SEC’s Division of Investment Management, added, “Pay to play serves the interests of advisers to public pension plans rather than the interests of the millions of pension plan beneficiaries who rely on their advice. The rule we are proposing today would help ensure that advisory contracts are awarded on professional competence, not political influence.”

The rule being proposed for public comment by the SEC includes prohibitions intended to capture not only direct political contributions by advisers, but other ways advisers may engage in pay to play arrangements.

Restricting Political Contributions

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

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

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.

Banning Solicitation of Contributions

The proposed rule also would prohibit an adviser 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 adviser.
2. Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.

Banning Third-Party Solicitors

The proposed rule also would prohibit an adviser and certain of its 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 adviser.

Restricting Indirect Contributions and Solicitations

Finally, the proposed rule would prohibit an adviser 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 adviser, if that conduct would violate the rule if the adviser did it directly. This provision would prevent advisers from circumventing the rule by directing or funding contributions through third parties.

* * *

Public comments on today’s proposed rule must be received by the Commission within 60 days after their publication in the Federal Register.

The full text of the proposed rule will be posted to the SEC Web site as soon as possible.
# # #


U.S. Securities and Exchange Commission

Speech by SEC Staff:
Pay-To-Play and
Public Pension Plans
Remarks of
Robert E. Plaze
Associate Director, Division of Investment Management,
U. S. Securities and Exchange Commission

At the Annual Joint Legislative Meeting of
The National Association of State Retirement Administrators,
National Conference on Public Employee Retirement Systems and
The National Council on Teacher Retirement, Washington, D.C.

January 26, 1999

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.

Thank you for inviting me to address this meeting of the group of state pension administrators. My father was a state retiree and lived on his pension for a number of years. I know how the importance the security of a pension plan is to millions of persons like my Dad, and how important your jobs are.

I am a member of the staff of the Commission. But my remarks this afternoon are my own, and I am not speaking for the Commission or my colleagues on the staff.

When Arthur Levitt became Chairman almost six years ago, among his goals was the reform of the municipal securities markets. Since then, a series of initiatives have improved investor disclosure in the municipal securities markets. A second area of reform – and one most relevant to why you have invited me here today – has been the curbing of pay-to-play practices.

When I refer to pay-to-play, I am talking about the practice of requiring, either expressly or implicitly, municipal securities participants to make political contributions to municipal officials in order to be considered for an award of underwriting, advisory, or related business from the municipality. In most cases these practices do not amount to outright bribery – which is already prohibited under state and federal law, since there is no express quid pro quo – but it is simply an understanding that if you don’t give, you don’t get business.

Chairman Levitt, and several SEC officials have been involved in the municipal securities markets. They knew that pay-to-play practices had been pervasive and corrupting to the market for municipal securities. And if you ask them, they will tell you stories about checks left on the table at a dinner. They may even know the minimum required contributions in a particular jurisdiction to be eligible for public contracts.

Pay-to-play creates the impression that contracts for professional services are awarded on the basis of political influence rather than professional competence. It harms the citizens of the municipality and the investing public asked to purchase the securities. It brings discredit on the businesses and professionals who participate in the practice.

In 1993, the first in a series of steps to end pay-to-play practices began when a group of investment banks voluntarily agreed to swear off making contributions for the purpose of obtaining municipal business. In 1994, the SEC approved MSRB rule G-37 – which is known as the pay-to-play rule.1

G-37 prohibits municipal securities dealers from engaging in the municipal securities business with an issuer two years after contributions are made to an official of an issuer by the dealer or its employees engaged in municipal finance business. The prohibition applies equally to officials who are incumbents and those who are candidates. There is a de minimis exception, which permits contribution of up to $250 to candidates for whom they can vote.

The rule was met with howls of protest from some state and municipal officials. Some argued that it violated their First Amendment rights to make and solicit political contributions. These claims were soon tested in the federal courts, and in an important decision, a federal court of appeals held that G-37 was a constitutionally permissible restraint on free speech – because it serves a compelling governmental interest of rooting out corruption in the market for municipal securities.2

As we meet this afternoon, the American Bar Association is considering proposals to bar the practice of lawyers obtaining business through political contributions. Deans of 47 law schools across the country have joined Chairman Levitt in calling for an end to what the San Francisco Chronicle called “a sleazy practice that costs taxpayers.” 3 We hope that my profession will adopt a strong and effective ban.

Bringing an end to pay-to-play practices thus has been a step-by-step process.

Recently, Chairman Levitt has asked my Division to look into the question of whether the Commission needed to address pay-to-play in the public pension area. We are now in the fact-gathering stage of this project, which could very well lead to a rule proposal.

What have we found? So far, we see strong indicators that pay-to-play can be a powerful force in the selection of money managers of public pension plans. There are public reports of pay-to-pay problems with the management of public money in 12 states – and many of these are the largest states.

* In one small state a former state treasurer raised over $73,000 in campaign contributions, virtually all from contractors for the state retirement system 4

* The controller of a large state has raised $1.8 million from pension fund contractors, many of which are out-of-state 5

* In another state, a former state treasurer raised contributions from contractors, one of whom received a five-fold increase in the custody fees it charged. The treasurer’s candidate lost and the contract was terminated by the new treasurer.6

* The Executive Director of the MSRB has been quoted in the Wall Street Journal as saying that “the conflicts of interest in the [public pension business] are as bad as anything we’ve seen in the muni-bond market.7

* An elected state official has told me that she thought that G-37 has resulted in the movement of some pay-to-play activity over to the public pension area. Phone calls from some advisers have confirmed this.

Claims that pay-to-play really isn’t a problem are refuted by the findings of states and plans that have taken on the issue. Vermont and Connecticut have enacted legislation.8 Both were concerned that awards of advisory contracts were being made on the basis of political favoritism rather than expertise. They concluded that even where no actual corruption occurred, the appearance of impropriety was intolerable.

CalPERS has acted in California, and the records of its rulemaking proceeding and subsequent litigation are particularly instructive about how pay-to-play works and its insidiousness.

It is heartening to see some of the plans and jurisdictions putting an end to the culture of pay-to-play. As you know, it takes two to tango, and it takes two to participate in these practices – the payer and the payee. Our concern is with the activities of the payers – investment advisers, whom we regulate under the Investment Advisers Act of 1940.9

The Advisers Act imposes a federal fiduciary duty on advisers with respect to their clients and prospective clients.10

* When the process of the selection of an investment adviser is corrupted, the duties of an adviser to his client are compromised.

* When the selection process is corrupted and advisers are selected based not on their merit but on the amount or their political contributions, the ultimate clients of advisers – the pension pools they manage – are harmed and the benefits of retirees threatened.

A similar harm occurs when advisers are not chosen because they have not made the requisite amount of contributions.

We at the Commission believe that G-37 is working pretty well. And I have to believe, based on the evidence we have collected so far, that the burden will fall on those who argue that the Commission should not apply the core principles of G-37 to investment advisers and the public pension plan area.

We have spoken with your representatives from NASRA, and we have discussed the matter with some of your colleagues. They have described the difficult position in which a professional manager is placed when it becomes apparent that the decision-making process is being skewed by considerations of political contributions. You have a unique perspective from which to help us understand the issues.

I look forward to further discussions with you and look forward to hearing your views.

Thank you.

1 Self-Regulatory Organizations; Municipal Securities Rulemaking Board, Securities Exchange Act Release No. 34-33868 (Apr. 7, 1994).

2Blount v. SEC , 61 F.3d 938 (1995), cert. denied , 517 U.S. 1119 (1996).

3A Sleazy Practice That Costs Taxpayers , San Francisco Chron., Aug. 1, 1997, at A26.

4See Office of Vermont State Treasurer James H. Douglas, If You Play, You Pay: New Campaign Finance Legislation Prohibits Contracts for Wall Street Firms Contributing to State Treasurer Races, a Provision Pushed by Douglas (06/16/97) http://www.state.vt.us/treasurer/press/pr970616.htm.

5 Clifford J. Leavy, Firms Handling N.Y. Pension Fund Are Donors to Comptroller , N.Y. Times, Oct. 3, 1998, at A16)

6See Steve Hemmerick, See You in Court,’ Bank Tells Its Client: State Street Sues over Custody Contract, Pens. & Inv., Feb. 23, 1998, at 2.

7 Charles Gasparino and Jonathan Axelrod, Political Money May Sway Business of Public Pensions , Wall St. J., Mar. 24, 1997, at C1.

8 Conn. Gen. Stat. § 9-333 o (1997); Vt. Stat. Ann. tit. 32, § 109 (1997).

9 15 U.S.C. 80b.

10SEC v. Capital Gains Research Bureau, Inc. , 375 U.S. 180 (1963).



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Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website.  Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund.  If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about investment adviser registration with the SEC or state securities commission, please call Mr. Mallon directly at 415-296-8510.