Subject: File No. S7-18-09
From: Edwin C Laurenson, Esq.
Affiliation: Partner, McDermott Will Emery LLP

December 31, 2009


The following comment raises a concern with regard to statutory authority and due process in relation to the Commission's proposed pay to play rule (proposed rule 206(4)-5 under the Investment Advisers Act of 1940).

The proposed rule would forbid a covered investment adviser to provide compensated investment advisory services to a covered governmental entity for two years after the adviser itself or a covered associate (a "covered person") made a political contribution covered by the proposed rule (a "prohibited contribution").

If the Commission has the authority to promulgate a rule forbidding prohibited contributions, the Advisers Act specifies procedures for the imposition and enforcement of penalties for such a rule's violation, including notice and opportunity for a hearing (either through the Commission's procedures or in a federal court) and, in the case of action by the Commission, review by the appropriate court (see subsections (e), (f), (i), (j) and (k) of Advisers Act section 203 (actions before the Commission U.S District Court review of temporary orders) sections 209 and 214 (Commission powers to gather evidence and institute judicial action jurisdiction of U.S. District Courts) and section 213 (general review of Commission orders by the appropriate U.S. Court of Appeals). In addition to procedural safeguards, those provisions require the exercise of judgment by the applicable forum concerning the severity of the violation and the appropriate resulting penalty.

The proposed rule's two-year prohibition of provision of compensated advisory services, however, would reverse the manner in which such procedures operate: if a covered person made a prohibited contribution, the proposed rule would automatically impose the prohibition, regardless of the amount of the prohibited contribution or the circumstances in which it was made, subject only to modification by the Commission in an action initiated by the adviser pursuant to paragraph (e) of the proposed rule and the possible deferential review of such Commission action by a Court of Appeals pursuant to Section 213 of the Advisers Act. The imposition of such an automatic penalty, subject only to discretionary post facto review, raises fundamental due process concerns, particularly in the context of prohibitions that implicate the exercise of First Amendment rights.

Assuming for purposes of this comment that Congress could impose such a method of enforcement in a duly enacted statute, it does not follow that the Commission has the authority to do so pursuant to its rulemaking powers under the Advisers Act. No provision of the Advisers Act empowers the Commission to impose an automatic penalty, subject only to subsequent discretionary review, on conduct prohibited by the Advisers Act or the Commission's rules thereunder. While the proposed rule is modeled after a similar regime established by the Municipal Securities Rulemaking Board with respect to municipal securities brokers, it also does not follow that Congress has granted the Commission the same kind of powers in this arena that are available to the MSRB (cf., Business Roundtable v. Securities and Exchange Commission, 905 F. 2d 406 (1990), invalidating Exchange Act Rule 19c-4 (the "one share/one vote" rule) on the grounds that the Commission could not require registered stock exchanges to adopt corporate governance rules that the exchanges had the authority to adopt on their own authority pursuant to their self regulatory powers).

I urge the Commission to take these considerations into account as it considers whether and how to adopt prohibitions on pay to play practices.

Very truly yours,

Edwin C. Laurenson
McDermott Will Emery LLP
340 Madison Avenue
New York, New York 10173
Tel: (212) 547-5657
Fax: (212) 547-5444