SEC Adopts New Measures to Curtail Pay to Play Practices by Investment Advisers
The Securities and Exchange Commission today voted unanimously to approve new rules to significantly curtail the corrupting influence of "pay to play" practices by investment advisers.
Pay to play is the practice of making campaign contributions and related payments to elected officials in order to influence the awarding of lucrative contracts for the management of public pension plan assets and similar government investment accounts. The rule adopted by the SEC today 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.
"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," said SEC Chairman Mary L. Schapiro. "These new rules will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service."
The new SEC rule has three key elements:
The new rule becomes effective 60 days after its publication in the Federal Register. Compliance with the rule's provisions generally will be required within six months of the effective date. Compliance with the third-party ban and those provisions applicable to advisers to registered investment companies subject to the rule will be required one year after the effective date.
Across the country, state and local governments manage money as part of many 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 plans that allow families to invest money for college (commonly known as "529 plans").
The assets overseen by these governments are substantial. Public pension plans alone hold more than $2.6 trillion of assets and represent one-third of all U.S. pension assets. 529 plans today hold approximately $100 billion in assets.The Role of an Investment Adviser
To help manage this money, state and local governments often hire outside investment advisers. These investment advisers may directly manage the money in the pension funds or government programs for these state and local governments.
In some cases, these advisers may provide advice to the governments about which investments they should make, or which investment options they should make available as choices to workers investing for retirement or families investing for college. Additionally, the advisers may manage the mutual funds or other investments in which employees' or families' money is invested.
In return for their advice, the investment advisers typically charge the governments 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.
Selecting an Investment Adviser
The investment advisers are often selected by one or more trustees who are either themselves elected officials, or are appointed by elected officials. While such a selection process is common, the fairness of the selection process can be undermined in two ways.
On the one hand, the process can be undermined when advisers seeking to do business with state and local governments make political contributions to elected officials or candidates, hoping to influence the selection process. On the other hand, elected officials or their associates may ask advisers for political contributions, or otherwise foster a perception that only advisers who make contributions will be considered for selection. Hence the term: "pay to play."
In recent years, the SEC has charged investment advisers with engaging in pay to play practices. Investment advisers who engage in such practices compromise their obligations to put their clients' interests first. Pay to play practices distort the process by which investment advisers are selected and can harm the pension, retirement or 529 plans, which may receive inferior advisory services and pay higher fees. Pay to play practices also create an uneven playing field among investment advisers, and may hurt smaller advisers who cannot afford the required contributions.
Prohibitions of the Pay to Play Rule
Advisers and government officials engaging in pay to play practices may try to hide the true purpose of contributions or payments. The SEC today adopted a rule that 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 new 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 applies to the investment adviser as well as certain executives and employees of the adviser. Additionally, the rule applies to political incumbents as well as to 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 $350 per election per candidate if the contributor is entitled to vote for the candidate, and up to $150 per election per candidate if the contributor is not entitled to vote for the candidate.
Banning Solicitation of Contributions
The pay to play rule prohibits an adviser and certain of its executives and employees from asking another person or political action committee (PAC) to:
Banning Certain Third-Party Solicitors
The pay to play rule also prohibits 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, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.
Restricting Indirect Contributions and Solicitations
Finally, the pay to play 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 prevents advisers from circumventing the rule by directing or funding contributions through third parties.
(Press Rel. 2010-116)
Commission Declares Decision as to World Transport Authority, Inc., Final
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SEC Files Emergency Action to Stop Ongoing Philadelphia Based Multi-Million Dollar Fraud
The Commission today announced fraud charges, an asset freeze and other emergency relief against Robert Stinson, Jr., of Berwyn, Pennsylvania, and several Philadelphia-area entities he controlled, with perpetrating an offering fraud and Ponzi scheme in which at least $16 million was raised from more than 140 investors.
According to the SEC's complaint, from at least 2006 through the present, Stinson, primarily through Life's Good, Inc. and Keystone State Capital Corporation, two companies he controlled, sold purported "units" in four Life's Good private real estate hedge funds. (Life's Good Funds). Stinson falsely claimed that the Life's Good Funds generated annual returns of 10 to 16 percent by originating more than $30 million in commercial mortgage loans, and other investment income gained on the sale of foreclosure and investment properties. In reality, the SEC's complaint alleges that Stinson has been stealing investor funds for his personal use, transferring money to family members and others, and using new investor proceeds to make payments to existing investors in the nature of a Ponzi scheme.
The Honorable Berle M. Schiller, U.S. District Judge for the Eastern District of Pennsylvania, has issued an order granting a temporary restraining order, freezing assets, and imposing other emergency relief. The Court also froze the assets of five named relief defendants - Susan L. Stinson, Christine A. Stinson, Michael G. Stinson, Laura Marable and First Commonwealth Service Company.
The SEC's complaint alleges that Stinson, a securities fraud recidivist and convicted felon, targeted investors across the country in various ways, including using websites, Internet presentations, investor newsletters and e-mails that included offering documents. Many of the investors targeted had self-directed IRA accounts, and Stinson promised that investments in the Life's Good Funds were safe and risk-free.
The complaint alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief already obtained, the complaint seeks disgorgement of the defendants' ill-gotten gains plus prejudgment interest, civil penalties, and permanent injunctions barring future violations of the charged provisions of the federal securities laws. The complaint also seeks disgorgement from the relief defendants.
The Commission's investigation is continuing.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Eastern District of Pennsylvania, and the Federal Bureau of Investigation. [SEC v. Robert Stinson, Jr., et al., Civil Action No. 10-cv-3130-BMS (E.D. Pa.)] (LR-21584)
SEC Completes Review of Performance by Citigroup, RBC and Wachovia Under Auction Rate Securities Settlements
The Securities and Exchange Commission today announced that three financial firms that settled the Commission's auction rate securities (ARS) charges against them have satisfied their obligations under their respective settlements and that more than $26 billion has been returned to their ARS customers.
Under the settlements, Citigroup Global Markets, Inc., RBC Capital Markets Corp., and Wachovia Securities LLC were required to offer to purchase ARS at par from their individual, charitable, and small business customers. Wachovia also agreed to offer to purchase ARS from all of its institutional customers as well.
Nearly 100% of these customers have accepted the firms' offers, resulting in approximately $14 billion of liquidity. Specifically, Citigroup, RBC, and Wachovia purchased ARS from their respective eligible customers in the amounts of $6.38 billion, $759 million, and $7.45 billion.
The settlements also required Citigroup and RBC to use "best efforts" to provide liquidity opportunities to their institutional customers. To assist in its analysis of whether the firms had in fact used "best efforts," the SEC retained an outside expert with extensive knowledge of the ARS market.
From the time of the ARS market failure in February 2008 through May 31, 2010, Citigroup institutional customer holdings were reduced by $8.46 billion or 46% (from $18.55 billion to $10.09 billion) and RBC institutional customer holdings were reduced by $3.2 billion or 48% (from $6.6 billion to $3.4 billion). In compliance with their obligations, Citigroup and RBC each implemented broad-based liquidity measures for their institutional investors.
Citigroup, RBC, and Wachovia also met their other settlement obligations, including compensating investors who sold ARS below par, reimbursing investors for excess interest costs associated with loans taken out due to ARS illiquidity, and participating in special arbitration proceedings before the Financial Industry Regulatory Authority. The firms also submitted periodic reports to, and met quarterly with, SEC staff regarding the firms' progress on meeting their settlement obligations.
To ensure compliance with the terms, the settlements provided for a potential deferred penalty if the firms did not meet their settlement obligations. The SEC has determined that based on the firms' compliance with their respective settlements, as well as other factors, no penalties will be pursued.
The Commission's eight ARS settlements, including those with Citigroup, RBC, and Wachovia, followed the Commission's investigation into the ARS market seizure of February 2008, an event that left tens of thousands of investors holding ARS they could not sell. One of the purposes of the settlements was to return liquidity as quickly as possible, particularly to individuals, charities, and small businesses. To date, over $67 billion has been returned to ARS customers of the settling firms.
The Commission notes the assistance and cooperation from the Office of the New York Attorney General, the Missouri Secretary of State, the Financial Industry Regulatory Authority, the Texas State Securities Board, and the North American Securities Administrators Association.
For further information, please see Litigation Release Nos. LR-20824; LR-21066; and LR-20885. [SEC v. Citigroup Global Markets, Inc., Civil Action No. 08 CIV 10753 (S.D.N.Y.); SEC v. RBC Capital Markets Corporation, Civil Action No. 09-CIV-5172 (S.D.N.Y); SEC v. Wachovia Securities, LLC, Civil Case No. 09 CV 743 (N.D. Ill.)] (LR-21585)
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