U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Reducing the Temptation of Advisers to Misuse Political Contributions


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Open Meeting
Washington, D.C.
July 22, 2009

State and municipal pension plans have over $2.3 trillion of assets and represent one-third of all U.S. pension assets. This is a lot of money. These state and municipal plans are typically administered and managed by elected officials who also have the responsibility for selecting the investment advisers who oversee the plans. Obviously, these plans pay significant advisory fees to investment advisers making the management of these plans highly desirable business. Advisers compete fiercely to win this business — as to be expected — and most generally compete fairly based on their qualifications.

The worry behind today's proposal is that some advisers and elected officials are engaging in pay-to play conduct — where advisers are making political contributions to elected officials who oversee public pensions in order to be chosen to manage some of the pension business. This type of conduct is incredibly hard to police. Today's rule proposal is the Commission's attempt to make sure that advisers compete for pension plan business on a level playing field and that they fulfill their fiduciary obligations and put the interests of the plan beneficiaries above all others.

This rule proposal is narrowly tailored to eliminate the ability of investment advisers to make political contributions in order to be chosen to manage public pension fund money. In other words, this rule attempts to eliminate the pay-to-play system that has been documented far too often

The Supreme Court has held that investment advisers owe their clients a fiduciary duty to put their clients' interests above their own. Investment advisers who seek to win pension business through political contributions, rather than their qualifications, are violating their fiduciary duty to the plan and its beneficiaries. Let's face it — if an adviser wins business because it has "paid" in order to "play," there are serious doubts as to whether the most qualified adviser was selected for the job. After all, in such a case, the adviser selection process would not appear to be based on merit and qualification. If the best person was not selected for the job, the plan could suffer inferior management that may lead to greater losses. The plan may also be paying higher fees because the adviser may be trying to recoup its political contributions or because the contract negotiations were not exactly arms-length.

I think this rule proposal will benefit both individual investors in pension plans as well as the advisory industry as a whole. By prohibiting an adviser's ability to enhance its chances of being hired through inappropriate political contributions, all advisers — large and small — will be able to more effectively compete for a slice of the public pension fund business. This proposal would insure that the emphasis is on choosing the most qualified adviser who is best able to fulfill the needs of pension plans and their beneficiaries.

It is important to note that this rule proposal regulates investment advisers but does not reach the conduct of the elected officials who serve as public pension plan trustees. These individuals engage in serious conflicts of interest when they accept political contributions from those who do business with the plan. I applaud the state and local authorities that have taken steps to prohibit pay-to-play activity and I encourage more to do the same.

Today's proposal builds on similar rules enacted by the Municipal Securities Rulemaking Board in 1994, and a similar rule proposed by the SEC staff in 1999. It is long overdue and I am pleased to support this rule proposal.

I would like to thank the Division of Investment Management for the time they spent with me and my counsel as well as for their tireless work. In addition, I would also like to thank all of the staff who contributed to this proposal and put forward such a high-quality product.

I have no questions and look forward to the comments we will receive.

Thank you.


Modified: 07/22/2009