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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Statement at SEC Open Meeting


Commissioner Troy A. Paredes

U.S. Securities and Exchange Commission

Washington, D.C.
July 22, 2009

Thank you, Chairman Schapiro.

Instances of so-called "pay to play" have tarnished the market for the provision of investment advisory services to state and local governments. A principal concern is that "pay-to-play" arrangements can distort competition in this market. "Pay to play" can skew the process by which states and municipalities choose advisers, as advisers who make political contributions to certain elected officials gain an improper advantage over advisors who refuse to "pay" in this way. Advisers who do not "pay" do not get hired, regardless of the merits. When advisers are selected for reasons other than the quality of their investment advice and the fees they charge, "pay to play" harms beneficiaries of public pension funds.

I am pleased to support the proposal before us today. Indeed, I am supportive of efforts to curb this sort of problematic behavior more generally. To the extent there are other settings in which "pay-to-play" arrangements create conflicts of interest that can harm investors, the Commission has a responsibility to evaluate what, if any, regulatory steps may be appropriate. For example, it has been suggested that some law firms may make political contributions in order to be chosen to represent public pension funds in securities cases. It is troubling if "pay-to-play" practices encourage government officials to select lawyers for reasons other than their ability and fees, as public pension fund beneficiaries are then disadvantaged. Given that this "pay-to-play" concern has been raised, it deserves Commission consideration.

As for today's proposal, I look forward to considering the comments we receive. I am particularly interested in comments that address how the ban on the use of third parties to solicit government business may impact smaller and less-established advisers. My specific concern is that the outright ban on third-party solicitation may adversely impact advisers who legitimately use third parties because the advisors themselves do not have the kind of relationships and contacts needed to compete effectively for business.

In addition, I am keenly aware that, to pass constitutional muster, the proposed "pay-to-play" rule must be tailored to the objectives it targets. The Municipal Securities Rulemaking Board enacted a similar rule, MSRB Rule G-37, several years ago. Although it faced a First Amendment challenge, MSRB Rule G-37 was upheld in the Blount case.

I hope we receive comments, including from constitutional law experts, on the First Amendment questions presented by today's proposal. If so-called "strict scrutiny" is implicated — the standard the Blount court applied in assessing MSRB Rule G-37 but without conclusively deciding it was the proper measure of the rule's constitutionality — the constitutional test will be whether the "pay-to-play" restrictions are "narrowly tailored" to remedy a "compelling" interest — or, as put in Blount, "whether less restrictive alternatives to the rule would accomplish the government's goals equally or almost equally effectively."

Finally, I would like join my colleagues in thanking the staff for their hard work in crafting this rule.


Modified: 07/22/2009