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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Opening Statement at SEC Open Meeting — Pay to Play by Investment Advisers (Final Rule)


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Washington, D.C.
June 30, 2010

I too would like to thank all the staff, and especially the Division of Investment Management, Buddy Donohue, Bob Plaze, Sarah Bessin, Dan Kahl, Matt Goldin, and Melissa Roverts, for their hard work on the final rule recommendations before us today. I support the recommendations, and believe that they will help protect public pension plans from the consequences of certain pay to play practices.

The participation of investment advisers in pay to play schemes has been a growing problem, and an embarrassing one for the industry. Today, advisers manage over $2.6 trillion in pension plan assets held in trust for the benefit of tens of thousands of public employees and retirees. As Chairman Schapiro noted earlier, the Commission has brought a number of enforcement actions charging investment advisers with participating in pay to play schemes, including most recently a civil action relating to unlawful kickbacks paid in connection with investments by the New York State Common Retirement Fund. Also, criminal authorities in recent years have brought cases in several states involving the same or similar conduct.

In light of these developments, last year we proposed an adviser pay to play rule that was based on our successful experience with MSRB rules G-37 and G-38; that rule was designed to capture not only direct political contributions by advisers, but also other ways that advisers may engage in pay to play arrangements. The proposal contained several core provisions applying to investment advisers and certain of their executives and solicitors. They included prohibitions on advisers from providing advisory services for compensation to a public pension plan for two years after making political contributions to certain elected officials, from bundling contributions to these officials, and also from paying third parties to solicit government business on their behalf.

Today, we are adopting new rule 206(4)-5 under the Advisers Act in order to prohibit adviser participation in certain pay to play practices, with some changes from what we had proposed. In my view, the most significant change relates to an adviser's use of third-party solicitors. Instead of prohibiting advisers from paying a third party to solicit government business, we are limiting advisers to engaging only solicitors that are "regulated persons," themselves subject to pay to play restrictions. Regulated persons for purposes of the rule would be either a broker-dealer subject to the rules of a registered national securities association that prohibit pay to play practices, or an investment adviser registered with the Commission (and therefore subject to our new pay to play rule).

Importantly, we are providing a 1-year transition period to give FINRA an opportunity to propose a rule for broker-dealers and for us to consider the rule. I understand from our staff that FINRA plans to act within the timeframe. These representations have played an important role in my support for moving forward at this time without having a broker-dealer rule in place. If FINRA does not act, as the release states, we will consider whether to take further action before a total ban on third-party solicitors goes into place.

I do not believe that a total ban is the right answer for municipal markets or investors, because they can provide needed services. But, third party solicitors should take heed, pay attention to Chairman Schapiro's earlier warning, and act appropriately within the system established here. This is a reasonable approach to solve a critical problem.

Once again, I appreciate the efforts of the staff, and support their recommendations.


Modified: 07/02/2010