The Securities and Exchange Commission (SEC) in mid-December said it would spend 1999 studying the possibility of creating rules to prohibit pay-to-play involving financial advisers and public pensions.
The SEC determined its current regulations did not extend commission authority to this area. The agency intends to focus its efforts on investment advisers hired by pensions but could broaden its study to include private equity professionals, said Robert Plaze, associate director of the SEC’s division of investment management.
The SEC oversees investment advisers with $25 million or more under management; smaller advisers are regulated by their respective states.
After Two Years, SEC Begins to Move
The agency initially began looking into pay-to-play allegations involving gifts and campaign donations in mid-1997, after former California State Teachers’ Retirement System (CalSTRS) Chief Investment Officer Thomas Flanigan wrote to SEC Chairman Arthur Levitt complaining about the improper influence contributions to pension board members could have on investment decisions.
The SEC’s rule-making process could produce an initial draft that would be subject first to commission approval, then to public review and comment. A final version would then be up for commission adoption.
The California Public Employees’ Retirement System (CalPERS), which adopted its own ban on contributions to its board members last year, thanked Chairman Levitt in a letter for taking the lead on this issue.
CalPERS board member and state Controller Kathleen Connell filed a lawsuit challenging the appropriateness and fairness of the pension’s contribution ban last year. A superior court judge, citing a technical oversight, ruled in favor of Dr. Connell, forcing CalPERS to send its rule to the state’s Office of Administrative Law for review (BUYOUTS Nov. 9, 1998, p. 4).
Meanwhile, the California legislature recently adopted campaign disclosure rules on gifts and donations to public pension board members doing business with pensions.
Similar pay-to-play issues in the municipal bond industry led to the creation of its own donation rule, known as G-37, in 1994. Administered by the Municipal Securities Rulemaking Board (MSRB), G-37 forbids a bond broker or dealer to conduct business within a municipality for two years if the broker, dealer or his associates gave gifts or donations to its municipal officials. However, brokers and dealers may contribute as much as $250 per election to candidates they can vote for without triggering G-37. The rule requires municipal bond dealers and brokers to file quarterly records of their donations, which are made public, with the MSRB.
Hamilton Lane Advisors Chairman and Chief Executive Leslie Brun said he would welcome a G-37-style rule or some other form of SEC intervention on the public pension pay-to-play. He does, however, remain uncertain about what solution-a complete ban or a limit on donations-would be the best form of action.
Mr. Brun made a $250 personal contribution to New York Comptroller H. Carl McCall years ago, which was mentioned in a Wall Street Journal article years later. Mr. Brun, however, said he thought the size of his donation was clearly too small to expect any professional favors in return.
Recently, as part of the CalPERS/Connell lawsuit, Mr. Brun submitted a statement alleging that Dr. Connell’s representative to the CalPERS board treated him less favorably because Mr. Brun declined to donate to Dr. Connell’s campaign. “I do know it’s very uncomfortable when there is the inference that your professional fate could be affected, usually negatively, if you don’t pay to play,” Mr. Brun said.