Since 1999, when the Securities and Exchange Commission first considered a proposal to rein in investment adviser "pay to play" practices, some things have changed. Among them is the size of U.S. public pension plans, which has mushroomed to more than $2.6 trillion in assets under management.
But here’s one thing that’s unchanged: the willingness of many people to engage in this improper behavior.
That’s why the SEC’s unanimous vote for a rule to curtail pay to play should be applauded. One could say it ought to have acted sooner, but better late than never.
Pay to play occurs when campaign contributions and related payments are made to elected officials in a position to influence the awarding of contracts for the management of public pension plan assets.
"Pay to play distorts municipal investment priorities as well as the process by which investment managers are selected," SEC chairman Mary Schapiro said in a statement before Wednesday’s vote. "It can mean that public plans and their beneficiaries receive sub-par advisory performance at a premium price."
The cost of this practice, she added, "is borne by retired teachers, firefighters and other government employees relying on expected pension benefits. … And, ultimately, this cost can be borne by taxpayers, who may have to make up shortfalls when vested obligations cannot be met."
Under the new rule, advisers who make a contribution to an elected official or a candidate who could be in a position to hire money managers would not be allowed to offer services to public pension plans for two years.
In addition, the advisory firm and its employees are prohibited from paying third parties to solicit public pension management contracts unless the third-party firms are subject to pay-to-play restrictions.
To see the need for this rule, look no farther than our own state. The SEC brought a civil action involving allegations of kickbacks related to New York State Common Retirement Fund investments. Since 2007, Attorney General Andrew Cuomo also has been investigating the state’s pension fund.
As Ms. Schapiro noted, pay to play is "corrupt and corrupting." One hopes the new SEC rule makes it much less common.