SEC Plans to Repropose Pay-to-Play Rules

WASHINGTON - The Securities and Exchange Commission plans to repropose rule changes next month that would impose pay-to-play restrictions on investment advisers for states and localities, modelled partly on limits already in place for municipal broker-dealers.

The rule changes would be revised from a proposal the SEC floated in August 1999 under former chairman Arthur Levitt, who made municipal market reforms a priority during his years at the commission. The changes were proposed but never finalized, partly in response to congressional opposition to them.

"We'll be revisiting that rule in July," SEC chairman Mary Schapiro told reporters yesterday, after testifying before the Senate Appropriations subcommittee on financial services about the proposed SEC budget for fiscal 2010, which begins Oct. 1. Previously, SEC staff had said the measure would be considered sometime this summer.

An SEC source said the measure is likely to be considered at a meeting of the five-member commission in late July. An earlier meeting, tentatively set for July 1, already has a full agenda.

In her prepared testimony, Schapiro said that pay-to-play practices by investment advisers to public pension plans "must be curtailed." Her remarks come amid ongoing investigations by New York Attorney General Andrew Cuomo and the SEC into a massive pay-to-play scheme involving that state's largest pension fund that have led to enforcement actions against individuals and firms and spread to other states.

While Schapiro told lawmakers that staff are also working on a series of "investor-oriented enhancements" to the municipal securities market, it is not clear if they will be considered at the same time as the pay-to-play measure. Though they are both related, the muni initiatives are being drafted by the division of trading and markets while the pay-to-play measure is being drafted by the investment management division.

When first proposed in 1999, SEC staff cited reports or evidence of pay-to-play practices by advisers for state and local pension funds in 17 states.

The 1999 proposal was modelled in part on the Municipal Securities Rulemaking Board's Rule G-37, which bans a dealer from engaging in a negotiated municipal securities business with an issuer for two years if it or its municipal finance professionals, or MFPs, make significant political contributions to officials of that issuer who influence the awarding of bond business. MFPs, however, can contribute up to $250 to any issuer official for whom they can vote.

The 1999 proposal, though, would have prohibited an investment adviser from providing advisory services for compensation to a government for two years after the adviser or any of its partners or executive officers made a contributions to certain elected officials or candidates.

An SEC source said that the staff is also "looking at" further modifying the 1999 proposal to reflect the MSRB's 2005 overhaul of its Rule G-38 to completely ban the use of outside consultants to obtain muni business.

The source said that the limits would apply only to firms subject to the Investment Advisers Act of 1940. Generally speaking, these are investment advisors with assets under management of more than $30 million. Firms managing $25 million or less in assets are regulated by the states, while firms with between $25 million and $30 million of assets can elect either state or SEC oversight, sources said.

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