Advisers’ pay-for-play dies aborning at SEC

Investment advisory companies have barely escaped harsh regulations calling for sanctions against contributing to officials who could influence awards of management contracts by public pension plans.

The regulations died in the moratorium by the Bush administration on the issuance of new rules, and their future is now in doubt.

That will be relief for financial advisers and broker-dealer reps, as well as institutional investors, who could have been caught by the proposal.

But at least one organization that represents federally registered advisers is still pushing for the Securities and Exchange Commission to come out with a rule on the issue.

“We think it would be a good idea to come out with a rule requiring codes of ethics by all investment advisers,” says David Tittsworth, executive director of the Investment Counsel Association of America Inc. in Washington, which represents large advisers regulated by the SEC.

The ICAA, like most of the investment advisory industry, had strongly opposed the proposal put forward by the SEC in 1999 under Arthur Levitt, then chairman. It would have banned advisory companies from receiving compensation from a public pension fund for two years after any partner, executive officer or solicitor connected with the firm made a contribution to any official who could influence pension contracts.

Clearly concerned

Contributions of up to $250 by officials who live in a politician’s district would have been exempted from the rule. But the SEC’s proposal could have affected even investment adviser or broker-dealer representatives, says Mike Udoff, vice president and associate general counsel of the Securities Industry Association.

“When you get to investment advisory activity, the way the rule was drafted was that essentially anybody who was involved in the process of prospecting for advisory business with public pension plans” would be barred from contributions, he says.

“A Merrill Lynch or a Salomon Smith Barney has 15,000 to 20,000 registered reps and investment adviser reps out there,” Mr. Udoff says. “They don’t have restrictions on who they can solicit.”

That could lead to a rep attempting to solicit business from a public official who is deemed to have an influence on awarding pension management contracts. That in turn could bar the rep’s firm from handling such accounts, Mr. Udoff says.

“If they meet a government treasurer at the local Kiwanis luncheon, what are they going to do, not talk to them?,” he says. “They would be caught in the umbrella of people covered by the rule.”

Charles Schwab & Co. was clearly concerned about the breadth of the regulation. In a November 1999 comment letter from associate general counsel David Riggs, the company said the proposal “should cover political contributions by only those solicitors that the adviser compensates to solicit government clients.”

The letter noted that more than 400 independent advisers receive referrals from Schwab through its Schwab AdvisorSource business, and added, “AdvisorSource is not a referral service for government entities seeking investment managers.” But, Schwab went on to say, “separate from AdvisorSource, participating advisers have or are seeking government-entity advisory clients.”

Other investment management companies that filed opposition comments to the proposal included Franklin Templeton Group, Zurich Scudder Investments, Morgan Stanley Dean Witter Investment Management Inc., Legg Mason Inc. and Fidelity Investments.

Mr. Levitt had indicated that the proposal was a high priority, but the agency was unable to get the final rule out before President Bush took office and imposed the moratorium on issuing new rules. Although the SEC is an independent agency and not subject to the rule, it decided to hold off.

“The commission has indicated it’s going to abide by the moratorium until we get a new chairman,” says Paul Roye, director of the SEC’s division of investment management.

no similar proposal

Industry observers believe that the agency is unlikely to issue a similar proposal.

Cases cited by the SEC to show the need for a rule governing advisers include Chicago’s treasurer, Miriam Santos, who was accused of demanding money from companies to get pension fund contracts, and Connecticut’s treasurer, Paul Silvester, who allegedly demanded money from advisers to get state pension business.

But Mr. Tittsworth argues that the proposed SEC regulation would not have prevented such abuses.