Key Takeaways
- • CalPERS CEO Marcie Frost, in a Nov. 2 comment letter, urged the SEC to abandon its September proposal to eliminate the investment adviser pay-to-play rule, arguing the rule guards against corruption and conflicts of interest in public pension asset management.
- • CalPERS, with $653.8 billion in assets, is the nation's largest public pension fund, and its opposition adds weight to the case against rescission.
- • Oregon State Treasurer Elizabeth Steiner also called for withdrawal of the proposal, warning that repeal would make manager compliance representations "meaningless" and force Oregon to rebuild its regulatory framework from scratch.
- • The Investment Adviser Association, in its Nov. 9 comment letter, supported rescission, citing the rule's compliance burdens and unintended consequences for advisers and government clients.
- • The 60-day public comment period closes Nov. 9, and the SEC could issue a final rule next year.
Summary
The nation's largest public pension fund is pressing the Securities and Exchange Commission to abandon its September proposal to eliminate the investment adviser pay-to-play rule. Marcie Frost, chief executive of the $653.8 billion California Public Employees' Retirement System (CalPERS), wrote in a Nov. 2 comment letter that the existing restrictions provide important safeguards against corruption, conflicts of interest and the appearance of impropriety when governmental and public trust fund assets are awarded to advisers. CalPERS argues that the rule has substantially reduced the number of pay-to-play scandals in the industry and ensures advisers compete on expertise, performance, fees and service rather than political influence.
The SEC's 2010 rule bars an investment adviser from working with a government entity for two years after the adviser or its "covered associates" makes a political contribution above a specified threshold. Contributions are capped at $350 where the adviser could vote for the candidate and $150 where it cannot. The commission's Sept. 3 proposal would remove the adviser-specific restriction and leave advisory firms to design their own pay-to-play policies in line with existing state, local and federal fraud and bribery laws, according to legal experts cited by Pensions & Investments. The 60-day comment period ends Nov. 9.
Oregon State Treasurer Elizabeth Steiner, who also sits on the Oregon Investment Council, filed a separate Nov. 2 letter calling for withdrawal of the proposal. Steiner acknowledged the rule's flaws, including a very low contribution threshold that has not been adjusted since 2010, but said it "protects our system and our beneficiaries." The Oregon Public Employees Retirement Fund, which manages $104 billion, requires each manager to represent that neither it nor its covered associates has made or will make contributions that would violate the rule and to retain the required records. Steiner warned that without the rule and SEC oversight, those representations would become meaningless and manager compliance would likely diverge. She also said other plans and jurisdictions rely on the rule in the same way, and that the lack of comparable state and local rules reflects that reliance.
The Investment Adviser Association took the opposite position in its Nov. 9 comment letter, commending the SEC and stating that rescission is warranted given the rule's longstanding compliance burdens, operational complexity and unintended consequences for advisers, their personnel and government clients. The SEC will now review the comments and could issue a final rule next year.
The SEC's 2010 rule bars an investment adviser from working with a government entity for two years after the adviser or its "covered associates" makes a political contribution above a specified threshold. Contributions are capped at $350 where the adviser could vote for the candidate and $150 where it cannot. The commission's Sept. 3 proposal would remove the adviser-specific restriction and leave advisory firms to design their own pay-to-play policies in line with existing state, local and federal fraud and bribery laws, according to legal experts cited by Pensions & Investments. The 60-day comment period ends Nov. 9.
Oregon State Treasurer Elizabeth Steiner, who also sits on the Oregon Investment Council, filed a separate Nov. 2 letter calling for withdrawal of the proposal. Steiner acknowledged the rule's flaws, including a very low contribution threshold that has not been adjusted since 2010, but said it "protects our system and our beneficiaries." The Oregon Public Employees Retirement Fund, which manages $104 billion, requires each manager to represent that neither it nor its covered associates has made or will make contributions that would violate the rule and to retain the required records. Steiner warned that without the rule and SEC oversight, those representations would become meaningless and manager compliance would likely diverge. She also said other plans and jurisdictions rely on the rule in the same way, and that the lack of comparable state and local rules reflects that reliance.
The Investment Adviser Association took the opposite position in its Nov. 9 comment letter, commending the SEC and stating that rescission is warranted given the rule's longstanding compliance burdens, operational complexity and unintended consequences for advisers, their personnel and government clients. The SEC will now review the comments and could issue a final rule next year.
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