"Pay-to-play" concerns about investment advisers prompts SEC review.

• Author: Owens, Tom
• Position: Securities and Exchange Commission

Are investment decisions by public pension funds and other state and local investment funds being influenced by campaign contributions from investment management firms who either control the fund's assets or seek to control those assets? That is the question being contemplated by the Securities and Exchange Commission (SEC) as it undertakes an examination of this issue, known as pay-to-play, within the nation's public pension and investment fund industries. A previous SEC investigation into pay-to-play abuses in the municipal bond industry resulted in a new rule, G-37, developed by the Municipal Securities Rulemaking Board (MSRB) and approved by the SEC. SEC Chairman Arthur Levitt has stated publicly that the commission will finalize a draft rule by the end of April 1999. According to Levitt, the five-member commission will then convene a public meeting to decide whether to formally propose the rule for public comment.

In the early 1990s, federal regulators, the media, and public-finance professionals began raising concerns that local government decisions involving the hiring of financial advisers, bond lawyers, and other types of public-finance professionals were being improperly influenced by political contributions made to those elected officials involved in such decision-making. The term "pay-to-play" was coined to describe this practice. At that time, the SEC considered pay-to-play practices a threat to the integrity of the municipal securities markets, pointing specifically to data showing an increase in the use of negotiated bond underwritings, as opposed to competitive bidding.

As a result, by August 1993 the MSRB issued a draft of MSRB Rule G-37. By law, the SEC must approve any rule promulgated by the MSRB before it can be enforced. Objections were raised to MSRB Rule G-37 based upon First Amendment considerations involving free speech, as well as the concerns of minority and women business owners. These objections were dismissed by the SEC, which then gave its final approval to MSRB Rule G-37 in 1994. The rule prohibits investment banking firms from accepting municipal securities business if any member of the firm's public finance department makes contributions to a public official who is in the position of influencing the award of such business. The rule does, however, permit contributions of up to $250 for any official for whom the contributor is a constituent. Rule G-37 was challenged in court,(1) but was upheld. The D.C...