Private investment advisers and their firms would face new restrictions on campaign contributions to public pension fund officials under a proposed federal crackdown that won provisional approval Wednesday.
The Securities and Exchange Commission unanimously endorsed the proposal amid widening investigations of so-called pay-to-play donations by private equity and hedge fund executives who jockey for lucrative fees to manage some of the more than $2.2 trillion in assets held by public pension funds.
"The selection of investment advisers to manage public plans should be based on merit and the best interests of the plans and their beneficiaries, not the payment of kickbacks or political favors," SEC Chair Mary Schapiro says.
The crackdown, set for a final decision by the SEC's five commissioners after a 60-day public comment period, would:
•Impose a two-year ban on pension fund contracts with paid advisers who have given more than $250 to any public official able to influence the fund's investments. The rule would cover donations to incumbents and challengers, and would apply to investment executives, their firms and some employees.
•Bar investment advisers and their firms from directing political action committees or intermediaries to give campaign donations to pension fund incumbents or candidates, or to a state or local political party.
•Bar investment advisers from paying placement agents, solicitors or other third parties to solicit public pension fund investment business.
•Prohibit indirect campaign contributions to pension fund officials through spouses, lawyers or companies affiliated with investment advisers.
The proposal, which includes a few narrowly tailored exemptions, is similar to restrictions the SEC considered but never enacted in 1999. Repeated pay-to-play allegations in the decade since have raised calls for new restrictions.
New York Attorney General Andrew Cuomo's office this spring filed a criminal case against David Loglisci, one of the state's former top pension fund officials, and Hank Morris, a key political adviser to former state comptroller Alan Hevesi. The two have pleaded not guilty to charges they got millions of dollars to influence New York pension fund investments. The SEC filed a parallel civil case.
Top investment firms touched by the investigations include the Quadrangle Group, the company founded by Steven Rattner, who this month stepped down as the Obama administration's point man for the auto industry bailout. Quadrangle indirectly paid more than $1 million to Morris in connection with a $100 million New York pension fund investment, according to the court complaint in the SEC case.
Cuomo said Wednesday that the SEC proposal and a similar state pension fund code of conduct he announced earlier this year "are essential to eliminating the corruption in the current system."