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SEC Speech Opening Statement

SEC Speech Opening Statement

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Published by billwhitefortexas

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Published by: billwhitefortexas on Oct 21, 2010
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10/21/2010

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Speech by SEC Chairman:Opening Statement at the SEC Open Meeting
by 
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
Washington, D.C.June 30, 2010Good Morning. This is an open meeting of the U.S. Securities and ExchangeCommission on June 30, 2010.Today we consider adopting rules that would significantly curtail thecorrupting influence of "pay to play." Pay to play is the practice of makingcampaign contributions and related payments to elected officials in order toinfluence the awarding of lucrative contracts for the management of publicpension plan assets and similar government investment accounts.Pay to play distorts municipal investment priorities as well as the process bywhich investment managers are selected. It can mean that public plans andtheir beneficiaries receive sub-par advisory performance at a premium price.The cost of this practice is borne by retired teachers, firefighters and othergovernment employees relying on expected pension benefits, or by parentsand students counting on a state-sponsored college savings account. And,ultimately, this cost can be borne by taxpayers, who may have to make upshortfalls when vested obligations cannot be met.An unspoken, but entrenched and well-understood practice, pay to play canalso favor large advisers over smaller competitors, reward politicalconnections rather than management skill, and — as a number of recentenforcement cases have shown — pave the way to outright fraud andcorruption.There should be no place for such practices in an investment advisoryindustry subject to high fiduciary standards. The selection of investmentadvisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacksand favors. The rules we consider today will help level the playing field, allowingadvisers of all sizes to compete for government contracts based oninvestment skill and quality of service.
Background
When the Commission first considered a proposal to curb adviser pay toplay practices in 1999, it was, in part, motivated by widespread mediaaccounts of dubious arrangements between fund managers and municipalofficials.In the years since, the amount of money at stake — and the incentive forinappropriate conduct — has ballooned. Public pension plans now representone-third of all U.S. pension assets, with more than $2.6 trillion in assetsunder management.
 
Additionally, state-sponsored higher education savings plans — commonlyknown as "529s" — now hold approximately $100 billion in assets. Theseplans were in their infancy when the Commission first took up this issue in1999.The SEC has brought a series of enforcement actions charging investmentadvisers with participating in pay to play schemes. Most recently, webrought a civil action involving allegations of unlawful kickbacks paid inconnection with investments by the New York State Common RetirementFund.In recent years, civil and criminal authorities also have brought cases inCalifornia, New York, New Mexico, Illinois, Ohio, Connecticut, and Florida,charging the same or similar conduct.Our recent cases may represent just the tip of the iceberg. I fear that manyother efforts to influence the selection of advisers to manage governmentplans pass unnoticed or — though highly suspect — cannot be proven tohave crossed the line into actionable behavior.Not surprisingly, parties to these suspect transactions take care to blur theirmotives, to hide their actions and to conceal their connections, making itdifficult to prove a direct quid-pro-quo or an intent to curry favor in aspecific case. The prophylactic rules we consider today are designed toeliminate this legal and ethical gray area.
Elements of the Rule
The rule we consider today has three key elements:First, it would prohibit an adviser from providing advisory services forcompensation — either directly or through a pooled investment vehicle— for two years, if the adviser or certain of its executives oremployees make a political contribution to an elected official who is ina position to influence the selection of the adviser.Second, the rule would prohibit an adviser and certain of itsexecutives and employees from soliciting or coordinating campaigncontributions from others — a practice referred to as "bundling" — foran elected official who is in a position to influence the selection of theadviser. It also would prohibit solicitation and coordination of payments to political parties, when the adviser is pursuing businessfrom public entities.Finally, and very importantly, the rule would prohibit an adviser frompaying third-party solicitors who are not "regulated persons" subjectto prohibitions against making contributions. Such "regulated persons"would be limited to registered investment advisers and to broker-dealers subject to pay to play restrictions.Third party placement agents have been involved in some of the mostegregious pay to play activities in recent years, and their activities shouldnot continue unabated. The approach we are taking is a strong step towardeliminating the corruptive influence that can result from the use of thirdparty placement agents.It will greatly improve the status quo by banning payments to third partieswho solicit government clients, unless they are "regulated persons" subjectto pay to play restrictions comparable to the rule we are considering foradoption today.This approach provides far greater protection of public pension plans andtheir beneficiaries than is currently the case, as third party placementagents come under the regulatory umbrella and, for the first time, becomesubject to meaningful federal pay to play restrictions.

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