A California Take on the SEC’s Pay-to-Play Rule

Earlier today, the Securities and Exchange Commission issued its final pay-to-play rule.  Among other things, the rule prohibits investment advisers from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees makes a contribution to specified elected officials or candidates.

Because this blog is devoted to California corporate and securities law issues, I am confining myself to comments about the rule and its impact here.  However, I cannot help to observe that any time a government agency takes 190 pages to justify and explain an 11 page rule, something is surely amiss.  Here are a few quick thoughts about the new rule from a California perspective:

  • The rule provides for a two-year cooling off period after a "contribution" to an "official" of a "government entity" is made by the investment adviser or any "covered associate" of the investment adviser.  The definition of "government entity" is quite broad and undoubtedly covers California's two major retirement systems, the California Public Employees' Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS).
  • CalPERS' Board of Administration is composed of elected members, appointed members and ex officio members.  The SEC's rule applies to elected officials with authority to hire the adviser as well as elected officials (such as persons with appointment authority) who can influence the hiring of the adviser by CalPERS.  This most clearly covers the Governor and candidates and successful candidates for Governor because the Governor appoints two members of the CalPERS Board.  It is less clear to me whether contributions to the Speaker of the Assembly or the members of the Senate Rules Committee are covered because none of these persons has the individual authority to appoint a member to the CalPERS Board (they jointly share the power of appointment with respect to one member).  There are four ex officio members of the CalPERS Board.  Two of these (the Treasurer and Controller) and candidates for those positions will be covered.  However, the other two (the Director of the DPA and a designee of the SPB) will not unless they hold an elective office or are candidates at the time of the contribution.  The balance of the CalPERS Board is elected by various member constituencies.  These would also seem to be covered by the rule because the Board appears to fit the definition of a government entity.
  • This is, of course, a federal rule and the state registered investment advisers will not be subject to the two-year time out.  However, persons who do not register as investment advisers with the SEC in reliance on Section 203(b)(3) of the Investment Advisers Act of 1940 will be subject to the two-year time out.  This may come as a big shock to venture capital and hedge funds.
  • Another aspect of the SEC's rule is to ban payments to any third party for solicitation of advisory business from any government entity unless the third party is itself a "regulated person".  Because the SEC does not include investment advisers registered by the Department of Corporations within the definition of "regulated person", these advisers (who are likely prohibited from registering with the SEC as a result of the National Securities Markets Improvement Act of 1996) will be negatively impacted.

I could write much more, but with apologies to Pierre de Fermat: "Hanc marginis exiguitas non caperet".