SEC Addresses Hedge Fund Pay-to-Play Issue
On the heels on several high profile scandals, the SEC has moved quickly to address “pay-to’play” practices in the hedge fund and investment advisory arenas. Last week, the SEC adopted new Rule 206(4)-5 limiting “pay-to-play” practices for investment advisers, including hedge fund investment advisers. The new Rule effectively prohibits the adviser from receiving compensation from any government entity for a two year period following a contribution to an elected official who controls that entity’s awarding of advisory business. Also prohibited are payments to unregistered third-party solicitors for solicitation of government entity advisory business.
For compliance professionals at hedge funds, the new Rule may require updating policies and procedures that address political contributions and the use of placement agents. Many hedge funds currently do not track employee political contributions. Keep in mind that the Rule prohibits “bundling” of contributions and that contributions up to two year’s prior to an employee’s start date of employment may be subject to the Rule restrictions. De minimis contibution amounts are allowed.
In adopting the new Rule, the SEC was primarily seeking to address how government pension plan investment advisory contracts are awarded, i.e., to ensure that those awarding the contracts fulfill their fiduciary duties. One of the highest profile scandals of this type involved David Loglisci, the chief investment officer at the New York State pension fund from 2003 to 2007. He admitted that he violated public trust in a kick-back scheme involving the awarding of investment contracts for the pension funds. Mr. Loglisci faces jail time.
The SEC release about the new Rule 206(4)-5 can be viewed at http://sec.gov/news/press/2010/2010-116.htm
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