SEC cracks down on 'pay to play' investment advisers

Posted May 10th 2009 2:10PM by Zac Bissonnette
Filed under: Law, Scandals

The Wall Street Journal reports (subscription required) that "The Securities and Exchange Commission is expected to propose a federal rule that would ban investment advisers from managing public pension-fund money after contributing to the campaigns of state pension fund overseers."

The move comes in response to several pension fund scandals that have emerged in recent months. New York Attorney General Mario Cuomo, along with the SEC, is investigating allegations that former state comptroller Alan Hevesi was effectively selling pension fund business.

State pension plans hire third-party managers to invest portions of their assets. In theory, these managers are chosen based on the best interests of the pension funds' beneficiaries but, as with any government contract, there is a concern that favoritism could play a role.

Part of what makes the pension fund business so subject to the kind of corruption that the SEC is looking to crack down on is that it's so subjective. Different managers have different styles and different track records, so it isn't a simply bid process. Elected officials can allocate business to major donors but defend the decisions as motivated by the best interests of the pension fund, and there's little anyone can do to prove that it's a case of corrupt favoritism.

Sixteen states already have laws similar to the rule the SEC is proposing, but it's probably important that it be made national. There are plenty of money managers capable of handling pension funds, and there's no reason to run the risk of problems that can come with having that money funneled to campaign contributors.

Tags: Alan Hevesi, Mario Cuomo, Pension Funds, SEC