BNA INSIGHTS: ‘Pay-to-Play’ in the Financial Services Industry: Current Developments and Strategies to Reduce Risk

“Pay-to-play” concerns in the financial services industry were placed under a spotlight in 2009 as a result of scandals highlighted by an investigation of the New York State Common Retirement Fund (“NY Retirement Fund”), the third largest public fund in the United States. The investigation, led by the New York Attorney General (“NYAG”), revealed extensive kickbacks by investment advisers seeking business from the NY Retirement Fund. The investment advisers, who largely provided alternative investment products, were introduced to the NY Retirement Fund by placement agents and other intermediaries. As a result of that investigation, the NYAG formed a nationwide task force and published a “Public Pension Fund Reform Code of Conduct” for advisers providing services to public funds.

Throughout the United States, public pension funds and various state and local governments have called for, or adopted, reforms designed to prevent decisions of public funds from being improperly influenced. At the federal level, the U.S. Securities and Exchange Commission (“SEC”) voted in July of 2009 to adopt an antifraud rule that would effectively ban the use of third-parties to market investment advisory services to public funds, and significantly restrict the ability of advisers and their employees to make political contributions to elected officials who have the ability to influence investment decisions by a public fund.In addition, the SEC has announced the creation of a specialized unit within its Division of Enforcement focused on, among other things, fraud involving public funds.

This article provides a summary of current developments affecting investment advisers who seek business from public funds, and provides an overview of the practices employed by some organizations to mitigate the risk of any non-compliance with existing laws and policies.

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