SEC wants to end pay-to-play prohibition for private equity
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The Trump administration is seeking to rescind a rule that was put in place to stop private equity funds from bribing public officials, following a raft of pay-to-play scandals.
The big picture: The Securities and Exchange Commission claims that the Rule 206(4)-5 of the Investment Advisers Act stifles "free speech" and had too many unintended consequences.
- It did not propose any sort of replacement, instead arguing that existing state and local laws would suffice — even though it was the failure of those very laws that led to the rule's creation in the first place.
Letter of the law: Rule 206(4)-5 prohibits "covered associates" from providing advisory services to a government client for two years after contributing to certain candidates and/or elected officials (federal candidates are generally exempted, unless they hold relevant state office). Other sorts of gifts are also prohibited.
- "Covered associates" includes a lookback provision for new hires, and has been interpretted by many firms to apply to all employees. There also are anti-circumvention clauses that apply to placement agents.
- It was sparked by private equity abuses, but also applies to other sorts of fund managers (VC, hedge, etc.).
Zoom in: The rule is very broad, but intentionally so.
- State and local prosecutors often had difficulties proving quid pro quo, and believed the federal ban was the best way to stop slippery actors.
- The SEC agreed on a bipartisan basis, voting unanimously in support.
Fast forward: The SEC now argues that compliance has been unwieldy, and prevented public pensions from accessing "the most qualified or cost-effective advisers."
- Maybe it was true in the early days, but by now every fund manager — and certainly their lawyers — know about the rule and the importance of sharing it with colleagues. To date there have been fewer than two dozen related charges by the SEC.
- Yes, some of those violations feel, in the SEC's new language, more like "foot faults" than intentional grift. But, again, the agency isn't talking about tweaking the rule; it's talking about eliminating it altogether, and just hoping that there isn't a resurgence of bribery in the pursuit of taxpayer dollars.
State of play: The rescission proposal is supported by SEC chair Paul Atkins, and the SEC's two current commissioners — both Republicans, as Trump hasn't bothered to fill the two Democratic spots, creating something of an echo chamber.
- The SEC will accept comments for the next two months.
