SEC Proposes Rule To Curtail “Pay To Play” Practices By Investment Advisers Seeking To Manage Money For State And Local Governments

Profession:Goodwin Procter LLP
 
FREE EXCERPT

Developments Of Note

SEC Proposes Rule To Curtail "Pay To Play" Practices

By Investment Advisers Seeking To Manage Money For State And Local

Governments

Treasury Submits Proposed Legislation For Various Elements of

Financial Regulatory Reform Program

Proposed Legislation On Consolidated Supervision And Regulation

Of Large, Interconnected Financial Firms

Proposed Legislation To Establish National Bank Supervisor;

Terminate Federal Thrift Charter

Proposed Legislation To Revise Certain Changes To Statutory

Framework For BHCs And Banks

Proposed Legislation Creating Office Of National Insurance

Proposed Legislation For Public Company Executive Compensation

Reform

Appeals Court Sends Fixed Index Annuity Rule Back to the

SEC

Other Item Of Note

Federal Banking Agencies Issue Final Revisions To Flood

Insurance Q&As

DEVELOPMENTS OF NOTE

SEC Proposes Rule To Curtail "Pay To Play" Practices

By Investment Advisers Seeking To Manage Money For State And Local

Governments

The SEC voted to propose a rule intended to curtail "pay to

play" practices where an investment adviser makes political

contributions or hidden payments to influence government officials

to select the adviser to manage money on behalf of public pension

plans, retirement plans and 529 plans. This summary is based on the

SEC press release announcing the proposed rule. A future edition of

the Alert will discuss the proposing release once it

becomes available.

The proposed rule would, among other things:

Prohibit direct political contributions by investment advisers

(including certain of their executives and employees) to elected

officials or candidates (or their associates), subject to certain

de minimis exceptions;

Bar an investment adviser who makes a political contribution to

an elected official (or candidate) in a position to influence the

selection of the investment adviser from providing advisory

services for compensation, either directly or through a fund, for

two (2) years;

Prohibit an investment adviser from soliciting contributions to

an elected official (or candidate) who can influence the selection

of the investment adviser and from soliciting payments to a

political party of the state or locality where the investment

adviser is seeking to provide advisory services to the

government;

Prohibit an investment adviser from paying a third party

(e.g., a solicitor or placement agent) to solicit a

government client on behalf of the investment adviser; and

Prohibit an investment adviser from directing or funding

contributions through third parties such as spouses, lawyers or

companies affiliated with the investment adviser if that conduct

would violate the rule if the investment adviser engaged in such

conduct directly.

Treasury Submits Proposed Legislation For Various Elements Of

Financial Regulatory Reform Program

The Obama Administration, through the Treasury, has been

releasing the text of proposed legislation for various elements of

its financial regulatory reform program (the "Program")

as they are submitted to Congress. The proposed legislation

provides significant detail concerning many segments of the Program

described in the Treasury's White Paper issued in June 2009 (as

discussed in the

June 23, 2009 Alert.) The proposed legislation on

hedge fund adviser registration was described in the

July 21, 2009 Alert. Some portions of the proposed

legislation concerning the Program are described in this issue of

the Alert. Other segments will be summarized in future

issues of the Alert. As reported in the financial press,

there is significant Congressional and industry opposition to

certain elements of the Program (e.g., the elimination of

the thrift charter, the selection of the Board of Governors of the

Federal Reserve System as the systemic risk regulator and the

establishment of a Consumer Financial Protection Agency), and some

or all of the elements of the Program may not be enacted. The

Treasury, however, is reportedly continuing to pursue these

initiatives in their current form. The Alert will continue

to cover developments in this area.

Proposed Legislation On Consolidated Supervision And Regulation

Of Large, Interconnected Financial Firms

As part of its financial regulatory reform program, the Obama

Administration, through the Treasury, submitted to Congress proposed legislation regarding the

consolidated supervision and regulation of large, highly leveraged

and substantially interconnected financial companies. As noted in

the proposed legislation, the inadequate consolidated supervision

and regulation of such companies was a key contributor to the

recent financial crisis. Accordingly, in order to mitigate systemic

risk and promote the stability of the U.S. financial system, the

proposed legislation authorizes the Board of Governors of the

Federal Reserve System (the "FRB") to designate certain

large, highly leveraged, and substantially interconnected financial

companies as "Tier 1 Financial Holding Companies" (or

"Tier 1 FHCs") and to subject such companies to

comprehensive and robust prudential supervision and regulation. The

proposed legislation is designed to implement recommendations made

in the Treasury's June 2009 White Paper on financial regulatory

reform (as discussed in the

June 23, 2009 Alert).

Designation of Tier 1 FHCs. Pursuant to the proposed

legislation, the FRB may designate any U.S. financial company as a

Tier 1 FHC if it determines that material financial distress at

such company could pose a threat to global or U.S. financial

stability or to the global or U.S. economy. In making these

determinations, the FRB will look at a number of factors, including

the amount and nature of a company's assets and liabilities,

its off-balance sheet exposures, the extent of the company's

transactions and relationships with other major financial

companies, and the company's importance as a source of credit

for households, businesses and State and local governments and as a

source of liquidity for the financial system. Similarly, the FRB

may designate any foreign financial company as a Tier 1 FHC if it

determines that material financial distress at such company could

pose a threat to U.S. financial stability or the U.S. economy,

taking into consideration the principles of national treatment and

equality of competitive opportunity and the amount of the foreign

company's U.S. assets, the leverage used to fund activities and

operations in the U.S., and other criteria related to the

company's U.S. activities and operations. Notably, the proposed

legislation does not limit Tier 1 FHCs to institutions that own

banking enterprises, or to domestic financial institutions. A

designation as a Tier 1 FHC is subject to reevaluation, rescission,

notice and an opportunity to be heard.

The proposed legislation provides that the FRB may require any

U.S. financial company that has: (i) $10 billion or more in assets;

(ii) $100 billion or more in assets under management; or (iii) $2

billion or more in gross annual revenue, to submit information for

the purpose of determining if such company is a Tier 1 FHC.

Similarly, the FRB may collect information for the same purposes

from any foreign financial company that has: (a) $10 billion or

more in assets in the U.S.; (b) $100 billion or more in assets

under management in the U.S.; or (c) $2 billion or more in gross

annual revenue in the U.S. In collecting such information, the FRB

must coordinate with any applicable federal regulatory agencies. In

addition, if necessary, the FRB may conduct a limited examination

of any U.S. financial company for the purpose of determining

whether to designate the company as a Tier 1 FHC. Despite criticism

from various members of Congress as well as other federal

regulators, the proposed legislation provides that, while the

Financial Services Oversight Council (the "Council"),

which would be created under Title I of the proposed legislation,

will have the ability to recommend that certain firms be designated

as Tier 1 FHCs, the final determination will rest solely with the

FRB.

Prudential Standards. The proposed legislation provides

that the FRB shall prescribe, after consultation with the Council,

prudential standards for Tier 1 FHCs that will be more stringent

than the standards applicable to bank holding companies to reflect

the potential risk posed to financial stability by Tier 1 FHCs.

Such prudential standards must include: (1) risk-based capital

requirements; (2) leverage limits; (3) liquidity requirements; and

(4) overall risk management requirements. These standards will be

set with a focus on the risks that these firms could pose to the

financial system as a whole, not just the risks to each

institution. The FRB may differentiate among Tier 1 FHCs taking

into consideration their risk, complexity, the financial activities

of the institution and its subsidiaries, as well as any other

factors the FRB deems appropriate.

Reporting. The FRB may require a Tier 1 FHC to submit

various reports, including with regard to: (i) its plan for rapid

and orderly resolution in the event of severe financial distress;

(ii) the nature and extent to which the Tier 1 FHC has credit

exposure to other Tier 1 FHCs; and (iii) the nature and extent to

which other Tier 1 FHCs have credit exposure to the Tier 1 FHC. The

proposed legislation requires the FRB to use existing reports

required by other federal regulatory agencies for these purposes

whenever possible.

Supervision/Examination. The proposed legislation also

gives the FRB the authority to supervise and examine a Tier 1 FHC

and all of its subsidiaries, including backstop authority over

functionally regulated subsidiaries, and also gives the Federal

Deposit Insurance Corporation (the "FDIC") back-up

authority over Tier 1 FHCs. The FRB may also prescribe, examine and

enforce more stringent prudential standards on functionally

regulated subsidiaries of Tier 1 FHCs if the FRB determines it is

necessary or appropriate to prevent or...

To continue reading

FREE SIGN UP