Good morning. I want to join Chairman Schapiro in recognizing the Division of Investment Management and the offices of General Counsel and Economic Analysis for their contributions to this proposing release.
Investment advisers manage around $2.3 trillion in pension plan assets that are held in trust for the benefit of millions of public employees and retirees. The management of these funds significantly affects not only beneficiaries and taxpayers, but the publicly held companies they invest in and the securities markets themselves. When an adviser makes political contributions for the purpose of influencing the selection of the manager of a public pension plan, the adviser interferes with the merit-based selection process of its prospective client. And, when the process of selecting an investment adviser is corrupted by pay to play practices, the duties of an adviser are compromised — significantly increasing the potential to harm pension funds and their underlying investors.
Pay to play practices are what you might call an open secret — one of those practices that everyone knows about, recognizes is wrong and harmful and yet, continues to participate in because it is just to difficult to step away from. The release effectively highlights the collective action problem associated with these practices: "[E]lected officials that [who] accept contributions from state contractors may believe they have an advantage over their opponents that forswear the contributions, and firms that do not 'pay' may fear they will lose government business to those that do."
While disclosure is often our preferred course in dealing with conflicts, it is important to recognize that here it appears to be an insufficient means of protecting advisory clients, those pension funds whose beneficiaries are affected by pay to play practices. In such cases, a prophylactic rule that is aimed at ensuring that advisers may no longer be compromised by such practices may be the most effective means of addressing the problem.
I also want to note that the release effectively highlights the issue of indirect efforts to make such contributions — whether through other individuals, such as spouses, third-party agents, or even lawyers, or through other mechanisms besides direct political contributions, such as to PACs, unions, conferences, and other entities that may serve as funnels for kickbacks. I look forward to commenters helping us ensure we properly tailor the rule to address these practices. I appreciate that the Staff has tried to craft a proposal that will do so and, with that, I want to thank you again for your great work.