Just about everyone wants to crack down on “pay to play” in the pension field. By this, most mean payments or political contributions by, or on behalf of, placement agents and/or investment advisers to obtain funds from public and union pension funds. Although investment advisers will not typically make under-the-table payments to the pension fund’s officers or employees, they may pay magnificent retainers to placement agents (who are usually old time politicos) to do this for them – no questions asked. It reminds old-timers of the “good old days” of corruption when U.S. defense industry firms paid placement agents to bribe foreign defense officials, because the U.S. companies were “too ethical” to pay the bribes themselves. Those practices persisted even after the Foreign Corrupt Practices Act because U.S. firms could maintain “plausible deniability” as to knowledge of their agents’ activities in the foreign country.
Already, the new scandal has resulted in indictments, SEC enforcement actions, and a very successful campaign by New York Attorney General Andrew Cuomo to reform practices in New York. But three major questions remain: (1) Should and can the SEC adopt a rule to restrict these practices?; (2) If “pay to play” is so clearly wrong when placement agents make political contributions to public officials with jurisdiction over state pension funds, is it any better when plaintiff law firms, competing to be named class counsel under the Private Securities Litigation Reform Act’s (“PSLRA”) provisions for “lead plaintiffs,” make political contributions to the same political officials?; and (3) If political contributions by interested persons should be barred to political officials with power over pension funds, what about related practices, such as the new practice of plaintiffs’ law firms “monitoring” their client pension funds’ portfolios? Each of these topics has seen recent developments, and more may be just days ahead.
