June 30, 2010 / 7:38 PM / 9 years ago

UPDATE 1-US SEC curbs money manager political contributions

* Advisers barred for two years after making contributions

* Rule bars third-parties, family from directing funds

* Limits placed on political contributions (Adds background, Blackstone comment)

By John Poirier and Megan Davies

WASHINGTON/NEW YORK, June 30 (Reuters) - Money managers will be restricted from making political contributions in hopes of winning business from pension funds under rules adopted by U.S. securities regulators on Wednesday.

The practice, known as “pay-to-play,” was the focus of rules approved by all five members of the Securities and Exchange Commission, seeking to curtail how political contributions influence the selection process when picking investment advisers to oversee various U.S. pension plans.

SEC officials are worried the process can short-change public pension plans for government employees, retirement plans for teachers and funds in which families invest for college tuition, called 529 plans.

“The selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors,” SEC Chairman Mary Schapiro said at an open meeting.

According to the SEC, public pension plans hold more than $2.6 trillion of assets, representing about one-third of all U.S. pensions. The college 529 plans hold about $100 billion in assets, the SEC said.

The rule bars an investment adviser for two years from providing services to a pension fund when the adviser makes a political contribution to an elected official who can influence the selection of advisers.

The rule also sets limits on political contributions by an adviser, and bans advisers from paying third parties, such as placement agents or family members, to make contributions to seek business.

The SEC’s original proposal for new rules drew ire from some parts of the private equity and venture capital industry, who argued it went too far by also seeking to ban the use of so-called placement agents. The rules outlined on Wednesday, however, focus just on political contributions.

Placement agents act as middlemen between pension funds looking for places to put their money and private equity funds seeking investments.

A spokesman for Blackstone Group LP (BX.N), which owns a placement agent, Park Hill, said: “We welcome the SEC’s ban on political contributions by placement agents. There is no room in this business for even the appearance of political influence.”

Critics of the original proposal had argued an outright ban would mean small and new funds would have a tougher time raising money. While large, established firms are well known enough to simply contact a pension fund directly, smaller funds without a brand or history have a tougher job getting heard.

Blackstone Chief Executive Stephen Schwarzman took a public stand on the issue in September, saying the private equity firm might never have gotten off the ground had it not been for placement agents helping it raise funds when it started in the 1980s.

The rule does not ban political contributions outright.

It allows an executive of an adviser or employee to make contributions of up to $350 per election and per candidate when the contributor is entitled to vote for the candidate, and up to $150 per candidate when the contributor is not entitled to vote for the candidate.

It prohibits advisers from coordinating campaign contributions from others — a practice known as bundling — for an elected official in a position to influence the selection of an adviser.

Schapiro said the rule also allows smaller advisers to better compete with larger firms for government contracts based on skills and quality of service.

“The rules we consider today will help level the playing field,” she said. (Editing by Gerald E. McCormick)

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