New York State Comptroller Issues Executive Order Banning Political Contributions

On September 23, 2009, New York State Comptroller Thomas DiNapoli issued an executive order that prohibits the New York State Common Retirement Fund from doing business with investment advisers who have made political contributions to the state comptroller and candidates for state comptroller. 

The new rules will become effective on November 7, 2009, and will remain in effect until the Securities and Exchange Commission’s (SEC) final rule pertaining to political contributions becomes effective.  The SEC has been working to implement a rule prohibiting contributions by certain investment advisers in an attempt to prevent “pay-to-play” practices.  The SEC issued a proposed rule on August 3, 2009, and they anticipate adopting a final rule following the comment period.

Important Provisions

The executive order prohibits the fund from engaging, hiring, investing with, or committing to, an outside investment adviser within two years after a contribution has been made by the investment adviser or any covered associate of the investment adviser to the incumbent state comptroller, any candidate for state comptroller or the successful candidate for state comptroller.  Per the terms of the executive order—

• “Investment Adviser” means an investment adviser registered or required to be registered with the SEC and those investment advisers exempt from registration with the SEC under section 203 of the Federal Advisers Act (15 U.S.C. 80b-3(b)(3)).
• “Covered Associates of an Investment Adviser” means any general partner, managing member or executive officer, or other individual with a similar status or function; any employee who solicits a government entity of the investment adviser; and any political action committee controlled by the investment adviser or by any general partner of the investment adviser, managing member or executive officer, or other individual with a similar status or function or any employee who solicits a government entity for the investment adviser.
• “Executive Officer” means the president; any vice president in charge of a principal business unity, division or functions (such as sales, administration or finance); or any other executive officer of the investment adviser who, in each case, in connection with his or her regular duties—
  
  • performs, or supervises any person who performs, investment advisory services for the investment adviser;
  • solicits, or supervises any person who solicits, for the investment adviser; or
  • supervises, directly or indirectly, any other person who is an executive officer.

In addition, the fund is prohibited from engaging, hiring, investing with, or committing to, an outside investment adviser if the investment adviser or any covered associate of the investment adviser coordinates or solicits any person or political action committee to make any contribution to the incumbent state comptroller, any candidate for state comptroller or successful candidate for state comptroller and provides or seeks to provide investment advisory services to the fund.

Exception

Covered associates of an investment adviser may make contributions of less than $250 per candidate, per election to the incumbent, candidate for, or successful candidate for state comptroller for whom he or she is entitled to vote at the time of the contribution.

Disclosure Requirement

Investment advisers must provide a “Political Contribution Representation” in the form of a letter stating that no banned political contributions were made after November 7, 2009, by the investment adviser or any covered associate of the investment adviser to the incumbent state comptroller, any candidate for state comptroller or the successful candidate for state comptroller within the two-year time period immediately preceding the date of representation. 

Penalties

If the investment adviser fails to comply with the “Political Contribution Representation” requirement, the fund will not proceed with an investment or agreement with the investment adviser.  Additionally, material misstatements or omissions may result in the termination of the relationship with the investment adviser.