SEC Passes Long-Awaited Rules on Investment Advisers and Political Contributions

06.30.2010

Citing to increasingly significant pay-to-play problems in the management of public funds by investment advisors, the Securities and Exchange Commission passed new rules today that prohibit pay-to-play practices.  As we previously reported here, the SEC first considered these rules, modeled after MSRB G-37 and G-38 rules, in 1999.   The rules passed today:
  • Prohibit investment advisers from receiving compensation for advisory services to a government client for two years if they make a political contribution to certain elected officials or candidates.
  • Prohibit an adviser from providing payment to any third party for a solicitation of advisory business from any government entity on behalf of such adviser unless the third-party is registered with the SEC or FINRA.
  • Prohibit an adviser from soliciting or coordinating contributions (i.e. bundling) to officials or candidates or payments to political parties where the adviser is providing or seeking government business.
  • Require a registered adviser to maintain records of the political contributions made by the adviser or covered executives and employees.
UPDATE:  While the rules generally go into effect 60 days after publication in the Federal Register, the effective dates for some of the rules are extended to provide time for compliance:
  • The prohibition on providing advisory services for compensation within two years of a contribution and the prohibition on soliciting or coordinating contributions will first be triggered by contributions made six months after the effective date.  Notably, this means that contributions given for the November 2010 elections are not covered.
  • The prohibition on making payments to third parties goes into effect one year after the effective date.
  • The record retention rule goes into effect six months after the effective date
Covered “officials” include an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for or can influence the outcome of the selection of an investment adviser. “Covered Associates” include the adviser’s general partners, managing members, executive officers, or other individual with a similar status or function. Any employee of the adviser who solicits government entity clients for the investment adviser and any supervisor of any such employee are covered associates.  Additionally, any PAC controlled by the investment adviser or any of the adviser’s covered associates are included in the definition of “covered associates.” The rule also contains a de minimis exception that would permit each covered associate who is an individual to make aggregate contributions of $350 or less, per election, to an elected official or candidate if the person making the contribution is entitled to vote for the official or candidate and $150 if the person is not entitled to vote for the official or candidate.

Tag: Federal