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SEC Adopts Investment Adviser Pay-To-Play Rule

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  • Baker, John M.
    The Securities and Exchange Commission has adopted a rule restricting political contributions by SEC-registered investment advisers and by investment advisers
    Message 1 of 1 , Jul 1, 2010
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      The Securities and Exchange Commission has adopted a rule restricting political contributions by SEC-registered investment advisers and by investment advisers that are exempt from registration because they have fewer than 15 clients. Release No. IA-3043 (July 1, 2010). New Rule 206(4)-5 under the Investment Advisers Act of 1940 can be seen as the culmination of an eleven-year effort, since the SEC first proposed to restrict "pay to play" practices in 1999. The rule has three main provisions:

      First, it prohibits an adviser from providing advisory services for compensation - either directly or through a pooled investment vehicle - for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official at the state or local level who is in a position to influence the selection of the adviser. If the investment vehicle is a registered investment company, the prohibition applies only if the investment company is an investment option of a plan or program of a government entity, such as a 529 plan or a retirement plan. There is a carve-out for contributions of less than $350 to an official for whom the contributor is able to vote, or of less than $150 to an official for whom the contributor is not able to vote.

      Second, the rule prohibits an adviser and certain of its executives and employees from soliciting or coordinating campaign contributions from others for an elected official who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties, when the adviser is pursuing business from public entities. The SEC particularly focuses on "bundling," but the prohibition apparently would reach ordinary volunteer work for a political party.

      Third, the rule prohibits an adviser from paying third-party solicitors who are not "regulated persons" subject to prohibitions against making contributions. Such "regulated persons" are limited to SEC-registered investment advisers and broker-dealers. Broker-dealers, however, can qualify only if the Financial Industry Regulatory Authority proposes and adopts a pay-to-play rule that is at least as stringent; FINRA is expected to do so. State-registered investment advisers do not qualify as regulated persons.

      The rule presents a host of difficult compliance issues. Even a single errant employee could cost an adviser its compensation (not just profits) from a major client. For newly hired "covered associates," the adviser must look back to determine if he or she has made any prohibited political contributions in the past two years (or, in certain cases, six months). (People who work in the investment advisory industry should get used to limiting their political contributions to $350 to officials for whom they can vote, and $150 to other officials.) Registered investment companies must identify government entities that have selected the fund as an investment option when shares are held through omnibus arrangements, such that the identity of the fund investor is not readily available to the adviser. Advisers compensating other advisers that qualify as "regulated persons" for soliciting government entities must adopt policies and procedures reasonably designed to prevent a violation of the rule. Because of the prophylactic nature of the rule, investment advisers, particularly fund advisers, may find that it has a significant effect on them even if they do not target government entities as clients.

      The rule becomes effective 60 days after publication in the Federal Register, and its compliance date for most purposes is six months after the effective date. Political contributions made prior to the compliance date will not trigger the rule's prohibitions. The registered investment company and third-party solicitor provisions have a compliance date one year after the effective date.

      The adopting release is available online at

      http://www.sec.gov/rules/final/2010/ia-3043.pdf

      For the SEC press release, with a brief fact sheet summarizing the rule, see

      http://www.sec.gov/news/press/2010/2010-116.htm


      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.419.8413
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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