At Wednesday's Open Meeting the Securities and Exchange Commission took up the discussion of their proposed rules on pay-to-play for investment advisers. The proposal is a new Rule 206 (4)-5 under the Investment Advisers Act. The Commission voted unanimously to adopt the rule.
The rule will have three main prongs:
Two Year Time-Out
An investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.
There will be two de minimis exceptions. For an official the person can vote for, you can contribute up to $300. That exception is lowered to $150 if you are not entitled to vote for the official.
There is a limited ability to get a return of a political contribution for inadvertent violations. It sounds like this will be difficult.
There was a mention that the political contributions limitation may not affect all employees of an investment adviser.
The proposed rule also would prohibit an adviser from coordinating, or asking another person or political action committee to:
- Make a contribution to an elected official (or candidate) who can influence the selection of the adviser.
- Make a payment to a political party of the state or locality where the adviser is seeking to provide advisory services to the government.
The SEC does not want investment advisers to be gatekeepers or aggregaters for political contributions to elected officials who select investment advisers for government funds.
Placement Agents and Solicitors
The third prong would prohibit advisers from hiring third party persons to act as agents or solicitors for an investment adviser unless the third party is a regulated person subject to pay-to-play regulation similar to this rule. The placement agents will need to a registered investment adviser or broker-dealer.
The comments to the flat ban resulted in the most comments to the rule. This is the biggest change to the final rule will vary from proposed rule.
They are going to keep a close eye on placement agents. If there continues to be a problem, the SEC is prepared to put a complete ban in place.
There is a catch-all provision is the rule that prohibits indirect violation of the rules.
Rule 206 (4)-5 will apply to registered investment advisers and unregistered investment advisers who are relying on the small adviser exception to registration. (Of course, that exception is likely to be eliminated shortly as part of the financial reform legislation.) Private equity fund managers and their employees will be subject to this rule.
There will be a one year period before the placement agent limitations are effective. This is designed to give FINRA time to enact its new regulations on pay-to-play. It's not clear if the one-year period is applicable for the other parts of Rule 206 (4)-5.
Commissioner Casey raised a concern that the rule not violate the first amendment rights to engage in the political process. She thought the rule struck a good balance. Commissioner Parades was concerned about rogue employees making contributions in violation of the policy.
As is typical with the SEC rules, the final text of Rule 206 (4)-5 was not released at the time of the vote. Keep an eye out for the final release and its detailed requirements.
For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.