Presidential Campaign Season and the SEC’s Pay-to-Play Rule

With the recent Iowa Straw Poll, the presidential campaign season is getting into full gear. That also means that campaign fundraising is in full gear. I thought it would be useful to apply the SEC's new Pay-to-play for Investment Advisors to the crop of presidential contenders.

Under SEC Rule 206(4)-5, investment advisors are limited in their ability to give campaign contributions to political candidates who can directly or indirectly influence the hiring of an investment advisor by a government-sponsored investment entity. A campaign contribution in violation of the rule means the investment advisor can not collect fees from the applicable government-sponsored investor for two years. The rule applies to registered investment advisors and fund managers that had been exempt under the now-repealed, private fund manager exemption.

The president of the United States is not an office that can directly or indirectly influence the hiring of an investment advisor, so that position is not one that is limited by the SEC Rule. However, you also need to look at the candidate's current office to see if that position is one that is limited.

That means campaign contributions to the incumbent president, Barack Obama, are not limited by the rule. Some of his potential competitors are limited.

  1. Michele Bachmann. Her current office in the US House of Representatives is not limited by the rule.
  2. Ron Paul. His current office in the US House of Representatives is not limited by the rule.
  3. Tim Pawlenty. As Governor of Minnesota, contributions to his campaign would have been limited had he still been in office. He finished his term on January 3, 2011, which pre-dates the March 13, 2011 effective date of the rule.
  4. Rick Santorum. He does not currently hold a political office and is therefore not limited by the rule.
  5. Herman Cain. He does not currently hold a political office and is therefore not limited by the rule.
  6. Rick Perry. As the current Governor of Texas, he appoints trustees to the
  7. Mitt Romney. He does not currently hold a political office and is therefore not limited by the rule.
  8. Newt Gingrich. He does not currently hold a political office and is therefore not limited by the rule.
  9. Jon Huntsman. He does not currently hold a political office and is therefore not limited by the rule.
  10. Thaddeus McCotter. His current office in the US House of Representatives is not limited by the rule.

Registered Investment Advisors, private fund managers getting ready to register with Securities and Exchange Commission, and their employees need to be very cautious about making contributions to Governor Perry if they have a Texas state sponsored fund as a client or investor, or hope to have one as a client or investor in the next two years.

The rule also applies to placement agents. They must either be a registered investment advisor subject to SEC Rule 206(4)-5 or a municipal adviser subject to MSRB Rule G-42.

It is very obvious that SEC Rule 206(4)-5 can cause significant distortions in the political campaign.

Sources:

For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.

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