SEC’s Rule on Pay to Play is Coming

SEC’s Rule on Pay to Play is Coming

It's been almost a year, but it looks like the SEC is ready to issue its rule on political contributions by investment advisers. They announced the subject matter for the Wednesday June 30 10:00 am open meeting:  The Commission will consider whether to adopt a new rule and related rule amendments under the Investment Advisers Act of 1940 to address "pay to play" practices by investment advisers. The new rule is designed to prohibit advisers from seeking to influence the award of advisory contracts by public entities by making or soliciting political contributions to or for those officials who are in a position to influence the awards.

Since private equity funds will have to register as investment advisers, the rule will be applicable.  Actually, the proposed rule was drafted to be applicable to registered investment advisers or those unregistered in reliance on the exemption under Section 203(b)(3), so it would have been applicable to most private equity funds anyhow. 

Back in April, the SEC engaged FINRA to craft rules for registered broker-dealers when acting as a placement agent soliciting investments from government investors. That would make it likely that placement agents will not be banned, but merely subject to some additional regulatory requirements.

The proposed rule limited political contributions to $250 per election per candidate if the contributor is entitled to vote for the candidate. Otherwise, the investment adviser would be subject to a two-year ban on providing advisory services for compensation to that government investor.  Private equity firms gearing up for registration will need to include a policy on political contributions.

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