Fund managers and other investment advisers will face tight new restrictions on their ability to make – or facilitate – contributions to politicians, candidates and other officials who are responsible for public assets, including pension plans and Section 529 tuition plans. The new Securities and Exchange Commission “pay-to-play” rule1 applies to investment advisory firms that are exempt from SEC registration under the private investment adviser (fewer-than-15-clients) exemption as well as to registered investment advisers.
New Restrictions. The new rule imposes the following restrictions:
(1) A two-year waiting period before a firm can manage assets of a State or local government entity if the firm or its principals or solicitors make a campaign contribution to an official or candidate who could influence the hiring of investment managers for that entity.
- De minimis contributions will be OK.
- The timeout would remain in place after the contributor leaves the firm. Moreover, his or her new firm would have to observe the remainder of the timeout if the contribution was made within the prior six months or the contributor’s duties at the new firm involve soliciting clients.
(2) A firm and its principals are banned from directly or indirectly soliciting from others, or “bundling:”
- campaign contributions to officials of a State or local government entity to which the firm provides, or is seeking to provide, investment advisory services and
- payments to political parties in the state or locality where the adviser is providing or seeking to provide such services.
(3) A firm may not pay a third party solicitor or placement agent to solicit public investment advisory business unless the third party is an SEC-registered investment adviser or broker-dealer.
- This softens the SEC’s original proposal, which would have banned payments to anyone but an employee or affiliate of the investment manager for soliciting public business.
Compliance Procedures and Recordkeeping. Registered investment advisers will need to enhance their compliance procedures and comply with detailed new recordkeeping requirements to address contributions and soliciting activities subject to the rule. Although the SEC’s recordkeeping rule does not apply to unregistered fund managers or other advisers, they are subject to the anti-fraud provisions of the Investment Advisers Act and must have adequate procedures to ensure compliance with applicable law. Therefore, unregistered advisers would be prudent to maintain similar records as well as enhancing their supervisory procedures.2
Transition Period. The restrictions on managing public assets following a contribution and the new recordkeeping requirements will take effect in March 2011, except that registered investment companies have until July 2011. Investment advisers may not use unregistered third parties to solicit government business after July 2011.