On Wednesday, July 22, 2009, the SEC voted unanimously to propose a rule that would prohibit investment advisers from making political contributions or other payments to attempt to influence their selection by government officials to manage government investment accounts. The use of political contributions or payments to gain favor with government officials is commonly known as “pay to play.” In her remarks regarding the proposal (available here), SEC Chairman Mary L. Schapiro stated, “In the end, the selection of investment advisers to manage public plans should be based on merit and the best interests of the plans and their beneficiaries, not the payment of kickbacks or political favors.” A copy of the SEC’s press release on the proposal can be found here. This client alert examines the measures expected to be addressed in the forthcoming proposed rule.  

Restrictions on Direct and Indirect Political Contributions  

Under the proposed rule, an investment adviser would be prohibited from providing advisory services for compensation to a government client, either directly or through a fund, for two years after the adviser makes a political contribution to an elected official in a position to influence the selection of the adviser. The rule would not only apply to the investment adviser itself, but also to certain executives and employees of the adviser.  

The proposed rule would encompass contributions either to incumbents in, or candidates for, a position capable of influencing the selection of an adviser. The rule would contain, however, a de minimis exception that would allow an executive or employee to make contributions of up to $250 per election per candidate, provided that the contributor is entitled to vote for the candidate.  

Investment advisers would not be able to avoid the proposed rule by engaging in indirect contributions or by soliciting others to make contributions. The proposed rule would prevent advisers and certain of their executives or employees from directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser, if such conduct would violate the rule if done directly. In addition, an investment adviser and certain of its executives and employees would be barred under the proposed rule from coordinating or asking another person or political action committee to make (i) a contribution to an elected official (or a candidate for such official’s position) capable of influencing the selection of the adviser or (ii) a payment to a political party of the state or locality where the adviser is looking to provide advisory services to the government client.  

Prohibition on Third-Party Solicitations  

Under the proposed rule, investment advisers and certain of their executives and employees would also be prohibited from paying third parties, such as solicitors or placement agents, to solicit a government client on the investment adviser’s behalf. It is not intended, however, that the proposed rule would stop a government client from hiring a third party to assist with the selection of an investment adviser.  


The SEC has not yet issued the proposing release. Public comments on the SEC’s new proposal will be due within 60 days of the publication of the proposed rule in the Federal Register. The SEC’s latest proposal appears to track closely a similar rule proposed in 1999 but not adopted. A copy of the 1999 proposing release can be found here.