Today, the Securities and Exchange Commission ("SEC") held an open meeting on a proposed pay-to-play rule that would regulate political contributions by investment advisors under the authority of the Investment Advisors Act of 1940. The Commissioners unanimously approved releasing the proposed rule to the public for comment. Once the proposed rule is published in the Federal Register, which should take one to two weeks, the public will have 60 days to submit comments.

Statements at today's meeting by the Commissioners and the staff of the Investment Management Division of the SEC emphasized several recent, high-profile enforcement actions involving investment advisors and public pension funds in explaining the need for such a rule. According to the SEC's staff, this rule would prevent distortions in the market that harm investors, and would ensure that investment advisors are selected to manage public funds on merit rather than political clout.

The text of the proposed rule is not yet available, but its release is expected on the SEC's website sometime next week. However, the SEC's staff outlined three key elements of the rule as currently drafted. First, it includes a "two year time out," which would prohibit an investment advisor from receiving compensation for investment advisory services for two years after a prohibited contribution is made. Second, the proposed rule includes a ban on the use of third-party solicitors or placement agents. Third, the rule includes a number of provisions designed to prevent bundling of contributions or the use of gatekeepers or intermediaries to make contributions indirectly.

Notably, the rule would not distinguish between investment advisors who provide direct investment management advice, and those that manage a pooled investment vehicle. Also, the rule would target government as well as some non-government clients (such as 529 and 409b plans).