What you need to know
If you or certain of your employees contribute to elected officials or candidates who have influence over public pension or investment funds on or after March 14, 2011, you may not receive compensation on capital you raise from those funds for two years.
What you need to do
Notify your employees of this rule, and establish a policy requiring them to seek your approval before they make or solicit political contributions or payments.
In June 2010, the Securities and Exchange Commission adopted Rule 206(4)-5 under the Investment Advisers Act of 1940 (the “Advisers Act”) to address “pay-to-play” practices in fundraising by investment advisers. Most managers of private equity and hedge funds, whether or not they are registered investment advisers, are covered by this rule. All advisers subject to this Rule must be in compliance with the political contribution limitations of the Rule on March 14, 2011. Key provisions of the Rule are:
- An investment adviser may not receive compensation (either directly or through a fund) on capital raised from a public pension fund or other government investment account for two years after the adviser or any of its executives makes any payment or political contribution to an elected official or candidate who is in a position to influence, directly or indirectly, the selection of the adviser. An elected official who has the authority to appoint a person involved in the selection of the adviser (e.g., a governor who appoints members of a pension investment board) would be considered to be “in a position to influence the selection of the adviser.”
- An investment adviser may not (i) solicit or coordinate contributions to an official of a government entity to which it is providing or seeking to provide services, or (ii) make payments to a political party of a state or locality where the adviser is providing or seeking to provide services.
- An investment adviser subject to the record-keeping requirements of the Advisers Act must maintain records of all employees who are covered under the Rule, all political contributions they make, and all government entities to which the adviser provides services.
Employees covered by the Rule generally include all managing directors and executives, and other employees engaged in any fundraising activities with a governmental authority. There is also a look back provision under which contributions made by persons who were not covered by the Rule, but are hired or promoted internally by the investment adviser, will be attributed to the adviser and trigger the prohibitions under the Rule.
The Rule includes an exception for contributions of up to $350 per election per candidate if the contributor is entitled to vote for the candidate, and up to $150 per election per candidate if the contributor is not entitled to vote for the candidate.
The Rule also provides that an adviser may not pay a third party, such as a placement agent, to solicit a government client unless the third party is a registered investment adviser or broker-dealer. This provision of the rule is effective on September 13, 2011.