The restrictions on investment advisers making and soliciting campaign contributions in SEC Rule 206-4(5) became effective on March 14, 2011. The new rule applies to advisers of hedge funds, private funds, venture capital funds and funds-of-funds if the adviser is either registered with the SEC or currently is relying on the “15-client” exemption from registration. The SEC has proposed to modify the “pay-to-play” rule so that it applies to registered investment advisers, “Exempt Reporting Advisers” (i.e., advisers solely to venture capital funds and advisers solely to private funds with less than $150 million in U.S. assets under management) and “Foreign Private Advisers” as defined in the Advisers Act. Registered investment advisers also are required to maintain detailed records of any campaign contributions and certain payments made to government officials, political parties and political action committees, effective as of March 14, 2011.

Under the new rule, investment advisers and their partners, members and employees holding policy-making and supervisory positions, as well as positions involving solicitation of government entities (Covered Associates) are largely prohibited from making contributions, or soliciting contributions from others, to public officials who can-directly or indirectly influence the selection of investment managers to manage assets for government entities. If an investment adviser or Covered Associate makes an impermissible campaign contribution, the manager cannot charge advisory fees (or carried interest) to the relevant government entity for two years. Although solicitation of others to make campaign contributions will not trigger the two-year “time-out,” it can be a violation of the new rule and entail penalties. The new rule is detailed and complex, and is available (along with the SEC’s explanatory notes) at

In addition, many state and local government entities and benefit plans have adopted policies with respect to campaign contributions that may differ from, or be more restrictive than, the new SEC rule, and many also have adopted rules and policies governing use of placement agents. (See, for example our advisory on new California rules here.) If an investment adviser has government entities as clients or investors in private funds it advises – or if it may solicit government entities as potential clients or investors in the future – it should adopt a campaign contribution policy as soon as possible.