In an effort to curb “pay-to-play” schemes, in which investment advisers secure government clients by making contributions to elected officials, the SEC proposed a new Rule 206(4)-5 under the Advisers Act. The proposed rule, based on Municipal Securities Rulemaking Board rules G-37 and G-38, would restrict advisers and advisers’ executive officers from making political contributions and also limit the way in which advisers solicit government entities for advisory business. Rel. No. IA-2910, 74 F.R. 39840 (August 7, 2009). The SEC has requested that comments be sent on or before October 6, 2009.

Here are the highlights of the proposed rule:

  • Advisers would be prohibited from (i) receiving compensation from a government client for two years if the adviser or certain employees of the adviser have made political contributions to elected officials of that government client; (ii) paying unrelated third parties to solicit government entities for business; (iii) soliciting or coordinating contributions for an official of a government entity for which the adviser provides, or is seeking to provide, investment advisory services; and (iv) doing anything indirectly which, if done directly, would result in a violation of the foregoing.
  • Most investment advisers would be covered by this rule, including registered investment advisers and many that are exempt from registration. Advisers not subject to the proposed rule would be small advisers registered under state law and advisers exempt from registration under the intrastate exemption.
  • An advisers whose clients are pooled investment vehicles in which a government entity invests would be treated as though the adviser was working directly for the government entity.
  • Individuals whose contributions are attributed to an adviser are referred to as “covered associates” in the proposed rule. Covered associates include general partners, managing members, executive officers, any employee who solicits government entity clients, or other individuals with similar status or function. The term “executive officer” includes the adviser’s president and any vice president who performs advisory services or solicits business.