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Client Alert: SEC Adopts New Pay-to-Play Rule

07.02.10

At its open meeting on June 30, 2010, the SEC voted to adopt proposed Rule 206(4)-5 under the Investment Advisers Act of 1940. The new rule is the SEC's response to the "pay-to-play" scandals that have been associated with certain investment advisers and the government officials who oversee the management of government assets. These rules will have a significant impact on the political contributions that may be made by investment advisers—including management companies for private investment funds—who seek to manage investments of government pension plans and other government authorities. 

The rule bans an investment adviser, including a fund management company or general partner, from taking investments from government authorities or otherwise providing services to government authorities for compensation for a period of two years after the investment adviser or a covered associate of the investment adviser[1] makes contributions to a government official, or solicits contributions on behalf of a government official, who is in a position to influence an award of the government authority's business. There is a de minimis exception to the general prohibition that permits 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 applies to registered investment advisers as well as many investment advisers exempt from registration (including private fund management companies and general partners).

The rule also prohibits an investment adviser and its covered associates from engaging in pay-to-play conduct indirectly, such as by directing or funding contributions through third parties, such as spouses or companies affiliated with the investment adviser, if that conduct would have violated the rule had the investment adviser engaged in it directly. 

The new rule also generally bans the use of unregistered third parties to solicit public plan investment, provided that an exemption to the general ban exists for third parties that are regulated persons, such as registered investment advisers or broker-dealers. An exemption to the general ban also exists for executive officers, general partners, managing members (or, in each case, a person with a similar status or function), or employees of the investment adviser. 

The new rule will become effective sixty days after its publication in the Federal Register. Compliance with the rule's provisions generally will be required within six months of the effective date. Compliance with the third-party ban and those provisions applicable to investment advisers to registered investment companies subject to the rule will be required one year after the effective date.

As a result of these rules, it is important that management companies, general partners and other advisers covered by the rule implement procedures now to make sure they are aware of political contributions made by their covered persons, and that prevent covered persons from making contributions that would prohibit investment funds managed by them from soliciting investments from state pension funds and other government authorities.

Because this area of law is rapidly changing, we will continue to monitor the legislative and regulatory proposals that regulate pay-to-play activities and communicate pertinent information to you. This Client Alert addresses pay-to-play laws and proposals only with respect to the authorities referenced. Other authorities and jurisdictions have similar restrictions. If you have any questions about the status or details of enacted or proposed pay-to-play laws and regulations or other political contribution reporting requirements, please contact:
 

This Client Alert has been prepared by Klehr Harrison Harvey Branzburg LLP (the “Firm”) for the general information of our clients and other interested persons.  This Client Alert is not, and is not intended to be, comprehensive in nature.  Due to the general nature of its content, this Client Alert is not and should not be regarded as legal advice or the opinion of the Firm, and you should not rely on any information in this Client Alert for any specific situation. Rather, you should consult with us or other legal counsel with respect to particular circumstances addressed in this Client Alert before taking any action. Receipt of this summary does not create an attorney-client relationship between you and the Firm.

 

 

 

 


[1] Covered associates of an investment adviser are: (i) any general partner, managing member or executive officer, or other individual with a similar status or function; (ii) any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee; and (iii) any political action committee controlled by the investment adviser or by any of the persons described above.