In the midst of a national election cycle, now is a good time for investment advisers to refresh their understanding on the SEC’s Pay to Play Rule (the “Rule”)1 and related SEC staff guidance2 As demonstrated by a number of recent administrative proceedings against advisers3 as well as our observations in SEC staff examinations, the Rule continues to be a regulatory focal point.
The Rule prohibits an adviser from:
- Receiving compensation from a government entity4 (e.g., state and local pension plans) for two years following a contribution5 by the adviser or certain of its personnel6 to an incumbent, candidate or successful candidate for elective office (each, an “official”7) of a government entity who is or will be in a position to influence the award of advisory business to the adviser.8
- Coordinating or soliciting9 any person or political action committee (a “PAC”) to make any contribution or payment to an official of a government entity to which the adviser is providing or seeking to provide advisory services.
- Indirectly taking any action which, if taken directly, would result in a violation of the Rule (e.g., payments or contributions to third parties (e.g., PACs) that circumvent the Rule).10
Advisers should keep in mind the technical aspects of the Rule, including the following.
- There is either a two-year or six-month look back to an individual’s prior contributions depending on the individual’s role at the adviser.
- A “time out” from receiving compensation runs for two years from the time the contribution was made, regardless of whether the contributing individual remains a covered associate of the adviser.
- Contributions made at any point during the adviser’s relationship with the government entity investor, including well after the government entity’s initial investment with the adviser, may require the adviser to forgo compensation or face penalties.
- Contributions that are not made with any intent to influence a government office or for which there is no quid pro quo may be in-scope.
- Sponsoring meetings, conferences and events for an official of a government entity may be in-scope.
- Contributions to a PAC or political party may be in-scope depending on how the contributions are used by the PAC or political party and/or how closely the PAC or political party is associated with an official of a government entity.
In an effort to comply with the Rule, advisers should consider the following actions:
- Provide periodic training on compliance policies and procedures adopted and implemented regarding the Rule, including preclearance of any political contributions or involvement in fundraising activities;
- Conduct periodic monitoring of political donation databases; and
- Emphasize diligence in the hiring and onboarding processes.
In addition to the Rule, advisers and their personnel should understand other restrictions regarding political activity that may apply, including restrictions prescribed by state and local “pay to play” and lobbying laws, rules and regulations as well as the Federal Election Commission’s contribution limits11.
* * * * *
If you have any questions regarding the foregoing, please contact one of the attorneys listed below or your Seward & Kissel contact attorney.
