SEC Proposes Ban of Political Contributions by Registered Investment Advisers Seeking to Manage Public Pensions

July 24, 2009

Earlier this week, the U.S. Securities and Exchange Commission (“SEC”) proposed a new rule prohibiting “pay to play” practices by SEC registered investment advisers seeking to manage money for state and local governments. The SEC explained that “[t]he measures are designed to prevent an [investment] adviser from making political contributions or hidden payments to influence their selection by government officials.” The proposed SEC rule prohibit three primary activities by a federally registered investment adviser seeking to manage public funds: (1) political contributions (2) solicitation of political contributions and (3) use of a third-party to solicit the government.

First, under the proposed rule, an SEC registered investment adviser, including certain executives and employees of the investment adviser, who makes a political contribution to a candidate or an elected official in a position to influence the selection of the investment adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund. However, the proposed rule provide a de minimis permitting an executive or employee of the registered investment adviser to make a contribution of up to $250 per election per candidate if the contributor is entitled to vote for the candidate.

Second, the proposed SEC rule would prohibit a federally registered investment adviser, including certain executives and employees of the investment adviser, from coordinating or asking another person or political action committee (“PAC”) to (a) make contribution to a candidate or elected official who can influence the selection of the investment adviser to manage the government’s funds, or (b) make a payment to a state or local political party where the registered investment adviser is seeking to provide investment advisory services to the government.

Third, the SEC proposed rule would prohibit a federally registered investment adviser, including certain executives and employees, from paying a third-party to solicit a government client on behalf of the registered investment adviser.

Finally, the proposed rule prevents a SEC registered investment adviser from circumventing these political contribution prohibitions by also banning the investment adviser from making indirect contributions through the use of third-parties such as spouses, lawyers or affiliated companies.

The proposed SEC rule will be subject to a 60 day comment period. RIA Compliance Consultants will keep its readers informed of any developments related to this proposed ruled by the SEC.

Posted by Bryan Hill
Labels: Pensions, Political Contributions