The adopted SEC Rule 206(4)-5 contains three main elements:

• First, the Rule prohibits an investment advisor from providing advisory services, either directly or through a pool investment vehicle, for two years if the investment adviser or its employees make a political contribution to an individual in a position to influence the award of a management contract.  There is a de minimis exception to this rule which allows for individuals to contribute up to $350 to a candidate per election if the contributor is allowed to vote for the candidate and up to $150 per candidate per election if the contributor is not allowed to vote for the candidate.
• Second, the Rule prohibits investment advisors and its employees from soliciting or coordinating campaign contributions for candidates or political parties. 
• Finally, the Rule prohibits investment advisers from paying third party solicitors, unless the third party solicitors is an SEC registered brokers dealer or registered investment adviser who will be subject to similar pay to play restrictions. 

In addition to these requirements, the adopted Rule 206(4)-5 contains a provision which makes it unlawful for an investment adviser or its employees to do anything indirectly, which if done directly would violate the rule.  This provision ensures that investment advisers can not use third parties to circumvent the new rule.  Also, with the enactment of Rule 206(4)-5, investment advisers will need to maintain certain records regarding political contributions and payments. 

The Rule, as originally introduced last July, would have banned the use of third party solicitors.  However, due to responses during the “Comments” period, the SEC backed away from this position and will allow the use of third party solicitation to continue, however the solicitors must be registered with the SEC as investment advisers or broker dealers.  Further, the SEC stated if third party solicitors continue to have a corruptive influence on the pension industry, then the SEC will ban the use of third party solicitors all together.

The adopted Rule 206(4)-5 applies to registered advisers as well as advisers who rely on the private adviser exception (less than 15 clients) and to unregistered advisers.  Investment advisers will need to be in compliance with the Rule within six months from the date the Rule is published in the Federal Register; except for the third party ban provisions which investment advisers will have to comply within one year. 

RIA Compliance Consultants recommends that all investment advisers implement politician contributions policies and procedures to ensure compliance with the adopted Rule.  Also, most investment adviser policy manuals will need to be updated because of new solicitor and record keeping requirements.  If you need advice or assistance in implementing procedures or updating policy manuals to ensure compliance with the adopted Rule, any of our compliance consultants are willing to assist you.

Last July, in an effort to limit pension fund corruption, the SEC considered a rule that would have banned the use of “placement agents,” individuals or firms hired by investment advisers to influence politicians who are responsible with awarding pension management contract.  However, the SEC has backed away from this position and is seeking to restrict investment advisers from participating in “pay to play” practices, which according to the SEC undermines the fairness of the government’s selection process of investment advisers.

Currently, the SEC does not prohibit investment advisers from making political contributions to government entities or officials.  A contribution is defined as “any gift, subscription, loan, advance, deposit of money, or anything of value made for the purpose of influencing an election for a federal, state or local office, including any payments for debts incurred in such an election.  It would also include transition or inaugural expenses incurred by a successful candidate for state or local office.”  “Government entities” include “all state and local governments, their agencies and instrumentalities, and all public pension plans and other collective government funds.”  “Government officials” includes “an incumbent, candidate or successful candidate for elective office of a government entity if the office is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser or has authority to appoint any person who is directly or indirectly responsible for or an influence the outcome of the selection of an investment adviser.”

If you are interested in learning more about recent enforcement actions against investment advisers which lacked safeguards related to gifts and political contributions, please consider purchasing a seat for only $59.95 to our upcoming webinar, “Supervising Gifts and Political Contributions,” on Wednesday, October 28, 2009 from 12:00 – 1:00 p.m.

During this webinar, our speaker, Bryan Hill, will share best practices for supervising gifts and political contributions while reviewing recent SEC enforcement actions against investment advisers, the proposed political contribution rule for investment adviser reps, current rules of FINRA and the U.S. Department of Labor which may apply to some investment adviser representatives and guidance from certain professional accrediting organizations on this subject.

Purchase your webinar seat for $59.95: www.RIA-Compliance-Consultants.com/webinars.

This SEC proposal relates to money managed by state and local governments under public programs such as public pension plans for government employees, retirement plans in which teachers and other government employees can invest monies, and 529 plans that allow families to invest money for college. The state and local governments often hire and pay outside registered investment advisers to provide advisory services such as direct investment management or recommendations about which investments to make. The outside registered investment advisers often are selected by one or more trustees who have been appointed by elected officials. The term “pay to play” has been coined because the selection of such trustees can be undermined if elected officials ask investment advisers for political contributions or if elected officials otherwise make it understood that only investment advisers who make contributions will be selected to provide advisory services to the public programs subject to the control of the elected official.

Pay to play practices have been recognized as a significant problem. During the past several years, the SEC has brought enforcement actions in New York, New Mexico, and Connecticut, and likewise, there also have been criminal prosecutions in New York, New Mexico, Illinois, Ohio, Connecticut, and Florida over pay to play schemes.

If you are interested in learning more about recent actions related to registered investment advisers involved in “pay to play” schemes and the SEC’s proposed rule to limit “pay to play” practices, please purchase your seat for only $59.95 to our upcoming webinar, “Supervising Gifts and Political Contributions,” on Wednesday, October 28, 2009 from 12:00 – 1:00 p.m. CST.

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.