United States: SEC Adopts Advisers Act Pay-to-Play Rule Relating to Government Plans

Originally published July 29, 2010

Keywords: Pay-to-play, SEC, investment advisory services, government funds, political contributions, campaign contributions, two-year time out

The US Securities and Exchange Commission (SEC) recently took action to curb pay-to-play abuses with respect to investment advisory services for any "plan or program of a government entity"; essentially, any state or local pension funds, retirement systems or other government plans (all referred to herein as government plans). On June 30, 2010, the SEC adopted Rule 206(4)-5 (the Rule) under the Investment Advisers Act of 1940 (Advisers Act),1 which had been under consideration for the past year. Investment advisers are cautioned that the Rule does not preempt current or future state or local restrictions on similar activities. As a result, in addition to complying with the Rule, investment advisers should confirm whether other state or local restrictions apply to each government plan investment.2

The SEC Rule

The Rule, which is modeled after Rules G-37 and G-38 of the Municipal Securities Rulemaking Board (MSRB), aims to curb pay-to-play abuses with respect to government plans by restricting the use of third-party placement agents in soliciting government plans for advisory business and by imposing limitations on certain campaign contributions. The Rule applies to every investment adviser registered (or required to be registered) with the SEC, as well as to unregistered advisers providing advice to private funds exempt from registration under certain provisions of the Investment Company Act.3 The Rule expressly prohibits doing indirectly that which it directly prohibits, and compliance with the Rule is subject to a strict liability standard, rather than then usual standard of reasonable behavior.

The Rule takes effect on September 13, 2010, and, except as noted below, investment advisers must be in compliance by March 14, 2011. The Rule's prohibition on making certain political contributions and soliciting or coordinating political contributions, including the two-year look-back described below, will not take into consideration contributions made before March 14, 2011.4

SEC Restriction on Use of Placement Agents

The Rule makes it unlawful for any covered investment adviser, or any of the adviser's covered associates, to provide or agree to provide, directly or indirectly, payment to any third party (including "finders," "solicitors," "placement agents" or "pension consultants") to solicit a government plan for investment advisory services, unless the third party is a "regulated person." The SEC had previously considered a complete prohibition on the use of placement agents, but instead opted for this less restrictive approach.

Regulated persons include any registered broker-dealer or registered investment adviser. At the request of the SEC, the Financial Industry Regulatory Authority (FINRA), which is an independent regulator of broker-dealers, has agreed to adopt similar campaign contribution restrictions. Consequently, regulated persons capable of serving as third-party placement agents will be subject to the same or similar campaign contribution restrictions as those described below. The restriction on the use of third parties does not take effect until September 13, 2011, in order to allow FINRA to adopt its own rule.5

Restrictions on Campaign Contributions

The Rule makes it unlawful for advisers to receive compensation for providing advisory services to a government plan for a two-year period (the two-year "time out") after the adviser or any of its covered associates makes a political contribution to certain public officials. The term "official" is defined to mean incumbents serving in public offices who are directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by the government plan, or who have authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by the government plan. It also includes candidates for such offices and such candidates' election committees. Whether or not an office is subject to the Rule is a factual determination to be made on a case-by-case basis upon a review of state and local law. Although not directly applicable to federal campaigns, the Rule does not completely exempt contributions to federal campaigns. Contributions are prohibited to candidates for federal office who are, at the time of the contribution, also a state or local official otherwise subject to the prohibition.

The Rule also prohibits an investment adviser or its covered associates from soliciting or coordinating contributions to a public official of a government entity to which the adviser is providing or seeking to provide investment advisory services, or to a political party of the state or locality where the adviser is providing or seeking to provide investment advisory services. The term "covered associates" includes general partners, managing members, certain executive officers and policy-making persons, as well as any employee of the adviser who solicits government plan clients for the investment adviser or supervises such persons. The term also includes any PAC controlled by the adviser or its other covered associates.

The term "contribution" is defined quite broadly and includes (i) making any gift, subscription, loan, advance, or deposit of money or anything of value for the purpose of influencing any election for federal, state or local office; (ii) paying debt incurred in connection with any such election; or (iii) paying transition or inaugural expenses of the successful candidate for state or local office. While the Rule does not specifically prohibit contributions by the adviser or its covered associates to a political party or other political action committees (PACs), it prohibits doing indirectly anything that, if done directly, would violate the Rule. Therefore, contributions to political parties and PACs may be effectively restricted in certain situations based upon the intent of the contributor and the facts and circumstances of the contribution.

The two-year time out will continue to apply to the adviser itself even after a covered associate who made a triggering contribution has ceased employment. Additionally, contributions made by a covered associate will be attributed to any other adviser that employs or engages the covered associate within two years after the date of the contribution. The employing adviser must look back in time to determine whether hiring such a formerly covered associate would subject the adviser to any business restrictions under the Rule. However, the adviser is only required to look back for a period of six months if the former covered associate made the contribution more than six months earlier and does not solicit clients on behalf of the adviser after becoming an employee of the adviser.

The two-year time out is applicable only to contributions made by the adviser and the adviser's covered associates and applies only to compensated advisory services such that an adviser could still provide uncompensated advisory services to a government plan after making an improper contribution. In fact, an adviser may be required to provide services free of charge for a reasonable period of time to ensure that the government plan can identify a sufficient replacement.

The Rule also treats investment advisers to certain pooled investment vehicles in which a government plan invests, or is solicited to invest, as though the adviser were providing or seeking to provide investment advisory services directly to the government plan. As such, the two-year time out applies to any solicitation activities directed at such investors. The SEC provided an extended compliance date of one year, or as of September 13, 2011, from the effective date to give such advisers time to identify any government plans invested in pooled vehicles they manage. Advisers to registered investment companies that have shares sold by brokerdealers through omnibus accounts may have an especially difficult time determining whether any fund shareholders are government plans. However, in the context of registered investment companies, only those government plans that are participant-directed are required to be identified.

Individuals otherwise covered by the Rule are permitted to make de minimis contributions in an aggregate amount of $350 or less, per election, to an elected official or candidate for whom the person making the contribution is entitled to vote; and $150 or less, per election, to an elected official or candidate for whom the person making the contribution is not entitled to vote. Certain other inadvertent prohibited contributions may be exempted from the prohibition if the adviser takes specific remedial steps. Additionally, an adviser may seek a specific exemption from the SEC for any prohibited contribution.

Recordkeeping Requirements

To facilitate compliance with the Rule, the SEC also adopted a corresponding amendment to Rule 204-2 of the Advisers Act that requires covered investment advisers doing business with or seeking to do business with government plans to keep certain records of contributions and payments made by the adviser and its covered associates.

Except as otherwise specifically noted, the Rule requires an adviser to maintain the following records no later than March 14, 2011:

  • The names, titles and business and residential addresses of all covered associates of the investment adviser;
  • All government entities to which the investment adviser provides or has provided investment advisory services, or which are or were investors in any covered investment pool to which the investment adviser provides or has provided investment advisory services, as applicable, in the past five years (but not prior to September 13, 2010);
  • All direct or indirect contributions made by the investment adviser or any of its covered associates to an official of a government entity, or direct or indirect payments to a political party of a state or political subdivision thereof, or to a political action committee; and
  • The name and business address of each regulated person to whom the investment adviser provides or agrees to provide, directly or indirectly, payment to solicit a government entity for investment advisory services on its behalf.

The records of contributions and payments must be kept in chronological order, identifying each contributor and recipient, the amounts and dates of each contribution or payment, and whether the contribution or payment was subject to the exemption for certain returned contributions pursuant to the Rule. These records must be maintained in the same manner, and for the same period of time, as most other books and records under Rule 204-2. However, advisers who are already making and keeping records required under the Securities Exchange Act of 1934, or to satisfy Rules G-37 or G-38 of the MSRB, which are substantially similar to records required by the Rule, may rely on their existing recordkeeping processes for such records.

Endnotes

1 For the full text of the new rule see "Political Contributions by Certain Investment Advisers," SEC Rel, No IA-3043 (July 1, 2010) (Adopting Release), available at http://www.sec.gov/rules/final/2010/ia-3043.pdf .

2 For more information on state and local regulations, as well as the SEC rulemaking process, see our client alert dated October 14, 2009, "SEC Joins State and Local Governments in Considering Regulation of Investment Adviser Activities Related to Government Plans," available at http://www.mayerbrown.com/publications/article.asp?id=7704&nid=6 .

3 The Dodd Frank Act, Public Law No. 111-203, 124 Stat. 1376 (July 21, 2010) repealed the exemption from investment adviser registration for advisers who manage funds exempt from registration under these provisions of the Investment Company Act effective one year from the date of enactment, As a result, most, if not all, of the advisers currently relying on this exemption will be subject to registration by July 21, 2011.

4 Of course, the SEC already has antifraud authority to bring enforcement action against any adviser who makes contributions intended to unlawfully influence public officials prior to the compliance date of the rule.

5 The SEC left the door open to revisit this issue should FINRA fail to act prior to the compliance deadline. See text of Adopting Release at n. 438.

Copyright 2010. Mayer Brown LLP, Mayer Brown International LLP, Mayer Brown JSM and/or Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.