Away With Pay To Play?

Sometimes, people like to give money to other people. Sometimes, those other people are politicians. Sometimes those politicians are officials of government entities whose funds investment advisers manage in exchange for compensation. There are lots of reasons someone would give money to politicians, but, over the last almost-sixteen years the SEC made it challenging for employees of investment advisers to give politicians money. Today the SEC has just proposed to undo that.

In 2010, the SEC adopted Rule 206(4)-5 under the Advisers Act (the “pay-to-play” rule), which imposed certain draconian restrictions relating to political contributions: if an investment adviser or certain employees (i.e. “covered associates”), give “too much” money to certain state or local politicians who are officials of government entities, the investment adviser could be prohibited from receiving compensation from that government entity for a period of two years. By “too much” the rule means “more than US$350” if you can vote for the candidate—and US$150 if you can’t.

This rule was originally intended to reduce the risk that political contributions would influence the award of investment advisory business by state and local governments (i.e., pay-to-play). Now, the SEC says that more than fifteen years of experience with the rule have revealed “significant unintended consequences” and has proposed rescinding Rule 206(4)-5 in its entirety. In doing so, Chair Atkins noted that the SEC “is not the nation’s elections regulator.”

In its proposal, the SEC channels longstanding industry feedback that the rule is operationally difficult to implement and imposes significant compliance burdens with outsized penalties for non-compliance. In fact, the SEC characterized the rule as a de facto strict-liability standard, in which relatively small donations or compliance “foot faults” can have outsized consequences. The SEC also noted that the rule complicated hiring and promotions because contributions made before someone becomes covered by the rule can follow that person into a new job.

The SEC wants that framework to go away. Its theory is not that pay-to-play is fine now. The Commission says the Advisers Act’s antifraud provisions are “likely sufficient to address pay-to-play practices,” rendering Rule 206(4)-5 unnecessary. To that end, the Commission also notes that investment adviser compliance programs would still need to address pay-to-play practices.

So, even if the pay-to-play rule is rescinded, paying-to-play will still be a problem.