SEC Unanimously Approves “Pay to Play” Rules
July 1, 2010
James S. "Jay" Crenshaw- Orlando
Scott R. MacLeod- Orlando
On June 30, 2010, the U.S. Securities and Exchange Commission (SEC) voted unanimously to approve new rules to significantly curtail “pay to play” practices by SEC registered investment advisers or exempt advisers in reliance on S.203(b)(3) of the Advisers Act (i.e., the 15-client de minimis exemption, which, effective July 21, 2011, will no longer be available as an exemption as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act). Pay to play is the practice of making campaign contributions and related payments to elected officials in order to influence the awarding of contracts for the management of public pension plan assets and similar government investment accounts.
Key Elements of the New SEC Rule
1. Political Contributions: It prohibits an investment adviser from providing advisory services for compensation (directly or through a pooled investment vehicle) for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official or candidate who is in a position to influence the selection of the adviser. Note: A de minimis exemption will permit an executive or employee to make contributions of up to $350 per election per candidate if the contributor is entitled to vote for the candidate, and up to $150 per election per candidate if the contributor is not entitled to vote for the candidate.
2. “Bundling”: It prohibits an adviser and certain executives and employees from soliciting or coordinating campaign contributions from others for an elected official or candidate who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.
3. Third-Party Solicitors: It prohibits an adviser and certain of its executives and employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.
4. Indirect Pay to Play Activities: It would prohibit an adviser and certain of its executives and employees from engaging in pay to play conduct indirectly, such as by directing or funding contributions through third parties such as spouses, lawyers or companies affiliated with the adviser, if that conduct would violate the rule if the adviser did it directly. This provision prevents advisers from circumventing the rule by directing or funding contributions through third parties.
Effective and Compliance Dates
The new rule becomes effective 60 days after its publication in the Federal Register. Compliance generally will be required within six months of the effective date. However, compliance with the rule as it relates to third-party solicitors will be required one year after the effective date. For more information regarding the new “Pay to Play” rules, see the SEC’s final rule release, “Political Contributions by Certain Investment Advisers.”
Related Practices