Advisers Act Rule 206(4)-5 (Political Contributions by Certain Investment Advisers)
A Small Entity Compliance Guide1
The Securities and Exchange Commission ("SEC" or "Commission") approved a new rule on June 30, 2010 to address so-called "pay to play" practices in which investment advisers make campaign contributions to elected officials in order to influence the award of contracts to manage public pension plan assets and other government investment accounts.
The rule is intended to combat pay to play arrangements in which advisers are chosen based on their campaign contributions to political officials rather than on merit. The potential for fraud to invade the various, intertwined relationships created by pay to play arrangements is without question, and the new rule is meant to reduce the occurrence of fraudulent conduct resulting from these practices and to protect public pension plans, beneficiaries, and other investors from the resulting harms. Pay to play practices often are not explicit, but have been widely reported.
Pay to play practices could, for example, lead a political official to choose an investment adviser with higher fees or inferior investment performance because the adviser contributed funds to the official's election campaign. Choosing an adviser with higher fees or weaker performance could harm retirees who rely on public pension plans. Moreover, advisers' participation in pay to play activities may diminish investor confidence, as pay to play practices are inconsistent with the high standards of ethical conduct required of investment advisers.
Importantly, the rule would not ban or limit the amount of political contributions an adviser or its covered associates could make; rather, it would impose a limited "time-out" on conducting advisory business for compensation with a government client after a contribution is made.
Advisers Act Rule 206(4)-5
The new rule, adopted under the Investment Advisers Act of 1940, applies to SEC-registered investment advisers and certain advisers exempt from registration with the SEC who provide investment advisory services, or are seeking to provide investment advisory services, to government entities. The rule subjects these advisers to several restrictions designed to curb pay to play activities. In particular, the rule prohibits:
Rule 206(4)-5 includes a provision that makes it unlawful for an adviser or certain of its executives or employees to do anything indirectly which, if done directly, would result in a violation of the rule. The rule allows investment advisers subject to the rule to apply for an exemption. In addition, an SEC-registered investment adviser subject to the rule also will have to maintain certain records under a related amendment to the Investment Advisers Act recordkeeping rule that the Commission adopted along with the new rule.
Other ResourcesThe final adopting release for Rule 206(4)-5 can be found on the SEC's website at http://www.sec.gov/rules/final/2010/ia-3043.pdf. The proposing release can be found on the SEC's website at http://www.sec.gov/rules/proposed/2009/ia-2910.pdf.
The text of Rule 206(4)-5 can be accessed through the "Laws and Rules" section of the Division of Investment Management page of the SEC's website at http://www.sec.gov/divisions/investment.shtml
Contacting the SEC
The SEC's Division of Investment Management is happy to assist small investment advisers with questions regarding Rule 206(4)-5. The Division's Office of Investment Adviser Regulation answers questions submitted by e-mail and telephone. You can submit a question by e-mail to firstname.lastname@example.org and a staff member of the office will call you to discuss your question. In addition, you can contact the Office of Investment Adviser Regulation at (202) 551-6787. Questions on other investment management matters concerning small companies may be directed to the Division's Office of Chief Counsel by e-mail at IMOCC@sec.gov, or by telephone at (202) 551-6825.
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