Best Practice Pay-to-Play Guidelines for Adviser Codes of Ethics
The Investment Counsel Association of America has worked with its members to suggest potential policies and procedures that could be included in an investment adviser's code of ethics to prevent and detect any pay-to-play abuses. Our suggested guidelines for an adviser's code of ethics follow:
General Guidelines for SEC-Registered Investment Advisers
A. In 1995, the ICAA encouraged its member firms to adopt a Code of Ethics that would address, among other things, personal trading, gifts, the prohibition against the use of inside information, and other situations where there is a possibility for conflicts of interest.
B. Since that time, the vast majority of ICAA member firms have adopted such a Code of Ethics.
C. The ICAA recommends that any investment adviser that provides investment supervisory services to government entities, or that seeks to provide such services, include in its Code of Ethics a broad prohibition against making political contributions for the purpose of obtaining or retaining advisory contracts with government entities ("pay-to-play").
D. The ICAA recommends that any investment adviser that provides investment supervisory services to government entities, or that seeks to provide such services, adopt policies and procedures reasonably designed to prevent pay-to-play abuses by the investment adviser and its employees.
E. The ICAA recommends that such policies and procedures be tailored to the investment adviser's specific circumstances, including, for example, the number of government clients the adviser advises, the amount of revenue derived from government business, the number and type of employees who have significant responsibilities and contact with government clients, the adviser's marketing efforts with respect to such clients, the firm structure as it relates to the public pension plan and other public entity business, relevant state and local laws and regulations, and other appropriate considerations.
F. The ICAA recommends that an investment adviser be mindful of constitutional issues related to pay-to-play, including an employee's right to make political contributions based on personal, religious, or political reasons. For example, a policy could be tailored permissibly to exclude from its scope contributions to candidates for federal office or could exclude contributions to officials of public entities that select advisers based on objective criteria and a competitive bidding process. A policy could also exclude contributions to organizations not controlled by the employee, firm, or particular candidate, such as groups supporting minority or female candidates or candidates with certain political positions.
Policies and Procedures Reasonably Designed to Prevent Pay-to-Play Abuses by the Firm and its Employees
The ICAA suggests the following potential compliance procedures, which should be tailored to the adviser's specific circumstances:
A. Certification of Compliance with Codes of Ethics. As recommended in 1995 in connection with the ICAA Guidelines on Personal Investing, an adviser's employees should annually certify that they have read, understood, and complied with the firm's Code of Ethics. As part of this certification, employees should also certify that they have not made any political contributions for the purpose of obtaining or retaining the firm's engagement as an investment adviser to a government entity.
B. Restrictions on Political Contributions. To prevent pay-to-play abuses, the following alternative approaches are suggested. An adviser could combine aspects of these approaches or develop other equally reasonable approaches:
1. Contribution Ban. An investment adviser may choose to prohibit all or certain of its employees from making political contributions above a certain de minimis amount to any person who may influence the selection or retention of an investment adviser by a government entity.
a. If such an option is approved, the adviser should implement appropriate policies and procedures that reasonably ensure - on a periodic basis - that each employee to whom the prohibition applies is aware of the adviser's policies and procedures, understands them, and agrees to comply with them.
b. Each firm should choose a de minimis amount based on its unique facts and circumstances, including the magnitude and type of its government entity business and any applicable state or local law. The firm could decide whether the de minimis standard applies to all contributions or is limited to some subset of contributions to officials or candidates.
2. Pre-Clearance. An investment adviser may prohibit contributions by all or certain of its employees in a manner similar to (1) above, unless otherwise pre-cleared with compliance or legal personnel. An employee seeking pre-clearance should certify that the contribution is not made for the purpose of obtaining or retaining the firm's engagement as an investment adviser by the government entity.
3. Disclosure to Clients. An investment adviser may establish an effective system to disclose or offer to disclose any and all firm and employee contribution information material to its current and prospective government clients.
a. If this approach is used, the disclosure should be made initially at the time the adviser proposes to be retained by the prospective client. If selected by the client, the adviser should make additional disclosure at the time of selection and then periodically thereafter.
b. A committee of senior personnel or the compliance officer should review employee political contribution reports for conflicts of interest or abusive practices, as set forth below in section D.
C. Reporting of Political Contributions. Codes of Ethics should establish reporting regimens appropriate to the conceptual approach taken (i.e. ban, pre-clearance, disclosure, or other). A firm that establishes a ban on contributions may require only annual certification of compliance with the ban. Firms taking a pre-clearance or disclosure approach may require certain employees to report to the firm their political contributions at the state and local level on a periodic basis or when they occur, or certify that no such contributions were made. A new covered employee should also disclose such political contributions from the time he or she entered into employment negotiations with the adviser.
1. This reporting policy should be designed to elicit reports from personnel likely to be significantly involved in soliciting government business. The coverage of the policy should be tailored to the structure of each firm. At smaller firms, all officers or solicitors may have substantial involvement in government entity solicitation or marketing. At mid-sized or larger firms, the universe may need to be defined more narrowly.
2. The policy may require reports of all contributions, contributions in excess of a certain de minimis amount, or only contributions (all or in excess of a de minimis) to persons who are in a position to influence the selection or retention of the adviser by government entities.
3. Reports by employees should include appropriate details regarding the jurisdiction in which the candidate is seeking public office and the position that the official or candidate holds or is seeking.
4. Each report could include a certification that no contribution was made for the purpose of obtaining or retaining the firm's engagement as an investment adviser to government clients.
5. The policy should include measures to ensure that the reports are kept confidential.
D. Monitoring of Political Contribution Disclosure. Where applicable, firm procedures should include review of political contribution reports in light of the firm's government clients, any pattern of contributions by a particular employee or group of employees, and other relevant factors. The review may include any known external information, such as public contribution reports required by local law in relevant jurisdictions.
E. Record-Keeping. Depending on the approach taken, an investment adviser should maintain required records of political contributions and a list (compiled at least annually) of the firm's government clients. For example, an adviser should maintain records of the pre-clearance process if the pre-clearance approach is chosen.
F. Sanctions for Violations of Code of Ethics Provisions. An adviser's Code of Ethics should include appropriate sanctions and/or remedies for violations of the adviser's pay-to-play policies and procedures. In this regard, the adviser should consider all relevant facts and circumstances, including whether the violation was inadvertent, any pattern or practice of violations, the size of the contribution, the influence of the official, and any harm caused. These sanctions or remedies could include:
1. Internal actions, based on the various facts and circumstances, including letter of reprimand, fines donated to charity, suspension or termination of the employee.
2. Disclosure to client and/or independent representatives of the client, where appropriate.
We emphasize that our guidelines are not intended to dictate the content of any firm's Code of Ethics. Policies and procedures adopted by an investment adviser should be tailored to meet the facts and circumstances of each adviser. An adviser's policies and procedures may vary depending upon consideration of appropriate factors.
May 15, 2000