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As we approach another election cycle, registered investment advisors should be aware of the specific regulations governing political contributions. The SEC’s Rule 206(4)-5, commonly known as the “pay-to-play” rule, is designed to prevent advisors from influencing the awarding of advisory contracts through political contributions. With heightened scrutiny during election periods, RIAS must understand the rule and ensure that they remain compliant.
What is the SECâs political contribution rule?
The pay-to-play rule prohibits an investment adviser from providing advisory services for compensation to a government entity, within two years after a contribution is made to an official of the government entity by the investment adviser or any covered associate of the investment adviser. A âcontributionâ includes any gift, subscription, loan, advance, or deposit of money or anything of value. A âcovered associateâ includes (1) an investment adviser’s general partner, managing member or executive officer, or other individual with a similar status or function; (2) any employee who solicits a government entity for the investment adviser or any person who supervises such employee, whether directly or indirectly; and (3) any PAC controlled by the investment adviser or by another covered associate. An âofficialâ includes individuals who either hold or are seeking political offices, with the ability to directly or indirectly influence the hiring of investment advisers (or appoint individuals capable of doing the same), on behalf of a government entity.
The SEC made clear in a recent enforcement action that the pay-to-play rule does not require actual intent to influence an elected official or candidate â if a contribution is made in violation of the rule, the firm will be held strictly liable.
De Minimis Exceptions
The rule permits any employee of the firm, even covered associates, to contribute up to $350, in aggregate, per election cycle, to each candidate for whom the employee is entitled to vote, and $150, in aggregate, per election cycle, for each candidate for whom the employee is not entitled to vote.Â
FAQs
Does the rule apply to federal elections?
It depends. Generally, political contributions to candidates seeking federal office are not covered under the rule, because they are usually unable to directly or indirectly influence the hiring of an investment adviser by a state or local government entity. However, when a candidate for federal office holds a state or local political office at the time of the contribution, that makes them an âofficial,â within the meaning of the pay-to-play rule. For example, Presidential candidates are not going to be considered âofficialsâ under the rule, when they do not currently hold state or local office. But if their running mate currently holds state or local office (e.g., mayor, governor, etc.) that will implicate the rule, and the contributions to the campaign will count toward the de minimis.
Do I need to collect political contribution information from all of my employees? What about new employees?
The rule only applies to employees (including independent contractors who solicit on behalf of the firm) who meet the definition of covered associates. However, given that the rule includes a two-year look-back provision thatâs applicable to existing employees who become covered associates, and new employees who are hired as covered associates, some firms prefer to track contributions across the board to ensure that there are no inadvertent violations.
Are contributions by an advisory employeeâs family members covered under the rule?
Generally, no. However, individuals are prohibited from doing anything indirectly that would be prohibited if done directly. For example, a covered associate cannot ask a family member to contribute to a political campaign of a government official who has the authority to award advisory business on their behalf to avoid contributing themselves.
What happens if a covered associate makes a contribution over de minimis?
Itâs important to remember that the pay-to-play rule is only triggered when the firm either has taken on or takes on a government client. If the firm does not currently have a government client and a contribution over de minimis is made, the firm will generally be prohibited from taking on a government client and receiving compensation for services for two years. If the firm has an existing government client and believes they may have violated the rule, we recommend engaging counsel or outside consulting to advise.
Key Takeaways
Compliance with the SECâs political contribution rule can be nuanced, with significant consequences for even inadvertent violations. Firms should adopt and maintain policies and procedures designed to prevent improper political contributions from being made and ensure that employees receive training on the complexities of this rule and the procedures that they should follow to prevent violation.
Partner With AdvisorLaw
In this challenging environment, AdvisorLaw is your trusted partner in SEC compliance. Our team of experts offers comprehensive support:
- Policy Development: We help you establish policies and procedures tailored to the new rule, focusing on accurate, relevant, and compliant marketing materials.
- Continuous Monitoring: We stay vigilant, keeping you informed of regulatory changes and guiding you through adjustments to your marketing practices.
- Education & Training: We equip your team with the knowledge and confidence to navigate compliance requirements effectively.
- Risk Mitigation: We proactively identify and address potential issues, minimizing the risk of violations and safeguarding your reputation.
Compliance with the SECâs political contribution rule is paramount for registered investment advisors. By partnering with AdvisorLaw, RIAs can enhance their compliance efforts, reduce risks, and ultimately focus on what they do best â providing sound financial advice to their clients. In todayâs regulatory climate, staying compliant isnât just a legal requirement â itâs a key component of building trust and success in the financial advisory industry.
Ready to streamline your compliance efforts? Contact us today for a free consultation and learn how AdvisorLaw can help safeguard your practice.