Another rule that firms must be mindful of in monitoring is the SEC's Pay-to-Play Rule. The Rule is designed to prevent investment advisers (IAs) from obtaining governmental business, through direct or indirect campaign contributions made by certain high level employees to state and local elected officials, political candidates, party committees, or organizations. Indirect contributions include fundraising activities for government officials or political parties, in the localities where the adviser is providing or seeking business from a government client, as well as compensation to third-party solicitors and placement agents to solicit government clients. Non-compliance with the Pay-to-Play Rule subjects the adviser to a two-year "time-out" period, during which time the adviser is barred from providing advisory services for compensation – either directly or through a fund – to the governmental entity whose official received the contribution. There is, however, a de minimis allowance that permits contributions of up to $350 per election per candidate, and up to $150 per election per candidate if the contributor is not entitled to vote for the candidate.
Here are some tips that firms should consider: (1) In screening potential new employees, require the potential new hire to disclose all political contributions, as well as gifts and entertainment provided to state and local government officials during the past 2 years; (2) Identify and educate employees on the permissible political contribution and gift and entertainment thresholds applicable to your business; and (3) Update policies and procedures to require pre-clearance of all political contributions, and keep records necessary to demonstrate compliance with the rule.
Finally, investment advisers must comply with significant additional recordkeeping requirements. The Rule requires Advisers to maintain:
- the name, titles and addresses of each of the adviser's covered associates;
- all government entities that the adviser has provided investment advisory services to in the past five years;
- all political contributions made by the adviser and its covered associates to a government official or candidate, and contributions or payments to state or local political parties and to PACs; and
- the names and business addresses of each regulated person to whom the adviser provides or agrees to provide, directly or indirectly, payment to solicit a government entity on its behalf.
Compliance efforts, therefore, are not just important – they are the only way to both prevent inadvertent violations, and to ensure business relationships with state and municipal clients are not disrupted. For further information about this, or other related topics, please contact us at (619) 278-0020 or at firstname.lastname@example.org.