The Securities and Exchange Commission has released the text of a proposed pay-to-play rule 206(4)-5 for investment advisers that prohibits certain political contributions and bans third-party placement agents.
Public comments to the proposal are due within 60 days after it is published in the Federal Register.
The proposed rule is modeled after the long-standing Municipal Securities Rulemaking Board Rule G-37 governing broker-dealers who underwrite municipal bonds. It is also similar to the pay-to-play rule the SEC proposed for investment advisers in 1999, but did not finalize.
The proposed rule covers "advisory services," including directly managing or advising government-run funds, or managing or advising a private investment fund (such as a hedge fund) in which the government-run funds invest. The proposal implies that managing or advising a mutual fund is also covered, although it was exempt in the version proposed in 1999.
Government-run funds contemplated under the proposal include public pension funds, local pooled funds (such as 529 college tuition savings programs) and 403(b) plans.
If an investment adviser, its PAC, or certain employees make a political contribution to a covered candidate, then the investment adviser is automatically banned for two years from providing advisory services for compensation in connection with the relevant government-run fund.
Covered candidates include those who are running for (or are incumbents of) an office that can influence the selection of an investment adviser by the government-run fund in question. It remains unclear which of the investment adviser's employees are covered under this prohibition.
If a prohibited contribution is made while there is an existing engagement/subscription agreement with a government-run fund, the investment adviser may have to provide free investment services to that government-run fund for two years, as opposed to terminating the engagement/subscription agreement. This is because the ban is limited to advisory services for compensation and the fiduciary duty that the investment adviser owes to the investor.
There is an exemption for individuals who contribute no more than $250 per election to a candidate for whom he or she is entitled to vote. Moreover, the commissioners have stated that there will be a procedure through which an investment adviser may apply for a waiver from the two-year ban on business.
To view a summary and fact sheet on the proposed rule, click here.
