SEC Adopts Pay to Play Regulations

In a unanimous vote Wednesday, the Securities and Exchange Commission adopted a regulation designed to curtail so-called “pay to play” schemes in which advisers try to curry favor with politicians by donating to their campaigns.

Under the rule, if an investment adviser or certain employees of an advisory firm contribute to a politician with influence over hiring, they cannot be paid by the pension fund for two years. Advisers would be prohibited from bundling donations from other people or political action committees for the officeholder or a party. (SEC limits political gifts from advisers to pension funds, Investment News, 6/30/10)

The new SEC rule has three key elements (SEC Adopts New Measures to Curtail Pay to Play Practices by Investment Advisers):

  • It prohibits an investment adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the adviser.
  • It prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as “bundling” — for an elected official who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.
  • It prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

The new rule becomes effective 60 days after its publication in the Federal Register. Compliance with the rule’s provisions generally will be required within six months of the effective date.


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