Almost nine months after the effective date of the SEC's pay-to-play rule — Rule 206(4)-5 under the Investment Advisers Act of 1940 — many advisers are first beginning to confront some of the challenges arising from new election cycles. The consequences for making impermissible contributions can be significant. Moreover, in many cases it will not be intuitive to employees of advisers that the political activities they may have engaged in for many years must be carefully considered in light of the new SEC regulation.
The Rule limits the amount of contributions that can be made to a candidate or incumbent who holds an elected office that can influence the selection of the adviser. The influence may be direct, or it may be the result of having the ability to appoint members to the board of a public retirement plan. The restrictions under the Rule apply regardless of whether or not the candidate is successful.
Although not always the case, those candidates most likely to have an influence over the selection of an adviser by virtue of their office are executive positions, such as mayors and governors. In the case of Federal elections, the office itself, whether Representative, Senator or President — will not be one that has the ability to influence the selection of advisers. Thus, contributions to incumbents are not affected by the SEC's Rule. However, a contribution made to a sitting mayor or governor running for Federal office is subject to the Rule. For example, a contribution to the presidential campaign of Governor Perry of Texas in excess of the limits under the Rule would preclude an adviser from receiving compensation from the Texas Retirement System for two years. In contrast, the same contribution could be made without consequence under the Rule to President Obama's campaign or to other Federal officials seeking the Presidency, and to any former governor running for President.
Questions frequently arise about political volunteer activity. In general, the SEC has stated that the Rule does not prohibit covered associates of an adviser from volunteering or engaging in other political speech in support of a candidate. However, many types of activity on behalf of a candidate, or political action committees ("PACs"), can be considered an impermissible "solicitation" or involve "in kind" contributions and should be carefully considered. Although the SEC has not offered a great deal of guidance on the term "solicitation," activities that may be considered solicitations include direct requests for contributions as well as hosting fundraisers, providing mailing lists of potential contributors, and allowing the covered associates' name to be used in connection with fundraising events or on fundraising literature. Other volunteer-related activity that may be considered a non-cash political contribution by the adviser includes permitting the use of the adviser's office space, personnel or supplies for campaign purposes, as well as reimbursing any expenses that the covered associate may incur in connection with their volunteer work (e.g., travel, meals or lodging).
In addition to the candidates themselves, covered associates may need to exercise care in making contributions to PACs and other organizations that have a political agenda. While the SEC has stated that contributors to independent expenditure committees and broad-based PACs may not be subject to its Rules, it also has indicated that PACs controlled by the adviser or its covered associates, as well as single candidate PACs, are subject to the Rule's limitations. In some cases, the purpose of a political committee may not be clear. In these instances, covered associates should pre-clear the contribution in order to allow the compliance department to conduct some due diligence.
As candidates begin to line up for elections, many covered associates will be confronted with appeals for contributions from friends and neighbors. In most cases, they may be inclined to support a candidate or political organization for reasons having nothing to do with attempting to improperly influence the adviser's selection by a public pension plan. However, regular education and training about the adviser's political activity policies is required to resist impulsive actions. While covered associates need not have a detailed understanding of the Rule, they should have a firm understanding of the adviser's policies — particularly those that may require pre-clearance of contributions. In addition, training should reinforce awareness that employees can bring questions or potential problems to an appropriate contact person.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.