November Elections Renew Focus on “Pay to Play” Rules for Advisors

Hedge fund attorney NYCAs election season gets into full swing, advisors should be cautious about the campaign contributions they make. Under tough new “pay to play” rules adopted by the Securities and Exchange Commission (SEC) in 2010, advisers can face steep fines if they make improper political donations.

The “pay to play” restrictions prohibit an investment advisor from providing advisory services for compensation to elected officials or candidates for public office for two years after the advisor or executives or employees make a campaign contribution to them. The SEC can also “look back” at an advisor’s donation history over the previous two years.

The devil is as always in the detail.  An official under the rules is an incumbent, a candidate, or successful candidate for elective office of a government entity who has the legal authority to hire or the ability to influence the hiring of the advisor.  “Government entities” include state and local, notably not federal, governments, their agencies and instrumentalities, and all public pension plans and other collective government funds, including participant-directed plans such as 403(b), 457, and 529 plans.

For election year 2012, this interestingly enough leads to the result that advisors are permitted to donate to the campaigns of Mr. Romney or President Obama; contributions to Gov. Rick Perry, however, if he were still in the running, would be prohibited.

Individual advisors are subject to a $150 de minimis, or $350 in elections in which they can vote.

Because the rules can be confusing, many firms have adopted policies addressing them. For example, Reuters reports that Allianz Global Investors of America, Allianz’ US Investment Advisory arm, now restricts political contributions by all employees, even those not actually covered by the rules: it created a “pre-approved” list of political organizations that are ok; if employees want to donate elsewhere, they must seek pre-approval.

This is a cautious and practical approach but there are many alternatives. A firm should address it, though, one way or the other, if it has not already done so.

Eckerle Law offers a highest-quality and cost-effective alternative to the traditional law firm model for a wide variety of transactional and regulatory matters serving all your business law needs. Our experienced attorneys also provide a full range of compliance services for investment advisers, offering compliance tools that are tailored to fit the ever changing regulatory landscape as well as your business needs.

If your company would like to strengthen its business practices, please contact us today so we can leverage our experience to create real-life business and legal solutions to help your business thrive.