The Securities and Exchange Commission announced that it is seeking to ease its restrictions involving political contributions by investment advisers.
In a press release, the SEC said it has issued a proposal to rescind its “pay-to-play” rule that prohibits investment advisers from providing compensated investment advisory services to a government client for two years after making a political contribution to certain elected officials or candidates, and related recordkeeping requirements.
The rule, Rule 206(4)-5) under the Investment Advisers Act of 1940, was adopted by the SEC in 2010 to stop investment advisers from using political contributions and kickbacks to win lucrative contracts for managing public pension plans and state or local government funds.
The rule applies to registered investment advisers, exempt reporting advisers, and foreign private advisers, including with respect to government entity investments in certain private funds and other covered investment pools.
But the SEC said it has determined that the rule led to significant unintended consequences, including prohibitions by some advisers on political contributions at the state and local level. Advisers indicated that the rule is challenging to implement, and creates a de facto strict liability standard, which can lead to situations where small donations or “foot faults” potentially trigger substantial prohibitions and fines.
“After more than 15 years of experience administering the ‘pay-to-play’ rule, it is clear that it is overly prescriptive and has produced a host of unintended consequences,” said SEC Chairman Paul S. Atkins. “Beyond operational implementation challenges, it has imposed serious penalties for small, often impulsive donations to candidates in both parties, and routinely punishes and handicaps advisory firms for an employee making a donation even before joining the business. Furthermore, advisers’ implementation of the rule has effectively resulted in the suppression of political speech. Ultimately, matters involving political contributions are more properly governed by local ordinances, state laws, and federal election regulations—not by the SEC.”
Specifically, the proposal would rescind Advisers Act Rule 206(4)-5 and amend the Advisers Act recordkeeping rule to eliminate the corresponding provisions related to the political contribution rule. The proposal was submitted to the White House for review. The SEC said all other requirements of the Advisers Act and its associated rules, including prohibitions on fraud, fiduciary duty requirements, the compliance rule, and the code of ethics rule, would continue to apply.
The public comment period will remain open for 60 days after the proposal is published in the Federal Register.
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