As explained in our prior client alert, the presence of a sitting state-level elected official—Minnesota Governor Tim Walz—on a presidential ticket should increase vigilance among investment advisers regarding the potential for inadvertent violations of Investment Advisers Act Rule 206(4)-5 (the “Pay-to-Play Rule” or “Rule”). Supporters of a campaign subject to the Rule can still provide financial support to their candidates of choice in other ways, but the specifics of each donation and where the funds will ultimately end up should be fully understood and vetted in advance by an investment adviser’s compliance and/or legal personnel.1
The Pay-to-Play Rule is intended to deter investment advisers and certain of their associated personnel (“covered associates”)2 from using campaign contributions to exert improper influence over state and municipal elective officeholders with authority over existing or prospective investment decisions by public sector clients. The Rule prohibits an adviser from receiving compensation for providing advisory services to a state or local public investment pool for two years after the adviser or one of its covered associates makes a campaign contribution to certain government officials or candidates for election. Relevant here, a government “official” is defined as a candidate for or incumbent in state or local elective office if the office is responsible for, or can influence, the selection of investment advisers to provide investment services for a public investment pool. Contributions to federal officials and candidates are typically not covered by the Pay-to-Play Rule, but as we noted in our earlier alert, the Rule does apply to contributions to campaigns for federal office by current state officials. Thus, the Rule could apply to contributions to a presidential ticket that includes a sitting governor running for vice president.
Now is a good time for an investment adviser’s compliance and/or legal personnel to reinforce with employees the importance of complying with firm policies in connection with political contributions. It is also a good time to double-check that individuals covered by the Rule have not inadvertently made contributions that could trigger penalties or a potentially costly two-year ban. There is a very narrow window to remediate violations of the Rule—the violation must be discovered within four months of the contribution date, a return of a contribution must be obtained within 60 days of discovery of the violation, and the contribution must not have exceeded $350.3 But even if all of the elements of this exception for returned contributions cannot be met, advisers would be well advised to act quickly to identify and mitigate violative contributions so that they will be able to demonstrate to the Securities and Exchange Commission (“SEC”) in an exemptive application4 that they have robust compliance operations and took steps to address the situation expeditiously when it was identified.
Our team has extensive experience designing and working with clients to implement effective pay-to-play policies and procedures focused on meeting the expectations of regulators, as well as analyzing requests for contributions, assisting in mitigating and seeking exemptions for potential violations, and defending conduct before the SEC.
