A Refresher on the SEC’s Pay to Play Rule

In the midst of a national election cycle, now is a good time for investment advisers to refresh their understanding on the SEC’s Pay to Play Rule (the “Rule”)¹ and related SEC staff guidance² As demonstrated by a number of recent administrative proceedings against advisers³ as well as our observations in SEC staff examinations, the Rule continues to be a regulatory focal point.

The Rule prohibits an adviser from:

• Receiving compensation from a government entity⁴ (e.g., state and local pension plans) for two years following a contribution⁵ by the adviser or certain of its personnel⁶ to an incumbent, candidate or successful candidate for elective office (each, an “official”⁷) of a government entity who is or will be in a position to influence the award of advisory business to the adviser.⁸
• Coordinating or soliciting⁹ any person or political action committee (a “PAC”) to make any contribution or payment to an official of a government entity to which the adviser is providing or seeking to provide advisory services.
• Indirectly taking any action which, if taken directly, would result in a violation of the Rule (e.g., payments or contributions to third parties (e.g., PACs) that circumvent the Rule).¹⁰

Advisers should keep in mind the technical aspects of the Rule, including the following.

• There is either a two-year or six-month look back to an individual’s prior contributions depending on the individual’s role at the adviser.
• A “time out” from receiving compensation runs for two years from the time the contribution was made, regardless of whether the contributing individual remains a covered associate of the adviser.
• Contributions made at any point during the adviser’s relationship with the government entity investor, including well after the government entity’s initial investment with the adviser, may require the adviser to forgo compensation or face penalties.
• Contributions that are not made with any intent to influence a government office or for which there is no quid pro quo may be in-scope.
• Sponsoring meetings, conferences and events for an official of a government entity may be in-scope.
• Contributions to a PAC or political party may be in-scope depending on how the contributions are used by the PAC or political party and/or how closely the PAC or political party is associated with an official of a government entity.

In an effort to comply with the Rule, advisers should consider the following actions:

• Provide periodic training on compliance policies and procedures adopted and implemented regarding the Rule, including preclearance of any political contributions or involvement in fundraising activities;
• Conduct periodic monitoring of political donation databases; and
• Emphasize diligence in the hiring and onboarding processes.

In addition to the Rule, advisers and their personnel should understand other restrictions regarding political activity that may apply, including restrictions prescribed by state and local “pay to play” and lobbying laws, rules and regulations as well as the Federal Election Commission’s contribution limits¹¹.

¹ Rule 206(4)-5 under the Advisers Act.

²See Division of Investment Management, Staff Responses to Questions About the Pay to Play Rule (Aug. 18, 2017).

³See In re Obra Capital Management, LLC, Release No. IA-6662 (Aug. 19, 2024); In re Wayzata Investment Partners LLC, Release No. IA-6590 (Apr. 15, 2024); In re Asset Management Group of Bank of Hawaii, Release No. IA-6127 (Sept. 15, 2022); In re Canaan Management, LLC, Release No. IA-6126 (Sept. 15, 2022); In re Highland Capital Partners, LLC, Release No. IA-6128 (Sept. 15, 2022); In re StarVest Asset Management, Inc., Release No. IA-6129 (Sept. 15, 2022).

⁴ “Government entity” means any state or political subdivision of a state including: (i) any agency, authority or instrumentality of the state or political subdivision; (ii) a pool of assets sponsored or established by the state or political subdivision or any agency, authority or instrumentality thereof including but not limited to a “defined benefit plan” or a state general fund; (iii) a plan or program of a government entity; and (iv) officers, agents or employees of the state or political subdivision or any agency, authority or instrumentality thereof, acting in their official capacity. Rule 206(4)-5(f)(5).

⁵ “Contribution” means any gift, subscription, loan, advance or deposit of money or anything of value made for: (i) the purpose of influencing any election for federal, state or local office; (ii) payment of debt incurred in connection with such election; or (iii) transition or inaugural expenses of the successful candidate for state or local office. Rule 206(4)-5(f)(1).

⁶ Personnel covered under the Rule includes any “Covered Associate” of an adviser, which means: (i) any general partner, managing member or executive officer, or other individual with a similar status or function; (ii) any employee who solicits a government entity for the adviser and any person who supervises, directly or indirectly, such employee; and (iii) any political action committee controlled by the adviser or by any of its other covered associates. Rule 206(4)-5(f)(2).

⁷ “Official” means any person who was, at the time of the contribution, an incumbent, candidate or successful candidate for elective office of a government entity, if the office: (i) is directly or indirectly responsible for, or can influence the outcome of, the hiring of an adviser by a government entity; or (ii) has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an adviser by a government entity. Notably, a candidate for federal office can be considered an “official” pursuant to the Rule not because of the office he or she is running for, but because of the office he or she currently holds. If a current state official is a candidate for federal office, such as Vice Presidency, the U.S. Senate or House of Representatives, contributions to that official would be covered by the Rule. For example, in 2016, Mike Pence was the Governor of Indiana and was also running for Vice Presidency. Thus, any direct or indirect contribution to the Trump-Pence campaign was covered by the Rule. In the current 2024 election, Tim Walz is the Governor of Minnesota and is also running for Vice Presidency, which means that any contributions to the Harris-Walz campaign would similarly be covered under the Rule.

⁸ Political Contributions by Certain Investment Advisers, Release No. IA-3043 (Jul. 14, 2010).

⁹ “Solicit” means (i) with respect to investment advisory services, to communicate, directly or indirectly, for the purpose of obtaining or retaining a client for, or referring a client to, an adviser; and (ii) with respect to a contribution or payment, to communicate, directly or indirectly, for the purpose of obtaining or arranging a contribution or payment. Rule 206(4)-5(f)(10).

¹⁰ Rule 206(4)-5(d).

¹¹ 88 Fed. Reg. 7088 (2023).