Pay to Play Rule Adopted by SEC

Investment Advisers Act Rule 206 (4)-5

Today the SEC approved new Rule 206 (4)-5 under the Investment Advisers Act of 1940 which prohibits investment advisers from making political contributions in certain situations.  The new rule has three essential elements:

  • Investment advisory firms and employees are prohibited from managing assets for compensation if the adviser or employees make political contributions to an elected official who could influence the allocation of assets to the adviser.  The prohibition would last two years from the date of the political contribution.
  • Investment advisory firms and employees are prohibited from coordinating contributions from numerous sources to an elected official who could influence the allocation of assets to the adviser.
  • Investment advisory firms are prohibited from hiring third parties to solicit assets from government clients unless such third parties are registered with the SEC as investment advisers or broker-dealers.

While this rule may not be applicable to certain hedge fund managers and other investment advisers, it is important that all firms implement policies and procedures to make sure that the firm and employee’s activities do not inadvertently fall outside the regulations.  It is important that private equity fund managers, who will likely be subject to investment adviser registration under the Wall Street Reform and Consumer Protection Act, understand that this will be applicable to their business as well.

The text of the new rule has not yet been released.

For more information, please see the SEC press release.  SEC Chairman Mary Shapiro also provided comments on the new rule.

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Cole-Frieman & Mallon LLP provides comprehensive regulatory support and hedge fund registration.  Bart Mallon, Esq. can be reached directly at 415-868-5345.

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