1 Securities and Exchange Commission Release No. I-A-1812 (August 4, 1999).
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August 6, 1999
TO: COMPLIANCE ADVISORY COMMITTEE No. 32-99
INVESTMENT ADVISER ASSOCIATE MEMBERS No. 15-99
INVESTMENT ADVISER MEMBERS No. 12-99
SEC RULES MEMBERS No. 48-99
RE: SEC PROPOSES "PAY TO PLAY" RULES FOR INVESTMENT ADVISERS
______________________________________________________________________________
The Securities and Exchange Commission has proposed for comment two rules under the
Investment Advisers Act (the "Act") that are designed to address "pay to play" practices in the
investment adviser industry.1 [The term "pay to play" refers to using political contributions and other
similar payments to officials to influence the award of public contracts.] The first of these proposed
rules, Rule 206(4)-5, would prohibit an investment adviser from providing advisory services for
compensation to a government client for two years after the adviser or any of its partners, executive
officers, or solicitors make a contribution to certain elected officials or candidates. The second rule
proposal would amend Rule 204-2 to require an adviser with government clients to maintain certain
records relating to those political contributions covered by the first rule. Comments on the proposed
rules are due to the Commission by November 1, 1999.
A copy of the Commission's proposal, which is summarized below, is attached.
PROPOSED RULE 206(4)-5, PROHIBITION ON "PAY TO PLAY" PRACTICES
Under proposed Rule 206(4)-5, which is modeled after MSRB Rule G-37, it would be a
fraudulent, deceptive, or manipulative act for an investment adviser to provide advisory services for
compensation to a governmental entity within two years after the adviser, any of its partners, executive
officers, or solicitors made a contribution to an elected official who could influence the selection of the
adviser. The rule would also make it unlawful for an adviser to solicit contributions (through a PAC or
otherwise) for an official of a government client while providing or seeking to provide the government
client advisory services. This rule would apply to all advisers registered with the Commission as well as
to certain exempt advisers. Contributions of $250 or less to elected officials or candidates for whom the
person making the contribution can vote would be exempt from the rule. As used in the rule, the term
"executive officer" would include the adviser's president, vice presidents in charge of a business unit or
division of the adviser, and other officers or persons who perform a policy-making function for the
adviser. The rule would extend to indirect acts that, if done directly, would violate the rule. Finally, the
rule would permit the Commission, upon application, to exempt advisers from the rule's prohibitions
when imposition of the prohibitions is inconsistent with the rule's intended purpose or when it is
triggered by inadvertent contributions.
PROPOSED AMENDMENTS TO RULE 204-2 RELATING TO RECORDKEEPING
The Commission's proposal would also revise Rule 204-2 under the Act, relating to
recordkeeping, to require a registered adviser that has government clients to make and keep certain
records of contributions made by the adviser, its partners, executive officers, and solicitors. These
records would be confidential and only reviewed by the Commission staff in the course of an adviser
examination. As proposed, the rule would require an adviser to make and keep a list of its partners,
executive officers and solicitors; the states in which the adviser has, or is seeking, government clients; the
identify of those clients; and the contributions made.
Tamara K. Reed
Associate Counsel
Attachment
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