The Securities and Exchange Commission (SEC) is seeking 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.
The SEC has determined that the political contribution rule, since its adoption in 2010, has led to significant unintended consequences, such as prohibitions by some advisers on political contributions at the state and local level. Advisers say the rule is operationally challenging to implement, creating a liability standard. SEC officials said that, in turn, can lead to situations where small donations 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. 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,” SEC Chairman Paul Atkins said. “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 record keeping rule to eliminate the corresponding provisions related to the political contribution rule.
“Rescinding the rule would not open the door to fraud because sufficient protections exist (and have always existed); for example, investment advisers are subject to the Investment Advisers Act antifraud requirements, fiduciary duty obligations, and rules requiring them to maintain compliance policies and procedures and codes of ethics,” Atkins added.
The proposal was commended by several financial associations including the Alternative Investment Management Association (AIMA), American Free Enterprise Chamber of Commerce, American Securities Association, Investment Adviser Association, Investment Company Institute, Managed Funds Association, Partnership for New York City, and the Securities Industry and Financial Markets Association (SIFMA).
“The SEC’s proposal will level the playing field so all Americans can participate in our democratic process. The wide array of robust federal, state, and local safeguards in place ensure public integrity and make the current rule obsolete. We look forward to working with the SEC on this important proposal,” the groups said in a joint statement.
U.S. Sen. Elizabeth Warren (D-MA), ranking member on the Senate Banking Committee, blasted the proposal.
“President Trump’s SEC just proposed to rescind a 15-year-old rule that prevents elected officials from rewarding wealthy campaign donors with lucrative contracts to advise government investments,” Warren said. “Another example of how Donald Trump and his Administration are rigging our markets to work for the wealthy and well-connected while working people pay the price.”
The SEC is accepting public comments on the proposal for 60 days after the proposing release is published in the Federal Register.