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Final Rule: Political Contributions by Certain Investment Advisers

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Final Rule: Political Contributions by Certain Investment Advisers SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 275 Release No. IA-3043; File No. S7-18-09 RIN 3235-AK39 Political Contributions by Certain Investment Advisers AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission is adopting a new rule under the Investment Advisers Act of 1940 that prohibits an investment adviser from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates. The new rule also prohibits an adviser from providing or agreeing to provide, directly or indirectly, payment to any third party for a solicitation of advisory business from any government entity on behalf of such adviser, unless such third parties are registered broker-dealers or registered investment advisers, in each case themselves subject to pay to play restrictions. Additionally, the new rule prevents an adviser from soliciting from others, or coordinating, contributions to certain elected officials or candidates or payments to political parties where the adviser is providing or seeking government business. The Commission also is adopting rule amendments that require a registered adviser to maintain certain records of the political contributions made by the adviser or certain of its executives or employees. The new rule and rule amendments address “pay to play” practices by investment advisers. DATES: Effective Date: September 13, 2010. --2-- Compliance Dates: Investment advisers subject to rule 206(4)-5 must be in compliance with the rule on March 14, 2011. Investment advisers may no longer use third parties to solicit government business except in compliance with the rule on September 13, 2011. Advisers to registered investment companies that are covered investment pools must comply with the rule by September 13, 2011. Advisers subject to rule 204-2 must comply with amended rule 204-2 on March 14, 2011. However, if they advise registered investment companies that are covered investment pools, they have until September 13, 2011 to comply with the amended recordkeeping rule with respect to those registered investment companies. See section III of this Release for further discussion of compliance dates. FOR FURTHER INFORMATION CONTACT: Melissa A. Roverts, Senior Counsel, Matthew N. Goldin, Branch Chief, Daniel S. Kahl, Branch Chief, or Sarah A. Bessin, Assistant Director, at (202) 551-6787 or [email protected], Office of Investment Adviser Regulation, Division of Investment Management, U.S. Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549. SUPPLEMENTARY INFORMATION: The Commission is adopting rule 206(4)-5 [17 CFR 275.206(4)-5] and amendments to rules 204-2 [17 CFR 275.204-2] and 206(4)-3 [17 CFR 275.206(4)-3] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] (“Advisers Act” or “Act”).1 1 15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 80b of the United States Code, at which the Advisers Act is codified, and when we refer to rule 206(4)-5, rule 204-2, rule 204A-1, rule 206(4)-3, or any paragraph of these rules, we are referring to 17 CFR 275.206(4)-5, 17 CFR 275.204-2, 17 CFR 275.204A-1 and 17 CFR 275.206(4)-3, respectively, of the Code of Federal Regulations, in which these rules are published. --3-- TABLE OF CONTENTS I. BACKGROUND ................................................................................................... 5 II. DISCUSSION ...................................................................................................... 15 A. First Amendment Considerations ......................................................................... 19 B. Rule 206(4)-5........................................................................................................ 25 1. Advisers Subject to the Rule............................................................................. 29 2. Pay to Play Restrictions .................................................................................... 31 (a) Two-Year “Time Out” for Contributions ................................................... 31 (1) Prohibition on Compensation.................................................................. 38 (2) Officials of a Government Entity............................................................ 43 (3) Contributions........................................................................................... 46 (4) Covered Associates ................................................................................. 49 (5) “Look Back”............................................................................................ 58 (6) Exceptions for De Minimis Contributions .............................................. 62 (7) Exception for Certain Returned Contributions........................................ 65 (b) Ban on Using Third Parties to Solicit Government Business..................... 70 (1) Registered Broker-Dealers ...................................................................... 87 (2) Registered Investment Advisers.............................................................. 90 (c) Restrictions on Soliciting and Coordinating Contributions and Payments. 93 (d) Direct and Indirect Contributions or Solicitations...................................... 96 (e) Covered Investment Pools .......................................................................... 97 (1) Definition of “Covered Investment Pool”............................................. 102 (2) Application of the Rule ......................................................................... 109 (3) Subadvisory Arrangements ................................................................... 111 (f) Exemptions ............................................................................................... 114 D. Recordkeeping .................................................................................................... 116 E. Amendment to Cash Solicitation Rule................................................................ 121 III. EFFECTIVE AND COMPLIANCE DATES................................................. 122 A. Two-Year Time Out and Prohibition on Soliciting or Coordinating Contributions ............................................................................ 122 B. Prohibition on Using Third Parties to Solicit Government Business and Cash Solicitation Rule Amendment......................................................................... 123 C. Recordkeeping .................................................................................................... 125 D. Registered Investment Companies...................................................................... 125 IV. COST-BENEFIT ANALYSIS.......................................................................... 127 A. Benefits ............................................................................................................... 130 B. Costs.................................................................................................................... 136 1. Compliance Costs Related to Rule 206(4)-5 .................................................. 136 2. Other Costs Related to Rule 206(4)-5............................................................. 148 (a) Two-Year Time Out.................................................................................. 148 (b) Third-Party Solicitor Ban.......................................................................... 154 3. Costs Related to the Amendments to Rule 204-2........................................... 159 --4-- V. PAPERWORK REDUCTION ACT ............................................................... 162 A. Rule 204-2........................................................................................................... 162 B. Rule 206(4)-3...................................................................................................... 171 C. Rule 206(4)-7...................................................................................................... 174 D. Rule 0-4............................................................................................................... 176 VI. FINAL REGULATORY FLEXIBILITY ANALYSIS.................................. 176 A. Need for the Rule................................................................................................ 179 B. Significant Issues Raised by Public Comment ................................................... 180 C. Small Entities Subject to Rule ............................................................................ 181 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements..... 183 E. Agency Action to Minimize Effect on Small Entities ........................................ 184 VII. EFFECTS ON COMPETITION, EFFICIENCY AND CAPITAL FORMATION ................................................................................................... 188 VIII. STATUTORY AUTHORITY.......................................................................... 191 --5-- I. BACKGROUND Investment advisers provide a wide variety of advisory services to state and local governments,2 including managing their public pension plans.3 These pension plans have over $2.6 trillion of assets and represent one-third of all U.S. pension assets.4 They are among the largest and most active institutional investors in the United States;5 the management
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