SEC Pay to Play Rule 206-4-5

The SEC Pay-to-Play Rule, Rule 206(4)-5 under the Investment Advisers Act, prohibits investment advisers from engaging in certain activities related to political contributions to state and local government officials.

Key aspects of the Pay-to-Play Rule include:

1. Prohibited Contributions: Investment advisers and their covered associates are banned from making political contributions to state or local government officials who can influence the selection of advisers if seeking to provide advisory services to government entities.
2. Cooling-Off Period: The rule imposes a two-year “cooling-off” period during which an investment adviser is restricted from receiving fees for advising government entities if the adviser or its covered associates made impermissible contributions.
3. Covered Associates: Covered associates include general partners, managing members, executive officers, employees who solicit government entities, and supervisors of such employees.
4. De Minimis Exceptions: De minimis contributions below specified amounts, like $350 per election cycle for eligible candidates, are allowed under the rule.
5. Scope: The rule applies not only to SEC-registered investment advisers but also to exempt reporting advisers and foreign private advisers exempt from SEC registration.
6. Enforcement: Violations of the Pay-to-Play Rule are considered fraudulent acts under Section 206 of the Advisers Act, leading to significant civil penalties and SEC enforcement actions.

These requirements aim to prevent pay-to-play arrangements, ensuring fair competition and transparency in the selection process for government contracts.

Related resources for investment advisers

Guide: Compliance Made Easy for RIAs and Broker-Dealers

Webinar: How to Supervise Your Suddenly-Remote Broker-Dealers & Investment Advisers

Checklist: RIA Compliance Checklist for Electronic Communications