Ledbetter, Andrew D._photo_3659.jpgpic-asher.jpg

 Andrew Ledbetter and
 Asher Bearman


New SEC rules regarding political contributions by certain investment advisers – dubbed the “Pay to Play” rules – become operative on March 14th.  These rules generally prohibit registered and certain unregistered advisers from engaging various political contribution practices with a quid-pro-quo element.

**UPDATE**  Don’t miss our newer post with some examples and guidance on dealing with the new rules, available here.

This post addresses the scope of these new rules and which investment advisers are subject to the restrictions (hint – most of them).

Scope of the Pay to Play Rules

The SEC’s press release summarizes the scope of the Pay to Play rules set out in Rule 206(4)-5 as follows:

The new SEC rule has three key elements:

  • It prohibits an investment adviser from providing advisory services for compensation — either directly or through a pooled investment vehicle — for two years, if the adviser or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the adviser.
  • It prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others — a practice referred to as “bundling” — for an elected official who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.
  • It prohibits an adviser from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment adviser or broker-dealer subject to similar pay to play restrictions.

The full text of the rule is available here

The SEC’s Release on the Pay to Play rules, is available here

The SEC’s release to change these rules based on the new Dodd-Frank Act is here (see page 68 – discussed further below).

Effective Date

While the new Pay to Play rules became effective September 13, 2010, they have delayed dates on which they become operative. Fund managers must be in compliance with the new rules by March 14, 2011 in most cases.  With respect to the ban on payments to third-parties (bullet three above) compliance is required by September 13, 2011.

Advisers Subject to the Pay to Play Rules

The Pay to Play rules are intentionally broad and apply to both registered and unregistered investment advisers.

As previously adopted, Rule 206(4)-5 applies to investment advisers that are either registered with the SEC or unregistered in reliance on the exemption for advisers with 15 or fewer clients (Section 203(b)(3) of the Advisers Act).  As discussed previously at The Venture Alley, the Dodd-Frank Act has since eliminated the 15 client exemption, replacing it with new exemptions for advisers to venture capital funds, foreign private advisers, and funds with less than $150M in assets under management.  As part of the rules promulgated under the Dodd-Frank Act, the SEC has proposed revising Rule 206(4)-5 to provide that the Pay to Play rules apply to exempt reporting advisers (including advisers to venture capital funds) and to foreign private advisers.  The SEC is proposing this change to ensure that the intentionally broad scope of the Pay to Play rules is not inadvertently narrowed by the new Dodd-Frank Act.

Given that the new Pay to Play rules go into effect March 14, 2011 but the Dodd-Frank Act regime does not become effective until July 21, 2011, the 15 client exemption will remain applicable for the period between these dates (meaning that fund managers exempt by virtue of the 15 client exemption will still be subject to the Pay to Play rules during this period).


Fund managers should be planning now for compliance with the new Pay to Play rules.  Among other things, fund managers should review their historical practices and consider implementing policies and procedures to ensure compliance with the new rules.