Political Contributions by Certain Investment Advisers

Summary

SIFMA ¹ provided comments on the SEC's proposed rule changes regarding political contributions by certain investment advisers (the "Proposal"). ² The Proposal seeks public comment on, among other things, whether the SEC should rescind Rule 206(4)-5, the "political contributions rule" (the "Rule"), and its related recordkeeping requirements, under the Investment Advisers Act of 1940 (the "Advisers Act").

Excerpt

The SEC adopted the Rule in 2010 with the intention of reducing the possibility that campaign contributions and other support of elected officials and candidates for public office by investment advisers and covered associates would result in fraudulent activity. ³ The primary objective of the Rule is to prevent investment advisers from using political contributions to fraudulently influence the award of public pension and government investment contracts (i.e., what the Proposal - as well as the original 2010 Adopting Release - refer to as "pay-to-play" practices). ⁴

SIFMA and its members fully appreciate that preventing pay-to-play practices in all of its forms is an important and legitimate objective. However, the Rule's highly prescriptive, strict liability framework, focused on political contributions, has proven unnecessary and ill-suited to meet the Rule's primary objective. Indeed, our industry's collective experience suggests that the Rule is not working as intended.

For advisory firms subject to the Rule, compliance has proven to be burdensome and complex, resulting in significant costs, while imposing strict liability consequences and harsh penalties untethered to the Rule's anti-fraud objective. The Rule has also inhibited industry professionals from personally participating in the political process by prohibiting them from contributing to their candidates of choice. The look-back provision on prior political contributions by new covered associates also deters advisers from hiring qualified personnel, while also inhibiting the mobility of talent within the industry. For government pension funds and other retirement plans, the Rule can potentially deny them their preferred choice of investment adviser.

Moreover, the Rule is unnecessary due to the broad anti-fraud provisions of the federal securities laws, as well as the wide array of robust federal and state safeguards in place (described at length in the Proposal) to ensure public integrity in the award of government contracts. In the event the Rule is rescinded, campaign contributions will still remain subject to existing federal, state and local campaign finance laws, and pay-to-play practices will still remain subject to existing federal, state and local anti-fraud and bribery laws. In fact, notwithstanding the prospective rescission of the Rule, pay-to-play practices - whether involving political contributions or other things of value - will always remain not only prohibited but also strictly enforced by the SEC and other regulators under the federal securities laws, and other federal, state and local related laws, including anti-fraud and bribery statutes, conflict of interest and ethics laws, and certifications included within the procurement process.