United States: SEC Adopts Final Rules to Eliminate Perceived "Pay-To-Play" Practices by Investment Advisers and Private Fund Managers

Last Updated: August 11 2010
Article by David M. Mahle, Matthew A. Gray, Anthony L. Perricone, John M. Saada, Jr. and Randall B. Schai
Most Read Contributor in United States, September 2019

On June 30, 2010, the U.S. Securities and Exchange Commission (the "SEC") voted unanimously to adopt amendments to the U.S. Investment Advisers Act of 1940 (the "Advisers Act") to eliminate perceived "pay-to-play" practices by investment advisers providing advisory services to government clients.1 The rules apply to registered investment advisers, as well as investment advisers and fund managers that are exempt from registration pursuant to the "private adviser exemption" provided by Section 203(b)(3) of the Advisers Act,2 but not to most small advisers with less than $25 million in assets under management that are registered with state authorities rather than the SEC. This includes many private equity funds, venture capital funds, hedge funds, real estate funds, and structured finance vehicles.

The new rules, among other things, prohibit an investment adviser from providing advisory services for compensation to a government entity (including managing a fund in which a government entity invests) for two years after making a contribution to certain officials or candidates. The new rules also prohibit an investment adviser from paying a third party to solicit business from any government entity on its behalf unless such third party is an investment adviser or broker-dealer registered with the SEC and is subject to comparable "pay-to-play" restrictions under the oversight of a national securities association, such as the Financial Industry Regulatory Authority ("FINRA").

The final rules vary in some respects from the proposed rules published by the SEC in August 2009, with the most notable being the permitted use of certain third-party solicitation agents under certain conditions and delayed effective dates for the new rules.

"Pay-To-Play" Restriction

The new rules prohibit covered investment advisers from providing advice for compensation to a government entity, including certain government-sponsored pension plans and other plans,3 within two years after a direct or indirect contribution to an "official" of the government entity has been made by the investment adviser or by any of its "covered associates."

An "official" includes an incumbent or candidate for a government office that is directly or indirectly responsible for, or can influence the outcome of, the selection of an investment adviser, or that has authority to appoint any person who is directly responsible for or can influence the outcome of the selection of such an investment adviser. The rules do not define "influence," which could be interpreted to run up the chain from lower-level state officials to a gubernatorial candidate.

The term "covered associates" includes the investment adviser's general partners, managing members, executive officers,4 and other individuals with similar status or function; any employee who solicits advisory clients for the adviser and any direct or indirect supervisor of such employee; and any political action committee controlled by the adviser or its covered associates.

Once triggered, the two-year prohibition will continue in effect even if the covered associate who makes the contribution leaves the employ of the investment adviser. Similarly, the prohibition is attributed to any other investment adviser that employs or engages the person who made the contribution for six months after the date the contribution was made, unless the person solicits clients on behalf of the investment adviser, in which case the look-back period is two years.5 The broad definition of "covered associates" and the look-back period for new hires creates new monitoring and hiring burdens for investment advisers, as oversights may cause significant consequences.

The new rules do not prohibit the provision of advisory services during such two-year period, only the receipt of compensation for providing such services. This approach mirrors that of rules G-37 and G-38 of the Municipal Securities Rulemaking Board, which address "pay-to-play" practices in the municipal securities market. An underwriter of municipal securities that becomes subject to a two-year time out may elect not to perform underwriting services for a particular government entity until the two-year period lapses. However, an investment adviser that triggers a two-year time-out may already have funds under management and/or commitments from the relevant government entity, in which case the adviser could be forced to provide services without compensation.

The new rules do not explicitly define "compensation"; however, they suggest that an investment adviser would be required to waive or rebate not only fees, but also any performance allocation or carried interest related to the government entity's investment in a fund or other similar arrangement. In the final release, the SEC noted that, to comply with the new rules, some investment advisers might cause the redemption of the government entity investment or, alternatively, maintain the government entity investment and relationship by continuing to provide investment advisory services without compensation.

In connection with the new rules, investment advisers need to consider amending their compliance materials, fundraising guidelines, and solicitation agreements; review and possibly revise their advisory and investment management agreements with government entities to address proper remedies and exit strategies in the event that a two-year time out is triggered; and review and possibly revise disclosures regarding redemptions of government entity interests.

Restriction on Use of Solicitation Firms

The new rules prohibit the use of third parties, including placement agents, to solicit government entities for investment advisory services unless such third parties are "regulated persons." "Regulated persons" include registered broker-dealers and registered investment advisers that are subject to prohibitions against participating in "pay-to-play" practices and are subject to oversight by the SEC and, in the case of broker-dealers, a national securities association, such as FINRA.6 Advisers compensating placement agents for soliciting government entities must adopt policies and procedures designed to prevent a violation of the rules, including careful vetting of placement agents and ongoing review of whether the placement agent has made political contributions or otherwise conducted activity that would disqualify it as a "regulated person."

Other Provisions

The new rules also prohibit an adviser and its covered associates from soliciting from others or coordinating contributions to an official of a government entity to which the adviser is providing or seeking to provide investment advisory services, or payments to a political party of a state or locality where the adviser is providing or seeking to provide investment advisory services to a government entity.

The new rules do, however, contain de minimis exceptions for individual covered associates who make aggregate contributions of $350 or less per election if they are entitled to vote for the official or candidate and $150 or less per election if they are not entitled to vote for the official or candidate.7 There is an additional exception for contributions by individual covered associates that do not fall within the de minimis exception if the contribution is discovered by the adviser within four months after the contribution is made and the funds are returned to the contributor within 60 days after the adviser learns of the triggering contribution. This exception can be used only a limited number of times per calendar year (three times for investment advisers with more than 50 employees performing investment advisory functions and twice for smaller investment advisers)8 and can never be used more than once for the same covered associate. An investment adviser would also be able to apply to the SEC for an order to exempt it from the two-year compensation ban under certain circumstances, including where the adviser has a compliance plan in effect, discovers a triggering contribution after it has been made, and takes all available steps to cause the return of the contribution, and where the imposition of the prohibition is unnecessary to achieve the intended purposes of the rule.

Lastly, there will be new recordkeeping requirements imposed upon investment advisers covered by the new rules. Such advisers will need to make and keep records of contributions made by them and their covered associates to government officials and state and local political parties and to political action committees, as well as a list of all third-party solicitors used. As a result of the recently enacted Wall Street Reform and Consumer Protection Act, more advisers to private funds may now be required to register as investment advisers and will be subject to these recordkeeping requirements.

Effective Date

The rules are effective September 13, 2010, but provide for a six-month transition period for investment advisers to establish compliance programs. Accordingly, investment advisers must be in compliance with the new rules by March 14, 2011, except that investment advisers have until September 13, 2011, to comply with the rules prohibiting the use of third-party solicitation agents that are not "regulated persons" (with the broker-dealer exception being effective only if FINRA, as expected, adopts similar "pay-to-play" prohibitions prior to such date) and the related recordkeeping requirements. Investment advisers to registered investment companies that are covered investment pools will also have until September 13, 2011, to comply with the new rules. Investment advisers with government clients, if they have not already done so, should begin establishing "pay-to-play" compliance programs as soon as possible.


1.The full release of the final rules is available at http://www.sec.gov/rules/final/2010/ia-3043.pdf .

2.The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act will make Section 203(b)(3) unavailable to many investment advisers.

3.Under the final rules, an adviser to a registered investment company is subject to the two-year ban only if the registered investment company is selected as an investment option for a participant-directed government investment plan, such as a 403(b) plan, 457 plan, or 529 plan, regardless of whether the registered investment company's shares are registered under the Securities Act and whether government entities own shares of the investment company.

4."Executive officers" include the president; any vice president in charge of a principal business unit, division, or function; and any other officer or person who performs a policy-making function.

5.The proposed rules had a look-back period of two years for all individuals, regardless of whether they solicited clients.

6.The proposed rules banned the use of any third-party solicitors.

7.The proposed rules provided an exception of $250 per election if the contributor was entitled to vote for the candidate and no exception if not entitled to vote for the candidate.

8.The proposed rules provided this exception to all investment advisers, regardless of size, only twice per 12-month period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions