Contributor: Ragini Pathak
The Securities and Exchange Commission recently passed the new “pay-to-play” rule under the Investment Advisers Act of 1940. With this new rule, the SEC aims to level the playing field: Investment advisers can no longer “pay to play” with governmental bodies that are involved in awarding contracts for the management of public pension funds and other investments.
But what does this mean for compliance professionals of advisory businesses?
Whether required to register with the SEC, or not – this rule will affect virtually all investment advisers, and many of their employees. Three key prohibitions advisors should take into consideration are:
- Firstly, the rule prohibits investment advisers from providing advisory services as compensation for two years. This goes into effect March 2011;
- Secondly, the rule prohibits investment advisors and its covered associates from soliciting a political contribution to such an influential government official or candidate or to a political party of a state or locality where the investment adviser provides (or seeks to provide) advisory services to a government plan. This goes into effect March 2011; and
- Thirdly, the rule prohibits investment advisers from paying third parties to solicit government clients on behalf of the investment adviser. This goes into effect September 2011.
And finally, the rule contains a catch-all that prohibits acts done indirectly, which if done directly, would result in a violation of the rule (such as funneling contributions through an investment adviser’s attorneys, spouses or affiliated companies).
What steps should investment advisers take to address these new requirements?
If you are in the compliance department of an advisory business, you will need to revise your compliance policies and procedures to identify the covered executives and employees from time to time, through initial and annual certification processes. You will need to have a pre-clearance process in place for political contributions. Additionally the compliance officers should be tracking outgoing contributions to candidates, campaign, political organizations, PACs etc. Lastly, SEC has communicated record keeping requirements which need to be in place to satisfy the rule.
Although the industry is still in the early stages of evaluating the impact this new rule will have on its activities, one thing we all know for certain is that federal regulation of pay-to-play is here to stay. At SunGard, we have established a working user group with customers from various segments in the industry in order to understand how the regulatory rule will affect their businesses and how our solutions can help support the requirements and related reporting requirements in an automated fashion.
Are you a compliance officer whose organization is affected by this new pay-to-play rule? If so, have you begun discussions internally around how these proposed changes may affect your business?