SEC Pay to Play Rule

The SEC enacted its Pay-to-Play Rule to make sure political campaign contributions have no bearing on who receives financial advisory contracts granted by state and local governments. IFAPAC has made procedural changes to ensure that the federal PAC is not affected.

Sharing your IFAPAC contribution with both your state IFAPAC and your federal IFAPAC is in the best interests of our advocacy program. Accordingly, it is imperative that you take action to make sure your contribution is shared with your state PAC – if your company and/or broker-dealer permits the contribution sharing – by completing an IFAPAC Directive.

NAIFA Member Directive for Use of IFAPAC Funds

Complete Your IFAPAC Directive Online
Printable IFAPAC Directive

Additional Information and Resources:

Does Your Compliance Officer Understand the SEC’s Pay to Play Rule?

To continue NAIFA’s tradition of an active volunteer leadership and strong, effective advocacy, IFAPAC has designed the SUMMARY OF NAIFA MEMBER PAC ACTIVITIES to help your compliance office(s) better understand the structure of IFAPAC to allow for political contributions as well as to better define the scope of the political activities in which IFAPAC volunteers engage. 
 

Questions and Answers on the SEC’s “Pay-to-Play” Rule

General Information

Q. What is the Pay-to-Play Rule?

A. The Pay-to-Play Rule is a regulation issued by the SEC to limit the influence of political contributions by investment advisers and certain other persons (known as “covered associates”) in the awarding of advisory contracts by state and local governments. The Rule has three key components:
1. Prohibition on Political Contributions – The Rule prohibits SEC-registered investment advisers and certain advisers exempt from SEC registration (an “SEC Adviser”) from receiving compensation for investment advisory services provided to a state or local government investment plan or program for two years following a contribution by the SEC Adviser, its “covered associates,” or a PAC controlled by either the SEC Adviser or a “covered associate,” to “covered” state and local officials.
a.    “Covered associate” includes senior officials of the SEC Adviser and employees who solicit state or local government entities for advisory business on behalf of the SEC Adviser.
b.    “Covered official” includes state and local officials with influence over the selection of the government investment plan’s investment adviser.
The Rule also prohibits an SEC Adviser from receiving compensation for advisory services provided to a state or local government investment plan or program for two years following a request for contributions to such officials by the Adviser, a “covered associate” or controlled PAC.
2. Placement-Agent Ban – The Rule prohibits SEC Advisers from using third parties to solicit government business unless the third-party solicitor is a regulated person subject to comparable Pay-to-Play restrictions; and
3. Recordkeeping Requirements – The Rule requires that SEC Advisers with state or local government clients maintain records of political contributions made by the SEC Adviser and its “covered associates.”
 
Q. How can the Pay-to-Play Rule impact me?

A. Generally, if neither you nor the company with which you are associated is registered with the SEC as an investment adviser, the Pay-to-Play Rule should not apply to you. If you are registered with the SEC, as an investment advisor or an investment advisor representative, or if you are a “covered associate” of an investment adviser registered with the SEC, the Rule will limit the adviser’s ability to receive compensation for providing advisory services to state or local governments if you contribute to certain “covered officials” with influence over the selection of the government entity’s investment adviser.

Q. What does that have to do with my contributions to NAIFA’s PAC?

A. The Rule states that contributions to a PAC could be considered “indirect” contributions to “covered officials” if the contributor knows or should know that the PAC would contribute to “covered officials.” If the PAC does indeed contribute to a “covered official,” the contributor and his/her investment adviser could be subject to the Rule’s restrictions and requirements.
 
Q. It seems that I am not covered by the Rule. Is there anything else I should be aware of?

A. Yes. Many companies have implemented compliance policies that are stricter than the Rule’s requirements, by considering a wider group of their employees and contractors to be “covered associates.” (For example, a number of companies consider all of their IARs to be “covered associates,” even though this is not required under the Rule.) You are encouraged to consult with your company’s compliance department for any specific limitations or requirements before making any political contributions.

Q. Should we start our own state PAC?

A. You already have one! There is no need to start another one. Starting another state PAC will not exempt your members from possible coverage under the Rule.

Q. Why doesn’t the portion of the SEC’s own FAQ (reproduced below) resolve many of the issues for NAIFA members?

Q: If an adviser subject to the Pay-to-Play Rule, or one of the adviser’s covered associates, makes a contribution to a political party, PAC or other committee or organization, but not to an official, could the adviser still be subject to a two-year time out under Rule 206(4)-5(a)(1)?

A: A contribution to a political party, PAC or other committee or organization would not trigger a two-year time out under Rule 206(4)-5(a)(1), unless it is a means to do indirectly what the Rule prohibits if done directly (for example, the contribution is earmarked or known to be provided for the benefit of a particular political official) (see footnote 154 of the Adopting Release). We note, however, that the Pay-to-Play Rule prohibits advisers and their covered associates from coordinating or soliciting any person (including a non-natural person) or PAC to make any payment to a political party of a state or locality where the investment adviser is providing or seeking to provide investment advisory services to a government entity (see Rule 206(4)-5(a)(2)(ii)).

A. Even though a contribution to a PAC is not, in and of itself, automatically considered to be a prohibited contribution under the Rule, the above FAQ excerpt indicates that contributions to PACs might be considered impermissible if they indirectly benefit a “covered official.” Additionally, this FAQ does not mention that the SEC’s Adopting Release imposes an obligation on all advisers and their “covered associates” to inquire how any funds contributed to PACs would be used. This “duty to inquire” gives the SEC a much broader mandate to pull contributions within the scope of the Rule. This is why many company and broker/dealer compliance departments will permit contributions to PACs, but will not permit contributions to PACs that are earmarked for a particular candidate.

Questions Regarding "Covered Officials"

Q. In our state, legislators have nothing to do with deciding who gets a government contract or appointing someone who decides who gets a government contract. Therefore, isn’t our state IFAPAC exempt from the SEC Pay-to-Play Rule?

A. Even if your state IFAPAC is not covered by the Rule, because your elected officials do not influence the awarding of government advisory contracts, you must keep in mind that it is the company and broker/dealer compliance departments that are largely setting the terms under which their field forces can participate in political giving. NAIFA cannot risk jeopardizing member livelihoods by suggesting that members can freely give to IFAPAC because NAIFA members must adhere to requirements set by their compliance departments.

Q. How does our state PAC determine who is a “covered official” so our PAC might be able to avoid conflicting with the Rule by simply refraining from contributing to those officials?

A. Unfortunately, there is no easy answer here since “covered officials” are determined on a state-by-state level. Each of the 50 states (to say nothing of individual municipalities within those states) has different procedures for choosing investment advisers, and has different officials involved in making these determinations. For example, in one state investment adviser contracts may be awarded by a single official appointed by the governor, in which case only that official and the governor would be covered officials. Other states, however, might have a more elaborate nomination and confirmation process involving a panel of elected officials (state treasurers, state comptrollers, state legislators, etc.) and, therefore, have a larger group of officials covered by the Rule. Thus, there is no way for NAIFA to provide “one size fits all” guidance to members and state associations on this issue. Furthermore, company and broker/dealer compliance departments are dictating the terms under which their field forces can participate in political giving.

Q. In my state "Financial Advisory Contracts" are not awarded by politicians, they are awarded by departments and department heads that do not run for office but are appointed. Is NAIFA working on or do they intend to exempt states where no amount of political contributions is going to influence what a department or department head decides? NAIFA, the SEC and company compliance departments surely are aware that some states have safeguards where PAC contributions do not influence Financial Advisory Contracts and I would ask that our state be exempted from this ruling and our PAC contributions be divided as they have always been.
 
A. Just because the direct decision-makers on advisory contracts in your state are not elected officials does not mean that your state PAC need not concern itself with the Pay-to-Play Rule. As stated in the SEC’s Adopting Release, the Rule is “triggered by contributions not only to elected officials who have legal authority to hire the adviser, but also to elected officials (such as persons with appointment authority) who can influence the hiring of the adviser” because “a person appointed by an elected official is likely to be subject to that official’s influences and recommendations.” The appointment process can differ from state-to-state, but elected officials with appointment authority could include the governor, chief financial officer, legislators or other elected officials.  Furthermore, NAIFA members must be sure to comply not only with the SEC Rule, but also with the compliance procedures that their companies have adopted in response to the Rule. As a result, it is imperative that NAIFA members check with their company compliance departments before making PAC contributions. Company compliance policies regarding the Pay-to-Play Rule vary quite a bit, and NAIFA cannot monitor what instructions every company has given to its particular field force. To date, NAIFA has not seen any company compliance policies on the Rule that are state-specific. Your best opportunity is to get all of your IFAPAC contributors to check the “state share” box on the IFAPAC Directive (if they are permitted to do so by their company or broker/dealer compliance departments) as soon as possible. NAIFA members must be the ones responsible for managing their own IFAPAC Directives, especially since they have the most to lose if they inadvertently make impermissible political contributions.

Q. Besides contributions to “covered official” campaigns, state party committees and state PACs, are there other types of contributions that are also covered by the SEC Rule?

A. Yes. A contribution is defined to include a gift, subscription, loan, advance, deposit of money, or anything of value made for the purpose of influencing a federal, state, or local election, including any payments for debts incurred in such an election. It also includes transition or inaugural expenses incurred by a successful candidate for state or local office.

Q. The legislators have "advise and consent" re: the governor's appointees, but do not sit in committee with him prior to the appointments of covered officials, so they would seem to be somewhere between the two hypothetical scenarios mentioned in the FAQ. I'd like a second/third opinion, if I can get it...because if "advice and consent" constitutes "covered," we won't be able to contribute to anybody!

A. Your question concerns how to disburse the old, pre-March 14 funds in your state IFAPAC. (You will not have to worry about identifying who is or is not a “covered official” with the post-April 18, 2011 funds, since NAIFA’s Directive process will allow funds to be given to any candidate and still be in compliance with the Rule.) Unfortunately, NAIFA cannot determine who is a “covered official” in your state and the SEC has declined to do so. If determining who is a “covered official” becomes too burdensome, we suggest you consider one of the other “old money” distribution methods mentioned in the “PAC Administration Questions” section of this document.