As the 2024 U.S. Presidential election approaches, investment advisers need to be acutely aware of the implications of the Advisers Act “Pay-to-Play” Rule (Rule 206(4)-5) considering recent developments in the race. With Tim Walz being announced as Vice President Kamala Harris’s running mate for the upcoming Presidential election, this may impact investment advisers due to the Pay-to-Play Rule.
Why This Matters
Governor Walz, in his capacity as governor of Minnesota, is considered an “official” under the Pay-to-Play Rule with respect to the Minnesota State Board of Investment. This board manages assets for several plans, including:
– Minnesota State Retirement System
– Minnesota Teachers Retirement Association
– Minnesota Public Employees Retirement Association
As a result, political contributions to or fundraising for the Harris-Walz campaign by investment advisers or their “covered associates” may now trigger the Pay-to-Play Rule.
Understanding the Pay-to-Play Rule
The Pay-to-Play Rule affects investment advisers that provide or seek to provide investment advisory services to state and local government entities. This includes both direct services (e.g., through separately managed accounts) and indirect services through “covered investment pools” (e.g., mutual funds, private equity funds, venture capital funds, and collective investment trusts).
What You Need to Know
1. Two-Year Ban: If a contribution is made by the advisory firm, it may not receive compensation for providing advisory services to a government entity for a two-year period.
2. Covered Associates: An adviser’s “covered associates” and controlled PACs cannot make contributions over a de minimis amount ($350 for those eligible to vote, $150 for those who aren’t) without triggering the compensation ban.
3. Look-Back Provision: When hiring new employees or promoting current ones to covered associate positions, advisers must review the individual’s political contributions over the past two years.
4. Non-Monetary Contributions: Donating time is generally not considered a “contribution” if the adviser didn’t solicit the effort and company resources aren’t used.
Implications for Investment Advisers
In response to the Harris-Walz ticket and the Pay-to-Play Rule, investment advisers must take proactive steps to ensure compliance. A thorough review and potential update of existing policies
regarding political contributions by covered personnel is essential. This is particularly crucial for firms advising Minnesota plans or managing funds with Minnesota plan investors.
Given the sensitivity of contributions to the Harris-Walz campaign under the Pay-to-Play Rule, advisers should exercise heightened caution. When in doubt about a contribution’s permissibility, consulting with experienced legal counsel is strongly recommended to prevent inadvertent violations and potential financial penalties.
Advisers should also be mindful that the Pay-to-Play Rule is not the only relevant regulation. A comprehensive compliance strategy should consider other applicable state and federal rules from bodies such as FINRA, CFTC, MSRB, and SEC to ensure full adherence to the complex regulatory landscape governing investment advisory services and political contributions.
Past Pay-To-Play Incidents
A similar situation occurred in the 2016 presidential election when John Kasich, then Governor of Ohio, ran for the Republican nomination. A senior executive at a large investment adviser made a $2,700 contribution to Kasich’s campaign while the firm had investments by the Ohio pension plan, triggering a lengthy process with the SEC.
The intersection of politics and investment advisory services requires careful navigation. As the 2024 election approaches, investment advisers must remain vigilant about their political contributions and those of their covered associates to avoid inadvertent violations of the Pay-to-Play Rule, which could result in severe financial consequences.
Stay informed, review your policies, and when in doubt, seek expert advice to ensure compliance with these complex regulations. To read more on Pay-To-Play, click here.
