SEC-registered investment advisers are taking a closer look at their compliance policies and procedures following Donald Trump’s selection of Mike Pence as Vice President. “Why?” you may ask. It’s because Mike Pence is the current state governor of Indiana and is thus subject to the “pay-to-play rule”. Let me explain.
SEC’s Pay-to-Play Rule
On June 30, 2010, the SEC adopted SEC Rule 206(4)-5, the “pay-to-play rule”, to address the unethical pay-to-play practices of investment advisers. The rule has the effect of restricting or limiting political contributions to an “official” of a “government entity.”
What Is a “Government Entity”?
“Government entity” means any State or political subdivision of a State, including:
- Any agency, authority, or instrumentality of the State or political subdivision;
- A pool of assets sponsored or established by the State or political subdivision or any agency, authority or instrumentality thereof, including, but not limited to a “defined benefit plan” as defined in section 414(j) of the Internal Revenue Code (26 U.S.C. 414(j)), or a State general fund;
- A plan or program of a government entity; and
- Officers, agents, or employees of the State or political subdivision or any agency, authority or instrumentality thereof, acting in their official capacity.
Who Is an “Official”?
“Official” means any person (including any election committee for the person) who was, at the time of the contribution, an incumbent, candidate or successful candidate for elective office of a government entity, if the office:
- Is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity; or
- Has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity.
Is Mike Pence an “Official” of a “Government Entity”?
Yes. As governor of Indiana, Mike Pence appoints the trustees of the state’s pension system. Therefore, he is indeed an official of a government entity for purposes of the pay-to-play rule.
Are Contributions to Trump and Pence Subject to the Pay-to-Play Rule?
Yes. Now that Pence is on the Republican ticket, contributions to Trump or Pence (or one of their election committees) are subject to the pay-to-play rule.
Concluding Thoughts
Now is a good time for investment advisers to re-examine their pay-to-play policies and procedures. It’s also a good time to deliver training to those individuals who must comply with them.