More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
The Securities and Exchange Commission (SEC) approved a new rule on Wednesday, June 29, to curtail what's called "pay-to-play" practices by investment advisors, in which advisors make campaign contributions to elected officials to win lucrative contracts to manage public pension plans and similar government investment accounts.
The SEC says the new rule includes "prohibitions intended to capture not only direct political contributions by investment advisers, but also other ways that advisers may engage in pay to play arrangements."
In her comments before adopting the rule, SEC Chairman Mary Schapiro said that "the selection of investment advisers to manage public plans should be based on the best interests of the plans and their beneficiaries, not kickbacks and favors." These new rules, she said, "will help level the playing field, allowing advisers of all sizes to compete for government contracts based on investment skill and quality of service."
Schapiro said that "pay to play can also favor large advisers over smaller competitors, reward political connections rather than management skill, and--as a number of recent enforcement cases have shown--pave the way to outright fraud and corruption."
The SEC says the new rule has three key elements:
- It prohibits an investment advisor from providing advisory services for compensation--either directly or through a pooled investment vehicle--for two years, if the advisor or certain of its executives or employees make a political contribution to an elected official who is in a position to influence the selection of the advisor.
- It prohibits an advisory firm and certain executives and employees from soliciting or coordinating campaign contributions from others--a practice referred to as "bundling"--for an elected official who is in a position to influence the selection of the adviser. It also prohibits solicitation and coordination of payments to political parties in the state or locality where the adviser is seeking business.
- It prohibits an advisor from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser, unless that third party is an SEC-registered investment advisor or broker/dealer subject to similar pay to play restrictions.