More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
I recently sat down with my partner, Paul Lieberman, who has considerable expertise on the new Advisors Act Rule 206(4)-5 regarding political contributions by investment advisors. Paul advised that the effective date of the rule for SEC-registered investment advisors is March 14, 2011. State registered advisors are currently exempt from the political contribution rule. The rule is not applicable to federal elections. An overview of the Rule is set forth below:
“Government Entity” is any state or political subdivision, including agencies, authorities, instrumentalities, public pension funds, collective funds, 403(b), 457 and 529 participant directed plans.
“Official” includes any person, including an election committee, who is an incumbent, candidate, or winner of elective office, or who has the ability to influence the outcome in hiring an advisor, or authority to appoint someone who can hire the advisor.
“Political Contribution” is anything given by the advisor to influence the election of a candidate or the selection of the advisor to perform a role for the government entity.
Exceptions from the compensation ban permit contributions under $250 per election where a covered associate is entitled to vote. A covered associate may make a $150 per election contribution even where not entitled to vote without violating the prohibition rules.
Advisor diligence in reviewing contributions is rewarded: Return of contributions less than $350 if they are discovered within four months of the date of contribution and returned within 60 days of the advisor’s discovery will not result in a two-year ban from receiving compensation for advisory services.
Two-Year Ban for Rule Violation
Except for the limited donations referenced above, an advisor, senior executive or any other personnel (“covered associate”) involved in soliciting investments from government entities, and who makes contributions to candidates or officials to influence the hiring of the advisor by the government client, may not provide advisory services for compensation to the government client for two years. Making or agreeing to make payments to any person to solicit a government entity on behalf of the advisor is prohibited, unless such person is an SEC-registered advisor or broker-dealer and a member of a registered national securities association that has adopted rules addressing pay-to-play and political contributions. The advisor can provide investment advisory services to the government entity without receiving any compensation. Prohibited contributions made by a former covered associate in the past are not forgiven with that person’s resignation or termination. Under the rule, a violation by a former employee could potentially result in a two-year ban!
Policies and Procedures
Advisors are required to adopt and implement policies and procedures governing their compliance with the rule. The firm’s policies and procedures should track contributions by covered associates; engagement by the advisor of third parties who may solicit government entities; and maintain records of compliance which would be subject to SEC examination. Procedures should include delegation of tracking employees’ political contributions to the CCO. Policies and procedures could prohibit all covered persons from making political contributions to candidates and parties as a blanket prohibitory rule. The issue here is whether broad prohibition is enforceable. It is prudent to utilize a “pre-approval process” for the CCO to screen political contribution requests. “Preapproval process” should document donor, recipient, amount, and grant of approval or rejection by the CCO. Corroborating documents should be maintained to provide to the SEC during an examination.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker-dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at firstname.lastname@example.org.