Federal Register

Friday,

August 7, 2009

Part IV

Securities and
Exchange
Commission

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17 CFR Part 275
Political Contributions by Certain
Investment Advisers; Proposed Rule

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Federal Register / Vol. 74, No. 151 / Friday, August 7, 2009 / Proposed Rules

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 275
[Release No. IA–2910; File No. S7–18–09]
RIN 3235–AK39

Political Contributions by Certain
Investment Advisers
Securities and Exchange

Commission.

ACTION: Proposed rule.

AGENCY:

The Securities and Exchange
Commission is proposing for comment a
new rule under the Investment Advisers
Act of 1940 that would prohibit an
investment adviser from providing
advisory services for compensation to a
government client for two years after the
adviser or certain of its executives or
employees make a contribution to
certain elected officials or candidates.
The new rule would also prohibit an
adviser from providing or agreeing to
provide, directly or indirectly, payment
to any third party for a solicitation of
advisory business from any government
entity on behalf of such adviser.
Additionally, the new rule would
prevent an adviser from soliciting from
others, or coordinating, contributions to
certain elected officials or candidates or
payments to political parties where the
adviser is providing or seeking
government business. The Commission
also is proposing rule amendments that
would require a registered adviser to
maintain certain records of the political
contributions made by the adviser or
certain of its executives or employees.
The new rule and rule amendments
would address ‘‘pay to play’’ practices
by investment advisers.
DATES: Comments should be received on
or before October 6, 2009.
ADDRESSES: Comments may be
submitted by any of the following
methods:

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SUMMARY:

Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to [email protected]. Please include File
Number S7–18–09 on the subject line;
or
• Use the Federal eRulemaking Portal
(http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.

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All submissions should refer to File
Number S7–18–09. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(http://www.sec.gov/rules/
proposed.shtml). Comments are also
available for public inspection and
copying in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549 on official
business days between the hours of 10
a.m. and 3 p.m. All comments received
will be posted without change; we do
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT:
Melissa A. Roverts, Attorney-Adviser,
Matthew N. Goldin, Senior Counsel,
Daniel S. Kahl, Branch Chief, or Sarah
A. Bessin, Assistant Director, at (202)
551–6787 or [email protected], Office of
Investment Adviser Regulation, Division
of Investment Management, U.S.
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–8549.
SUPPLEMENTARY INFORMATION: The
Commission is requesting public
comment on proposed rule 206(4)–5 [17
CFR 275.206(4)–5] and proposed
amendments to rules 204–2 [17 CFR
275.204–2] and 206(4)–3 [17 CFR
275.206(4)–3] under the Investment
Advisers Act of 1940 [15 U.S.C. 80b]
(‘‘Advisers Act’’ or ‘‘Act’’).
I. Background and Introduction
II. Discussion
A. Rule 206(4)–5: ‘‘Pay to Play’’

Restrictions

1. Advisers Subject to the Rule
2. Relationship with MSRB Rules;

Alternative Approaches

3. Pay to Play Restrictions
(a) Two-Year ‘‘Time Out’’ for Contributors
(1) Prohibition on Compensation
(2) Officials of a Government Entity
(3) Contributions
(4) Covered Associates
(5) ‘‘Look Back’’
(6) Exception for De Minimis Contributions
(7) Exception for Certain Returned

Contributions

(b) Ban on Using Third Parties To Solicit
Government Business
(c) Restrictions on Soliciting and

Coordinating Contributions and

Payments

(d) Direct and Indirect Contributions or
Solicitations
(e) Investment Pools
(1) Application of the Rule to Pooled

Investment Vehicles

(2) Covered Investment Pools
(3) Applying the Compensation Limit to
Covered Investment Pools

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(f) Exemptions
B. Recordkeeping
C. Amendment to Cash Solicitation Rule
D. Transition Period
E. General Request for Comment
III. Cost/Benefit Analysis
A. Benefits
B. Costs
C. Request for Comment
IV. Paperwork Reduction Act
A. Rule 204–2
B. Rule 206(4)–3
C. Request for Comment
V. Initial Regulatory Flexibility Analysis
A. Reasons for Proposed Action
B. Objectives and Legal Basis
C. Small Entities Subject to Rule
D. Reporting, Recordkeeping, and Other
Compliance Requirements
E. Duplicative, Overlapping, or Conflicting
Federal Rules
F. Significant Alternatives
G. Solicitation of Comments
VI. Effects on Competition, Efficiency and
Capital Formation
VII. Consideration of Impact on the Economy
VIII. Statutory Authority

I. Background and Introduction
Investment advisers provide a wide
variety of advisory services to State and
local governments.1 Advisers manage
public monies that fund pension plans
and a number of other important public
programs, including transportation,
children’s programs, arts programs,
environmental reclamation, and
financial aid for education. In addition,
advisers provide risk management,2
asset allocation,3 financial planning 4
and cash management services; 5 assist
in investing proceeds from bond
1 See Sofia Anastopoulos, An Introduction to
Investment Advisers for State and Local
Governments (2d ed. 2007); Werner Paul Zorn,
Public Employee Retirement Systems and Benefits,
in Local Government Finance, Concepts and
Practices 376 (John E. Peterson and Dennis R.
Strachota, eds., 1st ed. 1991) (discussing the
services investment advisers provide for public
funds).
2 See Robert A. Fippinger, The Securities Law of
Public Finance 669 (2d ed. 2004).
3 See, e.g., John H. Ilkiw, Investment Policies,
Processes and Problems in U.S. Public Sector
Pension Plans: Some Observations and Solutions
from a Practitioner, in Public Pension Fund
Management: Governance, Accountability and
Investment Policies (Alberto R. Musalem and
Robert J. Palacios, eds. 2004). See also Barry B.
Burr, The New $100 Billion Club, Pens. & Inv. (May
4, 1998), at 1.
4 See Cal. Ed. Code § 22303.5 (2008) (requiring
teachers’ retirement system to offer retirement
planning services to beneficiaries); CalSTRS
Counseling and Workshops, available at
http://www.calstrs.com/
Counseling%20and%20Workshops/index.aspx.
Other funds also offer financial planning services to
their beneficiaries. See, e.g., CalPERS Launches
Online Education Classes, U.S. States News (Mar.
3, 2008).
5 See Government Finance Officers Association,
An Introduction to External Money Management for
Public Cash Managers 5 (1991).

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offerings; 6 help State and local
governments find and evaluate other
advisers that manage public funds
(‘‘pension consultants’’); 7 and provide
other types of services.8
Most of the public funds managed by
investment advisers fund State and
municipal pension plans.9 These
pension plans have over $2.2 trillion of
assets and represent one-third of all U.S.
pension assets.10 They are among the
largest and most active institutional
investors in the United States.11 The
management of these funds significantly
affects publicly held companies 12 and
6 See In the Matter of O’Brien Partners, Inc.,
Investment Advisers Act Release No. 1772 (Oct. 27,
1998) (settled enforcement action in which
financial advisor was deemed subject to the
Advisers Act for rendering advice to municipal
securities issuers ‘‘concerning their investment of
bond proceeds in securities, including [nongovernment securities], and was compensated for
that advice’’).
7 In addition to assisting public funds in selecting
investment advisers, pension consultants may also
provide advice to State and local governments on
such things as designing investment objectives, or
recommending specific securities or investments for
the fund. Pension consultants may be investment
advisers subject to the Advisers Act. See
Applicability of the Investment Advisers Act of
1940 to Financial Planners, Pension Consultants,
and Other Persons Who Provide Others with
Investment Advice as a Component of Other
Financial Services, Investment Advisers Act
Release No. 1092 (Oct. 8, 1987) [52 FR 38400 (Oct.
16, 1987)] (‘‘Release 1092’’).
8 For example, public funds may retain advisers
to perform custodial services. See, e.g., Public
Employee Retirement Systems, supra note 1, at 376–
77.
9 For this reason, in this Release, we use the term
‘‘public pension plan’’ interchangeably with
‘‘government client’’ and ‘‘government entity’’;
however, our proposed rule would apply broadly to
investment advisory activities for government
clients, such as those mentioned here in this
Background and Introduction, regardless of whether
they are retirement funds. For a discussion of how
the proposed rule would apply with respect to
investment programs or plans sponsored or
established by government entities, such as
‘‘qualified tuition plans’’ authorized by Section 529
of the Internal Revenue Code [26 U.S.C. 529] and
retirement plans authorized by Section 403(b) or
457 of the Internal Revenue Code [26 U.S.C. 403(b)
or 457], see infra section II.A.3(e) of this Release.
10 Board of Governors of the Federal Reserve
System, Flow of Funds Accounts of the United
States, Flows and Outstandings, First Quarter 2009
(June 11, 2009) (at table L.119). Since 2002, total
financial assets of public pension funds have grown
by 13% Id.
11 According to a recent survey, seven of the ten
largest pension funds were sponsored by State and
municipal governments. The Top 200 Pension
Funds/Sponsors, Pens. & Inv. (Sept. 30, 2008),
available at http://www.pionline.com/article/
20090126/CHART/901209995.
12 See Stephen J. Choi & Jill E. Fisch, On Beyond
CalPERS: Survey Evidence on the Developing Role
of Public Pension Funds in Corporate Governance,
61 Vanderbilt L.Rev. 315 (Mar. 2008) (noting,
‘‘Collectively, public pension funds have the
potential to be a powerful shareholder force, and
the example of CalPERS and its activities have
spurred many to advocate greater institutional
activism.’’).

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the securities markets.13 But most
significantly, their management affects
taxpayers and the beneficiaries of these
funds, including the millions of present
and future State and municipal
retirees 14 who rely on the funds for
their pensions and other benefits.15
Public pension plan assets are held,
administered and managed by elected
officials who often are responsible for
selecting investment advisers to manage
the funds they oversee. Pay to play
practices undermine the fairness of the
selection process when advisers seeking
to do business with the governments of
States and municipalities make political
contributions to elected officials or
candidates, hoping to influence the
selection process. In other cases,
political contributions may be solicited
from advisers, or it is simply understood
that only contributors will be
considered for selection. Contributions,
in this circumstance, may not always
guarantee an award of business to the
contributor, but the failure to contribute
will guarantee that another is selected.
Hence the term ‘‘pay to play.’’
Elected officials who allow political
contributions to play a role in the
management of these assets violate the
public trust by rewarding those who
make political contributions. Similarly,
investment advisers that seek to
influence the award of advisory
contracts by public entities, by making
or soliciting political contributions to
those officials who are in a position to
influence the awards, compromise their
fiduciary obligations. Pay to play
practices can distort the process by
which investment advisers are selected
and can harm advisers’ public pension
plan clients, and the pension plan
beneficiaries, which may receive
inferior advisory services and pay
higher fees because, for instance,
advisers must recoup contributions, or
because contract negotiations are not
handled on an arm’s-length basis. Pay to
13 Federal Reserve reports indicate that, of the
$2.2 trillion in non-Federal government plans, $1.1
trillion are invested in corporate equities. Flow of
Funds Accounts of the United States, supra note 10
(at table L.119).
14 See Paul Zorn, 1997 Survey of State and Local
Government Employee Retirement Systems 61
(1997) (‘‘[t]he investment of plan assets is an issue
of immense consequence to plan participants,
taxpayers, and to the economy as a whole’’ as a low
rate of return will require additional funding from
the sponsoring government, which ‘‘can place an
additional strain on the sponsoring government and
may require tax increases’’).
15 The most current census data reports that
public pension funds have 18.6 million
beneficiaries. 2007 Census of Governments, U.S.
Bureau of Census, Number and Membership of
State and Local Government Employee-Retirement
Systems by State: 2006–2007 (2007) (at Table 5),
available at http://www.census.gov/govs/retire/
2007ret05.html.

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play practices also may manipulate the
market for advisory services by creating
an uneven playing field among
investment advisers. These practices
also may hurt smaller advisers that
cannot afford the required
contributions. We believe that advisers’
participation in pay to play practices is
inconsistent with the high standards of
ethical conduct required of them under
the Advisers Act.
Pay to play practices are rarely
explicit: participants do not typically let
it be publicly known that contributions
or payments are made or accepted for
the purpose of influencing the selection
of an adviser. As one court noted, in its
decision upholding one of the rules on
which the proposed rule is modeled,
‘‘[w]hile the risk of corruption is
obvious and substantial, actors in this
field are presumably shrewd enough to
structure their relations rather
indirectly.’’ 16 Pay to play practices may
take a variety of forms, including an
adviser’s direct contributions to
government officials, an adviser’s
solicitation of third parties to make
contributions or payments to
government officials or political parties
in the State or locality where the adviser
seeks to provide services, or an adviser’s
payments to third parties to solicit (or
as a condition of obtaining) government
business. As a result, the full extent of
pay to play practice remains hidden and
is often hard to prove.
The rule we are proposing today is
modeled on rules G–37 and G–38 of the
Municipal Securities Rulemaking Board
(‘‘MSRB’’),17 which address pay to play
practices in the municipal securities
markets.18 The Commission approved
rule G–37 in 1994, after concluding that
pay to play practices harm municipal
securities markets.19 MSRB rule G–37
16 Blount v. SEC, 61 F.3d 938, 945 (DC Cir. 1995),
cert. denied, 517 U.S. 1119 (1996).
17 In 1999 the Commission proposed a similar
rule, which also would have been codified as rule
206(4)–5 under the Advisers Act, had it been
adopted. See Political Contributions by Certain
Investment Advisers, Investment Advisers Act
Release No. 1812 (Aug. 4, 1999) [64 FR 43556 (Aug.
10, 1999)] (‘‘1999 Proposing Release’’). The
Commission also proposed amendments in 1999 to
rule 204–2 [17 CFR 275.204–2] under the Advisers
Act, which would have required advisers with
government clients to keep certain records relating
to the 1999 proposed rule. See id., at section II.B.
We are not re-proposing that rule or those rule
amendments today; we are withdrawing our 1999
proposal and proposing a new rule 206(4)-5 as well
as new amendments to rule 204–2.
18 MSRB rule G–37 and G–38 are available on the
MSRB’s Web site at http://www.msrb.org/msrb1/
rules/ruleg37.htm and http://www.msrb.org/msrb1/
rules/ruleg38.htm, respectively.
19 See In the Matter of Self-Regulatory
Organizations; Order Approving Proposed Rule
Change by the Municipal Securities Rulemaking

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prohibits a broker-dealer from engaging
in municipal securities business with a
municipal issuer for two years after
making a political contribution to an
elected official of the issuer who can
influence the selection of the brokerdealer.20 The rule also prohibits a
broker-dealer from providing or seeking
to provide underwriting services to a
government if the firm or any of its
‘‘municipal finance professionals’’
solicit contributions for a candidate or
an elected official of that government, or
if they solicit payments to political
parties where the firm is providing or
seeking to provide services to a
government client.21 MSRB rule G–38
prohibits municipal securities dealers
from making payments to consultants
for soliciting municipal securities
business.22 We believe that MSRB rules
G–37 and G–38 have been successful in
addressing pay to play practices in the
municipal securities market.23
Board Relating to Political Contributions and
Prohibitions on Municipal Securities Business and
Notice of Filing and Order Approving on an
Accelerated Basis Amendment No. 1 Relating to the
Effective Date and Contribution Date of the
Proposed Rule, Exchange Act Release No. 33868
(Apr. 7, 1994) [59 FR 17621 (Apr. 13, 1994)]
(‘‘MSRB Rule G–37 Approval Order’’), at sections
V.A.1 and 2. In approving MSRB rule G–37, we
concluded that pay to play practices may harm the
municipal markets by fostering a selection process
that excludes those firms that do not make
contributions, causes less qualified underwriters to
be retained, and undermines equitable practices in
the municipal securities industry. Id. at section V.
20 MSRB rule G–37(b). Shortly after MSRB rule
G–37 became effective, a municipal securities
dealer challenged it as an infringement on the
constitutional rights of municipal securities
professionals. A Federal appeals court upheld the
constitutionality of MSRB rule G–37, finding that
the rule is narrowly tailored to serve a compelling
government interest. See Blount, supra note 16.
21 MSRB rule G–37(c). A ‘‘municipal finance
professional’’ is an associated person of a brokerdealer who is ‘‘primarily engaged’’ in municipal
securities activities, who solicits municipal
securities business on behalf of a broker-dealer,
who supervises associated persons primarily
engaged in municipal securities activities ‘‘up
through and including’’ the chief executive officer
of the firm (or person performing similar functions),
or who is a member of the firm’s executive or
management committee (or person performing
similar functions). MSRB rule G–37(g)(iv).
22 MSRB rule G–38(a).
23 Others, including the MSRB, agree. See, e.g.,
MSRB Notice 2009–35, Request for Comment: Rule
G–37 on Political Contributions and Prohibitions on
Municipal Securities Business—Bond Ballot
Campaign Committee Contributions (June 22, 2009)
(‘‘The MSRB believes the rule has provided
substantial benefits to the industry and the
investing public by greatly reducing the direct
connection between political contributions given to
issuer officials and the awarding of municipal
securities business to dealers, thereby effectively
eliminating pay-to-play practices in the new issue
municipal securities market.’’ [footnote omitted]);
MSRB Notice 2003–32, Notice Concerning Indirect
Rule Violations: Rules G–37 and G–38 (Aug. 6,
2003) (‘‘The impact of Rules G–37 and G–38 has
been very positive. The rules have altered the
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Following the adoption of MSRB rule
G–37, we were increasingly concerned
that the very success of the rule may
have caused pay to play practices to
migrate to an area not covered by the
MSRB rules—the management of public
pension plans.24 Public pension plans
are particularly vulnerable to pay to
play practices. Management decisions
over these investment pools, some of
which are quite large, are typically
made by one or more trustees who are
(or are appointed by) elected officials.
And the elected officials that govern the
funds are also often involved, directly or
indirectly, in selecting advisers to
manage the public pension funds’
assets. These officials may have the sole
authority to select advisers,25 may be
members of a governing board that
selects advisers,26 or may appoint some
securities dealers and opened discussion about the
political contribution practices of the entire
municipal industry.’’); Letter from Darrick L. Hills
and Linda L. Rittenhouse of the CFA Institute to Jill
C. Finder, Asst. Gen. Counsel of the MSRB, dated
Oct. 19, 2001, available at http://
www.cfainstitute.org/centre/topics/comment/2001/
01msrb_ruleg37.html (stating, ‘‘We generally
believe that the existing [MSRB] pay-to-play
prohibitions have been effective in stemming
practices that compromise the integrity of the
[municipal securities] market by using political
contributions to curry favor with politicians in
positions of influence.’’); Cmte. on Cap. Mkts. Reg.,
Interim Report of the Cmte. on Cap. Mkts. Reg.
(Nov. 30, 2006), available at http://
www.capmktsreg.org/pdfs/
11.30Committee_Interim_ReportREV2.pdf (stating,
upon describing MSRB Rule G–37 and the 2005
amendments to MSRB Rule G–38, ‘‘Taken together,
the MSRB’s rules have largely put an end to the old
‘‘pay to play’’ practices in municipal
underwriting.’’).
24 1999 Proposing Release, supra note 17, at
section I (‘‘We have become particularly concerned
about the possibility that the adoption of rule G–
37 has resulted in a shift of pay to play practices
to [the management of public pension funds] as
political contributions by broker-dealers are
curtailed.’’). See also Bill Krueger, Money Managers
Giving to Boyles, News & Observer (May 2, 1996),
at A1 (noting that rule G–37 ‘‘dried up’’ a
contribution source for a State treasurer, ‘‘so now
he is getting campaign contributions from a group
[investment advisers] that is not subject to [rule G–
37]’’); Gerri Willis, Filling Carl’s War Chest:
Comptroller Getting Thousands From State’s Money
Managers, Crain’s N.Y. Bus. (Sept. 16, 1996), at 1
(noting the observation of a securities executive that
‘‘[b]ecause of the SEC’s crackdown on the pay to
play nature of the muni bond business, the game
has shifted to asset management and brokerage’’).
25 See, e.g., 2 NYCRR § 320.2 (placement of State
and local government retirement systems assets
(valued at $109 billion as of Mar. 2009) is under the
sole custodianship of the New York State
Comptroller).
26 See, e.g., S.C. Code Ann. §§ 9–1–20, 1–11–10
(2008) (board consists of all elected officials); Cal.
Gov’t Code § 20090 (Deering 2008) (board consists
of some elected officials, some appointed members,
and some representatives of interest groups chosen
by the members of those groups); Md. Code Ann.,
State Pers. & Pens. § 21–104 (2008) (pension board
consists of some elected officials, some appointed
members, and some representatives of interest
groups chosen by the members of those groups).

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or all of the board members who make
the selection.27
In response to these concerns, in 1999
we proposed a rule under the Advisers
Act, modeled substantially on MSRB
rule G–37, that was designed to prevent
advisers from participating in pay to
play practices affecting the management
of public pension plans.28 In particular,
the 1999 rule proposal would have
prohibited an adviser from receiving
compensation for the provision of
advisory services for two years after the
advisory firm or any of its partners,
executive officers or solicitors, directly
or indirectly, made a contribution to an
elected official who (or a candidate for
an elected office that) has the ability to
influence the selection of the adviser.29
Comments on the proposal were mixed,
and some commenters that objected
asserted that pay to play was not a
problem in the management of public
funds.30
Since then, it has become increasingly
clear that pay to play is a significant
problem in the management of public
funds by investment advisers. In recent
years, we and criminal authorities have
brought a number of actions charging
investment advisers with participating
in pay to play schemes. We recently
brought a civil action in Federal court
charging former New York State
officials, as well as a ‘‘placement agent,’’
with engaging in a fraudulent scheme to
extract kickbacks from investment
advisers seeking to manage assets of the
New York State Common Retirement
Fund.31 Investment advisers allegedly
paid sham ‘‘placement agent’’ fees,
portions of which were funneled to
public officials, as a means of obtaining
public pension fund investments in the
27 See, e.g., Ariz. Rev. Stat. Ann. § 38–713 (2008)
(governor appoints all nine members); Hawaii Rev.
Stat. § 88–24 (2008) (governor appoints three of
eight members); Idaho Code § 59–1304 (2008)
(governor appoints all five members).
28 See 1999 Proposing Release, supra note 17.
29 See id., at section II.A.1.
30 We received 59 comment letters on our 1999
proposal. Commenters representing beneficiaries
and public pension plans expressed concern about
pay to play practices and generally favored our
proposed rule. State government officials and
investment advisers generally opposed the rule.
State government officials generally argued that
there was no demonstrated need for the proposed
rule and that State laws are adequate to address any
concerns. Most advisers submitting comments
opposed the rule’s breadth and complained that the
consequences of violating the rule were too harsh;
some denied the existence of the problem we
sought to address. Comment letters on our 1999
proposal and a summary of comments prepared by
our staff are available in our Public Reference Room
in File No. S7–19–99. Comment letters we received
electronically are also available at http://
www.sec.gov/rules/proposed/s71999.shtml.
31 See SEC v. Henry Morris, et al., Litigation
Release No. 21036 (May 12, 2009).

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Federal Register / Vol. 74, No. 151 / Friday, August 7, 2009 / Proposed Rules
funds those advisers managed.32
Another settled administrative action
involved an investment adviser who
allegedly paid kickbacks in return for
investment advisory business awarded
by the New Mexico State treasurer’s
office.33 In addition, we brought two
separate cases against the former
treasurer of the State of Connecticut and
various other parties in which we
alleged that the former treasurer
awarded State pension fund
investments to private equity fund
managers in exchange for fees paid to
the former treasurer’s friends and
political associates.34 Criminal
authorities have in recent years also
brought cases in New York,35 New
Mexico,36 Illinois,37 Ohio,38
32 See

id.
In the Matter of Kent D. Nelson, Investment
Advisers Act Release No. 2765 (Aug. 1, 2008);
Initial Decision Release No. 371 (Feb. 24, 2009);
Investment Advisers Act Release No. 2868 (Apr. 17,
2009) (in which investment adviser was barred from
association with any broker, dealer or investment
adviser).
34 See SEC v. Paul J. Silvester et al., Litigation
Release No. 16759 (Oct. 10, 2000); Litigation
Release No. 20027 (Mar. 2, 2007); Litigation Release
No. 19583 (Mar. 1, 2006); Litigation Release No.
18461 (Nov. 17, 2003); Litigation Release No. 16834
(Dec. 19, 2000); SEC v. William A. DiBella et al.,
Litigation Release No. 20498 (Mar. 14, 2008). See
also U.S. v. Ben F. Andrews, Litigation Release No.
19566 (Feb. 15, 2006); In the Matter of Thayer
Capital Partners, TC Equity Partners IV, L.L.C., TC
Management Partners IV, L.L.C., and Frederick V.
Malek, Investment Advisers Act Release No. 2276
(Aug. 12, 2004); In the Matter of Frederick W.
McCarthy, Investment Advisers Act Release No.
2218 (Mar. 5, 2004); In the Matter of Lisa A.
Thiesfield, Investment Advisers Act Release No.
2186 (Oct. 29, 2003).
35 See New York v. Henry ‘‘Hank’’ Morris and
David Loglisci, Indictment No. 25/2009 (NY Mar.
19, 2009) (alleging that the deputy comptroller and
a ‘‘placement agent’’ engaged in enterprise
corruption and State securities fraud for selling
access to management of public funds in return for
kickbacks and other payments for personal and
political gain).
36 See U.S. v. Montoya, Criminal No. 05–2050 JP
(D.N.M. Nov. 8, 2005) (the former treasurer of New
Mexico pleaded guilty); U.S. v. Kent Nelson,
Criminal Information No. 05–2021 JP, (D.N.M.
2007) (defendant pleaded guilty to one count of
mail fraud); U.S. v. Vigil, 523 F. 3d 1258 (10th Cir.
2008) (affirming the conviction for attempted
extortion of the former treasurer of New Mexico’s
successor for requiring that a friend be hired by an
investment manager at a high salary in return for
the former treasurer’s willingness to accept a
proposal from the manager for government
business).
37 See Jeff Coen et al., State’s Ultimate Insider
Indicted, Chicago Tribune (Oct. 31, 2008)
(describing the thirteenth indictment in an Illinois
pay to play probe).
38 See Reginald Fields, Four More Convicted in
Pension Case: Ex-Board Members Took Gifts from
Firm, Cleveland Plain Dealer (Sept. 20, 2006)
(addressing pay to play activities of members of the
Ohio Teachers Retirement System).

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33 See

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Connecticut,39 and Florida,40 charging
defendants with the same or similar
conduct. In addition, there are a
growing number of reports about pay to
play activities involving investment
advisers in other jurisdictions.41 These
cases involving investment advisers, as
well as others involving broker-dealers,
may reflect more widespread
involvement by securities professionals
in pay to play activities.42
39 See U.S. v. Joseph P. Ganim, 2007 U.S. App.
LEXIS 29367 (2d Cir. 2007) (affirming the district
court’s decision to uphold an indictment of the
former mayor of Bridgeport, Connecticut, in
connection with his conviction for, among other
things, requiring payment from an investment
adviser in return for city business); U.S. v. Triumph
Capital Group, et al, No. 300CR217 JBA (D. Conn.
filed Oct. 10, 2000) (the former treasurer, along with
certain others, pleaded guilty—while others were
ultimately convicted).
40 See United States v. Poirier, 321 F.3d 1024
(11th Cir.), cert. denied sub nom., deVegter v.
United States, 540 U.S. 874 (2003) (partner at
Lazard Freres & Co., a municipal services firm, was
found liable for conspiracy and wire fraud for
fraudulently paying $40,000 through an
intermediary to Fulton County’s independent
financial adviser to secure an assurance that Lazard
would be selected for the Fulton County
underwriting contract).
41 See, e.g., David Zahniser, California; Private
Finances, Public Role Intersect; Former Pension
Board Member Had Consulted for a Firm that
Sought Work with the Panel on Which He Served,
Los Angeles Times (May 9, 2009) (discussing
alleged pay to play activities relating to a former
member of the Los Angeles Fire and Police
Pensions Board); Rick Rothacker & David Ingram,
Moore Defends Pension System, Charlotte Observer
(Feb. 25, 2007) (discussing alleged pay to play
activities involving North Carolina’s State
treasurer); Len Boselovic, Pensions, Politics and
Consultants Make for Unsavory Bedfellows,
Pittsburgh Post-Gazzette (Aug. 13, 2006) and Jeffrey
Cohan, Fund Managers ‘Pay to Play’: Six Firms
Managing County’s Pension Investments Gave to
Board Members’ Campaigns, Pittsburgh PostGazzette (Feb. 22, 2001) (discussing alleged pay to
play activities relating to the Allegheny County
Retirement Board); Mary Williams Walsh, Political
Money Said to Sway Pension Investments, N.Y.
Times (Feb. 10, 2004) (regarding a 2002 audit by
then-new controller of Luzerne County,
Pennsylvania alleging pay to play activities among
various parties involved with county pension
funds).
42 For example, we recently brought a case against
the mayor of Birmingham, Alabama, and other
defendants, alleging that while the mayor served as
president of the County Commission of Jefferson
County, Alabama, he accepted undisclosed cash
and benefits through a lobbyist as a conduit from
the chairman of a Montgomery, Alabama-based
broker-dealer, in return for awarding municipal
bond business and swap transactions to the brokerdealer. See SEC v. Larry P. Langford et al.,
Litigation Release No. 20545 (Apr. 30, 2008).
Several years earlier, we brought an enforcement
action against the former treasurer of the City of
Chicago, to whom two registered representatives
were alleged to have made secret cash payments to
obtain a share of the city’s lucrative securities
investments. See SEC v. Miriam Santos et al.,
Litigation Release No. 17839 (Nov. 14, 2002);
Litigation Release No. 19269 (June 14, 2005). We
also brought enforcement actions against the
registered representatives allegedly involved in the
scheme. See SEC v. Miriam Santos, Peter J. Burns,
and Michael F. Hollendoner, Litigation Release Nos.

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39843

Recognizing the harm pay to play
practices cause in the management of
public funds, several States, counties,
localities, and even individual public
pension funds, have undertaken to
prohibit or regulate these practices in
recent years.43 And, most recently, in
response to pay to play scandals that
have emerged in their jurisdictions,
public officials with oversight of public
pension funds have written to us
expressing support for a Commission
rule to prohibit investment advisers
from participating in pay to play
practices, including prohibiting the use
by advisers of placement agents (or
other types of consultants) to help
secure government business.44
These developments indicate that
investment advisers may be playing an
increasing role in pay to play activities.
We therefore believe it is time for us to
act with respect to investment advisers
who may engage in such activities.45
19270 and 19271 (June 14, 2005). In addition, we
brought a case against a broker-dealer, two of its
officers and a city official for participating in a
scheme to defraud the City of Atlanta in connection
with the purchase and sale of certain securities
while providing substantial, undisclosed monetary
benefits to the city’s investment officer who was
authorized to select a broker-dealer for the
transactions. See In the Matter of Pryor, McClendon,
Counts & Co., Inc. et al., Securities Act Release No.
7673 (Apr. 29, 1999); Securities Act Release No.
8062 (Feb. 6, 2002); Exchange Act Release No.
48095 (June 26, 2003); Securities Act Release No.
8245 (June 26, 2003); Securities Act Release No.
8246 (June 26, 2003).
43 For an example of a State statutory restriction
on pay to play activities, see Ill. Pub. Act 095–0971
(2008). For an example of a restriction pursuant to
a State constitutional amendment, see Colo. Const.
amend. LIV (2008). For an example of a county
restriction, see Resolution No. 08–397 (May 8, 2008)
Special Pay to Play Restrictions for Professional
Service Contracts and Extraordinary Unspecifiable
Service Contracts, Monmouth County, NJ. For an
example of a city restriction, see Ordinance 3663
(July 2, 2007), Prohibition of Redevelopment with
Certain Contributors, Township of Franklin, NJ. For
an example of a particular local government agency
restriction, see Cal. Pub. Util. Code § 130051.20
(2008), Contributions to Authority Members, Los
Angeles County Metropolitan Transportation
Authority. For an example of a particular public
pension fund restriction, see Prohibitions on
Campaign Contributions, California State Teachers’
Retirement System, 5 CCR § 24010 (2009).
44 See, e.g., Letter from New York City
Comptroller William C. Thompson, Jr., to Securities
and Exchange Commission Chairman Mary L.
Schapiro, dated May 12, 2009, available at http://
www.comptroller.nyc.gov/press/pdfs/05-13-09_SECletter.pdf, at 2; Letter from New York State
Comptroller Thomas P. DiNapoli to Securities and
Exchange Commission Chairman Mary L. Schapiro,
dated May 7, 2009, available at http://
www.osc.state.ny.us/press/releases/may09/
sec050709.pdf, at 1–2.
45 Another reason we believe it is important for
us to act is because pay to play practices are
characterized by what the Blount court called a
‘‘collective action problem [that tends] to make the
misallocation of resources persist.’’ Blount, supra
note 16 at 945–46. Elected officials that accept
contributions from State contractors may believe

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Section 206(1) of the Advisers Act
prohibits an investment adviser from
‘‘employ[ing] any device, scheme, or
artifice to defraud any client or
prospective client.’’ 46 Section 206(2)
prohibits advisers from engaging in
‘‘any transaction, practice or course of
business which operates as a fraud or
deceit on any client or prospective
client.’’ 47 The Supreme Court has
construed section 206 as establishing a
Federal fiduciary standard governing
the conduct of advisers.48
Investment advisers that seek to
influence the award of advisory
contracts by public pension plans, by
making political contributions to or
soliciting them for those officials who
are in a position to influence the
awards, compromise their fiduciary
obligations to the public pension
plans.49 In making such contributions,
the adviser hopes to benefit from
officials that ‘‘award the contracts on
the basis of benefit to their campaign
chests rather than to the governmental
they have an advantage over their opponents that
forswear the contributions, and firms that do not
‘‘pay’’ may fear they will lose government business
to those that do. See id. See generally Mancur
Olson, The Logic of Collective Action; Public Goods
and the Theory of Groups 44 (17th ed. 1998) (group
members that seek to maximize their individual
personal welfare will not act to advance common
objectives absent coercion or other incentive). See
also Paul Jacobs, Donations to Pension Officials
Scrutinized; Politics: Connell, Fong Say They Are
not Influenced by Contributions from Firms Doing
Business with State Systems, L.A. Times, Aug. 21,
1997, at A41 (fund contractor quoted as saying, ‘‘[i]f
you don’t contribute, you’re subject to the concern
that others might make contributions’’).
46 15 U.S.C. 80b–6(1).

47 15 U.S.C. 80b–6(2).

48 Transamerica Mortgage Advisors, Inc. v. Lewis,

444 U.S. 11, 17 (1979); SEC v. Capital Gains
Research Bureau, Inc., 375 U.S. 180, 191–192
(1963).
49 See 1999 Proposing Release, supra note 17, at
3. As a fiduciary, an adviser has a duty to deal fairly
with clients and prospective clients, and must make
full disclosure of any material conflict or potential
conflict. See, e.g., Capital Gains Research Bureau,
375 U.S. at 189, 191–192; Release 1092, supra note
7. Most public pension plans establish procedures
for hiring investment advisers, the purpose of
which is to obtain the best possible management
services. When an adviser makes political
contributions for the purpose of influencing the
selection of the adviser to advise a public pension
plan, the adviser seeks to interfere with the meritbased selection process established by its
prospective clients—the public pension plan. The
contribution creates a conflict of interest between
the adviser (whose interest is in being selected) and
its prospective client (whose interest is in obtaining
the best possible management services). Even if the
conflict was acknowledged and disclosed by the
adviser, disclosure may not be effective in
protecting the plan from harm. Disclosure to the
trustee or board of trustees may be futile in
protecting the plan since the trustees may be
similarly conflicted, having accepted the
contribution. Disclosure to beneficiaries may also
be inadequate as they may be unable to act on the
disclosure—beneficiaries generally cannot fire the
adviser or find another pension plan.

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entity.’’ 50 If pay to play is a factor in the
selection process, the public pension
plan can be harmed in several ways.
The most qualified adviser may not be
selected, potentially leading to inferior
management, diminished returns or
greater losses. The pension plan may
pay higher fees because advisers must
recoup the contributions, or because
contract negotiations may not occur on
an arm’s-length basis. The absence of
arm’s-length negotiations may enable
advisers to obtain greater ancillary
benefits, such as ‘‘soft dollars,’’ from the
advisory relationship, which may be
directed for the benefit of the adviser,
potentially at the expense of the pension
plan, thereby using a pension plan asset
for the adviser’s own purposes.51
We believe that play to play is
inconsistent with the high standards of
ethical conduct required of fiduciaries
under the Advisers Act. We have
authority under section 206(4) of the
Act to adopt rules ‘‘reasonably designed
to prevent, such acts, practices, and
courses of business as are fraudulent,
deceptive or manipulative.’’ 52 Congress
gave us this authority to prohibit
‘‘specific evils’’ that the broad anti-fraud
provisions may be incapable of
covering.53 The provision thus permits
the Commission to adopt prophylactic
rules that may prohibit acts that are not
themselves fraudulent.54 As noted
50 See

Blount, supra note 16, at 944–45.
In re Performance Analytics, et al.,
Investment Advisers Act Release No. 2036 (June 17,
2002) (settled enforcement action in which an
investment consultant for a union pension fund
entered into a $100,000 brokerage arrangement with
a soft dollar component in which the investment
consultant would continue to recommend the
investment adviser to the pension fund as long as
the investment adviser sent its trades to one
particular broker-dealer).
52 15 U.S.C. 80b–6(4).
53 S. Rep. No. 1760, 86th Cong., 2d Sess. 4, 8
(1960). The Commission has used this authority to
adopt seven rules addressing abusive advertising
practices, custodial arrangements, the use of
solicitors, required disclosures regarding the
adviser’s financial condition and disciplinary
history, proxy voting, compliance procedures and
practices, and deterring fraud with respect to
pooled investment vehicles. 17 CFR 275.206(4)–1;
275.206(4)–2; 275.206(4)–3; 275.206(4)–4;
275.206(4)–6; 275.206(4)–7; and 275.206(4)–8.
54 Section 206(4) was added to the Advisers Act
in Public Law 86–750, 74 Stat. 885 (1960) at sec.
9. See H.R. Rep. No. 2197, 86th Cong., 2d Sess.
(1960) at 7–8 (‘‘Because of the general language of
section 206 and the absence of express rulemaking
power in that section, there has always been a
question as to the scope of the fraudulent and
deceptive activities which are prohibited and the
extent to which the Commission is limited in this
area by common law concepts of fraud and deceit
* * * [Section 206(4)] would empower the
Commission, by rules and regulations to define, and
prescribe means reasonably designed to prevent,
acts, practices, and courses of business which are
fraudulent, deceptive, or manipulative. This is
comparable to Section 15(c)(2) of the Securities
Exchange Act [15 U.S.C. 78o(c)(2)] which applies to
51 Cf.

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above, pay to play practices are rarely
explicit and often hard to prove, which
makes a prophylactic rule particularly
appropriate.55 We are today proposing
new rule 206(4)–5 under the Advisers
Act designed to eliminate adviser
participation in pay to play practices.
II. Discussion
A. Rule 206(4)–5: ‘‘Pay To Play’’
Restrictions
The rule we are proposing today is
designed to protect public pension
plans from the consequences of pay to
play practices by preventing advisers’
participation in such practices. As a
result, advisers and government officials
may attempt to structure their
transactions in a manner intended to
hide the true purpose of a contribution
or a payment. For that reason, our
proposed pay to play restrictions would
capture not only direct political
contributions by advisers, but also other
ways that advisers may engage in pay to
play arrangements. Rule 206(4)–5 would
accomplish this through three measures.
First, the rule would make it unlawful
for an adviser to receive compensation
for providing advisory services to a
government entity for a two-year period
after the adviser or any of its covered
associates makes a political contribution
to a public official of a government
entity that is in a position to influence
the award of advisory business.56
brokers and dealers.’’). See also S. Rep. No. 1760,
86th Cong., 2d Sess. (1960) at 8 (‘‘This [section
206(4) language] is almost the identical wording of
section 15(c)(2) of the Securities Exchange Act of
1934 in regard to brokers and dealers.’’). The
Supreme Court, in United States v. O’Hagan,
interpreted nearly identical language in section
14(e) of the Securities Exchange Act [15 U.S.C.
78n(e)] as providing the Commission with authority
to adopt rules that are ‘‘definitional and
prophylactic’’ and that may prohibit acts that are
‘‘not themselves fraudulent * * * if the prohibition
is ‘reasonably designed to prevent * * * acts and
practices [that] are fraudulent.’’’ United States v.
O’Hagan, 521 U.S. 642, at 667, 673 (1997). The
wording of the rulemaking authority in section
206(4) remains substantially similar to that of
section 14(e) and section 15(c)(2) of the Securities
Exchange Act. See also Prohibition of Fraud by
Advisers to Certain Pooled Investment Vehicles,
Investment Advisers Act Release No. 2628 (Aug. 3,
2007) [72 FR 44756 (Aug. 9, 2007)] (stating, in
connection with the suggestion by commenters that
section 206(4) provides us authority only to adopt
prophylactic rules that explicitly identify conduct
that would be fraudulent under a particular rule,
‘‘We believe our authority is broader. We do not
believe that the commenters’ suggested approach
would be consistent with the purposes of the
Advisers Act or the protection of investors.’’).
55 Cf. Blount, supra note 16 at 945 (‘‘no smoking
gun is needed where, as here, the conflict of interest
is apparent, the likelihood of stealth great, and the
legislative purpose prophylactic’’).
56 Proposed rule 206(4)–5(a)(1) states: ‘‘As a
means reasonably designed to prevent fraudulent,
deceptive or manipulative acts, practices, or courses
of business within the meaning of section 206(4) of
the Act [15 U.S.C. 80b–6(4)], it shall be unlawful:

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Proposed rule 206(4)–5 would not,
therefore, ban or limit the amount of
political contributions an adviser or its
covered associates could make; rather, it
would impose a two-year ‘‘time out’’ on
conducting compensated advisory
business with a government client after
a contribution is made. This aspect of
the proposed rule is modeled on MSRB
rule G–37 and is consistent with our
1999 proposal.
Second, the rule would prohibit
advisers from paying third parties to
solicit government entities for advisory
business.57 That is, an adviser would be
prohibited from providing or agreeing to
provide, directly or indirectly, payment
to any person who is not a related
person of the adviser for solicitation of
government advisory business on behalf
of such adviser. This aspect of our
proposed rule is modeled on MSRB rule
G–38.58 Third, the rule would also make
it unlawful for an adviser itself or
through any of its covered associates to
solicit or to coordinate contributions for
an official of a government entity to
which the investment adviser is seeking
to provide investment advisory services,
or payments 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. MSRB rule G–37
contains a similar prohibition, as did
our 1999 proposal.59
We recognize that we cannot
anticipate all of the ways advisers and
government officials may structure pay
to play arrangements to attempt to evade
the prohibitions of our proposed rule.
For that reason, we are also proposing
to include a provision that would make
it unlawful for an adviser or any of its
covered associates to do anything
(1) For any investment adviser registered (or
required to be registered) with the Commission, or
unregistered in reliance on the exemption available
under section 203(b)(3) of the Advisers Act [15
U.S.C. 80b–3(b)(3)], to provide investment advisory
services for compensation to a government entity
within two years after a contribution to an official
of the government entity is made by the investment
adviser or any covered associate of the investment
adviser (including a person who becomes a covered
associate within two years after the contribution is
made).’’
57 Proposed rule 206(4)–5(a)(2)(i).
58 MSRB rule G–38 was amended in 2005 to
prohibit municipal securities dealers from paying
third-party solicitors to solicit municipal securities
business. In the Matter of Self-Regulatory
Organizations; Municipal Securities Rulemaking
Board; Order Approving Proposed Rule Change and
Notice of Filing and Order Granting Accelerated
Approval to Amendment No. 1 to the Proposed Rule
Change Relating to Solicitation of Municipal
Securities Business under MSRB Rule G–38,
Exchange Act Release No. 52278 (Aug. 17, 2005) [70
FR 49342 (Aug. 23, 2005)]. Our 1999 proposal did
not include an analogous prohibition.
59 See MSRB rule G–37(c); 1999 Proposing
Release, supra note 17, at section II.A.2.

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indirectly which, if done directly,
would result in a violation of the
proposed rule. Finally, for purposes of
the proposed rule, an investment
adviser to certain pooled investment
vehicles in which a government entity
invests or is solicited to invest would be
treated as though the adviser were
providing or seeking to provide
investment advisory services directly to
the government entity.
Although today’s proposal is similar
to the one we made in 1999, we are
proposing a few critical changes in
response to intervening developments
that we highlight in the discussion
below. We have made these changes to
conform our proposal to measures
undertaken in recent years to curtail pay
to play activities by the MSRB and
various State and local authorities and
to deter circumvention of the
restrictions through the use of thirdparty placement agents or through an
adviser obtaining government clients
indirectly by soliciting investment in
funds it manages.
1. Advisers Subject to the Rule
Proposed rule 206(4)–5 would apply
to any investment adviser registered (or
required to be registered) with the
Commission, or unregistered in reliance
on the exemption available under
section 203(b)(3) of the Advisers Act [15
U.S.C. 80b–3(b)(3)].60 We are including
this category of exempt advisers within
the scope of the rule in order to make
the rule applicable to the many advisers
to private investment companies that
are not registered under the Advisers
Act.61 The rule would not apply,
however, to most small advisers that are
registered with the State securities
authorities,62 and certain other advisers
that are exempt from registration with
60 Proposed rule 206(4)–5(a)(1) and (2). Section
203(b)(3) [15 U.S.C. 80b–3(b)(3)] exempts from
registration any investment adviser that is not
holding itself out to the public as an investment
adviser and had fewer than 15 clients during the
last 12 months.
61 See discussion infra section II.A.3(e).
62 Section 203A of the Advisers Act [15 U.S.C.
80b–3A] prohibits investment advisers with less
than $25 million in assets under management from
registering with the Commission; although we do
not propose to include them within the coverage of
this rule, they remain subject to the Act’s general
anti-fraud authority. See, e.g., Rules Implementing
Amendments to the Investment Advisers Act of
1940, Investment Advisers Act Release No. 1633,
n.154 and accompanying text (May 15, 1997) [62 FR
28112 (May 22, 1997)] (‘‘Both the Commission and
the States will be able to continue bringing
antifraud actions against investment advisers
regardless of whether the investment adviser is
registered with the State or the SEC.’’). See also S.
Rep. No. 293, 104th Cong., 2d Sess. 3–4 (1996)
(‘‘1996 Senate Report’’) at 4.

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39845

us.63 We believe that the rule would
apply to most advisers to public pension
plans.64 We request comment on the
scope of the proposed rule. Should we
apply the rule to State-registered
advisers? Should we limit the rule only
to advisers registered (or required to be
registered) with us? Should we apply
the rule to advisers that are exempt from
registration in reliance on Advisers Act
section 203(b)(3)? We request comment
on whether we should extend the scope
of the rule to apply to advisers exempt
from registering with us pursuant to any
or all of the other categories under
Advisers Act section 203(b). For
example, should we include advisers
exempt from registration pursuant to
any or all of Advisers Act sections
203(b)(1) (intrastate advisers), 203(b)(2)
(advisers with only insurance company
clients), 203(b)(4) (investments advisers
that are charitable organizations),
203(b)(5) (advisers that are plans
described in section 414(e) of the
Internal Revenue Code of 1986 or
certain persons associated with such
plans), or 203(b)(6) (certain commodity
trading advisors)? 65 To the extent that
they are able to have government clients
at all, are any of these advisers likely to
engage in pay to play?
We note that proposed rule 206(4)–5
would regulate the activities of
investment advisers—business
organizations over which we have clear
regulatory authority under the Advisers
Act. The rule would have no effect on
State laws, codes of ethics or other rules
governing the activities of State and
municipal officials or employees of
63 See, e.g, exemption for intrastate investment
advisers under section 203(b)(1) [15 U.S.C. 80b–
3(b)(1)].
64 With the exception of the exemption from
registration provided for by section 203(b)(3) [15
U.S.C. 80b–3(b)(3)], advisers that are exempt from
SEC registration are unlikely to have State or
municipal government clients as providing advisory
services to them would result in the adviser no
longer being eligible for the exemption, e.g., section
203(b)(2) [15 U.S.C. 80b–3(b)(2)] and section
203(b)(4) [15 U.S.C. 80b–3(b)(4)]. Moreover, based
on a review of a sampling of requests for proposals
from State and municipal governments for
investment advisory services, a common
requirement is that the adviser be registered with
the SEC or a State. See, e.g., Request for Information
Vermont Pension Investment Committee—Vermont
Manager Program RFI (Feb. 27, 2009) (stating that
eligible investment advisers must be SEC-registered
with at least $100 million in assets under
management), available at: http://
www.vermonttreasurer.gov/documents/rfp/
20090316_VPICVermontManagerProgram.pdf. It
also is our understanding from discussions with
representatives of the State securities regulators that
a very small percentage of State-registered advisers
have State or municipal government clients.
65 Our 1999 proposed rule would have applied to
all investment advisers not prohibited from
registering with the Commission. See 1999
Proposing Release, supra note 17.

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public pension plans over whom we
have no regulatory jurisdiction.66
2. Relationship With MSRB Rules;
Alternative Approaches

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As discussed above, we modeled
proposed rule 206(4)–5 on MSRB rules
G–37 and G–38, which we believe have
successfully addressed pay to play in
the municipal bond market. This
approach should minimize the
compliance burdens on firms that
would be subject to both rule regimes
because firms that are already subject to
MSRB rules would already have
developed policies and systems for
compliance that could be adapted to
meet investment adviser requirements.
Certain provisions of our proposed rule,
however, are somewhat different in
ways that reflect the different statutory
framework under which the rule would
be adopted and the differences between
municipal underwriting and asset
management. Comment is requested on
whether we should use rules G–37 and
G–38 as the models for proposed rule
206(4)–5.67 If not, are there alternative
models that would be more appropriate?
Are there significant differences in
governments’ selection process for
municipal underwriters and investment
advisers that we have not addressed but
that should be reflected in the rule?
Would our approach adequately protect
public pension plans, their sponsors
and participants against the adverse
effects of pay to play practices?
We understand many advisers have
established restrictions on pay to play
practices in their codes of ethics and
compliance policies. Instead of, or in
addition to, adopting a new rule to
address pay to play practices, should we
amend our code of ethics rule 68 or our
66 A number of commenters in 1999, including
those representing State and local officials, argued
that the rule would be an intrusion on State
sovereignty. We disagree. We have a responsibility
to regulate the activities of investment advisers. Our
objectives in the proposed rule do not relate to
campaign finance, but rather to prohibiting
fraudulent activity by investment advisers. We
believe our proposed rule is appropriately tailored
to those ends.
67 For instance, in 1999, we requested comment
on our use of MSRB rule G–37 as a model, and
several commenters responded that, because of
distinctions between the investment adviser
profession and the municipal securities industry,
we should not follow the approach of MSRB rule
G–37. Some commenters asserted that, unlike
municipal underwriters, advisers’ business
relationships with State and municipal clients are
ongoing and long-term and thus the two-year ban
is much more harsh a consequence. While
municipal underwritings themselves tend to be
episodic, underwriting relationships are often
longstanding. As a result, the rules’ time outs may
have similar effects.
68 Rule 204A–1 under the Advisers Act [17 CFR
275.204A–1].

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compliance rule 69 to require all
registered advisers to adopt policies and
procedures designed to prevent them
from engaging in pay to play
practices? 70 Should we instead, or also,
require an executive officer of each
adviser to certify annually that the
adviser or its covered associates did not
participate in pay to play? Should some
other employee of the adviser, such as
the chief compliance officer, make the
certification?
In 1999, we considered proposing a
different approach to address pay to
play, which would have required an
adviser to disclose information about its
political contributions to officials of
government entities to which it
provided or was seeking to provide
investment advisory services. We
decided not to propose such an
approach at that time because we
thought that disclosure would not be
effective to protect public pension plan
clients.71 Disclosure to a pension plan’s
69 Rule 206(4)–7 under the Advisers Act [17 CFR
275.206(4)–7].
70 Some commenters in 1999 suggested that the
better approach would be to require advisers to
adopt codes of ethics designed to prevent pay to
play practices. The Investment Counsel Association
of America (subsequently renamed the Investment
Advisers Association) submitted to the comment
file relating to our 1999 proposal ‘‘Best Practice
Pay-to-Play Guidelines for Adviser Codes of Ethics,’’
advocating such an approach as an alternative to
our 1999 proposal. See http://www.sec.gov/rules/
proposed/s71999/tittswo2.htm. The ICAA offered
the following three alternative policies on political
contributions, and suggested that advisers should
tailor these policies to fit their respective
circumstances: (1) A contribution ban above a
certain de minimis amount (either with respect to
all political contributions or ones that fall within
certain specified parameters); (2) a pre-clearance
process for contributions; or (3) a disclosure policy
with respect to contributions. At that time, codes of
ethics were voluntary. However, in 2004, the
Commission adopted a requirement that advisers
adopt and implement codes of ethics that include
a standard of conduct that reflects the adviser’s
fiduciary obligations, although the code of ethics
rule does not directly address pay to play practices.
See Advisers Act rule 204A–1 [17 CFR 275.204A–
1]; Investment Adviser Codes of Ethics, Investment
Advisers Act Release No. 2256 (July 2, 2004) [69 FR
41696 (July 9, 2004)]. See also Investment Counsel
Association of America, Report on Pay-to-Play and
the Investment Advisory Profession (May 15, 2000),
available at http://www.investmentadviser.org/
eweb/docs/Publications_News/
PublicDocs_UsefulWebsites/PubDoc/report
(condemning practices by which investment
professionals try to gain access to business through
political contributions, and urging its members to
adopt codes of ethics designed to prevent pay to
play).
71 In response to our 1999 Proposal, some
commenters suggested requiring advisers to
disclose publicly their contributions to State and
local officials. Statutes requiring disclosure of
political contributions are designed to inform voters
about a candidate’s financial supporters; an
informed electorate can then use the information to
vote for or against a candidate. But, as several other
commenters correctly pointed out, our goal is not
campaign finance reform, and how voters might
react to such disclosure is not, for us, the relevant

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trustees might be insufficient because,
in some cases, the trustees would have
received the contributions. Disclosure to
plan beneficiaries also would likely be
insufficient because they are generally
unable to act on the information by
moving their pension assets to a
different plan or reversing adviser hiring
decisions. Moreover, disclosure
requirements may not stop pay to play
practices and can be circumvented.72
Accordingly, we do not believe that
relying on disclosure is sufficient to
address these problematic practices.73
We request comment on whether we
should, nonetheless, consider this
approach, as well as potential
alternative approaches that may be more
effective or less costly.
3. Pay To Play Restrictions
(a) Two-Year ‘‘Time Out’’ for
Contributors
Proposed rule 206(4)–5(a)(1) would
prohibit investment advisers from
providing advice for compensation to a
‘‘government entity’’ 74 within two years
after a ‘‘contribution’’ to an ‘‘official’’ of
the government entity has been made by
the investment adviser or by any of its
‘‘covered associates.’’ 75 We are
proposing that the time out be two years
long because the duration needs to be
sufficiently long to have a deterrent
effect. We recognize, however, that a
longer ban could be overly harsh.76 We
note that MSRB rule G–37 contains a
two-year time out, which appears, based
on the success of the MSRB rules, to
have operated as an effective deterrent
concern. Our primary concern is the protection of
advisory clients and investors who are affected by
pay to play practices whom we have the
responsibility to protect under the Advisers Act.
72 See infra note 158 and accompanying text
regarding swap arrangements that may be used to
circumvent public disclosure.
73 MSRB rule G–37, however, does establish a
reporting and disclosure system for broker-dealers
subject to that rule. MSRB rule G–37(e)(ii).
74 ‘‘Government entity’’ is defined by the
proposed rule as ‘‘any State or political subdivision
of a State, including any agency, authority, or
instrumentality of the State or political subdivision,
a plan, program, or pool of assets sponsored or
established by the State or political subdivision or
any agency, authority or instrumentality thereof;
and officers, agents, or employees of the State or
political subdivision or any agency, authority or
instrumentality thereof, acting in their official
capacity.’’ Proposed rule 206(4)–5(f)(5).
75 Proposed rule 206(4)–5(a)(1).
76 We note that, notwithstanding the proposed
duration of the rule’s ‘‘time out’’—two years—the
reach of the time out is relatively narrow in the
sense that it only prohibits advisers from receiving
compensation for providing advice from the
particular government entities to whose officials
triggering contributions have been made. It does not
limit the adviser from receiving compensation from
other government entities as to which triggering
contributions have not been made.

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in the municipal securities context.77
We request comment on whether two
years is an appropriate length of time.78

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(1) Prohibition on Compensation
Investment advisers making
contributions covered by the proposed
rule would not be prohibited from
providing advisory services to a
government client, even after triggering
the two-year time out. Instead, an
adviser would be prohibited from
receiving compensation for providing
advisory services to the government
client during the time out. This
approach is intended to avoid requiring
an adviser to abandon a government
client after the adviser or any of its
covered associates makes a political
contribution covered by the rule. An
adviser subject to the prohibition would
likely, at a minimum, be obligated to
provide (uncompensated) advisory
services for a reasonable period of
time 79 until the government client finds
a successor to ensure its withdrawal did
not harm the client, or the contractual
arrangement between the adviser and
the government client might obligate the
adviser to continue to perform under the
contract at no fee.80 We request
77 See supra note 24. Several commenters in 1999
suggested that, because advisers’ business
relationships with State and municipal clients are
ongoing and long-term, as compared to the
relationships between municipal underwriters and
their clients, the two-year ban is much more harsh
a consequence. As we note above, while municipal
underwritings themselves tend to be episodic,
underwriting relationships are often longstanding,
which may result in the rules’ time outs having
similar effects. See supra note 67.
78 Some commenters in 1999 objected to two
years as being too long a period of time (arguing,
for example, that because changing investment
advisers can be so disruptive to a pension fund that
such a fund would be extremely unlikely to return
to an adviser after a ‘‘time out,’’ thereby rendering
the two-year ban tantamount to a permanent one),
whereas others suggested that the period be longer
or that it track the remainder of the term of the
government official to whom the contribution was
made.
79 Some commenters in 1999 indicated concern
that government entities that retain advisers who
trigger the two-year time out—and would therefore
be unable to receive compensation for two years—
might try to delay an adviser’s ability to withdraw
in order to enjoy the benefits of investment advice
for free. We believe that while an adviser’s fiduciary
obligations require it to act in the best interests of
its clients, they do not require it to provide
uncompensated advice indefinitely because it is
prohibited from receiving compensation under the
rule—rather, the adviser may need to continue to
provide advice for only a reasonable period of time.
80 An investment adviser that violates the rule
may be required, under its fiduciary duties, to
continue providing advisory services to the public
pension plan, for a reasonable period of time, until
the plan obtains a new adviser. See Temporary
Exemption for Certain Investment Advisers,
Investment Advisers Act Release No. 1846 (Nov. 29,
1999) [64 FR 68019, 68024 (Dec. 6, 1999)]
(describing an investment adviser’s fiduciary duties
to an investment company in the case of an
assignment of the advisory contract).

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comment on our proposed approach. Is
there another approach that would
cause less disruption to the government
client?
(2) Officials of a Government Entity
The prohibitions in the rule would be
triggered by a contribution to an
‘‘official’’ of a ‘‘government entity.’’
Government entities under the proposed
rule include all State and local
governments, their agencies and
instrumentalities, and all public
pension plans and other collective
government funds.81 An official would
include 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
selection of an investment adviser or
has authority to appoint any person who
is directly or indirectly responsible for
or can influence the outcome of the
selection of an investment adviser.82
Generally, executive or legislative
officers who hold a position with
influence over the hiring of an
investment adviser are government
officials under the proposed rule.83
These definitions are substantively the
same as those in MSRB rule G–37.84
We request comment on our proposed
definition of ‘‘official.’’ For instance, a
candidate for Federal office may be an
‘‘official’’ under the rule, just as such a
We note that the two-year time out in MSRB rule
G–37 operates to prohibit a broker, dealer or
municipal securities dealer from engaging in all
municipal securities business; it does not
distinguish between providing compensated and
uncompensated services. MSRB Rule G–37(b)(i).
See also MSRB Rule G–37 Interpretive Notices,
Interpretation of Prohibition on Municipal
Securities Business Pursuant to Rule G–37 (Feb. 21,
1997) (determining that once a dealer enters into
contract and a subsequent contribution results in a
prohibition, the dealer ‘‘should not be allowed to
continue with the municipal securities business,
subject to an orderly transition to another entity to
perform such business’’). But see infra note 189
(discussing MSRB’s approach to transitions in the
context of pre-existing engagements relating to
municipal fund securities, such as interests in
Section 529 plans).
81 See supra note 74.
82 Proposed rule 206(4)–5(f)(6). The two-year time
out would be triggered by contributions, not only
to elected officials who have legal authority to hire
or select the adviser, but to elected officials (such
as persons with appointment authority) who can
influence the hiring of the adviser. A person who
serves at the will of an elected official is likely to
be subject to that official’s influences and
recommendations. We note that MSRB rule G–37
also applies to elected officials empowered to
appoint persons with the authority to select which
broker-dealers will receive government business.
83 It is the scope of authority of the particular
office of an official, not the influence actually
exercised by the individual, that would determine
whether the individual has influence over the
awarding of an investment advisory contract under
the definition.
84 See MSRB rule G–37(g)(ii) and (g)(vi).

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39847

person may be under MSRB rule G–37,
not because of the office he or she is
running for, but as a result of an office
he or she currently holds.85 As a
preliminary matter, we do not believe
that an incumbent State or local official
should be excluded from the definition
solely because he or she is running for
Federal office, but we request comment
on this aspect of the proposed rule.
Should such a candidate for Federal
office be excluded? 86 Are there other
persons to whom an adviser or its
covered associates might make a
contribution to influence the selection
of that adviser? For example, should we
expand the rule’s prohibitions to apply
expressly in cases where an adviser or
a covered associate gives a contribution
to others closely associated with the
official—such as an official’s political
action committee (‘‘PAC’’), his or her
inauguration or transition committee,87
a local or State political party that
provides assistance to such official,88 or
85 Proposed rule 206(4)–5(f)(6), in relevant part,
defines ‘‘official’’ as any person * * * who was, at
the time of the contribution, an incumbent,
candidate or successful candidate for elective office
of a government entity * * *, ’’ and a ‘‘government
entity,’’ in relevant part, as ‘‘any State or political
subdivision of a State’’ (emphasis added).
Accordingly, any person, including a person
running for Federal office, who meets the definition
of ‘‘official’’ would be covered under the rule. See
also MSRB rule G–37(g)(ii) and (g)(vi) (defining
‘‘issuer’’ and ‘‘official of an issuer’’, respectively);
MSRB Qs & As, Question IV.2 and IV.3, available
at http://www.msrb.org/msrb1/rules/QAG372003.htm (explaining how G–37 applies to
candidates for Federal office).
86 Some 1999 commenters urged that
contributions to candidates for Federal office be
excluded from the rule, while others agreed these
contributions should be covered. In particular,
certain commenters asserted that this aspect of the
proposed rule would have a disparate effect on
candidates for Federal office because State and local
politicians would experience limitations on their
ability to receive Federal campaign contributions
while their opponents would be subject to no such
limitations. These commenters also claimed the
rule would have little effect because if the
candidate for Federal office was successful, he or
she would quickly lose his or her ability to
influence the selection of an investment adviser at
the State or local level. Other commenters thought
it appropriate that the rule apply to candidates for
Federal office. As noted above, our emphasis in the
proposed rule remains on the current office of an
elected official and his or her ability to affect the
selection of an investment adviser, regardless of
what outside positions that official may seek.
87 A contribution to an official, as opposed to a
committee, for inauguration or transition expenses
would be a contribution under the proposed rule.
See infra note 93 and accompanying text. This
approach is consistent with the approach in MSRB
rule G–37. We are proposing a similar approach for
reasons of regulatory consistency; nonetheless, we
have included this request for comment on whether
we should include contributions to such
committees.
88 Under the proposed rule, such contributions or
payments by an adviser (or its covered associates)
would only trigger the rule’s provisions to the
extent that an adviser was trying to do indirectly

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a foundation or other charitable
institution associated with such
official? 89
(3) Contributions

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The proposed rule covers
‘‘contributions’’ made by an investment
adviser and its covered associates. The
proposed rule uses the same definition
of contribution as MSRB rule G–37.90 A
contribution would generally be any
gift, subscription, loan, advance, deposit
of money, or anything of value 91 made
for the purpose of influencing an
election for a Federal, State or local
office, including any payments for debts
incurred in such an election.92 It would
also include transition or inaugural
what it is prohibited from doing directly. See infra
section II.A.3(d) of this Release. In contrast, the
prohibition on advisers soliciting contributions or
payments from others in proposed rule 206(4)–
5(a)(2)(ii) would expressly include payments 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 infra section II.A.3(c) of this
Release. Further, our proposed amendments to rule
204–2 (in particular, rule 204–2(a)(18)(i)(D)) would
expressly include a requirement that an adviser
subject to the rule make and keep records of, among
other things, all direct or indirect contributions or
payments made by the investment adviser or any
of its covered associates to a political party of a
State or political subdivision thereof. Our proposed
approach to these provisions generally tracks the
MSRB approach.
89 For a discussion of associated recordkeeping
requirements, see infra note 206 and accompanying
text.
90 MSRB rule G–37(g)(i).
91 Commenters to our 1999 proposal raised
concerns that volunteer campaign work by advisory
employees could trigger the proposed rule’s time
out provision. We would not consider volunteer
campaign work by an individual to be a
contribution, provided the adviser has not solicited
the individual’s efforts and the adviser’s resources,
such as office space, are not used. Cf. MSRB Qs &
As, Question II.12, available at http://
www.msrb.org/msrb1/rules/QAG-372003.htm.
92 Proposed rule 206(4)–5(f)(1). Commenters in
1999 expressed concern that the scope of our
proposed rule was too broad. These commenters,
many of whom represented investment advisers,
raised concerns that the rule as proposed could
unnecessarily restrict their employees from making
any political contributions. Some commenters
questioned the constitutionality of our proposal,
arguing that the proposed rule would violate First
Amendment protections for free speech. In Blount,
supra note 16, a Federal appeals court upheld a
First Amendment challenge to MSRB rule G–37.
The Court left open the question of the appropriate
level of scrutiny to be applied, but concluded that
the rule satisfied even a strict scrutiny test. We
believe that the rule we are proposing today
similarly is consistent with the First Amendment.
Absent provisions to limit the application of the
rule’s prohibitions, it could result in frequent
inadvertent violations that would carry harsh
consequences for advisers. Accordingly, we refined
the categories of persons whose personal political
contributions would be covered under the rule and
provided for a self-executing exception that should
prevent many inadvertent violations. We believe
these changes will address many of the
commenters’ concerns about the rule we proposed
in 1999.

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expenses incurred by a successful
candidate for State or local office.93 We
request comment on our proposed
definition of ‘‘contribution.’’ 94 Are
there additional items of value that, as
with transitional or inaugural expenses,
should be specified in and covered by
the definition? For instance, should we
include the expenses an investment
adviser would incur in organizing or
sponsoring a conference at which a
government official is invited to attend
or is a speaker? 95 If so, how should our
rule distinguish legitimate conferences
or meetings from those that are more
akin to fundraising events? 96 Are there
items that should be excluded from the
definition?
(4) Covered Associates
Contributions made to influence the
selection process are typically made not
by the firm itself, but by officers and
employees of the firm who have a direct
economic stake in the business
relationship with the government client.
For this reason, MSRB rule G–37 limits
its prohibitions to contributions made
by ‘‘municipal finance professionals’’
employed by a broker-dealer. No group
analogous to municipal finance
professionals, however, exists within
the typical investment advisory firm. In
many of the pay to play enforcement
93 Proposed rule 206(4)–5(f)(1)(iii). Transition or
inaugural expenses of a successful candidate for
Federal office are not included. Contributions to
political parties are not specifically covered by the
definition and thus would not trigger the proposed
rule’s two-year timeout unless they are a means to
do indirectly what the proposed rule would
prohibit if done directly (for example, the
contributions are earmarked or known to be
provided for the benefit of a particular political
official). See proposed rule 206(4)–5(d).
Contributions to State and local political parties are,
however, subject to the proposed rule’s
recordkeeping requirements. See infra section II.B
and proposed rule 204–2(a)(18)(i)(D).
94 Commenters in 1999 urged us to adopt a rule
prohibiting only political contributions intended to
influence, or made for the purpose of influencing,
adviser selection. This approach, they argued,
would eliminate the risk that innocent campaign
contributions would trigger application of the ‘‘twoyear time out.’’ Political contributions are made
ostensibly to support a candidate, however, and the
burden of proving a different intent is very difficult
absent unusual evidence. As one court noted,
‘‘actors in this field are presumably shrewd enough
to structure their relations rather indirectly.’’
Blount, supra note 16. As a result, requiring proof
of such an intent would greatly diminish, if not
eliminate, the prophylactic value of the proposed
rule.
95 Under the proposed rule, an adviser would be
prohibited from soliciting contributions for the
official. Proposed rule 206(4)–5(a)(2)(ii).
96 Cf. Supervision When Sponsoring Meetings and
Conferences Involving Issuer Officials, MSRB Rule
G–37 Interpretive Notice (Mar. 26, 2007), available
at http://www.msrb.org/msrb1/rules/notg37.htm
(rather than addressing meetings and conferences of
this nature in its rules directly, the MSRB applies
a facts-and-circumstances test on a case-by-case
basis).

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actions we have brought involving
investment advisers, we have alleged
that political contributions or other
payments were made to influence the
selection of the advisory firm by
executives of the adviser or persons who
solicit government clients on behalf of
the adviser.97 We therefore are
proposing to limit application of the
rule’s ‘‘time out’’ provision to
contributions made by the adviser and
its ‘‘covered associates,’’ which would
include the adviser’s general partners,
managing members, executive officers,
or other individual with a similar status
or function.98 Any employee of the
97 See, e.g., In the Matter of Barrett N. Wissman,
Investment Advisers Act Release No. 2879 (May 22,
2009) (in a settled action, the Commission alleged
that managing director of registered investment
adviser engaged in a fraudulent scheme involving
undisclosed kickback payments made by
investment management firms and others in
connection with the sale of securities to the New
York Common Retirement Fund and the investment
of the fund’s assets in the purchase and sale of
securities); In the Matter of Thayer Capital Partners,
TC Equity Partners IV, L.L.C., TC Management
Partners IV, L.L.C., and Frederick V. Malek,
Investment Advisers Act Release No. 2276 (Aug. 12,
2004) (in a settled action, the Commission alleged
that unregistered adviser, through its chairman,
agreed to hire an inexperienced associate of the
Connecticut Treasurer as a consultant as a
condition to securing a State pension fund
investment); In the Matter of Frederick W.
McCarthy, Investment Advisers Act Release No.
2218 (Mar. 5, 2004) (in a settled action, the
Commission alleged that principal and chairman of
investment management firm provided $2 million
in consulting contracts to associates of the
Connecticut Treasurer in order to secure the
Treasurer’s decision to invest). We have also
observed this pattern of contributions in pay to play
arrangements in other contexts, including those
involving union pension funds. See, e.g., In the
Matter of William M. Stephens, Investment
Advisers Act Release No. 2076 (Nov. 4, 2002) (in
a settled action, the Commission alleged that
executive vice president and chief investment
strategist of registered investment adviser met with
people who offered to introduce him to the trustees
of union pension funds, and he agreed that after he
and his firm became the funds’ adviser, he would
arrange to divert a portion of the funds into
investments controlled by the people who made the
introductions, who would, in turn, pay kickbacks
to the pension fund trustees who hired him and his
firm); In the Matter of Chris Woessner, Investment
Advisers Act Release No. 2164 (Aug. 26, 2003)
(Commission alleged that former vice president of
sales at registered investment adviser who was in
charge of marketing to pension plans caused his
firm to direct client commissions for the benefit of
a broker-dealer and pension consultant in exchange
for the referral of a union pension fund client to the
firm).
98 Proposed rule 206(4)–5(f)(2)(i). Under our 1999
proposal, the rule would have applied more broadly
to ‘‘partners’’ (not just a general partner or
equivalent) and ‘‘executive officers’’ (which we
proposed to define as ‘‘the president, any vice
president in charge of a principal business unit,
division or function (such as sales, administration
or finance), any other officer who performs a policymaking function, or any other person who performs
similar policy-making functions, for the investment
adviser’’). See 1999 Proposing Release, supra note
17, at section II.A.1. Commenters in 1999 suggested
that, instead of applying the rule to all partners, we

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adviser who solicits 99 government
entity clients for the investment adviser
would also be a covered associate,100 as
would any PAC controlled by the
investment adviser or any of the
adviser’s covered associates.101
Under the proposed rule, the term
‘‘executive officer’’ includes the
adviser’s president and any vice
president in charge of a principal
business unit, division or function (such
as sales, administration or finance) or
any other executive officer who, in each
case, in connection with his or her
regular duties: (i) Performs investment
advisory services (or supervises
someone who performs them) for an
narrow the rule to apply only to a firm’s general
partner (or equivalent) and other owners that have
a significant ownership interest in the firm.
Commenters also suggested that we either exclude
executive officers of divisions unrelated to the
firm’s solicitation and/or advisory functions or limit
the rule’s application to only the most senior
officers of an adviser, such as persons required to
be listed on Schedule A of Form ADV. In light of
these comments, we have included in our proposed
definition of ‘‘covered associates’’ only those
persons associated with an investment adviser who
we believe are more likely to have an economic
incentive to make contributions to influence the
advisory firm’s selection and who we have found,
in our enforcement actions, typically make
contributions.
99 See proposed rule 206(4)–5(f)(10) (defining
‘‘solicit’’).
100 Proposed rule 206(4)–5(f)(2)(ii). Several
commenters in 1999 argued that we would have
included too broad a category of solicitors because
our definition of ‘‘solicitor’’ would have included
any person who solicited any client for or referred
any client to the adviser. The two-year time out
would have been triggered, for example, by
registered representatives who solicited brokerage
business for a firm dually registered as a brokerdealer and as an adviser, even though the registered
representatives had no involvement with
government clients. See 1999 Proposing Release,
supra note 17, at section II.A.1. We have included
a narrower category of solicitors in our current
proposed rule; the two-year time out provisions
would be triggered by a contribution by a person
who solicits government entities for advisory
services. Many commenters also urged that the
definition of ‘‘solicitor’’ exclude third-party
solicitors. They asserted that it was unfair to hold
advisers responsible for the actions of these
solicitors, arguing that the advisers did not control
their activities. We have excluded third-party
solicitors from this two-year time out provision;
instead we are proposing to prohibit advisers from
soliciting government business through third
parties, as discussed in detail in section II.A.3(b) of
this Release.
101 Proposed rule 206(4)–5(f)(2)(iii). Our 1999
proposal would also have included PACs controlled
by the investment adviser and the individuals
associated with the investment adviser whose
contributions would have triggered the ‘‘time out.’’
See 1999 Proposing Release, supra note 17, at
section II.A.1. We have proposed to include PACs
because these vehicles, which may be regulated by
State and/or Federal election law, are often used by
corporations, interest groups, or others to make
political contributions. See, e.g., Tennessee Registry
of Election Finance, PACs FAQ, available at http://
www.state.tn.us/tref/pacs/pacs_faq.htm; Federal
Election Commission, Quick Answers to PAC
Questions, available at http://www.fec.gov/ans/
answers_pac.shtml.

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adviser; (ii) solicits (or supervises
someone who solicits) for an adviser,
including with respect to investors for a
covered investment pool; 102 or (iii)
supervises, directly or indirectly,
executive officers described in (i) or
(ii).103 Accordingly, for instance, the
proposed rule would cover
contributions by a portfolio manager
who is an executive officer, as well as
contributions by anyone in the portfolio
manager’s chain of supervision up to
and including the president of the
adviser. The rule would also cover
contributions by an executive officer
who supervises personnel who solicit
advisory clients and contributions by
anyone in that executive’s chain of
supervision. The rule would not,
however, cover contributions by the
adviser’s other executives, such as its
comptroller, its head of human
resources, or its director of information
services, unless the contribution is an
indirect contribution for the adviser,
because the compensation of these
individuals is likely to be tied less
directly to obtaining or retaining clients.
Contributions by non-executive
employees (other than those who solicit
government entity clients) would not
trigger the rule’s prohibitions, unless the
adviser or any of its covered associates
used the person to indirectly make a
contribution.104 This could occur, for
example, if a firm paid a non-executive
employee a bonus with the
understanding that the bonus would be
used by the employee to make a
political contribution that, if made by
the firm, would trigger the rule’s
prohibition.105
As noted above, the Commission has
drafted the proposed rule so that its
prohibitions are triggered by political
contributions by persons who, in the
context of an advisory firm, are likely to
have an economic incentive to make
contributions to influence the advisory
firm’s selection and the categories of
executives and employees of an adviser
that we have seen, most typically, to
make political contributions and
payments in pay to play situations. We
are mindful of the burdens the proposed
rule would place on advisory firms and
on the ability of persons associated with
102 See discussion of covered investment pools,
infra, section II.A.3(e).
103 Proposed rule 206(4)–5(f)(4). Our proposed
definition of ‘‘executive officer’’ in rule 206(4)–
5(f)(4) is based on the same considerations as a
similar definition in Advisers Act rule 205–3 [17
CFR 275.205–3]. Whether a person is an executive
officer depends on his or her function, not title; a
chief executive officer whose title does not include
‘‘president’’ is clearly an executive officer.
104 Proposed rule 206(4)–5(d).
105 See id. See also discussion of indirect
contributions, infra section II.A.3(c).

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an adviser to participate in civic affairs.
We thus have narrowly tailored the rule
to achieve our goal of preventing adviser
participation in pay to play practices.
We request comment on the scope of
the proposed rule and, in particular,
those persons associated with the
advisers whose political contributions
would trigger the application of the twoyear ‘‘time out’’ and would be
prohibited from soliciting political
contributions from others. Have we
included persons most likely to have an
economic incentive to make political
contributions for the purpose of
influencing the selection of the adviser?
Have we covered too many persons?
If so, how should we narrow the rule?
For example, are there certain executive
officers of the adviser we should not
include? The proposed rule would cover
all executive officers who, as part of
their regular duties, perform investment
advisory services or supervise someone
who performs them. Should we instead
limit the scope to a subset of such
officers? If so, how should we define
that subset? 106 Should we extend the
rule to cover all portfolio managers, or
just those portfolio managers
responsible for managing government
client assets? Are there other types of
employees whose contributions should
trigger the time out?
Have we too narrowly drawn the rule
to achieve our goals? Should we, for
example, include employees of
companies that are related persons of an
adviser who solicit government entity
clients for the investment adviser? As
discussed further below, we propose
permitting payments to these persons
under the proposed ban on payments to
third parties because we recognize that
an adviser may rely on them to assist it
in seeking government clients.107 Would
that same rationale support including
them as ‘‘covered associates’’ of the
adviser (whose contributions would be
subject the proposed rule’s two-year
time out provision)? Would not
including them be likely to encourage
circumvention of the rule’s
requirements? 108 We also request
comment on whether we should, for
example, include certain family
members who, and related businesses
that, might give political contributions
on the adviser’s behalf to try to
106 Many 1999 commenters argued that our
proposal included too many persons whose
activities are unconnected to managing public
pension money, making it too likely that an
innocent political contribution would trigger a twoyear time out. We considered these comments in
narrowing the scope of persons covered by our
current proposed rule, as described above.
107 See discussion at section II.A.3(b), infra .
108 See proposed rule 206(4)–5(d), however.

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influence officials of government
entities? 109 Under the proposed rule,
political contributions by such persons
would only result in a violation under
the rule if the adviser or its covered
associates were acting through them to
do indirectly what they cannot do
directly under the rule.110 MSRB rule
G–37 addresses this matter similarly.
Should we include beneficial owners of
the adviser because they have a direct
economic stake in the adviser’s business
relationship with the government
client? If so, should the definition
include all owners, or only those with
a significant ownership stake in an
adviser, such as those who have
contributed (or that have the right to
receive upon dissolution) ten percent or
more of the company’s capital?

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(5) ‘‘Look Back’’
Under the proposed rule, the two-year
time out would continue in effect after
the covered associate who made the
triggering contribution left the advisory
firm. Moreover, a contribution made by
a covered associate of an adviser would
be attributed to any other adviser that
employs or engages the person who
made the contribution within two years
after the date the contribution was
made.111 As a result, an investment
adviser would be required to ‘‘look
back’’ in time to determine whether it
would be subject to any business
restrictions under the proposed rule
when employing or engaging a covered
associate. This provision, which tracks
MSRB rule G–37,112 would prevent
advisers from circumventing the rule by
channeling contributions through
departing employees, or by influencing
the selection process by hiring persons
who have made political contributions.
Comment is requested on the proposed
look-back requirement. For example,
109 See, e.g., Martin Z. Braun et al., A Political
Family Affair?, The Bond Buyer (Oct. 21, 2002)
(noting that spouses of municipal finance
professionals in dealer firms are making campaign
contributions to issuer officials who can influence
the award of bond business).
110 Paragraph (d) of proposed rule 206(4)–5. See
section II.A.3(d) of this Release.
111 Proposed rule 206(4)–5(a)(1). In no case would
the prohibition imposed by the proposed rule be
longer than two years from the date the covered
associate makes a covered contribution. If, for
example, a covered associate becomes employed by
an investment adviser one year and six months after
making a contribution, the new employer would be
subject to the proposed rule’s prohibition for the
remaining six months of the two-year period. The
covered associate’s employer at the time of the
contribution would be subject to the proposed
rule’s prohibition for the entire two-year period
regardless of whether the covered associate remains
employed by the adviser. See infra section II.B.
112 MSRB rule G–37(g)(iv). Cf. MSRB Qs & As,
Question II.12, available at http://www.msrb.org/
msrb1/rules/QAG-372003.htm.

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would a shorter period be sufficient to
prevent circumvention of the rule? 113 If
so, what period would be appropriate?
Would our proposed look-back
provision inappropriately deter
politically active individuals from
joining advisory firms that provide
investment advice to government
entities or are seeking to do so?
(6) Exception for De Minimis
Contributions
Proposed rule 206(4)–5 contains a de
minimis exception that would permit
each covered associate who is an
individual 114 to make aggregate
contributions of $250 or less, per
election, to an elected official or
candidate without triggering the rule’s
prohibitions if the person making the
contribution is entitled to vote for the
official or candidate.115 We have
proposed $250 because we believe that
contributions of $250 or less are
typically made without the intent or
ability to influence the selection process
for investment advisers and thus do not
involve the conflicts of interest the rule
is intended to prevent, as well as for
reasons of regulatory consistency. The
$250 amount is the same as the de
minimis amount excepted from MSRB
rule G–37.116 Comment is requested on
the scope of the exception.117 Should
113 Commenters in 1999 urged us to reduce the
look back period, arguing that politically active
individuals might be discouraged from joining
advisory firms. However, we are concerned about
the prospect of advisers seeking to circumvent the
rule by hiring individuals shortly after they have
made significant contributions that could influence
government officials.
114 Under the proposed rule, each covered
associate, taken separately, would be subject to the
$250 de minimis exception for elections in which
he or she is entitled to vote. In other words, the
$250 limit applies per covered associate and is not
an aggregate limit for all of an adviser’s covered
associates.
115 Proposed rule 206(4)–5(b)(1). Under the
proposed rule, primary and general elections would
be considered separate elections. Accordingly, a
covered person of an investment adviser could,
without triggering the prohibitions of the rule,
contribute up to $250 in both the primary election
campaign and the general election campaign (up to
$500) of each official for whom the person making
the contribution would be entitled to vote. For
purposes of this rule, a person would be ‘‘entitled
to vote’’ for an official if the person’s principal
residence is in the locality in which the official
seeks election. See, e.g., In the Matter of Pryor,
McClendon, Counts & Co., Inc. et al., Exchange Act
Release No. 48095 (June 26, 2003) (noting that Rule
G–37 allows a person to contribute $250 to a
candidate’s campaign in the primary and in the
general election, for a total of $500 during the
election cycle, and clarifying that contributions
must be limited to $250 before the primary, with
an additional $250 allowed after the primary for the
general election). See also MSRB Qs & As, Question
II.8, available at http://www.msrb.org/msrb1/rules/
QAG-372003.htm.
116 See MSRB rule G–37(b)(i).
117 Some commenters in 1999 suggested that the
amount be substantially higher. Some commenters

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the amount be increased or decreased,
and if so, on what basis? For instance,
the MSRB has not adjusted its de
minimis amount for inflation since it
was established in 1994. We have not
adjusted the $250 for inflation because
of ease of reference to a round number
and because an inflation adjustment
would result in an amount not
significantly higher. We request
comment, however, on whether we
should adjust our amount for inflation.
Should we provide a de minimis
exception for contributions to officials
for whom an individual is not entitled
to vote, and if so, what would be an
appropriate de minimis amount? 118
(7) Exception for Certain Returned
Contributions
We are proposing a second exception
from the two-year compensation ban
intended to address situations in which
the adviser triggers the ban
inadvertently.119 We have attempted to
limit the scope of this exception to the
types of contributions that we believe
are unlikely to raise pay to play
concerns. This exception would be
available only with respect to
contributions made by a covered
associate of the investment adviser to
officials other than those for whom the
covered associate was entitled to vote at
the time of the contributions and which,
in the aggregate, do not exceed $250 to
any one official, per election.120 Further,
the adviser must have discovered the
thought we should raise the de minimis amount to
$1,000 to be consistent with the limits on private
contributions for candidates for Federal office. We
believe that a higher threshold—such as $1,000—
would be significantly more likely to enable a
contributor to seek to exert influence over an
official with the ability to select an investment
adviser, especially in a local election. We also
believe a lower amount might be too restrictive—
it could preclude individuals from supporting
candidates for whom they are able to vote at levels
that are less likely to facilitate undue influence.
118 Our proposed de minimis exception only
applies to contributions to a candidate for whom
the contributor is entitled to vote. Whereas the
outcome of an election in which a contributor is
eligible to vote is likely to have a greater personal
impact on the contributor, there is a significantly
greater likelihood that a contributor’s contribution
in an election in which he or she is not entitled to
vote could be motivated by other factors, which
might include influencing a candidate. In 1999,
there was a mixture of support and criticism for
limiting the exception to contributions to officials
or candidates for whom the contributor is entitled
to vote, and one commenter advocated expanding
it to a $100 de minimis exception for candidates for
whom the contributor is not entitled to vote.
119 Proposed rule 206(4)–5(b)(2).
120 Proposed rule 206(4)–5(b)(2)(i). To the extent
that the contribution by a covered associate of the
adviser was less than $250 and was for an official
for whom the covered associate was entitled to vote
at the time of the contributions, the contribution
would not have triggered the two-year ban on
account of the exception contained in paragraph
(b)(1) of the proposed rule.

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contribution which resulted in the
prohibition within four months of the
date of such contribution 121 and, within
60 days after learning of the triggering
contribution, must cause the
contribution to be returned to the
contributor.122 We believe this
exception should only be available
when the adviser discovered the
triggering contribution, and caused it to
be returned, promptly. Our proposal
generally tracks MSRB rule G–37’s
‘‘automatic exemption’’ provision.123
121 Id. We believe that requiring that the adviser
must have discovered the contribution within four
months provides an appropriate time limit for the
exception. On one hand, we do not believe the
exception should be available where it takes longer
for advisers to discover contributions made by
covered associates because they might enjoy the
benefits of a contribution’s potential influence for
too long a period of time. On the other hand, we
believe it makes sense to give advisers sufficient
time to discover contributions made by covered
associates if, for example, their covered associates
disclose their contributions to the adviser on a
quarterly basis. Also, this provision is consistent
with the approach taken in MSRB rule G–37(j)(i).
122 Proposed rule 206(4)–5(b)(2)(i). The prompt
return of the contribution would provide some
indication that the contribution would not affect an
official of a government entity’s decision-making
process with regard to choosing an adviser. We
have proposed that the contribution must be
returned within 60 days to give contributors
sufficient time to seek its return, but still require
that they do so in a timely manner. Also, this
provision is consistent with MSRB rule G–37(j)(i).
If the recipient will not return the contribution, the
adviser would still have available the opportunity
to apply for an exemption under paragraph (e) of
the proposed rule. Paragraph (e), which sets forth
factors we would consider in determining whether
to grant an exemption, includes as a factor whether
the adviser ‘‘has taken all available steps to cause
the contributor involved in making the contribution
which resulted in such prohibition to obtain a
return of the contribution.’’
123 MSRB rule G–37(j). We did not include an
equivalent provision in our 1999 proposal, and
MSRB rule G–37 contained no such provision at
that time. However, the MSRB added an ‘‘automatic
exemption’’ provision in 2003. Exchange Act
Release No. 47814 (May 8, 2003) [68 FR 25917 (May
14, 2003)]. Several of the comments we received on
our 1999 proposal, while supporting the exemptive
provision we proposed at that time, expressed
concern that the scope and breadth of the rule
would expose advisers to the risk of inadvertent
violations, which would necessitate frequent
exemptive applications. See, e.g., Comment Letter
of the Securities Industry Association (Oct. 29,
1999) (‘‘SIA Comment Letter’’); Comment Letter of
Morgan Stanley Dean Witter Investment
Management Inc. (Nov. 1, 1999) (‘‘MSDW Comment
Letter’’); Comment Letter of Fidelity Investments
(Nov. 1, 1999); Investment Counsel Association of
America Comment Letter (Nov. 1, 1999) (‘‘Nov.
ICAA Comment Letter’’); Comment Letter of
Scudder Kemper Investments (Nov. 8, 1999)
(‘‘Scudder Kemper Comment Letter’’); Comment
Letter of Nicholas-Applegate Capital Management
(Oct. 26, 1999) (‘‘Nicholas-Applegate Comment
Letter’’); Comment Letter of Smith Barney Asset
Management and Salomon Brothers Asset
Management Inc. (Nov. 1, 1999) (‘‘Smith Barney
Comment Letter’’) (suggesting, alternatively, that
the time out period be 30 days for inadvertent
violations); Comment Letter of Davis Polk &
Wardwell (Nov. 1, 1999) (‘‘Davis Polk Comment
Letter’’); and Comment Letter of American Bar

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To ensure that the exception for
certain returned contributions does not
encourage an investment adviser to
relax its efforts to promote compliance
with the rule’s prohibitions, no adviser
would be entitled to rely on the
exception more than twice per 12month period.124 And an investment
adviser would not be permitted to rely
on the exception more than once with
respect to contributions by the same
covered associate of the investment
adviser,125 regardless of the time period.
We request comment on the proposed
criteria for, and limitations on, the
exception for certain returned
contributions. Are the various time
periods we proposed (discovery of
contribution within four months of it
being made, return of contribution
within 60 days of discovery, and
limitation of reliance on the exception
twice per adviser per 12-month period)
reasonable? Would they be effective?
Are there other circumstances under
which an adviser should be able to avail
itself of an exception? Alternatively,
should we require that an adviser
institute special supervisory procedures
(after it relies on the exception for
certain returned contributions) for the
covered associate making the
contribution, including requiring preclearance of all contributions, for a
specified period of time?
(b) Ban on Using Third Parties To
Solicit Government Business
After the adoption of rule G–37 in
1994, the MSRB observed that
municipal securities dealers sought to
circumvent rule G–37 by hiring thirdparty consultants to solicit government
clients on their behalf.126 These thirdAssociation, Subcommittees on Investment
Companies and Investment Advisers and on Private
Investment Entities of the Committee on Federal
Regulation of Securities, Section of Business Law
(Jan. 5, 2000) (‘‘ABA Comment Letter’’). The
exception we have proposed would help address
these concerns.
124 Proposed rule 206(4)–5(b)(2)(ii). We wanted to
give each adviser more than one opportunity to
refine its compliance procedures to avoid further
violations of the proposed rule but, as noted, did
not want to allow an adviser to relax its standards
by making multiple exceptions available. This will
generally create some flexibility to accommodate a
covered associate’s inadvertent violation.
125 Proposed rule 206(4)–5(b)(2)(iii). Once a
covered associate has been made aware of an
‘‘inadvertent’’ violation, a justification for a second
violation is more questionable.
126 See In the Matter of Self-Regulatory
Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking
Board Relating to Consultants, Exchange Act
Release No. 36522 (Nov. 28, 1995) [60 FR 62275
(Dec. 5, 1995)] (‘‘The Board believes that rules G–
37 and G–20 [regarding gifts and gratuities] * * *
along with [the rule on fair dealing] set appropriate
standards for dealer conduct in the municipal
securities industry. However, the Board is

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39851

party consultants would make political
contributions or otherwise seek to exert
influence designed to secure municipal
business for the municipal securities
firm.127 Two years later, in 1996, the
Commission approved, and the MSRB
adopted, rule G–38, which required
municipal dealers to disclose publicly
the terms of their agreements with
consultants.128 In 2005, after concluding
that the required disclosure was neither
adequate to prevent circumvention of
rule G–37, nor consistently being
made,129 the MSRB (with the
concerned about dealers’ increasing use of
consultants to obtain or retain municipal securities
business. While the Board believes that in many
instances the use of consultants is appropriate, it
also believes that, in a number of instances, the use
of consultants may be in response to limitations
placed on dealer activities by rule G–37 and rule
G–20. While both of these rules prohibit dealers
from doing indirectly what they are precluded from
doing directly, indirect activities often are difficult
to prove.’’ (footnotes omitted)).
127 See id.
128 See In the Matter of Self-Regulatory
Organizations; Order Approving Proposed Rule
Change by the Municipal Securities Rulemaking
Board Relating to Consultants, Exchange Act
Release No. 36727 (Jan. 17, 1996) [61 FR 1955 (Jan.
24, 1996)] (‘‘The rule approved today is intended
to provide additional information to issuers and to
the public to assist in determining the extent to
which payments to consultants influence the
issuer’s selection process in connection with
municipal securities business. * * *’’) (‘‘MSRB
Rule G–38 Adoption Order’’). See also Municipal
Securities Rulemaking Board, Request for
Comments on Revised Draft Amendments to Rule
G–38 Relating to Solicitation of Municipal
Securities Business (as modified on Oct. 12, 2004)
(Sept. 29, 2004), available at http://www.msrb.org/
msrb1/archive/2004/RevRuleG38Solicitation.htm#revised1 (noting, with regard to
MSRB rule G–38, ‘‘As initially adopted, the rule
required * * * that the dealer disclose information
about its consulting arrangements to any issuer
from which a consultant would solicit municipal
securities business on its behalf [and that the dealer
disclose] to the MSRB * * * the terms of the
consulting agreements and the business obtained by
the consultants * * * [with] such disclosures made
available to the public through the MSRB Web site
* * *’’ (footnotes omitted)).
129 See Municipal Securities Rulemaking Board,
Amendments Relating to Solicitation of Municipal
Securities Business Under Rule G–38, SR–MSRB–
2005–04 (Mar. 17, 2005), available at http://
www.msrb.org/msrb1/rulesandforms/sec/SR-MSRB2005-04.pdf (‘‘The MSRB began its current
rulemaking initiative on the solicitation on behalf
of brokers, dealers and municipal securities dealers
(‘‘dealers’’) of municipal securities business by
consultants early last year because of certain
practices that could present challenges to
maintaining the integrity of the municipal securities
market. These practices include, among other
things, significant increases in recent years in the
number of consultants being used, the amount these
consultants are being paid and the level of reported
political giving by consultants. The MSRB has been
concerned that increases in levels of compensation
paid to consultants for successfully obtaining
municipal securities business may be motivating
consultants, who currently are not subject to the
basic standards of fair practice and professionalism
embodied in MSRB rules, to use more aggressive or
questionable tactics in their contacts with
issuers.’’).

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Commission’s approval) amended rule
G–38 to impose a complete ban on the
use of third-party consultants to solicit
government clients.130
We are concerned that our adoption of
a rule addressing pay to play practices
by advisers would lead to a similar use
of consultants or solicitors by
investment advisers to circumvent the
rule. Indeed, we have alleged that thirdparty solicitors have played a central
role in each of the enforcement actions
against investment advisers that we
have brought in the past several years
involving pay to play schemes.131
Government authorities in New York
and other jurisdictions have prohibited,
or are considering prohibiting, the use
of consultants, solicitors, or placement
agents by investment advisers to solicit
government investment business.132

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130 See

In the Matter of Self-Regulatory
Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting
Accelerated Approval to Amendment No. 1 to the
Proposed Rule Change Relating to Solicitation of
Municipal Securities Business under MSRB Rule G–
38, Exchange Act Release No. 52278 (Aug. 17, 2005)
[70 FR 49342 (Aug. 23, 2005)]. As amended, MSRB
rule G–38(a) states, ‘‘Subject to section (c) of this
rule [regarding transitional payments], no broker,
dealer or municipal securities dealer may provide
or agree to provide, directly or indirectly, payment
to any person who is not an affiliated person of the
broker, dealer or municipal securities dealer for a
solicitation of municipal securities business on
behalf of such broker, dealer or municipal securities
dealer.’’
131 See, e.g., SEC v. Henry Morris, et al., Litigation
Release No. 20963 (Mar. 19, 2009) (the
Commission’s complaint alleges that investment
advisers and a placement agent, among others,
engaged in a fraudulent scheme to extract kickbacks
from investment management firms seeking to
manage assets of the New York State Common
Retirement Fund); In the Matter of Kent D. Nelson,
Investment Advisers Act Release No. 2765 (Aug. 1,
2008); Initial Decision Release No. 371 (Feb. 24,
2009); Investment Advisers Act Release No. 2868
(Apr. 17, 2009) (an administrative law judge found
that an investment adviser funneled payments
through a third party to the New Mexico State
treasurer in exchange for being retained as an
adviser by the State treasurer’s office); SEC v. Paul
J. Silvester et al., Litigation Release No. 16759 (Oct.
10, 2000); Litigation Release No. 16834 (Dec. 19,
2000); Litigation Release No. 18461 (Nov. 17, 2003);
Litigation Release No. 19583 (Mar. 1, 2006);
Litigation Release No. 20027 (Mar. 2, 2007) (alleging
that, in order to obtain investment contracts,
investment adviser firms made payments to
associates of the Connecticut State treasurer, a
portion of which were kicked back to the treasurer).
See also supra notes 31–40 (discussing other cases
related to these enforcement actions).
132 See, e.g., Aaron Elstein, NY Pension Fund
Bans Controversial Middlemen, Crain’s New York
Business (Apr. 22, 2009) (describing the New York
State Comptroller’s ban on placement agents); Press
Release, Office of the New York City Comptroller,
Thompson Moves to Ban Placement Agents, Asks
State AG to Investigate Quadrangle Transaction,
PR–09–04–095 (Apr. 22, 2009), available at http://
www.comptroller.nyc.gov/press/2009_releases/
pr09-04-095.shtm (describing the New York City
Comptroller’s calls on the New York City Pension
Funds to ban placement agents); Henry Goldman,
New York City Police Pension Bans Placement
Agent Use, Bloomberg (May 5, 2009) (describing the

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In our 1999 proposal, contributions to
a government official by an adviser’s
third-party solicitor, engaged by the
adviser to obtain clients, would have
triggered a two-year ‘‘time out’’ for the
adviser.133 Several commenters opposed
inclusion of contributions by third-party
solicitors as a trigger for the ‘‘time out.’’
Most argued that this aspect of the rule
was unfair and created significant
compliance challenges because these
solicitors were not, according to the
commenters, controlled by advisers.134
In light of these considerations,
including the apparent difficulties for
advisers to monitor the activities of their
third-party solicitors, we are proposing
to prohibit investment advisers from
using third-party solicitors to obtain
New York City Police Pension Fund’s suspension
on the use of placement agents); Martin Z. Braun,
New York City’s Fire Pension Bans Middlemen,
Joining Two Others, Bloomberg (May 16, 2009)
(describing the New York City Fire Pension Fund’s
suspension on the use of placement agents); Barry
Massey, NM Agency Bans Placement Agents on
Investments, Businessweek (May 26, 2009)
(describing the New Mexico State Investment
Council’s ban on placement agents). See also In the
Matter of the Carlyle Group, AGNY Investigation
No. 2009–071, Assurance of Discontinuance
Pursuant to Executive Law § 63(15) (May 14, 2009),
available at http://www.oag.state.ny.us/
media_center/2009/may/pdfs/Carlyle%20AOD.pdf;
In the Matter of Riverstone Holdings, LLC, AGNY
Investigation No. 2009–091, Assurance of
Discontinuance Pursuant to Executive Law § 63(15)
(June 11, 2009), available at http://
www.oag.state.ny.us/media_center/2009/june/pdfs/
Riverstone%20AOD%20FINAL%20EXECUTED.pdf;
and In the Matter of PCG Corporate Partners
Advisors II, LLC, AGNY Investigation No. 2009–101,
Assurance of Discontinuance Pursuant to Executive
Law § 63(15) (July 1, 2009), available at http://
www.oag.state.ny.us/media_center/2009/july/pdfs/
PCG%20AOD%20FINAL%20EXECUTED.pdf (in
each case, banning the use of third-party placement
agents pursuant to a ‘‘Public Pension Fund Reform
Code of Conduct’’ in connection with the New York
Attorney General’s findings that ‘‘private equity
firms and hedge funds frequently use placement
agents, finders, lobbyists, and other intermediaries
* * * to obtain investments from public pension
funds * * *, that these placement agents are
frequently politically-connected individuals selling
access to public money, * * * and that the use of
placement agents to obtain public pension fund
investments is a practice fraught with peril and
prone to manipulation and abuse.’’).
133 See 1999 Proposing Release, supra note 17, at
section II.A.1.
134 See, e.g., SIA Comment Letter; T. Rowe
Comment Letter; MSDW Comment Letter; Comment
Letter of Legg Mason, Inc. (Nov. 1, 1999); American
Bankers Association Comment Letter (Nov. 1, 1999);
Nov. ICAA Comment Letter; Scudder Kemper
Comment Letter; Nicholas-Applegate Comment
Letter; Smith Barney Comment Letter; Davis Polk
Comment Letter; and ABA Comment Letter. We
note that rule 206(4)-3 (the ‘‘cash solicitation rule’’)
under the Advisers Act, among other things,
requires an adviser that engages a third-party
solicitor for clients: (i) to make a bona fide effort
to ascertain whether the solicitor has complied with
the adviser’s agreement with the solicitor; and (ii)
to have a reasonable basis for believing that the
solicitor has so complied. Advisers Act rule 206(4)3(a)(2)(iii)(C) [17 CFR 275.206(4)–3(a)(2)(iii)(C)].

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government clients.135 Proposed rule
206(4)–5 would make it unlawful for
any investment adviser registered (or
required to be registered) with the
Commission, or unregistered in reliance
on the exemption available under
section 203(b)(3) of the Advisers Act [15
U.S.C. 80b–3(b)(3)], or any of its covered
associates, to provide or agree to
provide, directly or indirectly,
‘‘payment’’ to any person to solicit a
government entity for investment
advisory services unless such person is:
(i) A ‘‘related person’’ of the investment
adviser or, if the related person is a
company, an employee of that related
person; or (ii) any of the adviser’s
employees, general partners, LLC
managing members, executive officers
(or other person with a similar status or
function, as applicable).136 The rule’s
prohibition on an adviser’s payments to
third-party solicitors may apply to
persons commonly called ‘‘finders,’’
‘‘solicitors,’’ ‘‘placement agents,’’ or
‘‘pension consultants.’’ 137
135 Although rule 206(4)–3 under the Advisers
Act (the ‘‘Cash Solicitation Rule’’) contemplates
that certain client solicitation activities of third
parties can be undertaken where certain conditions
are met and the adviser both ‘‘makes a bona fide
effort to ascertain whether’’ and ‘‘has a reasonable
basis for believing that’’ the solicitor has complied
with certain aspects of the rule (Advisers Act rule
206(4)–3(a)(2)(iii)(C) [17 CFR 275.206(4)–
3(a)(2)(iii)(C)]), commenters’ concerns about the
inability of advisers to control the political
contribution activity of their solicitors (which is not
restricted under the Cash Solicitation Rule)
persuade us that a different approach is appropriate
for solicitation of government clients.
136 Proposed rule 206(4)–5(a)(2)(i). Advisers
making payments to solicitors must comply with
the cash solicitation rule under the Advisers Act.
If this component of proposed rule 206(4)–5 is
adopted as proposed, investment advisers registered
or required to be registered with us would no longer
be able to rely on the cash solicitation rule to pay
third-party solicitors to obtain government clients.
For a discussion of proposed amendments to the
cash solicitation rule, see infra section II.C.
137 Pension consultants provide advice to pension
plans (public or private) and their trustees with
respect to their investments, selection of money
managers and other service providers, and other
investment-related matters. Many pension plans
rely heavily on the expertise and guidance of their
pension consultant in helping them to manage
pension plan assets. Pension consultants may act as
third-party solicitors. Others may act as investment
advisers subject to our rule. In 2005, our Office of
Compliance Inspections and Examinations
published a report highlighting concerns relating to
the Advisers Act stemming from examinations of 24
pension consultant firms, including conflicts of
interest that arise with respect to pension
consultants that provide products and services to
both pension plan advisory clients and money
managers and mutual funds on an ongoing basis.
Office of Compliance Inspections and
Examinations, U.S. Securities and Exchange
Commission, Staff Report Concerning Examinations
of Select Pension Consultants (May 16, 2005),
available at http://www.sec.gov/news/studies/
pensionexamstudy.pdf. Commission staff also
published on the Commission’s Web site, in
cooperation with the U.S. Department of Labor, tips
to assist fiduciaries of employee benefit plans in

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The proposed rule would only apply
to ‘‘third-party’’ solicitors who solicit
government entities for investment
advisory services.138 The prohibition on
payments to third-party solicitors would
not cover solicitations on behalf of an
investment adviser by a person who is
a ‘‘related person’’ of the adviser, any of
the related person’s employees if the
related person is a company,139 or any
executive officer or partner of the
adviser.140 A contribution to a
government official by certain of these
persons would instead trigger the twoyear ‘‘time out’’ under paragraph (a) of
the proposed rule, during which the
investment adviser could not provide
investment advisory services for
compensation to the government entity
whose selection of an adviser that
official could influence.141 We have
reviewing conflicts of interest of pension
consultants. Selecting and Monitoring Pension
Consultants: Tips for Plan Fiduciaries (June 1,
2005), available at http://www.sec.gov/investor/
pubs/sponsortips.htm.
Although the terms are sometimes used
interchangeably, ‘‘finders’’ typically locate buyers
and/or sellers for a security on behalf of a brokerdealer, ‘‘solicitors’’ typically locate investment
advisory clients on behalf of an investment adviser,
and ‘‘placement agents’’ typically specialize in
finding investors (often institutional investors or
high net worth investors) that are willing and able
to invest in a private offering of securities on behalf
of the issuer of such privately offered securities.
138 Proposed rule 206(4)–5(a)(2)(i).
139 We would define ‘‘related person’’ as any
person, directly or indirectly, controlling or
controlled by the investment adviser, and any
person that is under common control with the
investment adviser. Proposed rule 206(4)–5(f)(9).
The term ‘‘company’’ is defined in the Advisers
Act, in relevant part, as ‘‘a corporation, a
partnership, an association, a ‘joint-stock’ company,
a trust, or any organized group of persons, whether
incorporated or not.’’ 15 U.S.C. 80b–2(a)(5).
140 More specifically, we do not include any of
the following within the prohibition on payments
for solicitation of government clients: executive
officers, general partners, managing members (or, in
each case, persons with similar status or function),
employees, or ‘‘related persons’’ of the investment
adviser. Proposed rule 206(4)–5(a)(2)(i). We make
this distinction because related person solicitors are
subject to an adviser’s (or its affiliates’) control and
thus should not present the compliance challenges
that advisers pointed to with respect to third-party
solicitors. See supra note 134 and accompanying
text. MSRB rule G–38’s exclusions are based on two
similar definitions—of ‘‘affiliated person of the
broker, dealer or municipal securities dealer’’ and
of ‘‘affiliated company of the broker, dealer or
municipal securities dealer.’’ MSRB rule G–38(b)(i)
and (b)(ii).
141 Pursuant to proposed rule 206(4)–5(a)(1),
certain contributions by the investment adviser and
its covered associates would trigger the two-year
time out. For a discussion of the two year ‘‘time
out’’ provision of the proposed rule, see supra
section II.A.3(a). We are not proposing that
contributions by ‘‘related persons’’ and their
employees would trigger the two-year time out,
although we request comment on whether to
include in the definition of ‘‘covered associate’’ an
employee of a related person who solicits a
government entity for the adviser. See discussion at
section II.A.3(a)(4), supra. See also proposed rule
206(4)–5(d).

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proposed to include related persons and
their employees (if the related persons
are companies) in order to enable
advisers to compensate parent
companies and other owners,
subsidiaries and sister companies—as
well as employees of related
companies—for government entity
solicitation activities because we
recognize that there may be efficiencies
in allowing advisers to rely on these
particular types of persons to assist
them in seeking clients.142 We request
comment on whether we should include
employees of an adviser’s related
persons that are companies within the
group of persons not subject to the ban
on payments to third parties. Should we
include only employees of certain
related persons of the adviser? If so,
how should we make that
determination? We also request
comment on whether there are other
types of persons associated with an
investment adviser who should not be
subject to the ban on payments to third
parties. We would define ‘‘payment’’ as
any gift, subscription, loan, advance or
deposit of money or anything of
value.143 We are proposing this
definition to cover the various means by
which an adviser and its covered
associates may seek to compensate a
third-party solicitor.144 A ‘‘finder’s fee’’
paid for a third-party solicitation would
be an example of a prohibited payment.
It could also include payments made to
pension consultants for performing
various services, such as attending or
sponsoring conferences, if those services
are intended to obtain government
clients.145 Are there other types of
payments we should explicitly include
142 For example, if an adviser’s sister company
has an office in a given location, the adviser might
seek the assistance of a sister company’s employee
at that location to solicit local government business
on its behalf rather than relying on its own
personnel who might be located a significant
distance away.
143 Proposed rule 206(4)–5(f)(7). MSRB rule G–38
incorporates the definition of ‘‘payment,’’ as well as
the definitions of ‘‘issuer’’ and ‘‘municipal
securities business’’ from MSRB rule G–37(g).
144 As well as the various means by which an
adviser and its covered associates may seek to
solicit other persons or coordinate donations to
political parties. See infra section II.A.3(d).
145 The proposed rule’s prohibition on making
payments to third-party solicitors of government
clients would apply expressly only to investment
advisers and their covered associates. But see
proposed rule 206(4)–5(d) (the proposed rule’s
prohibitions on an adviser and its covered
associates doing indirectly what cannot be done
directly). For a discussion of this provision, see
infra section II.A.3.(d) of this Release. The proposed
rule would not prohibit government entities from
retaining ‘‘pension consultants’’ (or other thirdparties) and paying them to recommend particular
investment advisers for the management of public
funds.

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39853

in the definition? Are there others that
we should exclude, and, if so, why?
We would broadly define ‘‘solicit’’ to
mean: (i) With respect to investment
advisory services, to communicate,
directly or indirectly, for the purpose of
obtaining or retaining a client for, or
referring a client to, an investment
adviser; and (ii) with respect to a
contribution or payment, to
communicate, directly or indirectly, for
the purpose of obtaining or arranging a
contribution or payment. We are
proposing this definition to capture the
types of communications in which an
investment adviser might engage that
we believe should trigger application of
the rule’s prohibitions—
communications for the purpose of
obtaining or retaining a client or a
contribution.146 Whether a particular
communication constitutes a
‘‘solicitation,’’ therefore, depends on the
specific facts and circumstances relating
to the communication. The nature of
information conveyed in any
communication and the manner in
which it is presented would be relevant
factors to consider. Does our proposed
definition effectively capture the
appropriate scope of communications?
If not, what types of communications
should we exclude, and why?
We request comment on our proposal
to prohibit the use of third-party
solicitors of government business. Is our
proposed prohibition on the use of
third-party solicitors an appropriate
means to deter pay to play practices?
We propose to prohibit only third-party
solicitors as likely posing a significant
threat to investor protection; certain
related-party solicitors would, instead,
be subject to the time out limitations of
proposed rule 206(4)–5(a)(1). Is this
differentiation appropriate? If not,
should we instead subject advisers to
the two-year time out for contributions
made by their third party solicitors
although, as noted above, commenters
in 1999 indicated that such a
requirement may impose significant
compliance challenges? 147 If the
differentiation is appropriate, should we
also have a two-year look back
restriction for any contributions made
by the third party? Is there a different
approach that would be effective at
eliminating circumvention of the rule
through the use of third parties? For
example, should we consider narrowing
the prohibition to accommodate
government solicitation activities by
third parties if such third parties (and
146 See proposed rule 206(4)–5(f)(10). MSRB rule
G–38 contains a similar definition. See MSRB rule
G–38(b)(i).
147 See supra note 134.

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their related persons) commit not to
contribute to (or solicit contributions
for) officials of any government entity
from which any adviser that hires them
is seeking business? To what extent
might the proposed ban on using third
parties to solicit government business
disproportionately impact the ability of
certain investment advisers, such as
those that are smaller and less
established, to compete in the market to
provide advisory services to government
clients? Conversely, to what extent
might the proposed ban benefit smaller
or less established advisers who are
currently unable or unwilling to engage
in pay to play practices to compete for
government business?

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(c) Restrictions on Soliciting and
Coordinating Contributions and
Payments
Another way an adviser can attempt
to influence the selection process is by
coordinating contributions for an
elected official or payments to a
political party, or by soliciting others to
make contributions to an elected official
or payments to a political party.148
Therefore, proposed rule 206(4)–
5(a)(2)(ii) would prohibit an adviser and
its covered associates from soliciting
any person or PAC to make, or from
coordinating, any contribution to an
official of a government entity to which
the adviser is providing or seeking to
provide investment advisory services, or
any payment 149 to a political party of a
148 For examples of solicitation or coordination of
contributions in the municipal securities dealer
context, see In the Matter of Pryor, McClendon,
Counts & Co., Inc. et al., Exchange Act Release No.
48095 (June 26, 2003) (Commission alleged that a
broker-dealer violated rule G–37(c) because its
president delivered three $250 money orders (in
other people’s names) in addition to his own
personal check for $250 to the campaign of a New
York City mayoral candidate during a period when
the firm was engaged in municipal securities
business with New York City); In the Matter of FAIC
Securities, Inc., Exchange Act Release No. 36937
(Mar. 7, 1996) (Commission alleged that the brokerdealer willfully violated G–37(c) because the firm’s
municipal finance professionals approved its
affiliated companies’ political contributions to
candidates for office who could influence the
awarding of municipal securities business by the
State of Florida and by Dade County, Florida, and
during the two-year period following those
contributions, the firm continued to seek, and was
selected, to participate in negotiated underwritings
of certain municipal securities by both Dade County
and a State agency).
149 See supra note 143 and accompanying text for
the definition of ‘‘payment.’’ This definition is
derived from the definition of ‘‘contribution,’’ but
does not include the limits on the purposes for
which such money is given, as currently set forth
in the proposed definition of contribution. We are
including ‘‘payments,’’ as opposed to
‘‘contributions,’’ here to deter an adviser from
circumventing the rule’s prohibitions by
coordinating indirect contributions to government
officials through payments to political parties. We
noted similar concerns in the context of MSRB Rule

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State or locality where the investment
adviser is providing or seeking to
provide investment advisory services to
a government entity.150 Our proposed
restrictions on soliciting and
coordinating contributions and
payments generally track MSRB rule G–
37.151 The MSRB amended its rule in
2005, with Commission approval, to
expand its prohibition on soliciting
others to make, and on coordinating,
payments to State and local political
parties to close what the MSRB
identified as a gap in which
contributions were being made
indirectly to officials through payments
to political parties for the purposes of
influencing their choice of municipal
securities dealers.152 The MSRB had not
G–37 when we approved a recordkeeping provision
in rule G–8 to require persons subject to that rule
to keep records relating to political party payments.
See SEC Order Approving Proposed Rule Change by
the Municipal Securities Rulemaking Board
Relating to Rule G–37 on Political Contributions
and Prohibitions on Municipal Securities Business,
and Rule G–8, on Recordkeeping, Exchange Act
Release No. 35446 (Mar. 6, 1995) (‘‘[S]ome [industry
participants] currently are urging dealers to make
payments to political parties earmarked for
expenses other than political contributions (such as
administrative expenses or voter registration
drives). Since these payments would not constitute
‘‘contributions’’ under the rule, the recordkeeping
and reporting provisions would not apply. The
MSRB is concerned, based upon this information,
that the same pay-to-play pressures that motivated
the MSRB to adopt rule G–37 may be emerging in
connection with the fundraising practices of certain
political parties described above.’’).
150 Proposed rule 206(4)–5(a)(2)(ii). An
investment adviser would be seeking to provide
advisory services to a government entity when it
responds to a request for proposal, communicates
with a government entity regarding that entity’s
formal selection process for investment advisers, or
engages in some other solicitation of investment
advisory business of the government entity. A
violation of paragraph (a)(2)(ii) of the proposed rule
would not trigger a two-year ban on the provision
of investment advisory services for compensation,
but would be a violation of the rule. This provision
would prohibit, for example, an adviser’s
solicitation of a payment to the political party of the
State in which the adviser was seeking to provide
advisory services to a government entity of the
State, but would not preclude that adviser from
soliciting a payment to a local political party,
unless the adviser was doing so as a means to do
indirectly what the adviser could not do directly
under the proposed rule (for example, if the adviser
was soliciting the payment as a means to funnel
payments to an official of the government entity
from which the adviser was seeking business). See
proposed rule 206(4)–5(d).
151 See MSRB rule G–37(c). We note, however,
that G–37 did not contain a prohibition on
soliciting or coordinating payments to political
parties in 1999, and our 1999 proposal did not
contain such a provision. 1999 Proposing Release,
supra note 17.
152 See Rule G–37: Request for Comments on Draft
Amendments to Rule G–37(c), Relating to
Prohibiting Solicitation and Coordination of
Payments to Political Parties, and Draft Question
and Answer Guidance Concerning Indirect Rule
Violations, MSRB Notice 2005–11 (Feb. 15, 2005),
available at http://www.msrb.org/msrb1/archive/
2005/2005-11.asp (‘‘G–37(c) Notice’’) (‘‘[T]he MSRB

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previously been able to deter this
misconduct, despite issuing informal
guidance in both 1996 and in 2003.153
We are proposing a similar prohibition
on soliciting or coordinating payments
to political parties in States or localities
where the investment adviser is
providing or seeking to provide
investment advisory services to a
government entity because we are
concerned that our adoption of a rule
that only prohibits advisers from
soliciting others to make, or
coordinating, contributions to officials
would lead to the development of a
similar gap in which advisers could
circumvent the rule by making
payments to political parties to
influence an official.154
Proposed rule 206(4)–5(a)(2)(ii) would
also prohibit advisers from seeking to
influence the selection process by, for
example, ‘‘bundling’’ 155 contributions
is especially troubled by the emergence of recent
media and other reports that issuer agents have
informed dealers and [municipal finance
professionals] that, if they are prohibited from
contributing directly to an issuer official’s
campaign, they should contribute to the affiliated
party’s ‘‘housekeeping’’ account. The MSRB is
concerned that dealers or [municipal finance
professionals] who make such payments may be
doing so in an effort to avoid the political
contribution limitations embodied in Rule G–37.’’);
Self-Regulatory Organizations; Municipal Securities
Rulemaking Board; Order Approving Proposed Rule
Change Concerning Solicitation and Coordination
of Payments to Political Parties and Question and
Answer Guidance on Supervisory Procedures
Related to Rule G–37(d) on Indirect Violations,
Exchange Act Release No. 52496 (Sept. 22, 2005)
(SEC order approving change to MSRB G–37 to
prohibit soliciting or coordinating payments to
political parties).
153 See G–37(c) Notice, supra note 152. (‘‘Both the
1996 Q&A guidance and the 2003 Notice were
intended to alert dealers and [municipal finance
professionals] to the realities of political
fundraising and guide them toward developing
procedures that would lead to compliance with
both the letter and the spirit of the Rule. The MSRB
continues to be concerned, however, that dealer,
[municipal finance professional], and affiliated
persons’ payments to political parties, including
‘‘housekeeping,’’ ‘‘conference’’ or ‘‘overhead’’ type
accounts, and PACs give rise to at least the
appearance that dealers may be circumventing the
intent of Rule G–37.’’).
154 We note that a direct contribution to a
political party by an adviser or its covered
associates would not trigger the two-year time out
provision of the proposed rule (although we request
comment on our proposed definition of
‘‘contribution’’), unless the contribution was a
means for the adviser to do indirectly what the
proposed rule would prohibit if done directly (for
example, if the contribution was earmarked or
known to be provided for the benefit of a particular
government official). See supra note 93. We are
proposing, however, that an adviser be prohibited
from soliciting others to make, or coordinating,
payments to political parties because, as the
MSRB’s experience has shown, advisers could
otherwise use such means to circumvent the
proposed rule’s limitations on direct contributions
to government officials.
155 An employee or person acting on an adviser’s
behalf ‘‘bundles’’ contributions or payments by

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or payments from its employees or
others or by making or coordinating
contributions or payments through a
third party, such as a ‘‘gatekeeper.’’ 156
In a gatekeeper arrangement, political
contributions or payments are arranged
by an intermediary, typically a pension
consultant, which distributes or directs
contributions or payments to elected
officials or candidates.157 The
coordinating small contributions or payments from
several employees of the adviser or others to create
one large contribution or payment. For an example
of this in the context of the municipal securities
industry, see In the Matter of Pryor, McClendon,
Counts & Co., Inc. et al., Securities Act Release No.
48095 (June 26, 2003) (‘‘Counts[, the president of
the broker-dealer firm,] gave his administrative
assistant $750 in cash, told her to purchase three
separate money orders, and told her to make them
payable for $250 each to the candidate’s campaign.
Counts instructed his assistant to make out one of
the money orders as if it were from the assistant
herself, and to make out the other two as if they
were from the wife of a [firm] employee and a
friend of Counts’, respectively. Counts then caused
those money orders to be delivered to the
candidate’s campaign together with Counts’ own
personal check for $250. [When two of the three
money orders were subsequently returned,] Counts
instructed his assistant to deposit the returned $500
into [the firm]’s bank account, which she did.’’).
156 We are proposing that solicitation of
contributions of others for an official of a
government entity to which an adviser is providing
or seeking to provide investment advisory services
by an adviser or its covered associates be subject to
a flat prohibition under the rule, rather than trigger
a two-year ‘‘time out,’’ because we recognize it may
be more difficult for an adviser to monitor
solicitation activities (as opposed to direct
contribution activity). For a discussion of an
adviser’s obligation to adopt policies and
procedures reasonably designed to prevent
violations of the Advisers Act pursuant to our
‘‘compliance rule,’’ see infra note 207 and
accompanying text.
157 See, e.g., SEC v. Morris et al., Litigation
Release No. 21001 (Apr. 15, 2009) (the
Commission’s complaint alleges that placement
agents acted as gatekeepers by directing investment
management firms to funnel kickbacks through
various entities); In the Matter of Kent D. Nelson,
Initial Decision Release No. 371 (Feb. 24, 2009) (an
administrative law judge found that an investment
adviser funneled payments through a third party to
the New Mexico State treasurer, acting as
gatekeeper by extracting $4.4 million in finder’s
fees from broker-dealers and siphoning $2.9 million
to the State treasurer’s office to influence the
office’s discretionary commitment of funds, in
exchange for being retained as an adviser by the
State treasurer’s office); (Investment Advisers Act
Release No. 2868 (Apr. 17, 2009). Similar types of
arrangements exist outside of the context of
government investments, such as in the area of
union pension funds. See, e.g., In the Matter of Duff
& Phelps Investment Management Co., Inc.,
Investment Advisers Act Release No. 1984 (Sept.
28, 2001) and related case In re Performance
Analytics, et al., Investment Advisers Act Release
No. 2036 (June 17, 2002) (in a settled action, the
Commission alleged that an investment adviser
entered into an arrangement with gatekeeper
broker-dealer in which the adviser would direct its
trades to broker-dealer if the broker-dealer would
continue to recommend the adviser to the union
pension fund board, and the broker-dealer allegedly
funneled payments to certain trustees on the
pension fund board to preserve its role as
gatekeeper and to preserve the adviser’s role as
adviser to the fund).

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gatekeeper ensures that advisers not
making a requisite amount of
contributions or payments are not
included among the final candidates for
advisory contracts. In addition, a
gatekeeper could arrange ‘‘swaps’’ of
contributions or payments between
elected officials in order to obscure the
significance of the contributions or
payments from public disclosure or to
circumvent plan restrictions on
contributions to trustees.158 Under the
proposed rule, the gatekeeper in these
arrangements would be coordinating
political contributions or payments and,
if the gatekeeper is an investment
adviser, would itself violate the
proposed rule’s restrictions on
coordinating contributions or
payments.159 The adviser would also
violate the proposed rule if it paid the
third-party solicitor to coordinate
political contributions or payments in
order to obtain business.
We request comment on this aspect of
the proposed rule, including our
proposed definitions. Is it appropriate to
differentiate between ‘‘contributions’’ to
officials and ‘‘payments’’ to political
parties? Are there alternative
approaches that would effectively deter
these types of indirect pay to play
arrangements? Do commenters believe
that our proposed inclusion of payments
to State and local political parties closes
an important gap in which contributions
might be made indirectly to officials for
the purposes of influencing their choice
of investment advisers? Alternatively,
do commenters believe that our
proposed inclusion of political parties is
unnecessary?
(d) Direct and Indirect Contributions or
Solicitations
Rule 206(4)–5(d) would also prohibit
acts done indirectly, which, if done
directly, would result in a violation of
the rule.160 Thus, an adviser and its
158 For example, Adviser A advises Plan X, while
Adviser B advises Plan Y. The ‘‘gatekeeper’’ may
direct a political contribution from Adviser A to the
elected official, who is a trustee to Plan Y, and from
Adviser B to the elected official, who is a trustee
to Plan X, agreeing to place both advisers on each
plan’s approved list. Persons reviewing records of
the political contributions would have no way of
determining that the contributions were swapped
and that they created conflicts of interest on the
part of the advisers as well as the elected officials.
159 Regardless of whether the gatekeeper is an
investment adviser, a person participating in such
a scheme could, if the rule is adopted, be
considered to be aiding and abetting an adviser’s
violation of the rule. See section 209(d) of the Act
[15 U.S.C. 80b-9(d)] (authorizing Commission
enforcement action for aiding and abetting a
violation of the Advisers Act or any Advisers Act
rule).
160 Proposed rule 206(4)–5(d). See also section
208(d) of the Advisers Act [15 U.S.C. 80b–8(d)];
MSRB rule G–37(d).

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covered associates could not circumvent
the rule by directing or funding
contributions through third parties,
including, for example, consultants,
attorneys, family members, friends or
companies affiliated with the adviser.
This provision would also cover, for
example, situations in which
contributions by an adviser are made,
directed or funded through a third party
with an expectation that, as a result of
the contribution, another contribution is
likely to be made by a third party to an
‘‘official of the government entity,’’ for
the benefit of the adviser. Contributions
made through gatekeepers (described
above) thus would be considered made
‘‘indirectly’’ for purposes of the
proposed rule. We request comment on
this aspect of the proposed rule.
(e) Investment Pools
(1) Application of the Rule to Pooled
Investment Vehicles
Pay to play activities in the context of
investment pools 161 also raise concerns
about the potential for fraud.162 The
fraud that may result from pay to play
practices can occur in a number of
circumstances involving the government
official and the pooled investment
vehicle. The following are examples of
pay to play relationships involving
161 Investment pools may include, but are not
limited to: mutual funds, hedge funds, private
equity funds, and venture capital funds.
162 See, e.g., SEC v. Paul J. Silvester et al.,
Litigation Release No. 16759 (Oct. 10, 2000) (action
in which investment adviser allegedly paid third
party solicitors who kicked back a portion of the
money to the former Connecticut State Treasurer in
order to obtain public pension fund investments in
a hedge fund managed by the adviser); SEC v.
William A. DiBella et al., Litigation Release No.
20498 (Mar. 14, 2008) (consultant was found to
have aided and abetted the former Connecticut
State Treasurer in a pay to play scheme involving
an investment adviser to a private equity fund who
had paid third-party solicitors to obtain public
pension fund investments in the fund); In the
Matter of the Carlyle Group, AGNY Investigation
No. 2009–071, Assurance of Discontinuance
Pursuant to Executive Law § 63(15) (May 14, 2009),
available at http://www.oag.state.ny.us/
media_center/2009/may/pdfs/Carlyle%20AOD.pdf;
In the Matter of Riverstone Holdings, LLC, AGNY
Investigation No. 2009–091, Assurance of
Discontinuance Pursuant to Executive Law § 63(15)
(June 11, 2009), available at http://
www.oag.state.ny.us/media_center/2009/june/pdfs/
Riverstone%20AOD%20FINAL%20EXECUTED.pdf;
and In the Matter of PCG Corporate Partners
Advisors II, LLC, AGNY Investigation No. 2009–101,
Assurance of Discontinuance Pursuant to Executive
Law § 63(15) (July 1, 2009), available at http://
www.oag.state.ny.us/media_center/2009/july/pdfs/
PCG%20AOD%20FINAL%20EXECUTED.pdf (three
settled actions brought by New York Attorney
General in which advisers allegedly paid thirdparty solicitors who kicked back a portion of the
money to the former New York Deputy State
Treasurer in order to obtain public pension
investments in private equity funds managed by the
advisers).

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investment pools that implicate the
concerns underlying this rulemaking:
• When an investment adviser to a
pooled investment vehicle makes a
contribution to a government official
and the government official directs that
public monies (e.g., pension plan assets)
be invested in that adviser’s pooled
investment vehicle;
• When an investment adviser to a
pooled investment vehicle makes a
contribution to a government official
and that government official chooses
that investment adviser to be an adviser
to a government sponsored plan, such as
a ‘‘529 plan;’’ 163 and
• When an investment adviser to a
pooled investment vehicle makes a
contribution to a government official
and that government official chooses
that adviser’s pooled investment vehicle
as an investment option in a
government sponsored plan, such as a
‘‘529 plan,’’ 164 regardless of whether the
adviser is also chosen to be the adviser
to the plan.
Pay to play activities can harm public
pension plans and their beneficiaries.
Such activities can cause competition in
the market for investments to be
manipulated, which can distort the
process by which investment decisions
regarding public investments are made,
and can result in public pension plans
making inferior investments. In
addition, the pension plan may pay
higher fees because advisers must
recoup the contributions, or because the
contract negotiations are not handled on
an arm’s-length basis.
An adviser’s participation in pay to
play activities may also defraud other
investors in a pooled investment
vehicle. For example, in a pay to play
kickback scheme, the government
investor in the pooled vehicle would
receive a kickback payment from the
adviser while other investors in the pool
may pay higher advisory fees as a result
of the adviser trying to recoup the cost
of the kickback. As another example, a
government investor that has engaged in
a pay to play scheme with an
investment adviser may leverage the fact
of the adviser’s payment to obtain
additional benefits for itself that may
163 This practice would be covered under (a)(1) of
the proposed rule. See supra section II.A.3.(a) of
this release. For a specific discussion of the
application to ‘‘529 plans,’’ see discussion below at
footnotes 176–189 and related text.
164 See Elliot Blair Smith, Fund Scandal Worries
Tuition Plan Investors, USA Today (Nov. 19, 2003),
at B1 (reporting that the former governor of
Wisconsin received campaign contributions from
the founder of a mutual fund company, and
subsequently the then-governor’s staff created a
panel of four State employees that selected the
founder’s firm to manage the State’s 529 plan and
provide the plan’s investment options).

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operate as a fraud on other investors in
the pooled vehicle.
Therefore, the proposed prophylactic
rule seeks to address pay to play
practices by advisers managing pooled
investment vehicles.165 The proposed
rule would subject an adviser to a
covered investment pool to the
prohibitions of proposed rule
206(4)–5 166 so that the government
entities, the pooled investment vehicles,
and the other investors in that vehicle
are also protected against the harms that
may result when advisers engage in pay
to play practices.
(2) Covered Investment Pools
The proposed rule’s prohibitions
would be applicable only with respect
to an adviser that manages a covered
investment pool.167 The proposed rule
would generally define ‘‘covered
investment pool’’ 168 as: (i) Any
investment company as defined in
section 3(a) of the Investment Company
Act of 1940 (‘‘Investment Company
Act’’); 169 or (ii) any company that
would be an investment company under
section 3(a) of that Act but for the
exclusion provided from that definition
by section 3(c)(1), section 3(c)(7) or
section 3(c)(11) of that Act.170
Our 1999 proposal would have
applied the rule only to advisers
managing private funds, such as hedge
funds and private equity funds,171 that
are typically excepted from the
definition of investment company by
either section 3(c)(1) or 3(c)(7) of the
Investment Company Act.172 We have
expanded upon that proposal to include
advisers managing investment
companies 173 (which are registered
under the Investment Company Act 174)
as well as collective investment trusts
(which are excepted from the definition
of investment company by section
3(c)(11)).175 Both of these types of
165 See

proposed rule 206(4)–5(c).

166 Id.
167 See proposed rule 206(4)–5(c). As described
below, proposed rule 206(4)–5 narrows this
definition to exclude certain investment companies
for the purposes of paragraph (a)(1) of the proposed
rule.
168 Proposed rule 206(4)–5(f)(3).
169 15 U.S.C. 80a–3(a).
170 15 U.S.C. 80a–3(c)(1), (7) or (11).
171 See 1999 Proposing Release, supra note 17, at
section II.A.4.
172 15 U.S.C. 80a–3(c)(1) and (7).
173 15 U.S.C. 80a–3(a).
174 15 U.S.C. 80a–8.
175 15 U.S.C. 80a–3(c)(11). We note that a bank
maintaining a collective investment trust would not
be subject to the proposed rule if the bank falls
within the exclusion from the definition of
‘‘investment adviser’’ in Section 202(a)(11)(A) of the
Advisers Act [15 U.S.C. 80b–2(a)(11)(A)]. A person
who falls within the definition of an investment
adviser that provides advisory services with respect

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collective investment pools today are
used as either funding vehicles for, or
investments of, government-sponsored
savings and retirement plans. These
plans include, for example, college
savings plans (such as ‘‘529 plans’’ 176)
and retirement plans (such as ‘‘403(b)
plans’’ 177 and ‘‘457 plans’’ 178). They
typically allow participants to select
among pre-established investment
‘‘options,’’ or particular investment
pools (often invested in registered
investment companies or funds of
funds, such as target date funds), that a
government official has directly or
indirectly selected to include as
investment choices for participants.179
to a collective investment trust in which a
government entity invests, however, would be
subject to the rule’s prohibitions.
176 A 529 plan is a ‘‘qualified tuition plan’’
established under Section 529 of the Internal
Revenue Code of 1986 [26 U.S.C. 529]. States
generally establish 529 plans as State trusts which
are considered instrumentalities of States for
Federal securities law purposes. As a result, the
plans themselves are generally not regulated under
the Federal securities laws and many of the
protections of the Federal securities laws do not
apply to investors in them. See Section 2(b) of the
Investment Company Act [15 U.S.C. 80a–2(b) and
Section 202(b) of the Advisers Act [15 U.S.C. 80b–
2(b) (exempting State-owned entities from those
statutes). However, the Federal securities laws do
generally apply to, and the Commission does
generally regulate, the brokers, dealers, and
municipal securities dealers that effect transactions
in interests in 529 plans. See generally Sections
15(a)(1) and 15B of the Securities Exchange Act of
1934 [15 U.S.C. 78a–15(a)(1) and 15B] (‘‘Exchange
Act’’). A bank effecting transactions in 529 plan
interests may be exempt from the definition of
‘‘broker’’ or ‘‘municipal securities dealer’’ under the
Exchange Act if it can rely on an exception from
the definition of broker in the Exchange Act. In
addition, State sponsors of 529 plans may hire
third-party investment advisers either to manage
529 plan assets on their behalf or to act as
investment consultants to the agency responsible
for managing plan assets. These investment
advisers, unless they qualify for a specific
exemption from registration under the Advisers
Act, are generally required to be registered with the
Commission and would therefore be subject to our
proposed rule.
177 A 403(b) plan is a tax-deferred employee
benefit retirement plan established under Section
403(b) of the Internal Revenue Code of 1986 [26
U.S.C. 403(b)].
178 A 457 plan is a tax-deferred employee benefit
retirement plan established under Section 457 of
the Internal Revenue Code of 1986 [26 U.S.C. 457].
179 For example, many 529 plans allow plan
participants to select among various underlying
investment options to direct the investment of their
contributions. The participants’ contributions are
then invested in options of the 529 plan and the
plan, in turn, invests its assets in the investment
companies or other investments on which the plan
options are based. The Internal Revenue Code
requires that in order to set up a 529 plan investor
contributions must be held in a qualified trust. See
26 U.S.C. 529(b). Often, the adviser to the 529 plan
also advises the registered investment companies
that serve as the underlying investment options for
the plan. Sometimes, however, registered
investment companies advised by investment
advisers that do not provide advisory services
directly to the government entity may serve as the
underlying investment options for the plan.

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Government-sponsored savings plans
have grown enormously in recent
years.180 Competition for an adviser’s
fund to be selected as an investment
option in government-sponsored savings
plans is keen,181 and we are concerned
that advisers to pooled investment
vehicles are making political
contributions to influence the decision
by government entities of the funds to
be included as options in such plans. Of
course, as discussed above,182 proving
such a direct quid pro quo or intent to
influence in a specific case often will
not be possible. As previously stated, it
is precisely because of that difficulty
that a prophylactic rule is needed.183
We are concerned about the harmful
effects pay to play activities may have
in this context on these governmentsponsored plans and their beneficiaries.
Plans and their beneficiaries may be
harmed, for example, if because of an
adviser’s political contributions, a
government official causes a
government-sponsored plan to invest in
a fund managed by that adviser that
charges higher fees or is less well
managed than a fund that may have
been chosen on the basis of pure merit.
In addition, pay to play practices could
be particularly damaging in the 529
context if a State offers only one, or very
few, investment options to its
180 See Investment Company Institute, 529 Plan
Program Statistics, Dec. 2008 (May 22, 2009),
available at http://www.ici.org/research/stats/529s/
529s_12-08 (indicating that 529 plan assets have
increased from $8.6 billion in 2000 to $104.9 billion
in the fourth quarter of 2008, and that 529 plan
participants have increased from 1.3 million in
2000 to 11.2 million in the fourth quarter of 2008);
Investment Company Institute, The U.S. Retirement
Market, 2008, 18 Research Fundamentals, No. 5
(June 2009), available at http://www.ici.org/pdf/fmv18n5.pdf (indicating that 403(b) plan and 457 plan
assets have increased from $627 billion in 2000 to
$712 billion in the fourth quarter of 2008); SEI,
Collective Investment Trusts: The New Wave in
Retirement Investing (May 2008), available at
https://longjump.com/networking/
RepositoryPublicDocDownload?id=80031025axe
139509557&
docname=SEI%20CIT%20White%20Paper
%205.08.pdf&cid=80031025&encode=application/
pdf (citing Morningstar data indicating that
collective investment trust assets nearly tripled
from 2004 to 2007 and grew by more than 150
percent between 2005 and 2007 alone).
181 See, e.g., Charles Paikert, TIAA–CREF Stages
Comeback in College Savings Plans, Crain’s New
York Business (Apr. 23, 2007) (depicting TIAA–
CREF’s struggle to remain a major player in
managing State 529 plans because of increasing
competition from the industry’s heavyweights);
Beth Healy, Investment Giants Battle for Share of
Exploding College-Savings Market, Boston Globe
(Oct. 29, 2000), at F1 (describing the increasing
competition between investment firms for State 529
plans and increasing competition to market their
plans nationally).
182 See supra notes 16 and 55 and accompanying
text.
183 See, e.g. Blount, supra note 16, at 945.

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participants.184 Accordingly, we are
proposing to include these other pooled
investment vehicles often managed by
investment advisers.
Under the rule, each of the pay to play
prohibitions (with one exception
discussed below) would be equally
applicable to an investment adviser that
manages assets of a government entity
through the entity’s investment in a
covered investment pool managed by
that adviser. For example, if an
investment adviser subject to our rule
makes a campaign contribution to an
official of a government entity in a
position to influence the decision to
invest government assets in a private
equity fund managed by that adviser,
the investment adviser would be
prohibited from receiving compensation
with respect to the government entity’s
investment in the private equity fund.
In the case of an adviser to a publiclyoffered registered investment company,
however, we propose to apply the twoyear ‘‘time out’’ provision only when
the investment company is included in
a plan or program of a government
entity (e.g., a 529 plan).185 When a
government entity invests in publiclyoffered securities of a registered
investment company, we are generally
less concerned that the investment
company’s adviser would be motivated
by pay to play considerations if, for
example, the adviser has not bid for, or
solicited, the government entity’s
business. Moreover, in many
circumstances in which a government
entity determines to make an
investment in an investment company
for cash management or other purposes,
the adviser may not even be aware that
a government entity has made an
investment.186 We are mindful that
184 See, e.g., Restrictions Lessen Benefits of State
College Savings Plans, USA Today (Dec. 1, 2003),
at A20 (‘‘[M]any States offer only a few investment
options * * * [and] limit investors to a single fund
company. * * * While plans vary, States typically
have negotiated an exclusive deal with one fund
company.’’).
185 Proposed rule 206(4)–5(c), (f)(3). Accordingly,
the time out provision would be applicable, for
example, if a particular mutual fund is selected to
be an investment option for participants in a 529
plan; the time out provision would not be
applicable if a State government invested its
pension fund assets in that same mutual fund. We
define a ‘‘plan or program of a government entity’’
in the proposed rule as any investment program or
plan sponsored or established by a government
entity, including, but not limited to, a ‘‘qualified
tuition plan,’’ such as a 529 plan, a retirement plan,
such as a 403(b) plan or 457 plan, or any similar
program or plan. Proposed rule 206(4)–5(f)(8).
186 In contrast, where securities are privately
placed, such as securities of a private fund, the
adviser (and through its compliance program, its
personnel) should be aware that an investment from
a government entity is being solicited and should
therefore be in a position to refrain from making
contributions that would trigger a ‘‘time out’’ with

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subjecting advisers and their covered
associates to the two-year ‘‘time out’’ in
these situations could create substantial
compliance challenges because the
adviser would have to monitor
investments by these government
entities in its investment companies to
ensure that a contribution by the adviser
or its covered associates did not trigger
a time out. In contrast, we have
included an exception that would
subject to the two-year time out
provision an adviser to a publicly
offered registered investment company
that is included in a plan or program of
a government entity because we believe
pay to play concerns are more likely to
be present in that situation, and advisers
will clearly know that the government
entity is a client or investor in the
adviser’s investment company. As noted
above, significant competition exists
among advisers to have their funds
selected as investment options in
government-sponsored savings plans,
which we believe may contribute to the
risk of pay to play.187
We believe it is appropriate, however,
to apply the other two substantive
prohibitions of the proposed rule 188 to
advisers to pooled investment vehicles
regardless of whether it is included in
a plan or program of a government
entity. We believe the same concerns
regarding pay to play are raised under
those prohibitions whether the adviser
is managing the government entities’
assets directly or through a pooled
investment vehicle.
For example, an investment adviser
subject to our proposed rule that
manages a registered investment
company would be prohibited from
compensating a third party to solicit an
investment by a government entity in
the fund or soliciting others to make
contributions to officials of a
government entity that the adviser seeks
to have invest in the fund. For purposes
of the two-year time out, however, a
mutual fund adviser would not need to
screen for investments from government
entities to determine if a disqualifying
campaign contribution has been made if
the fund is used for investment of a
State government’s general assets or for
investment by the State’s pension fund.
If the registered investment company is
to be included in that State’s 529 plan,
however, the investment adviser would
be subject to the two-year time out on
contributions.189
respect to receiving compensation from that
government entity.
187 See supra note 180 and accompanying text.
188 Proposed rule 206(4)–5(a)(2)(i) and (ii).
189 The proposed rule would prohibit the receipt
of compensation from the investment company by

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We request comment on the definition
of covered investment pool under the
proposed rule. Should we also apply the
rule in the context of government
investments in structured finance
vehicles in which public funds may
invest? 190 Should we, alternatively or in
addition, limit the applicability of the
proposed rule’s prohibitions in the
context of registered investment
companies to circumstances under
which the government entity’s
investment is of a sufficiently large size
such that the fund adviser is more likely
to have an incentive to attempt to
influence the government entity’s
decision-making process? If so, how
should we define that threshold?
Should we, for example, base it on the
amount of assets in the fund, such as 5
percent of the fund’s assets? Should we
treat differently under the rule advisers
the investment adviser, not the inclusion of the
investment company in the 529 plan, and would
also prohibit the receipt of any advisory fee to
which the adviser is entitled if it is also a direct
adviser to the 529 plan.
We note that a firm retained by a government
entity to distribute interests in a 529 plan (i.e.,
municipal fund securities) may be subject to MSRB
rules. See Municipal Securities Rulemaking Board,
Interpretive Notice: Rule D–12: Interpretation
Relating to Sales of Municipal Fund Securities in
the Primary Market (Jan. 18, 2001), available at
http://www.msrb.org/msrb1/rules/NewRuleD­
12Interpretation.htm. Such a distributor may have
an affiliated investment adviser that is retained by
the government entity to provide investment advice
to the 529 plan. Thus, the distributor could be
subject to MSRB rules G–37 and G–38, while the
affiliated investment adviser could be subject to our
proposed rule, if adopted. As we note above, the
investment adviser’s fiduciary obligations could
require it to continue to provide investment advice
without compensation after it or a covered associate
gives a contribution that triggers our proposed
rule’s two-year ‘‘time out’’ while MSRB rule G–37
typically would ban a firm from continuing to
engage in municipal securities business for two
years after a triggering contribution is made. See
supra note 80. However, the MSRB has provided
additional flexibility in the context of contracts to
distribute securities such as interests in 529 plans.
See Municipal Securities Rulemaking Board,
Interpretation on the Effect of a Ban on Municipal
Securities Business under Rule G–37 Arising During
a Pre-Existing Engagement Relating to Municipal
Fund Securities (Apr. 2, 2002), available at
http://www.msrb.org/msrb1/rules/notg37.htm
(allowing a dealer that has become subject to G–37’s
ban on new municipal securities business to
continue receiving compensation throughout the
duration of the ban if certain conditions are met).
We are not proposing a similar approach under our
rule because it would undermine the deterrent
effect of having a two-year time out.
190 These might include, for example, pools
exempt from the definition of ‘‘investment
company’’ under Section 3(c)(5) or (6) of the
Investment Company Act [15 U.S.C. 80a–3(c)(5) and
(6)] and pools relying on rule 3a–7 under the
Investment Company Act. [17 CFR 270.3a–7].
Pursuant to our proposed definition of ‘‘covered
investment pool,’’ the rule would apply to an
investment by a government entity in a structured
finance vehicle that relies on Section 3(c)(1) or
3(c)(7) of the Investment Company Act [15 U.S.C.
80a–3(c)(1) and (7)]. See proposed rule 206(4)–
5(f)(3).

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to funds in plans where the adviser is
not the sole or primary adviser to the
plan or where a different adviser’s funds
are included as investment options
under the plan? For example, are there
sub-advisory arrangements in which a
sub-adviser would not know or be able
to influence whether, or which,
government entities are being solicited
for a covered investment pool? If so,
how should we define those subadvisers? Should we circumscribe the
rule’s applicability so it is not triggered
in the context of government entity
investments in particular types of funds,
such as money market funds, where the
ability of the adviser to profit might be
attenuated because, for example, those
particular types of funds tend to
generate lower margin or investments
tend to be for relatively short terms?
Should we provide exceptions to the
provision subjecting an adviser to a twoyear ‘‘time out’’ from receiving
compensation in the context of specific
types of government entity investments
(such as short-term investments for cash
management)?
(3) Applying the Compensation Limit to
Covered Investment Pools
If a government entity is an investor
in a covered investment pool at the time
the contribution triggering a two-year
‘‘time out’’ is made, the proposed rule
would require the adviser to forgo any
compensation related to the assets
invested or committed by that
government entity.191 We recognize the
provisions of the proposed rule that
would require the adviser to either
waive its fee or terminate the
relationship raise different issues for
investment pools than for separately
managed accounts due to various
structural and legal differences.
In the case of a private fund, the
adviser typically could waive or rebate
the related fees and any performance
allocation or carried interest.192 The
adviser may also seek to cause the
191 See

discussion at Section II.A.3.(a)(1), supra.
We note that the phrase ‘‘for compensation’’
includes both profits and the recouping of costs, so
the proposed rule would not permit an adviser to
continue to manage assets at cost after a
disqualifying contribution is made.
192 Some commenters on our 1999 Proposal noted
that a performance fee waiver raises various
calculation issues. An adviser making a
disqualifying contribution could comply with the
proposed rule by waiving a performance fee or
carried interest determined on the same basis as the
fee or carried interest is normally calculated, e.g.,
on a mark-to-market basis. For arrangements like
those typically found in private equity and venture
capital funds where the fee or carry is calculated
based on realized gains and losses and mark-tomarket calculations are not feasible, advisers could
use a straight line method of calculation which
assumes that the realized gains and losses were
earned over the life of the investment.

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pooled investment vehicle to redeem
the investment of the government entity.
For many private funds, such as venture
capital and private equity funds, it may
not be possible for a government entity
to withdraw its capital or cancel its
commitment without harm to the other
investors. We request comment on ways
to prevent advisers to these funds from
benefitting from contributions covered
by the two-year time out, while
protecting other investors in the funds.
The options for restricting
compensation involving government
investors in registered investment
companies are more limited, due to both
Investment Company Act provisions
and potential tax consequences.193 One
approach that would meet the
requirements of the proposed rule
would be for the adviser of a registered
investment company to waive its
advisory fee for the fund as a whole in
an amount approximately equal to fees
attributable to the government entity.194
We request comment on other options
that may be available, including
alternatives that might require us to
revise the proposed rule.
An adviser to a covered investment
pool that serves as an investment option
in a government program such as a 529
plan might seek to eliminate its
investment pool as an option in order to
comply with or mitigate costs arising
from the rule’s two-year ‘‘time out.’’ As
a result, plan investors may be denied
an appropriate investment alternative.
Would elimination of the option be an
inappropriate consequence we should
seek to prevent? Have we appropriately
applied the rule to curb pay to play
activities (that may be effectuated, for
example, through revenue sharing
arrangements) while still permitting
funds to be marketed and distributed to
government entities in the ordinary
course of business through compensated
third parties, such as registered brokerdealers?
(f) Exemptions
We are proposing a provision under
which an adviser may apply to us for an
order exempting it from the two-year
compensation ban.195 Under the
proposed rule, the Commission could
193 See, e.g., Rule 18f–3 under the Investment
Company Act. Moreover, other regulatory
considerations, such as the Employee Retirement
Income Security Act of 1974 [29 U.S.C. 18]
(‘‘ERISA’’), may impact these arrangements with
respect to collective investment trusts.
194 This may also be done at the class level or
series level for private funds organized as
corporations.
195 Rules 0–4, 0–5, and 0–6 under the Advisers
Act [17 CFR 275.0–4, 0–5, and 0–6] provide
procedures for filing applications under the Act,
including applications under the proposed rule.

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Federal Register / Vol. 74, No. 151 / Friday, August 7, 2009 / Proposed Rules
exempt advisers from the rule’s ‘‘time
out’’ requirement where the adviser
discovers contributions that trigger the
compensation ban only after they have
been made or when imposition of the
prohibitions is unnecessary to achieve
the rule’s intended purpose.196
In determining whether to grant an
exemption from the two-year
compensation ban, we would take into
account the varying facts and
circumstances that each application
presents. Further, we would consider:
(i) Whether the exemption is necessary
or appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Advisers Act; (ii) whether the
investment adviser, (A) before the
contribution resulting in the prohibition
was made, adopted and implemented
policies and procedures reasonably
designed to prevent violations of this
section; (B) prior to or at the time the
contribution which resulted in such
prohibition was made, had no actual
knowledge of the contribution; and (C)
after learning of the contribution, (1) has
taken all available steps to cause the
contributor involved in making the
contribution which resulted in such
prohibition to obtain a return of the
contribution; and (2) has taken such
other remedial or preventive measures
as may be appropriate under the
circumstances; (iii) whether, at the time
of the contribution, the contributor was
a covered associate or otherwise an
employee of the investment adviser, or
was seeking such employment; (iv) the
timing and amount of the contribution
which resulted in the prohibition; (v)
the nature of the election (e.g., Federal,
State or local); and (vi) the contributor’s
apparent intent or motive in making the
contribution which resulted in the
prohibition, as evidenced by the facts
and circumstances surrounding such
contribution.197
These factors are similar to those
considered by FINRA and the
appropriate bank regulators in
determining whether to grant an
exemption under MSRB rule G–37(i).198
As suggested above, when applying the
criteria, we expect to take into account,
among other things, the varying facts
and circumstances presented by each
application. The factors are intended to
assist us in determining whether
granting relief is appropriate. For
example, one factor relates to whether
196 This

provision is similar to our 1999 proposal.
rule 206(4)–5(e). If the proposed rule
is adopted, we would grant such exemptions
pursuant to our authority under Section 206A of the
Advisers Act [15 U.S.C. 80b–6a].
198 See MSRB rule G–37(i).
197 Proposed

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the adviser had and implemented
reasonably designed policies and
procedures. Several other factors relate
to the adviser’s knowledge of the
contribution and its conduct after the
contribution was discovered. The
remaining factors largely relate to the
particular facts surrounding the
contribution that may affect whether it
is appropriate for us to grant relief in
that situation. For example, the same
amount of money contributed in a local
election may have a much greater
impact than in a Federal election. Facts
regarding the timing and amount of the
contribution, the contributor’s
employment status at the time of the
contribution, as well as the contributor’s
apparent intent or motive may suggest
whether the contribution was made to
influence the selection of the adviser.
We would apply these exemptive
provisions with sufficient flexibility to
avoid consequences disproportionate to
the situation, while effecting the
policies underlying the rule.199 Should
we provide for additional exemptions
from the proposed rule? We request
comment on the proposed criteria for
exemptions by application. Are there
additional criteria the Commission
should explicitly consider when
determining whether to grant an
exemption?
B. Recordkeeping
We are also proposing amendments to
rule 204–2 200 to require an investment
adviser that is registered or required to
be registered with us and (i) has or seeks
government clients or (ii) provides
investment advisory services to a
covered investment pool in which a
government entity investor invests or is
solicited to invest, to make and keep
certain records of contributions made by
the adviser and its covered associates.
We believe these records would be
necessary to allow us to examine for
compliance with rule 206(4)–5, if
adopted.
The proposed amendments would
require an adviser to make and keep the
following records: (i) The names, titles
and business and residence addresses of
all covered associates of the investment
adviser; (ii) all government entities for
which the investment adviser or any of
its covered associates is providing or
199 An adviser applying for an exemption could
place advisory fees earned between the date of the
contribution triggering the prohibition and the date
on which we determine whether to grant an
exemption in an escrow account. The escrow
account would be payable to the adviser if the
Commission grants the exemption. If the
Commission does not grant the exemption, the fees
contained in the account must be returned to the
public fund.
200 17 CFR 275.204–2.

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39859

seeking to provide investment advisory
services, or which are investors or are
solicited to invest in any covered
investment pool to which the
investment adviser provides investment
advisory services, as applicable; 201 (iii)
all government entities to which the
investment adviser has provided
investment advisory services, along
with any related covered investment
pool(s) to which the investment adviser
has provided investment advisory
services and in which the government
entity has invested, as applicable, in the
past five years, but not prior to the
effective date of the proposed rule; 202
and (iv) all direct or indirect
contributions or payments made by the
investment adviser or any of its covered
associates to an official of a government
entity, a political party of a State or
political subdivision thereof, or a
PAC.203 The adviser’s records of
contributions and payments would be
required to be listed in chronological
order identifying each contributor and
recipient, the amounts and dates of each
contribution or payment and whether
such contribution or payment was
subject to the exception for certain
returned contributions pursuant to
proposed rule 206(4)–5(b)(2).204 These
requirements are generally consistent
with the MSRB recordkeeping rule for
broker-dealers.205
Should we exclude de minimis
contributions from the recordkeeping
requirement? Should we expand our
recordkeeping requirements to cover
records of contributions or payments
not just to government officials and
political parties, but also persons
associated with officials of government
entities, regardless of whether
contributions or payments to these
individuals trigger the prohibitions
201 We note that an adviser may identify its
clients on its books through the use of codes. See
Advisers Act rule 204–2(d) [17 CFR 275.204–2(d)].
202 See id.
203 Proposed rule 204–2(a)(18)(i). We note that
this provision is intended to include records of
direct contributions an adviser or its covered
associates makes under proposed rule 206(4)–
5(a)(1), as well as records of contributions or
payments an adviser or its covered associates
coordinates or solicits another person or PAC to
make under proposed rule 206(4)–5(a)(2)(ii), which
would be considered indirect contributions or
payments.
204 Proposed rule 204–2(a)(18)(ii).
205 MSRB rule G–8(a)(xvi). Like rule G–37, the
proposed rule requires an investment adviser to
keep, in addition to records of political
contributions, records of any other ‘‘payments’’
made to officials, political parties or PACs. See
proposed amendment to rule 204–2(a)(18)(i)(D). See
also supra note 149 and accompanying text for an
explanation of how the rule distinguishes between
contributions and payments. The MSRB also
requires certain records to be made and kept in
accordance with disclosure requirements that our
proposed rule does not contain.

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contained in our proposed pay to play
rule? 206
To manage compliance with the
proposed rule effectively, we would
expect that the adviser would adopt
sufficient internal procedures—which
would include keeping certain
records—to prevent the rule’s
prohibitions from being triggered.207 As
discussed above, a single contribution
could, under the rule, lead to a two-year
suspension of compensated advisory
activities for a government client.
Therefore, we anticipate that many, if
not all, of the records that we propose
to require registered advisers make and
keep under our proposed amendments
would be those an adviser undertaking
a serious compliance effort would
ordinarily make and keep. We request
that commenters opposing the new
recordkeeping requirements suggest
alternative means that would be
sufficient to aid examinations for
compliance with the proposed rule.

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C. Amendment to Cash Solicitation Rule
We are also proposing a technical
amendment to rule 206(4)–3 under the
Advisers Act, the ‘‘cash solicitation
rule.’’ That rule makes it unlawful,
except under specified circumstances
and subject to certain conditions, for an
investment adviser to make a cash
payment to a person who directly or
indirectly solicits any client for, or
refers any client to, an investment
adviser.208
Because paragraph (iii) of rule
206(4)–3 contains provisions regarding
more general restrictions on third-party
solicitors that would cover solicitation
activities directed at any client—
whether a government entity client or
not—our proposed technical
amendment would be designed to note
the specialized provisions prohibiting
payments by an adviser to third-party
solicitors of government clients that are
contained in proposed rule 206(4)–5.
Specifically, we propose to add a new
paragraph (e) to rule 206(4)–3 to alert
advisers and others that special
prohibitions apply to solicitation
activities involving government entity
clients under our proposed pay to play
rule.209
D. Transition Period
The prohibition and recordkeeping
requirements under the proposed rule
would arise from contributions made on
or after the effective date of the rule, if
206 See

supra note 89 and accompanying text.
Advisers Act rule 206(4)–7 [17 CFR
275.206(4)–7] (setting forth guidelines for advisers’
compliance policies and procedures).
208 17 CFR 275.206(4)–3.
209 Proposed rule 206(4)–3(e).
207 See

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adopted. As a result, firms would need
to have developed and adopted
appropriate procedures to track
contributions and would need to begin
monitoring contributions made by their
covered associates on that date. The
Commission requests comment on
whether firms would require additional
time to develop procedures to comply
with the proposed rule and, if so, how
long of a transition period following the
rule’s adoption would be necessary? For
example, if a transition period is
necessary, would 90 days be an
appropriate amount of time? Would
longer be necessary, e.g., six months,
and if so, why?
E. General Request for Comment
Any interested persons wishing to
submit written comments on the
proposed rule and rule amendment that
are the subject of this Release, or to
suggest additional changes or submit
comments on other matters that might
have an effect on the proposals
described above, are requested to do so.
Commenters suggesting alternative
approaches are encouraged to submit
proposed rule text.
III. Cost/Benefit Analysis
We are sensitive to the costs and
benefits imposed by our rules, and
understand that there would be
compliance costs with proposed rule
206(4)–5 and the proposed amendment
to rule 204–2.210 We are mindful of the
burdens the proposed rule would place
on advisory firms and limitations it
would place on the ability of certain
persons associated with an adviser to
make contributions to candidates for
certain offices and to solicit
contributions for certain candidates and
payments to political parties. We thus
have narrowly tailored the rule to
achieve our goal of ending adviser
participation in pay to play practices,
while seeking to limit these burdens.
The proposed rule and rule
amendments would address ‘‘pay to
play’’ practices by investment advisers
that provide, or are seeking to provide,
advisory services to government entity
clients and to certain covered
investment pools in which a
government entity invests. The
proposed rule would prohibit an
investment adviser from providing
advisory services for compensation to a
government client for two years after the
adviser or certain of its executives or
210 We are also proposing to make a conforming
technical amendment to rule 206(4)–3 to address
potential areas of conflict with proposed rule
206(4)–5. We do not expect that this technical
amendment will affect the costs associated with the
rulemaking.

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employees make a contribution to
certain elected officials or candidates.
The proposed rule would also prohibit
an adviser from providing or agreeing to
provide, directly or indirectly, payment
to any third party for a solicitation of
advisory business from any government
entity, or for a solicitation of a
government entity to invest in certain
covered investment pools, on behalf of
such adviser. Additionally, the
proposed rule would prevent an adviser
from coordinating or soliciting from
others contributions to certain elected
officials or candidates or payments to
certain political parties. Our proposed
amendment to rule 204–2 would require
a registered adviser (or adviser required
to be registered) to maintain certain
records of the political contributions
made by the adviser or certain of its
executive or employees.
A. Benefits
As discussed extensively throughout
this release, we expect that proposed
rule 206(4)–5 would yield several
important direct and indirect benefits.
At its core, the rulemaking addresses
practices that undermine the integrity of
our markets. Overall, the proposed rule
is intended to address pay to play
relationships that interfere with the
legitimate process by which advisers are
chosen based on the merits rather than
on their contributions to political
officials. The potential for fraud to
invade the various, intertwined
relationships created by pay to play
arrangements is without question.
Accordingly, we believe that the
proposed rule will achieve its goals of
protecting public pension plans,
beneficiaries, and other investors from
the resulting harms.
Curtailing pay to play practices will
help protect public pension plans and
investments of the public in
government-sponsored savings and
retirement plans and programs by
addressing situations in which a more
qualified adviser may not be selected,
potentially leading to inferior
management, diminished returns or
greater losses. By addressing pay to play
practices, we would be leveling the
playing field so that the advisers
selected to manage retirement funds and
other investments for the public are
more likely to be selected based on their
skills and the quality of their advisory
services. These benefits could result in
substantial savings and better
performance for the public pension

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Federal Register / Vol. 74, No. 151 / Friday, August 7, 2009 / Proposed Rules
plans, their beneficiaries, and
participants.211
By leveling the playing field among
advisers competing for State and local
government business, the proposed rule
could also eliminate or minimize
manipulation of the market for advisory
services provided to State and local
governments. Payments made to thirdparty solicitors as part of pay to play
practices create artificial barriers to
competition for firms that cannot, or
will not, make those contributions or
payments. They also create increased
costs for firms that may feel they have
no alternative but to pay to play.
Additionally, pay to play practices
potentially expose an adviser to other
costs, such as liability, defense costs
and distraction from its duties.
Curtailing pay to play arrangements
enables advisory firms, particularly
smaller advisory firms, to compete on
merit, rather than their ability or
willingness to make contributions.
Moreover, the absence of arm’s-length
negotiations may enable advisers to
obtain greater ancillary benefits, such as
‘‘soft dollars,’’ from the advisory
relationship, which may be directed for
the benefit of the adviser, potentially at
the expense of the pension plan, thereby
using a pension plan asset for the
adviser’s own purposes.212
Additionally, taxpayers could benefit
because they might otherwise bear the
financial burden of bailing out a
government pension fund that has
ended up with a shortfall due to poor
performance or excessive fees that might
result from pay to play.
Applying the proposed rule to
government entity investments in
certain pooled investment vehicles or
where a pooled investment vehicle is an
investment option in a governmentsponsored plan or program would
extend the same benefits regardless of
whether an adviser subject to the
proposed rule is providing advice
directly to the government entity or is
managing assets for the government
entity indirectly through a pooled
investment vehicle. By addressing
distortions in the process by which
investment decisions are made
regarding public investments, we will
provide important protections to public
pension plans and their beneficiaries, as
well as participants in other important
plans or programs sponsored by
government entities. Other investors in
a pooled investment vehicle also will be
better protected from, among other
211 According to U.S. census data as of 2007, there
are 2,547 State and local government employee
retirement systems.
212 See supra note 51.

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things, the effects of fraud that may
result from an adviser’s participation in
pay to play activities, such as higher
advisory fees.
Finally, the proposed amendments to
rule 204–2 would benefit the public
plans and their beneficiaries and
participants in State plans or programs
as well as investment advisers that keep
the required records. The public
pension plans, beneficiaries, and
participants would benefit from these
amendments because the records
required to be kept would provide
Commission staff with information to
review an adviser’s compliance with
proposed rule 206(4)–5 and thereby may
promote improved compliance.
Advisers would benefit from the
proposed amendments to the
recordkeeping rule as these records
would assist the Commission in
enforcing the rule against, for example,
competitors whose pay to play
activities, if not uncovered, could
adversely affect the competitive position
of a compliant adviser.
B. Costs
The proposed rule and rule
amendments would impose costs on
advisers that provide advisory services
to government clients, though we have
tried to minimize the costs associated
with an inadvertent violation of
proposed rule 206(4)–5 by including an
exception for certain returned
contributions. The proposed rule would
require an adviser with government
clients, and an adviser that solicits
business from government clients, to
incur costs to monitor contributions
made by the adviser and its covered
associates, and to establish procedures
to comply with the proposed rule and
rule amendments. The initial and
ongoing compliance costs imposed by
the proposed rule would vary
significantly among firms, depending on
a number of factors. These include the
number of covered associates of the
adviser, the degree to which compliance
procedures are automated, the extent to
which an adviser has a pre-existing
policy under its code of ethics or
compliance program,213 and whether
the adviser is affiliated with a brokerdealer firm that is subject to rules G–37
and G–38. A smaller adviser, for
example, would likely have a small
number of covered associates, and thus
expend less resources to comply with
213 See Investment Counsel Association of
America Comment Letter (May 15, 2000) (‘‘May
ICAA Comment Letter’’) (‘‘According to our
members, many investment advisers already have
policies and procedures in place to report
contributions under State and local law and to
avoid pay to play issues.’’).

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the proposed rule and rule amendments
than a larger adviser.
A large adviser is likely to spend more
resources to comply with the rule than
a smaller adviser. However, based on
staff observations, a large adviser is
more likely to have an affiliated brokerdealer that is required to comply with
MSRB rules G–37 and G–38.214 Such a
large adviser could likely use some or
all of the compliance procedures
established by its broker-dealer affiliate
to facilitate its compliance with
proposed rule 206(4)–5. As a result,
many advisers with broker-dealer
affiliates may spend less resources to
comply with the proposed rule and rule
amendments.215
We anticipate that advisory firms
subject to proposed rule 206(4)–5 would
develop compliance procedures to
monitor the political contributions
made by the adviser and its covered
associates. We estimate that the costs
imposed by the proposed rule would be
higher initially, as firms establish and
implement procedures and systems to
comply with the rule and rule
amendments. It is anticipated that
compliance expenses would then
decline to a relatively constant amount
in future years, and annual expenses are
likely to be lower for small advisers as
the systems and processes should be
less complex than for a large adviser.
We estimate that approximately 1,764
investment advisers registered with the
Commission may be affected by the
proposed rule and rule amendments.216
214 According to registration information available
from Investment Adviser Registration Depository
(‘‘IARD’’) as of July 1, 2009, there are 1,312 SECregistered investment advisers (or 11.57% of the
total 11,340 registered advisers) that indicate in
Item 5.D.(9) of Form ADV that they have State or
municipal government clients. Of those 1,312
advisers, 108 (or 82.4%) of the largest 10% have
one or more affiliated broker-dealers or are,
themselves, also registered as a broker-dealer; and
202 of the largest 20% (or 87.1%) have one or more
affiliated broker-dealers or are, themselves, also
registered as a broker-dealer. Conversely, only 46
(or 35.1%) of the smallest 10% have one or more
affiliated broker-dealers or are, themselves, also
registered as a broker-dealer; and only 72 of the
smallest 20% (or 31.0%) have one or more affiliated
broker-dealers or are, themselves, also registered as
a broker-dealer. With respect to broker-dealer
affiliates, however, we note that our IARD data does
not indicate whether the affiliated broker-dealer is
a municipal securities dealer subject to MSRB rules
G–37 and G–38.
215 Cf. Comment Letter of US Bancorp Piper
Jaffray (Nov. 15, 1999) (‘‘U.S. Bancorp Letter’’)
(‘‘[T]he more the Rule mirrors G–37, the more firms
can borrow from or build upon compliance
procedures already in place. * * * [H]owever,
[there are] many differences between the rules that
would result in significant new burdens.’’).
216 This number is based on registration
information available from IARD as of July 1, 2009.
As noted previously, there are 1,312 SEC-registered
investment advisers (or 11.57% of the total 11,340

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Of the 1,764 advisers, we estimate that
approximately 1,300 advisers have
fewer than five covered associates that
would be subject to the proposed rule
each, a ‘‘smaller firm’’; approximately
328 advisers have between five and 15
covered associates each, a ‘‘medium
firm’’; and approximately 136 advisers
have more than 15 covered associates
that would be subject to the prohibitions
of the proposed rule each, a ‘‘larger
firm’’ 217.
Advisers that are unregistered in
reliance on the exemption available
under section 203(b)(3) of the Advisers
Act [15 U.S.C. 80b–3(b)(3)] would be
subject to proposed rule 206(4)–5.218
Based on our review of registration
information on IARD and outside
sources and reports, we estimate that
there are approximately 2,000 advisers
that are unregistered in reliance on
section 203(b)(3).219 Applying the same
principles we used with respect to
registered investment advisers, we
registered advisers) that indicate in Item 5.D.(9) of
Form ADV that they have State or municipal
government clients. Based on this data point and
other responses to Item 5.D., we further estimate
that 289 (or 11.57%) of the 2,502 registered
investment advisers that manage ‘‘other pooled
investment vehicles’’ (and do not also indicate that
they have State or municipal government clients)
are advising pooled investment vehicles in which
government clients invest, and we estimate that 79
(or 11.57%) of the 679 registered investment
advisers that manage registered investment
companies (and do not also indicate that they have
State or municipal government clients) are advising
registered investment companies that are available
as an investment option in a government plan or
program. The sum of 1,312, 289 and 79 is 1,680.
The proposed rule also applies to those advisers
that seek to obtain government clients, and we do
not know the precise number of such advisers. We
believe, however, that the percentage of advisers is
likely not great because, according to IARD data,
there has not been any appreciable growth or
shrinkage over the past five years in the percentage
of SEC-registered advisers who have State or
municipal government clients; the percentage has
been almost unchanged. Accordingly, we estimate
that an additional 5% (or 84) of SEC-registered
advisers are seeking government clients, for a total
of 1,764 (1,680 + 84) registered advisers subject to
the proposed rule.
217 These estimates are based on IARD data,
specifically the responses to Item 5.B.(1) of Form
ADV, that 967 (or 73.7%) of the 1,312 registered
investment advisers that have government clients
have fewer than five employees who perform
investment advisory functions related to those
government clients, 244 (or 18.6%) have five to 15
such employees, and 101 (or 7.7%) have more than
15 such employees. We then applied those
percentages to the 1,764 advisers we believe will be
subject to the proposed rule for a total of 1,300
smaller, 328 medium and 136 larger firms.
218 The proposed amendments to rules 204–2 and
206(4)–3 would apply only to advisers that are
registered, or required to be registered, with the
Commission.
219 This number is based on our review of
registration information on IARD as of July 1, 2009,
IARD data from the peak of hedge fund adviser
registration in 2005, and a distillation of numerous
third-party sources including news organizations
and industry trade groups.

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estimate that 231 of those advisers
manage pooled investment vehicles in
which government client assets are
invested and would therefore be subject
to the proposed rule.220
For purposes of this analysis, it is
assumed that each exempt advisory firm
that would be subject to the proposed
rule would likely either be smaller firms
or medium firms, in terms of number of
covered associates because it is unlikely
that an adviser that is limited to fewer
than 15 clients would have a large
number of advisory personnel that
would be covered associates.221
Although the time needed to comply
with the proposed rule would vary
significantly from adviser to adviser, the
Commission staff estimates that firms
with government clients would spend
between 8 hours and 250 hours to
establish policies and procedures to
comply with the proposed rule.
Commission staff further estimates that
ongoing compliance with the proposed
rule would require between 10 and
1,000 hours, annually. These estimates
are derived in part from conversations
with industry professionals regarding
broker-dealer compliance with rule G–
37 and G–38 and representatives of
investment advisers that have pay to
play policies in place. In addition,
advisory firms may incur one-time costs
to establish or enhance current systems
to assist in their compliance with the
proposed rule. These costs would vary
widely among firms. Small advisers may
not incur any system costs if they
determine a system is unnecessary due
to the limited number of employees they
have or the limited number of
government entity clients they have.
Large firms likely already have devoted
significant resources into automating
compliance and reporting and the new
rule could result in enhancements to
these existing systems. We believe such
system costs could range from the tens
of thousands of dollars for simple
reporting systems, to hundreds of
thousands of dollars for complex
systems used by the large advisers. As
we noted previously, large advisers are
more likely to have broker-dealer
affiliates that may already have
compliance systems in place for MSRB
rules G–37 and G–38 that could be used
by an adviser.
Initial compliance procedures would
likely be designed, and ongoing
administration of them performed, by
compliance managers and compliance
clerks. We estimate that the hourly wage
rate for compliance managers is $258,
220 11.57%

of 2000 is 231.4. See supra note 216.
section 203(b)(3) of the Advisers Act [15
U.S.C. 80b–3(b)(3)].
221 See

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including benefits, and for compliance
clerks, $63 per hour, including
benefits.222 To establish and implement
adequate compliance procedures, we
estimate that the proposed rule would
impose initial compliance costs of
approximately $2,064 223 per smaller
firm, approximately $26,156 224 per
medium firm, and approximately
$52,313 225 per larger firm.226 It is
estimated that the proposed rule would
impose annual, ongoing compliance
222 Our hourly wage rate estimate for a
compliance manager and compliance clerk is based
on data from the Securities Industry Financial
Markets Association’s Management & Professional
Earnings in the Securities Industry 2008, modified
by Commission staff to account for an 1800-hour
work-year and multiplied by 2.93 to account for
bonuses, firm size, employee benefits and overhead.
223 The per firm cost estimate is based on our
estimate that development of initial compliance
procedures for smaller firms would take 8 hours of
compliance manager time (at $258 per hour).
224 With respect to our estimated range of 8–250
hours, we assume a medium-sized firm would take
125 hours to develop initial compliance procedures,
and such a firm would likely have support staff. We
also anticipate that a compliance manager would do
approximately 75% of the work because he/she is
responsible for implementing the policy for the
entire firm. Accordingly, the per firm cost estimate
is based on our estimate that development of initial
compliance procedures for medium firms would
take 93.75 hours of compliance manager time (at
$258 per hour) and 31.25 hours of clerical time (at
$63 per hour).
225 With respect to our estimated range of 8–250
hours, we assume a larger firm would take 250
hours to develop initial compliance procedures,
and such a firm would likely have support staff. We
also anticipate that a compliance manager would do
approximately 75% of the work because he/she is
responsible for implementing the policy for the
entire firm. Accordingly, the per firm cost estimate
is based on our estimate that development of initial
compliance procedures for larger firms would take
187.50 hours of compliance manager time (at $258
per hour) and 62.5 hours of clerical time (at $63 per
hour).
226 Some commenters in 1999 suggested that our
cost estimates, then, were too low. See U.S. Bancorp
Letter (‘‘[W]e believe the initial compliance cost
estimates in the [1999] Release of $285 for a small
firm, $13,387.50 for a medium firm and $22,312.50
for a large firm underestimate by orders of
magnitude the initial costs of compliance.’’);
Comment Letter of American Council of Life
Insurance (Nov. 1, 1999) (‘‘Many of our member
companies have observed that the proposal’s
compliance cost projections are speculative and
unrealistic, especially when applied to large
diversified financial institutions like life insurers.
* * * Moreover, the cost estimates are greatly
understated when the proposed rule is applied to
large diversified life insurers offering investment
advice as one of several products and services.
* * * One of our larger diversified member
companies has estimated that it would cost
approximately $200,000 per year to administer
compliance with the proposed rule for the
approximately 200–300 people the rule would
encompass. The company developing these
estimates based its estimate of hours and labor costs
on its actual compliance with Rule G–37.’’). We
have significantly increased our cost estimates from
our 1999 proposal. We also note that the scope of
persons covered under the current rule proposal is
narrower than the scope of persons proposed to be
covered in 1999. See supra note 98 and
accompanying text.

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expenses of approximately $2,580 227
per smaller firm, $104,625 228 per
medium firm, and $209,250 229 per
larger firm.
We further anticipate that
approximately one-third of advisers that
we estimate would be subject to the rule
may also engage outside legal services to
assist in drafting policies and
procedures.230 We estimate the cost
associated with such an engagement
would include fees for approximately
three hours of outside legal review for
a smaller firm, 10 hours for a medium
firm, and 30 hours for a large firm, at a
rate of $400 per hour. For a smaller firm
we estimate a total of $1,200 in outside
legal fees for each of the estimated 325
advisers that would seek assistance, for
a medium firm we estimate a total of
$4,000 for the estimated 164 advisers
that would seek assistance, and for each
of the 102 larger firms we estimate a
total of $12,000.231 Thus, we estimate
that approximately 591 investment
advisers will incur these additional
costs, for a total cost of $2,270,000
among advisers affected by the proposed
rule amendments.
Additionally, we expect that on
average approximately five advisers
annually will apply to the Commission
for an exemption from the proposed
rule.232 We estimate that a firm that
applies for an exemption will hire
outside counsel to prepare an exemptive
request, and that counsel will spend 16
hours preparing and submitting an
application for review at a rate of $400
per hour. As a result, each application
will cost approximately $6,400, and the
total estimated cost for five applications
annually will be $32,000.
The prohibitions of the proposed rule
may also impose other costs on advisers,
covered associates, third-party
solicitors, and political officials. An
227 The per firm cost estimate is based on our
estimate that ongoing compliance procedures for
smaller firms would take 10 hours of compliance
manager time (at $258 per hour) per year.
228 The per firm cost estimate is based on our
estimate that ongoing compliance procedures for
medium firms would take 375 hours of compliance
manager time (at $258 per hour) and 125 hours of
clerical time (at $63 per hour), per year.
229 The per firm cost estimate is based on our
estimate that ongoing compliance procedures for
larger firms would take 750 hours of compliance
manager time (at $258 per hour) and 250 hours of
clerical time (at $63 per hour), per year.
230 Based on staff observations, we estimate 75%
of larger firms, 50% of medium firms, and 25% of
smaller firms would seek to outsource all or a
portion of this type of legal work.
231 As noted above, we estimate 75% of larger
firms, 50% of medium firms, and 25% of smaller
firms would seek the assistance of outside counsel.
232 This estimate is based on staff discussions
with Financial Industry Regulatory Authority staff
responsible for reviewing exemptive applications
submitted under MSRB rule G–37.

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adviser that becomes subject to the
prohibitions of the proposed rule would
no longer be eligible to receive advisory
fees from its government client. This
could limit the number of advisers able
to provide services to potential
government entity clients. The adviser,
however, may be obligated to provide
(uncompensated) advisory services for a
reasonable period of time until the
government client finds a successor to
ensure its withdrawal did not harm the
client, or the contractual arrangement
between the adviser and the government
client might obligate the adviser to
continue to perform under the contract
at no fee. An adviser that provides
uncompensated advisory services to a
government client would incur the
direct cost of providing uncompensated
services, and may incur opportunity
costs if the adviser is unable to pursue
other business opportunities for a
period of time. Advisers to government
clients, as well as covered associates of
the adviser, also may be less likely to
make political contributions to political
officials, possibly imposing costs on the
officials if they are unable to secure
alternate funding. Under the proposed
rule, covered associates and executives
may face new limitations on the
amounts and to whom they can
contribute. In addition, these same
individuals could be prohibited from
soliciting others to contribute or from
coordinating contributions to
government officials or political parties
in certain circumstances. These
limitations and prohibitions, including
if a firm chose to adopt policies or
procedures that are more restrictive than
the proposed rule, could be perceived
by the individuals subject to them as
costs imposed on their ability to express
their support for certain candidates for
elected office and government officials.
Because the proposed rule would
prohibit advisers from compensating
third parties to solicit government
entities for advisory services, advisers
that currently rely on third-party
solicitors to obtain government clients
may have to bear the expense of hiring
and training in-house staff in order to
continue their solicitation activities.
While third-party solicitors are not
subject to the proposed rule, the
proposed ban on advisers’ use of thirdparty solicitors may have a substantial
negative impact on persons who provide
third-party solicitation services, and if
their businesses consists solely of
soliciting government entities on behalf
of investment advisers, the proposed
rule could result in these persons
instead being employed directly by
advisers or shifting the focus of their

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solicitation activities. In addition, small
investment advisers and new
investment advisers that do not have the
capital to hire employees to obtain
government clients may find it difficult
to enter the market to provide advisory
services to government pension plans or
to obtain additional government clients.
We also anticipate that the proposed
amendment to rule 204–2 would impose
additional costs. The proposed
amendments to rule 204–2 would
require that SEC-registered advisers
maintain certain records of campaign
contributions by certain advisory
personnel.233 For purposes of the
Paperwork Reduction Act, we have
estimated that Commission-registered
advisers would incur approximately
3,528 additional hours annually to
comply with the proposed amendments
to rule 204–2.234 Based on this estimate,
we anticipate that advisers would incur
an aggregate cost of approximately
$222,264 per year for the total hours
advisory personnel would spend in
complying with the proposed
recordkeeping requirements.235
Unregistered advisers that would be
subject to proposed rule 206(4)–5 would
not be subject to the proposed
amendments to rules 204–2 and
206(4)–3.
C. Request for Comment
The Commission requests comment
on the effects of the proposed rule and
rule amendments on pension plan
beneficiaries, participants in
government plans or programs,
investors in pooled investment vehicles,
investment advisers, the advisory
profession as a whole, government
entities, third party solicitors, and
political action committees. We request
data to quantify the costs and value of
the benefits associated with the
233 One commenter in 1999 expressed the view
that our proposed amendments to the
recordkeeping rule would be burdensome. See Nov.
ICAA Comment Letter (‘‘The proposed rule, in
effect, requires firms to keep an ongoing,
continuously updated list of prospective
government clients. * * * [I]t is logistically unclear
how a firm should compile this list. * * * [T]he
burden of continuously compiling this list would be
significant.’’) We have increased our burden
estimate from our 1999 proposal. We note that
records are a critical component of proposed rule
206(4)–5. In particular, such records are necessary
for examiners to inspect advisers for compliance
with the terms of the proposed rule. We also note
that it is typical for advisers seeking business from
government entities to do so through a request for
proposal or similar process, which would typically
generate a record.
234 See infra note 242.
235 We expect that the function of recording and
maintaining records of political contributions
would be performed by a compliance clerk at a cost
of $63 per hour. See supra note 222. Therefore the
total costs would be $222,264 (3,528 hours × $63
per/hour).

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proposed rule. Specifically, comment is
requested on the costs of establishing
compliance procedures to comply with
the proposed rule, both on an initial and
ongoing basis. Comment also is
requested on the costs of using
compliance procedures of an affiliated
broker-dealer that the broker-dealer
established as a result of rule G–37 and
G–38.236 In addition, we request data
regarding our assumptions about the
number of unregistered advisers that
would be subject to the proposed rule,
and the number of covered associates of
these exempt advisers. As discussed
below, section 202(c)(1) of the Advisers
Act does not apply to proposed new
rule 206(4)–5 or the proposed
amendments to rule 206(4)–3.
Nonetheless, in the context of the
objectives of this rulemaking, we are
interested in comments that address
whether these proposed rules will
promote efficiency, competition and
capital formation. We solicit comment
on the effect the proposed rule would
have on the market for investment
advisory services and third-party
solicitation services. Commenters
should provide analysis and empirical
data to support their views on the costs
and benefits associated with this
proposal.

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IV. Paperwork Reduction Act
A. Rule 204–2
The proposed amendment to rule
204–2 contains a new ‘‘collection of
information’’ requirement within the
meaning of the PRA, and the
Commission has submitted the
proposed amendment to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. The title for
the collection of information is ‘‘Rule
204–2 under the Advisers Act of 1940.’’
Rule 204–2 contains a currently
approved collection of information
number under OMB control number
3235–0278. An agency may not conduct
or sponsor, and a person is not required
to respond to a collection of information
unless it displays a currently valid
control number.
Section 204 of the Advisers Act
provides that investment advisers
registered or required to be registered
with the Commission must make and
keep certain records for prescribed
periods, and make and disseminate
certain reports. Rule 204–2 sets forth the
236 See ABA Comment Letter (‘‘Any cost-benefit
analysis of the Rule logically should begin, by
analogy, with an analysis of the costs that have been
borne by Municipal Securities Professionals in
complying with MSRB Rule G–37, bearing in mind
that the proposed Rule contains no reporting
requirements.’’).

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requirements for maintaining and
preserving specified books and records.
This collection of information is
mandatory. The Commission staff uses
this collection of information in its
examination and oversight program, and
the information generally is kept
confidential.237
The current approved collection of
information for rule 204–2 is based on
an average of 181.15 burden hours each
year, per Commission-registered
adviser, for a total of 1,954,109 burden
hours. The current total burden is based
on an estimate of 10,787 registered
advisers.
The proposed amendments to rule
204–2 would require every investment
adviser registered or required to be
registered that provides or seeks to
provide advisory services to government
entities to maintain certain records of
contributions made by the adviser or
any of its covered associates. The
proposed amendments would require an
adviser to make and keep the following
records: (i) The names, titles and
business and residence addresses of all
covered associates of the investment
adviser; (ii) all government entities for
which the investment adviser or any of
its covered associates is providing or
seeking to provide investment advisory
services, or which are investors or are
solicited to invest in any covered
investment pool to which the
investment adviser provides investment
advisory services, as applicable; (iii) all
government entities to which the
investment adviser has provided
investment advisory services, along
with any related covered investment
pool(s) to which the investment adviser
has provided investment advisory
services and in which the government
entity has invested, as applicable, in the
past five years, but not prior to the
effective date of the proposed rule; and
(iv) all direct or indirect contributions
or payments made by the investment
adviser or any of its covered associates
to an official of a government entity, a
political party of a State or political
subdivision thereof, or a PAC. An
adviser to a covered investment pool in
which a government entity invests or is
solicited to invest would be treated as
though that investment adviser were
providing or seeking to provide
investment advisory services directly to
the government client. The adviser’s
records of contributions and payments
would be required to be listed in
chronological order identifying each
contributor and recipient, the amounts
and dates of each contribution or
237 See section 210(b) of the Advisers Act [15
U.S.C. 80b–10(b)].

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payment and whether such contribution
or payment was subject to the exception
for certain returned contributions
pursuant to proposed rule 206(4)–
5(b)(2). These records would be required
to be maintained in the same manner,
and for the same period of time, as other
books and records under rule 204–2(a).
This collection of information would be
found at 17 CFR 275.204–2. Advisers
that are exempt from Commission
registration under section 203(b)(3) of
the Advisers Act would not be subject
to the recordkeeping requirements.
Commission records indicate that
currently there are approximately
11,340 registered investment advisers
subject to the collection of information
imposed by rule 204–2.238 As a result of
the increase in the number of advisers
registered with the Commission since
the current total burden was approved,
the total burden has increased by
100,176 hours (553 additional
advisers 239 × 181.15 hours). We
estimate that approximately 1,764
Commission-registered advisers
provide, or seek to provide, advisory
services to government clients and to
certain pooled investment vehicles in
which government entities invest, and
would thus be affected by the proposed
rule amendments.240 Under the
proposed amendments, each respondent
would be required to retain the records
in the same manner and for the same
period of time as currently required
under rule 204–2. The proposed
amendments to rule 204–2 are estimated
to increase the burden by approximately
two hours per Commission-registered
adviser with government clients
annually for a total increase of 3,528
hours.241 The revised annual aggregate
burden for all respondents to the
recordkeeping requirements under rule
204–2 thus would be 2,057,813
hours.242 The revised weighted average
burden per Commission-registered
adviser would be 181.46 hours.243
Additionally, we expect advisory
firms may incur one-time costs to
establish or enhance current systems to
238 This figure is based on registration
information from IARD as of July 1, 2009.
239 11,340¥10,787 = 553.
240 See supra note 216.
241 This increased burden relates only to the
recordkeeping requirements we are proposing to
amend. See supra section III.B. of this release for
an explanation of other estimated costs associated
with complying with the proposed rule and rule
amendments.
242 1,954,109 (current approved burden) +
100,176 (burden for additional registrants) + 3,528
(burden for proposed amendments) = 2,057,813
hours.
243 2,057,813 (revised annual aggregate burden)
divided by 11,340 (total number of registrants) =
181.46.

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assist in their compliance with the
proposed amendments to rule 204–2.
These costs would vary widely among
firms. Small advisers may not incur any
system costs if they determine a system
is unnecessary due to the limited
number of employees they have or the
limited number of government entity
clients they have. Large firms likely
already have devoted significant
resources into automating compliance
and reporting and the new rule could
result in enhancements to these existing
systems. We believe they could range
from the tens of thousands of dollars for
simple reporting systems, to hundreds
of thousands of dollars for complex
systems used by the large advisers.
B. Rule 206(4)–3
The proposed amendment to rule
206(4)–3 contains a revised ‘‘collection
of information’’ requirement within the
meaning of the PRA, and the
Commission has submitted the
proposed amendment to the OMB for
review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. The title for
the collection of information is ‘‘Rule
206(4)–3—Cash Payments for Client
Solicitations.’’ Rule 206(4)–3 contains a
currently approved collection of
information number under OMB control
number 3235–0242.
Section 206(4) of the Advisers Act
provides that it shall be unlawful for
any investment adviser to engage in any
act, practice, or course of business
which is fraudulent, deceptive, or
manipulative. Rule 206(4)–3 generally
prohibits investment advisers from
paying cash fees to solicitors for client
referrals unless certain conditions are
met. The rule requires that an adviser
pay all solicitors’ fees pursuant to a
written agreement that the adviser is
required to retain. This collection of
information is mandatory. The
Commission staff uses this collection of
information in its examination and
oversight program, and the information
generally is kept confidential.244
The current approved collection of
information for rule 206(4)–3 is based
on an estimate that 20% of the 10,817
Commission-registered advisers (or
2,163 advisers) rely on the rule, at an
average of 7.04 burden hours each year,
per respondent, for a total of 15,228
burden hours (7.04 × 2,163).
The proposed amendments to rule
206(4)–3 would require every
investment adviser that relies on the
rule and that provides or seeks to
provide advisory services to government
entities to also abide by the limitations
244 See section 210(b) of the Advisers Act [15
U.S.C. 80b–10(b)].

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provided in proposed rule 206(4)–5.
This collection of information would be
found at 17 CFR 275.206(4)–3. Advisers
that are exempt from Commission
registration under section 203(b)(3) of
the Advisers Act would not be subject
to rule 206(4)–3.
Commission records indicate that
currently there are approximately
11,340 registered investment
advisers,245 20% of which (or 2,268) are
likely subject to the collection of
information imposed by rule 206(4)–3.
As a result of the increase in the number
of advisers registered with the
Commission since the current total
burden was approved, the total burden
has increased by 739.2 hours (105
additional advisers 246 × 7.04 hours). We
assume that approximately 20% of the
Commission-registered advisers that use
rule 206(4)–3 (or 454 advisers) provide,
or seek to provide, advisory services to
government clients and would thus be
affected by the proposed rule
amendments.247 Under the proposed
amendments, each respondent would be
prohibited from certain solicitation
activities with respect to government
clients,248 which would eliminate the
need to enter into and retain the written
agreement required under rule 206(4)–3
with respect to those clients.
Accordingly, the proposed amendments
to rule 206(4)–3 are estimated to
decrease the burden by 20%, or
approximately 1.4 hours, per
Commission-registered adviser that uses
the rule and has or is seeking
government clients annually, for a total
decrease of 635.6 hours. The revised
annual aggregate burden for all
respondents to the recordkeeping
requirements under rule 206(4)–3 thus
would be 15,331.6 hours.249 The revised
weighted average burden per
Commission-registered adviser would
be 6.76 hours.250
245 This figure is based on registration
information from IARD as of July 1, 2009.
246 2,268 (20% of current registered investment
advisers) ¥2,163 (20% of registered investment
advisers when burden estimate was last approved
by OMB) = 105.
247 In light of the 11.57% of registered investment
advisers that indicate they have State or municipal
government clients, we conservatively estimate that
20% of the advisers who rely on rule 206(4)–3 are
soliciting government entities to be advisory clients
or to invest in covered investment pools those
advisers manage. See supra note 214.
248 See proposed rule 206(4)–3(a).
249 15,228 (current approved burden) + 739.2
(burden for additional registrants) ¥635.6
(reduction in burden for proposed amendments) =
15,331.6 hours.
250 15,331.6 (revised annual aggregate burden)
divided by 2,268 (total number of registrants who
rely on rule) = 6.76.

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C. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to:
(i) Evaluate whether the proposed
amendments to the collection of
information are necessary for the proper
performance of the functions of the
Commission, including whether the
information will have practical utility;
(ii) evaluate the accuracy of the
Commission’s estimate of the burden of
the proposed collection of information;
(iii) determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected; and (iv) determine whether
there are ways to minimize the burden
of the collection of information on those
who are to respond, including through
the use of automated collection
techniques or other forms of information
technology.
Persons desiring to submit comments
on the collection of information
requirements should direct them to the
Office of Management and Budget,
Attention: Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Room 3208, Washington, DC
20503, and also should send a copy of
their comments to Elizabeth M. Murphy,
Secretary, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–1090 with
reference to File No. S7–18–09.
Requests for materials submitted to
OMB by the Commission with regard to
this collection of information should be
in writing, refer to File No. S7–18–09,
and be submitted to the Securities and
Exchange Commission, Office of
Investor Education and Advocacy, 100 F
Street, NE., Washington, DC 20549–
0213. OMB is required to make a
decision concerning the collections of
information between 30 and 60 days
after publication. A comment to OMB is
best assured of having its full effect if
OMB receives it within 30 days after
publication of this release.
V. Initial Regulatory Flexibility
Analysis
The Commission has prepared the
following Initial Regulatory Flexibility
Analysis (‘‘IRFA’’) regarding proposed
rule 206(4)–5 and the amendments to
rules 204–2 and 206(4)–3 in accordance
with section 3(a) of the Regulatory
Flexibility Act.251
A. Reasons for Proposed Action
Investment advisers that seek to
influence the award of advisory
contracts by government entities, by
making or soliciting political
251 5

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contributions to those officials who are
in a position to influence the awards
violate their fiduciary obligations. These
practices—known as ‘‘pay to play’’—
distort the process by which investment
advisers are selected and, as discussed
in greater detail above, can harm
advisers’ public pension plan clients,
and thereby beneficiaries of those plans,
which may receive inferior advisory
services and pay higher fees. In
addition, the most qualified adviser may
not be selected, potentially leading to
inferior management, diminished
returns or greater losses for the public
pension plan. Pay to play is a significant
problem in the management of public
funds by investment advisers. Moreover,
we believe that advisers’ participation
in pay to play is inconsistent with the
high standards of ethical conduct
required of them under the Advisers
Act. The proposed rule and rule
amendments are designed to prevent
fraud, deception and manipulation by
reducing or eliminating adviser
participation in pay to play practices.
B. Objectives and Legal Basis
Proposed rule 206(4)–5, the ‘‘pay to
play’’ rule, would prohibit an adviser
registered (or required to be registered)
with the Commission, or unregistered in
reliance on the exemption available
under section 203(b)(3) of the Advisers
Act, from providing advisory services
for compensation to a government client
for two years after the adviser, or any of
its covered associates, make a
contribution to public officials (and
candidates) such as State treasurers,
comptrollers or other elected executives
or administrators who can influence the
selection of the adviser.252 In addition,
we are proposing to prohibit an adviser
or any of its covered associates from
soliciting contributions for an elected
official or candidate or payments to a
political party of a State or locality
where the adviser is providing or
seeking to provide advisory services to
a government entity,253 and from
providing or agreeing to provide,
directly or indirectly, payment to any
third party engaged to solicit advisory
business from any government entity on
behalf of the adviser.254 Further, the
prohibitions in the proposed rule also
would apply to advisers to certain
investment pools in which a
government entity invests.255 The
proposed rule amendment to rule 204–
2 is designed to provide Commission
staff with records to review compliance
rule 206(4)–5(a)(1).

rule 206(4)–5(a)(2)(ii).

254 Proposed rule 206(4)–5(a)(2)(i).

255 Proposed rule 206(4)–5(c).

with proposed rule 206(4)–5, and the
proposed amendment to rule 206(4)–3
would clarify the application of the cash
solicitation rule as a result of proposed
rule 206(4)–5.
The Commission is proposing new
rule 206(4)–5 and proposing to amend
rule 206(4)–3 pursuant to the authority
set forth in sections 206(4) and 211(a) of
the Advisers Act [15 U.S.C. 80b–6(4)
and 80b–11(a)]; to amend rule 204–2
pursuant to the authority set forth in
sections 204 and 211 of the Advisers
Act [15 U.S.C. 80b–4 and 80b–11].
Section 206(4) gives us authority to
prescribe means reasonably designed to
prevent fraudulent, deceptive, or
manipulative acts or practices. Section
211 gives us authority to classify, by
rule, persons and matters within our
jurisdiction and to prescribe different
requirements for different classes of
persons, as necessary or appropriate to
the exercise of our authority under the
Act. Section 204 gives us authority to
prescribe, by rule, such records and
reports that an adviser must make, keep
for prescribed periods, or disseminate,
as necessary or appropriate in the public
interest or for the protection of
investors.
C. Small Entities Subject to Rule
Under Commission rules, for the
purposes of the Advisers Act and the
Regulatory Flexibility Act, an
investment adviser generally is a small
entity if it: (i) Has assets under
management having a total value of less
than $25 million; (ii) did not have total
assets of $5 million or more on the last
day of its most recent fiscal year; and
(iii) does not control, is not controlled
by, and is not under common control
with another investment adviser that
has assets under management of $25
million or more, or any person (other
than a natural person) that had $5
million or more on the last day of its
most recent fiscal year.256
The Commission estimates that as of
July 2009 there are approximately 706
small SEC-registered investment
advisers.257 Of these 706 advisers, 57
indicate on Form ADV that they have
State or local government clients. The
proposed rule also would apply to those
advisers that are exempt from
registration with the Commission in
reliance on section 203(b)(3) of the
Advisers Act. We estimate that
approximately 231 such unregistered
advisers may manage pooled investment
vehicles in which government client
assets are invested and would be subject

252 Proposed
253 Proposed

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256 17

CFR 275.0–7(a).
estimate is based on registration
information from IARD as of July 1, 2009.

to the proposed rule.258 We do not have
data and are not aware of any databases
that compile information regarding how
may advisers that are exempt from
registration with the Commission in
reliance on section 203(b)(3) of the
Advisers Act and that have State or
local government clients. It is unclear
how many of these advisers that are
exempt from registration that would be
subject to the rule are small advisers for
purposes of this analysis.
D. Reporting, Recordkeeping, and other
Compliance Requirements
The proposed rule would impose
certain reporting, recordkeeping and
compliance requirements on advisers,
including small advisers. The proposed
rule imposes a new compliance
requirement by: (i) Prohibiting an
adviser from providing advisory
services for compensation to
government clients for two years after
the adviser or any of its covered
associates makes a contribution to
certain elected officials or candidates;
(ii) prohibiting an adviser from
providing or agreeing to provide,
directly or indirectly, payment to any
third party engaged to solicit advisory
business from any government entity on
behalf of the adviser; and (iii)
prohibiting an adviser or any of its
covered associates from soliciting
contributions for an elected official or
candidate or payments to a political
party of a State or locality where the
adviser is providing or seeking to
provide advisory services to a
government entity.
The proposed rule amendments
would impose new recordkeeping
requirements by requiring an adviser to
maintain certain records about its
covered associates, its advisory clients,
government entities invested in certain
pooled investment vehicles managed by
the adviser, and its political
contributions as well as the political
contributions of its covered associates.
An investment adviser that does not
provide or seek to provide advisory
services to a government entity, or to a
covered investment pool in which a
government entity invests, would not be
subject to the proposed rule and rule
amendments.
As noted above, we believe that a
limited number of small advisers will
have to comply with the proposed rule
and rule amendments. Moreover, to the
extent small advisers tend to have fewer
clients and fewer employees that would
be covered associates for purposes of the
rule, the proposal should impose lower
costs on small advisers as compared to

257 This

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large advisers as variable costs, such as
the requirement to make and keep
records relating to contributions, should
be lower as there should be fewer
records to make and keep.259
E. Duplicative, Overlapping, or
Conflicting Federal Rules
The Commission believes that there
are no other Federal rules that
duplicate, overlap, or conflict with the
proposed rule amendments. As
discussed above, to make clear the
relationship between our rules, we
propose making a technical amendment
to rule 206(4)–3 to specify that
solicitation activities involving
government entity clients under our
proposed rule 206(4)–5 are subject to
limitations set forth in that rule.

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F. Significant Alternatives
The Regulatory Flexibility Act directs
the Commission to consider significant
alternatives that would accomplish the
stated objective, while minimizing any
significant impact on small entities.260
In connection with the proposed rule
amendments, the Commission
considered the following alternatives:
(i) The establishment of differing
compliance or reporting requirements or
timetables that take into account the
resources available to small entities;
(ii) the clarification, consolidation, or
simplification of compliance and
reporting requirements under the
proposed rule and rule amendments for
such small entities; (iii) the use of
performance rather than design
standards; and (iv) an exemption from
coverage of the proposed rule and rule
amendments, or any part thereof, for
such small entities.
Regarding the first alternative, the
Commission is not proposing different
compliance or reporting requirements
for small advisers as it may be
inappropriate under the circumstances.
The proposal is designed to reduce or
eliminate adviser participation in pay to
play, a practice that can distort the
process by which investment advisers
are selected to manage public pension
259 However, as noted above, many larger advisers
with broker-dealer affiliates may spend less
resources to comply with the proposed rule and
rule amendments because they may be able to rely
on compliance procedures and systems that the
broker-dealer already has in place to comply with
MSRB rules G–37 and G–38. See supra note 214
and accompanying text.
260 As noted above, we considered two
alternatives to certain aspects of proposed rule
206(4)–5: A disclosure obligation and a two-year
time out for third-party solicitors. We do not believe
either alternative would accomplish our stated
objective of curtailing pay to play activities and
thereby address potential harms from those
activities. See section II.A.2., as well as notes 133
and 134 and accompanying text.

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plans that can harm public pension plan
clients and cause advisers to violate
their fiduciary obligations. To establish
different requirements for small advisers
could diminish the protections the
proposal would provide to public
pension plan clients and their
beneficiaries.
Regarding the second alternative, we
will continue to consider whether
further clarification, consolidation, or
simplification of the compliance
requirements is feasible or necessary,
but we believe that the current proposal
is clear. The proposed rule and rule
amendments contain an approach to
curtailing pay to play practices that is
modeled on established MSRB rules that
have already been implemented by
financial firms of varying sizes.
However, we note that we are proposing
an amendment to rule 206(4)–3, the
cash solicitation rule, to clarify that the
requirements of new proposed rule
206(4)–5 apply to solicitation activities
involving government clients.
Regarding the third alternative, we
consider using performance rather than
design standards with respect to pay to
play practices of investment advisers to
be neither consistent with the objectives
for this rulemaking nor sufficient to
protect investors in accordance with our
statutory mandate of investor
protection. Design standards, which we
have employed, provide a baseline for
advisory conduct as it relates to
contributions and other pay to play
activities, which is consistent with a
rule designed to prohibit pay to play.
The use of design standards also is
important to ensure consistent
application of the rule among
investment advisers to which the rule
and rule amendments will apply.
Regarding the fourth alternative,
exempting small entities could
compromise the overall effectiveness of
the proposed rule and related rule
amendments. Since we intend to extend
the benefit of banning pay to play
practices to clients of both small and
large advisers, it would be inconsistent
to specify different requirements for
small advisers.
G. Solicitation of Comments
We encourage written comments on
matters discussed in this IRFA. In
particular, the Commission seeks
comment on:
• The number of small entities,
particularly small advisers, to which the
proposed rule and rule amendments
would apply and the effect on those
entities, including whether the effects
would be economically significant; and
• How to quantify the number of
small advisers, including those that are

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unregistered, that would be subject to
the proposed rule and rule amendments.
Commenters are asked to describe the
nature of any effect and provide
empirical data supporting the extent of
the effect.
VI. Effects on Competition, Efficiency
and Capital Formation
The Commission is proposing to
amend rule 204–2 pursuant to its
authority under sections 204 and 211.
Section 204 requires the Commission,
when engaging in rulemaking pursuant
to that authority, to consider whether
the rule is ‘‘necessary or appropriate in
the public interest or for the protection
of investors.’’ 261 Section 202(c) of the
Advisers Act 262 requires the
Commission, when engaging in
rulemaking that requires it to consider
or determine whether an action is
necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action will promote efficiency,
competition, and capital formation.263
We are proposing to amend rule 204–
2 to require an adviser to make and keep
a list of its covered associates, the
government entities the adviser
provides advisory services to or seeks to
provide advisory services to, and the
contributions made by the firm and its
covered associates, as applicable, to
government officials and candidates.264
The proposed amendment is designed to
provide our examiners important
information about the adviser and its
covered associates’ contributions to
government officials and the
government entities that the adviser
provides advisory services to or seeks to
provide those services. We believe that
the proposed amendment to the
Advisers Act recordkeeping rule would
not materially increase the compliance
burden on advisers under rule 204–2.
Similarly, we do not believe that the
proposed amendments to the
recordkeeping rule would
disproportionately affect advisers with
government entity clients or potential
government clients. The amendments
will apply equally to all SEC-registered
advisers. All registered advisers are
already subject to a variety of
recordkeeping requirements in the
course of their business and, therefore,
the proposed amendments to the
recordkeeping rule should not affect
261 15

U.S.C. 80b–4(a).
U.S.C. 80b–2(c).
263 In contrast, the Commission is proposing new
rule 206(4)–5 and amendments to rule 206(4)–3
pursuant to its authority under sections 206(4) and
211, neither of which requires us to consider the
factors identified in section 202(c)(1).
264 Proposed rule 204–2(a)(18)(i).
262 15

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efficiency. We do not anticipate that the
proposed recordkeeping rule
amendments would affect capital
formation.
The Commission requests comment
whether the proposed amendment to
rule 204–2, if adopted, would promote
efficiency, competition, and capital
formation. Commenters are requested to
provide empirical data to support their
views.
VII. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ 265 the Commission
must advise OMB whether a proposed
regulation constitutes a ‘‘major’’ rule.
Under SBREFA, a rule is considered
‘‘major’’ where, if adopted, it results in
or is likely to result in: (1) An annual
effect on the economy of $100 million
or more; (2) a major increase in costs or
prices for consumers or individual
industries; or (3) significant adverse
effects on competition, investment or
innovation.
We request comment on the potential
impact of the proposed new rule and
proposed rule amendments on the
economy on an annual basis.
Commenters are requested to provide
empirical data and other factual support
for their views to the extent possible.
VIII. Statutory Authority
The Commission is proposing new
rule 206(4)–5 and amendments to rule
206(4)–3 of the Advisers Act pursuant to
the authority set forth in sections 206(4)
and 211(a) of the Investment Advisers
Act of 1940 [15 U.S.C. 80b–6(4), 80b–
11(a)].
The Commission is proposing
amendments to rule 204–2 of the
Advisers Act pursuant to the authority
set forth in sections 204 and 211(a) of
the Advisers Act [15 U.S.C. 80b–4 and
80b–11(a)].
List of Subjects in 17 CFR Part 275

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Reporting and recordkeeping
requirements; Securities.
For the reasons set out in the
preamble, Title 17 Chapter II of the
Code of Federal Regulations is proposed
to be amended as follows.
PART 275—RULES AND
REGULATIONS, INVESTMENT
ADVISERS ACT OF 1940
1. The authority citation for part 275
continues to read in part as follows:
265 Public Law 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).

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Authority: 15 U.S.C. 80b–2(a)(11)(G), 80b–
2(a)(17), 80b–3, 80b–4, 80b–4a, 80b–6(4),
80b–6a, and 80b–11, unless otherwise noted.

*

*
*
*
*
2. Section 275.204–2 is amended by
adding paragraph (a)(18) and by revising
paragraph (h)(1) to read as follows:
275.204–2 Books and records to be
maintained by investment advisers.

(a) * * *
(18)(i) Books and records that pertain
to § 275.206(4)–5 containing a list or
other record of:
(A) The names, titles and business
and residence addresses of all covered
associates of the investment adviser;
(B) All government entities for which
the investment adviser or any of its
covered associates is providing or
seeking to provide investment advisory
services, or which are investors or are
solicited to invest in any covered
investment pool to which the
investment adviser provides investment
advisory services, as applicable;
(C) All government entities to which
the investment adviser has provided
investment advisory services, along
with any related covered investment
pool(s) to which the investment adviser
has provided investment advisory
services and in which the government
entity has invested, as applicable, in the
past five years, but not prior to [effective
date of this section]; and
(D) All direct or indirect contributions
or payments made by the investment
adviser or any of its covered associates
to an official of a government entity, a
political party of a State or political
subdivision thereof, or a political action
committee.
(ii) Records relating to the
contributions and payments referred to
in paragraph (a)(18)(i)(D) of this section
must be listed in chronological order
and indicate:
(A) The name and title of each
contributor;
(B) The name and title (including any
city/county/State or other political
subdivision) of each recipient of a
contribution or payment;
(C) The amount and date of each
contribution or payment; and
(D) Whether any such contribution
was the subject of the exception for
certain returned contributions pursuant
to § 275.206(4)–5(b)(2).
(iii) For purposes of this section, the
terms ‘‘contribution,’’ ‘‘covered
associate,’’ ‘‘covered investment pool,’’
‘‘government entity,’’ ‘‘official,’’
‘‘payment,’’ and ‘‘solicit’’ have the same
meanings as set forth in § 275.206(4)–5.
(iv) For purposes of this section, an
investment adviser to a covered
investment pool in which a government

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entity invests or is solicited to invest
shall be treated as though that
investment adviser were providing or
seeking to provide investment advisory
services directly to the government
entity.
*
*
*
*
*
(h)(1) Any book or other record made,
kept, maintained and preserved in
compliance with §§ 240.17a–3 and
240.17a–4 of this chapter under the
Securities Exchange Act of 1934, or with
rules adopted by the Municipal
Securities Rulemaking Board, which is
substantially the same as the book or
other record required to be made, kept,
maintained and preserved under this
section, shall be deemed to be made,
kept, maintained and preserved in
compliance with this section.
*
*
*
*
*
3. Section 275.206(4)–3 is amended
by adding paragraph (e) and removing
the authority citation following the
section to read as follows:
§ 275.206(4)–3 Cash payments for client
solicitations.

*

*
*
*
*
(e) Special rule for solicitation of
government entity clients. Solicitation
activities involving a government entity,
as defined in § 275.206(4)–5, shall be
subject to the additional limitations set
forth in that section.
4. Section 275.206(4)–5 is added to
read as follows:
§ 275.206(4)–5 Political contributions by
certain investment advisers.

(a) Prohibitions. As a means
reasonably designed to prevent
fraudulent, deceptive or manipulative
acts, practices, or courses of business
within the meaning of section 206(4) of
the Act (15 U.S.C. 80b–6(4)), it shall be
unlawful:
(1) For any investment adviser
registered (or required to be registered)
with the Commission, or unregistered in
reliance on the exemption available
under section 203(b)(3) of the Advisers
Act (15 U.S.C. 80b–3(b)(3)) to provide
investment advisory services for
compensation to a government entity
within two years after a contribution to
an official of the government entity is
made by the investment adviser or any
covered associate of the investment
adviser (including a person who
becomes a covered associate within two
years after the contribution is made);
and
(2) For any investment adviser
registered (or required to be registered)
with the Commission, or unregistered in
reliance on the exemption available
under section 203(b)(3) of the Advisers

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Act (15 U.S.C. 80b–3(b)(3)) or any of the
investment adviser’s covered associates:
(i) To provide or agree to provide,
directly or indirectly, payment to any
person to solicit a government entity for
investment advisory services on behalf
of such investment adviser unless:
(A) Such person is a related person of
the investment adviser or, if the related
person is a company, an employee of
that related person; or
(B) Such person is an executive
officer, general partner, managing
member (or, in each case, a person with
a similar status or function), or
employee of the investment adviser; and
(ii) To coordinate, or to solicit any
person or political action committee to
make, any:
(A) Contribution to an official of a
government entity to which the
investment adviser is providing or
seeking to provide investment advisory
services; or
(B) 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.
(b) Exceptions.
(1) De minimis exception. Paragraph
(a)(1) of this section does not apply to
contributions made by a covered
associate, if a natural person, to officials
for whom the covered associate was
entitled to vote at the time of the
contributions and which in the
aggregate do not exceed $250 to any one
official, per election.
(2) Exception for certain returned
contributions.
(i) An investment adviser that is
prohibited from providing investment
advisory services for compensation
pursuant to paragraph (a)(1) of this
section as a result of a contribution
made by a covered associate of the
investment adviser is excepted from
such prohibition, subject to paragraphs
(b)(2)(ii) and (b)(2)(iii) of this section,
upon satisfaction of the following
requirements:
(A) The investment adviser must have
discovered the contribution which
resulted in the prohibition within four
months of the date of such contribution;
(B) Such contribution must not have
exceeded $250; and
(C) The contributor must obtain a
return of the contribution within 60
calendar days of the date of discovery of
such contribution by the investment
adviser.
(ii) An investment adviser is entitled
to no more than two exceptions
pursuant to paragraph (b)(2)(i) of this
section per 12-month period.
(iii) An investment adviser may not
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paragraph (b)(2)(i) of this section more
than once with respect to contributions
by the same covered associate of the
investment adviser regardless of the
time period.
(c) Prohibitions as applied to covered
investment pools. For purposes of this
section, an investment adviser to a
covered investment pool in which a
government entity invests or is solicited
to invest shall be treated as though that
investment adviser were providing or
seeking to provide investment advisory
services directly to the government
entity.
(d) Further prohibition. As a means
reasonably designed to prevent
fraudulent, deceptive or manipulative
acts, practices, or courses of business
within the meaning of section 206(4) of
Advisers Act (15 U.S.C. 80b–6(4)), it
shall be unlawful for any investment
adviser registered (or required to be
registered) with the Commission, or
unregistered in reliance on the
exemption available under section
203(b)(3) of the Advisers Act (15 U.S.C.
80b–3(b)(3)) or any of the investment
adviser’s covered associates to do
anything indirectly which, if done
directly, would result in a violation of
this section.
(e) Exemptions. The Commission,
upon application, may conditionally or
unconditionally exempt an investment
adviser from the prohibition under
paragraph (a)(1) of this section. In
determining whether to grant an
exemption, the Commission will
consider, among other factors:
(1) Whether the exemption is
necessary or appropriate in the public
interest and consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of Advisers Act (15 U.S.C.
80b);
(2) Whether the investment adviser:
(i) Before the contribution resulting in
the prohibition was made, adopted and
implemented policies and procedures
reasonably designed to prevent
violations of this section; and
(ii) Prior to or at the time the
contribution which resulted in such
prohibition was made, had no actual
knowledge of the contribution; and
(iii) After learning of the contribution:
(A) Has taken all available steps to
cause the contributor involved in
making the contribution which resulted
in such prohibition to obtain a return of
the contribution; and
(B) Has taken such other remedial or
preventive measures as may be
appropriate under the circumstances;
(3) Whether, at the time of the
contribution, the contributor was a
covered associate or otherwise an

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employee of the investment adviser, or
was seeking such employment;
(4) The timing and amount of the
contribution which resulted in the
prohibition;
(5) The nature of the election (e.g,
Federal, State or local); and
(6) The contributor’s apparent intent
or motive in making the contribution
which resulted in the prohibition, as
evidenced by the facts and
circumstances surrounding such
contribution.
(f) Definitions. For purposes of this
section:
(1) Contribution means any gift,
subscription, loan, advance, or deposit
of money or anything of value made for:
(i) The purpose of influencing any
election for Federal, State or local office;
(ii) Payment of debt incurred in
connection with any such election; or
(iii) Transition or inaugural expenses
of the successful candidate for State or
local office.
(2) Covered associate of an investment
adviser means:
(i) Any general partner, managing
member or executive officer, or other
individual with a similar status or
function;
(ii) Any employee who solicits a
government entity for the investment
adviser; and
(iii) Any political action committee
controlled by the investment adviser or
by any person described in paragraphs
(f)(2)(i) and (f)(2)(ii) of this section.
(3) Covered investment pool means
any investment company, as defined in
section 3(a) of the Investment Company
Act of 1940 (15 U.S.C. 80a–3(a)), or any
company that would be an investment
company under section 3(a) of that Act
but for the exclusion provided from that
definition by either section 3(c)(1),
section 3(c)(7) or section 3(c)(11) of that
Act (15 U.S.C. 80a–3(c)(1), (c)(7) or
(c)(11)), except that for purposes of
paragraph (a)(1) of this section, an
investment company registered under
the Investment Company Act of 1940
(15 U.S.C. 80a), the shares of which are
registered under the Securities Act of
1933 (15 U.S.C. 77a), shall be a covered
investment pool only if it is an
investment or an investment option of a
plan or program of a government entity.
(4) Executive officer of an investment
adviser means the president, any vice
president in charge of a principal
business unit, division or function (such
as sales, administration or finance), or
any other executive officer of the
investment adviser who, in each case, in
connection with his or her regular
duties:

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(i) Performs, or supervises any person
who performs, investment advisory
services for the investment adviser;
(ii) Solicits, or supervises any person
who solicits, for the investment adviser,
including with respect to investors for a
covered investment pool; or
(iii) Supervises, directly or indirectly,
any person described in paragraph
(f)(4)(i) or (f)(4)(ii) of this section.
(5) Government entity means any
State or political subdivision of a State,
including:
(i) Any agency, authority, or
instrumentality of the State or political
subdivision;
(ii) A plan, program, or pool of assets
sponsored or established by the State or
political subdivision or any agency,
authority or instrumentality thereof; and
(iii) Officers, agents, or employees of
the State or political subdivision or any
agency, authority or instrumentality
thereof, acting in their official capacity.
(6) 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

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office of a government entity, if the
office:
(i) Is directly or indirectly responsible
for, or can influence the outcome of, the
hiring of an investment adviser by a
government entity; or
(ii) 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.
(7) Payment means any gift,
subscription, loan, advance, or deposit
of money or anything of value.
(8) Plan or program of a government
entity means any investment program or
plan sponsored or established by a
government entity, including, but not
limited to, a ‘‘qualified tuition plan’’
authorized by section 529 of the Internal
Revenue Code (26 U.S.C. 529), a
retirement plan authorized by section
403(b) or 457 of the Internal Revenue
Code (26 U.S.C. 403(b) or 457), or any
similar program or plan.
(9) Related person of an investment
adviser means any person, directly or
indirectly, controlling or controlled by

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the investment adviser, and any person
that is under common control with the
investment adviser.
(10) Solicit means:
(i) With respect to investment
advisory services, to communicate,
directly or indirectly, for the purpose of
obtaining or retaining a client for, or
referring a client to, an investment
adviser; and
(ii) With respect to a contribution or
payment, to communicate, directly or
indirectly, for the purpose of obtaining
or arranging a contribution or payment.
(g) Effective date. The prohibitions on
providing investment advisory services
and payments to solicit, in each case as
described in this section, arise only
from contributions and payments,
respectively, made on or after [the
effective date of this section].
Dated: August 3, 2009.

By the Commission.

Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–18807 Filed 8–6–09; 8:45 am]
BILLING CODE 8010–01–P

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