It is entirely understandable if after the recent hotly contested “mid-term” elections the general public would like to put political campaigns behind them– at least for the few months before the hype around the 2016 U.S. Presidential elections kicks into gear.  For many folks in the U.S. financial services industry, however, political campaigns have to be kept in mind all year round, every year.  This is thanks, foremost, to the U.S. Securities and Exchange Commission’s “pay-to-play” rules promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”).  The so-called “pay-to-play” rules can be found in Advisers Act Rule 206(4)-5 (the “Political Contribution Rules”) (which can be found on page 194 of this PDF).  The Political Contribution Rule was first proposed in 2009, in the wake of the scintillating tales arising out of the unquestioned abuse of position by certain politicians at the pension plans for New York, California, Illinois and New Mexico, to name a few.  The Political Contribution Rule was adopted in 2010 (and went effective in 2011) and has found its place into the compliance programs of RIAs across the US.

In brief (and the Political Contribution Rule should not be thought of in brief, as it is a very complicated rule, and far reaching), the Political Contribution Rule provides that it constitutes fraudulent activity for an SEC registered investment adviser to accept compensation for the provision of advisory services to a US public pension plan (other than a federal pension plan) if within the prior two years certain folks at the firm (or their family members) made non-de minimis donations (roughly, in excess of $350 or $150 per campaign, depending) to any government official or candidate whose governmental position puts (or would put) them in a position to influence the decisions of a public pension plan.  The express prohibition on “doing indirectly that which you are prohibited from doing directly” (see Rule 206(4)-5(d)) and coverage of political activity committees (PACs) make clear that the Political Contribution Rule is intended to capture a broad range of political giving.  For this reason, an RIA compliance policy designed to avoid any issues with the Political Contribution Rule will pick up RIA staff (regardless of title – to avoid any inference of firm directed giving by senior staff), their immediate family members (including children) and, most conservatively, prohibit all political giving, entirely.  Another reasonable response to the Political Contribution Rule is to simply not manage any money for or accept investments from public pension plans.

As invasive and hard to read as the Political Contribution Rule is, the SEC staff stand ready to enforce the rule.  In the first administrative proceeding brought under the rule, TL Ventures Inc. agreed to pay $295,000 to settle claims made by the SEC under the Political Contribution Rule.  The SEC action against TL Ventures arose out of a pair of political contributions made in 2011 (the year the Political Contribution Rule went into effect) by a “covered associate” of TL Ventures, who donated $2,000 to the governor of the State of Pennsylvania and another $2,500 to a Philadelphia mayoral candidate.  These donations resulted in a violation of the Political Contribution Rule when matched with the fact that TL Ventures had accepted investments by the Pennsylvania State Employees’ Retirement System in two TL Ventures venture funds formed in 1999 and 2000, as well as an investment by the Philadelphia Retirement Board in the TL Ventures venture fund formed in 2000. Although these fund investments were fairly dated by 2011, they were still generating fees to TL Ventures during their run off phase.  The dates involved might suggest to a more sympathetic observer that the violation was an oversight, but (as is often the case) other issues that arose during the SEC exam of TL Ventures likely exhausted any willingness on the part of the staff to give TL Ventures the benefit of the doubt.  The order describing and resolving the TL Ventures case presents an interesting set of facts, generally; you can read more about the TL Ventures settlement here.

However, and not without irony, political developments may draw the Political Contribution Rule out of the shadows of regulatory compliance and plop it squarely onto the political stump.  The reason is that in the upcoming 2016 presidential campaign certain candidates for higher office might find themselves at a disadvantage with deep pocketed would-be campaign contributors (i.e., owners and employees of financial services firms) due to the Political Contribution Rule.  A prime example would be New Jersey Governor Christopher Christie, who is widely expected to throw his hat into the ring for nomination as the presidential candidate for the Republican Party.  As the sitting Governor of New Jersey, Chris Christie is an “official” under the Political Contribution Rule, and as governor of New Jersey holds sway over the approximately $81 billion New Jersey’s Public Employees’ Retirement System, through the Governor’s ability to make appointments to the New Jersey State Investment Council.  The Political Contribution Rule does not apply to U.S. federal officials, but, as a sitting governor, any political contributions to Gov. Chris Christy’s presidential campaign would be picked up by the Political Contribution Rule.  Thus, any contribution to a Christie presidential campaign by an owner or employee of a hedge or private equity fund (or other asset manager) would side line her or his advisory firm from managing investments for New Jersey state pension plans.   And, of course, Governor Christie’s proximity to Wall Street and its deep pocketed financial services firms will make the issue that much more acute for him.

There may be no need to wait for the political fireworks to start popping on this issue.  The New York and Tennessee state Republican parties have already brought a legal action against the SEC to invalidate the Political Contribution Rule.  In that case, the plaintiffs allege that the SEC overstepped its authority because the Political Contribution Rule illegally attempts to regulate activity that is exclusively the responsibility of the Federal Election Commission.  (Copy of the complaint). This is similar to the claims of the law suit that lead to the “Goldstein” decision, which saw the SEC’s initial attempt at forcing hedge fund managers to register with the SEC as investment advisers invalidated in 2006.  However, on September 30, 2014, U.S. District Judge Beryl Howell dismissed the plaintiff’s challenge to the Political Contribution Rule, finding that the court lacked jurisdiction and that only the U.S. Court of Appeals for the District of Columbia Circuit had authority to hear the case. Presently, it remains to be seen whether the New York and Tennessee state Republican parties (or anyone else) will renew the complaint with the U.S. Court of Appeals for the District of Columbia.

The political winds seem to be blowing in such a way that the Political Contribution Rule may get blown out of RIA compliance programs.  The SEC staff’s rationale for wanting to address the pay-to-play scandals of the recent and not so recent past are entirely understandable.  But the breadth of the Political Contribution Rule does suggest that the behavior being targeted is best addressed by public pension plans, many of whom have already taken affirmative steps to address the SEC staff’s concerns about the temptations they present to fund manager (many or which are notably doing).  The Political Contribution Rule is hard to implement, cuts too close to the right to political speech, and, ultimately, may hit too close to home for many politicians.

For further information regarding the foregoing, please contact either Thomas Devaney (; 212-634-3042) or Jung Yeon Son (; 650-815-2676).


This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.