SEC Answers Questions About the Pay to Play Rule

The staff of the Division of Investment Management at the Securities and Exchange Commission has prepared responses to some questions about Rule 206(4)-5 under the Investment Advisers Act of 1940.

Here are a few that caught my eye:

Question II.6. Covered Associates’ Family Members.

Q: Are contributions by an advisory employee’s family members covered under the rule?

A: Generally not. However, rule 206(4)-5 and section 208(d) of the Advisers Act prohibit doing anything indirectly which would be prohibited if done directly (see rule 206(4)-5(d)).

Question II.7. Independent Contractors.

Q: If certain personnel of an investment adviser are considered “independent contractors,” rather than “employees,” for state law or tax law purposes, will they still be regarded as covered associates if they solicit or supervise those who solicit government entities on behalf of the adviser?

A: The term “employee” is not defined in the Advisers Act. The staff interprets the term “employee” to include “independent contractors” acting on behalf of an investment adviser (see Interpretive Release No. IA-1000, at II.C.3).

Question III.1. Foreign Governments.

Q: Does the definition of government entity include foreign governments?

A: No.

You can’t run political contributions through your spouse to avoid this rule and you can’t hire someone as an independent contractor to try and circumvent the rule. You can contribute to the political campaigns of foreign officials, but that raises issues elsewhere.


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