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September 25, 2019

Part II: 10 Myths About US Investment Advisers Making Political Contributions (Myths 6-10)

By Kevin Ehrlich

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SEC Rule 206(4)-5 became effective in September 2010 in the aftermath of the global financial crisis. Better known as the “pay-to-play” rule, the SEC targeted political contributions made by investment advisers or certain employees in the name of the public trust. The objective was to address the classic political conflict of private parties making contributions to politicians to obtain or be considered for government contracts. The SEC expressed concern that public officials could compromise their own fiduciary obligations to pension plans for which they have responsibility due to the distortive effect “pay-to-play” practices can have on investment advisers seeking to win or retain business.

When the US political process completes its journey toward Election Day 2020, a decade will have passed since the SEC rule was adopted. Even though almost 10 years have passed, misconceptions and practice challenges persist.

At Western Asset, we regularly exchange best practices and industry observations with our clients and colleagues that collectively can help address operational and regulatory challenges in the investment industry. Part I of this post addressed five myths and practice challenges for investment advisers. Here in Part II, we continue the discussion and address five more myths.

Myth #6: Buying a Ticket to a Dinner or a Campaign T-Shirt Is Not a Campaign Contribution.

Truth: The contributed amount beyond the reasonable value of an item like a t-shirt is considered a contribution. Buying a ticket to a $5,000 per plate fundraising dinner when the actual value of the event is much lower makes the balance a contribution as if it was made in cash on its own. In addition, buying a shirt, hat or bumper sticker from an unrelated third party is not a contribution to a candidate at all.

Practice Tip: If the campaign provides information for the actual cost, the employee can use that amount to determine the contribution amount. If not, the adviser and employee need to work together to make a reasonable estimate. A good indicator of a political contribution is whether the campaign asks for the identity of the contributor’s employer because this information is required for filings the campaign makes under Federal Election law.

Myth #7: Contributions Made by Family Members of Adviser Employees Are Permitted.

Truth: The Rule text does not refer to family members, but the Rule explicitly prohibits acts done indirectly which, if done directly, would violate the Rule. As a result, contributions from immediate family members of Covered Associates are often included within adviser policies because of the challenge of proving that a family member operated independently.

Practice Tip: The implications of the Rule extend not only to family members, but to any other friends, consultants, attorneys, affiliated companies of either the adviser or its covered associates. While the Rule imposes strict liability, intentionally funneling or re-directing contributions through third parties to avoid the Rule would not be viewed favorably by SEC enforcement staff and could result in a more severe sanction.

Myth #8: SEC Rule 206(4)-5 Preempts All State or Local Rules on Political Contributions.

Truth: There is no preemption of state and local rules. While state and local governments do not directly regulate SEC-registered investment advisers, they often have their own procurement standards. These apply to any vendors seeking to do business with a government entity and typically focus on disclosure to avoid conflicts when awarding business. For example, they may ask for disclosure of political contributions from the adviser or the adviser’s senior management to elected officials of that state or locality.

Practice Tip: Advisers often require pre-clearance and reporting of all political contributions to help address these needs. Certifications are a common requirement when responding to a request for proposal and a log of contribution activity by both the adviser and its employees helps to support that certification. State and local governments can also change their requirements over time. It is easier to require pre-clearance and reporting by all than it is try to adapt to changing requirements.

Myth #9: Political Contributions That Comply With the Rule Also Comply With Federal Laws.

Truth: SEC Rules are completely independent of other federal laws or requirements, including those governing federal elections and federal taxes.

Practice Tip: Woe to the adviser compliance professional that seeks to opine on nuances of federal election law or tax law. These areas can be complex and the adviser’s internal legal and compliance staff put themselves, their employees and their organization in potential peril by offering legal advice.

Myth #10: Political Contribution Details of Adviser Employees Are Confidential.

Truth: Political contributions are public record. Internet databases like and maintain searchable databases. The name of the individual, date and amount of the contribution, recipient and employer are all publicly accessible.

Practice Tip: The SEC staff has access to the internet, so it’s a good idea to presume that examination and enforcement staff will use the data in their work. Advisers can use their compliance monitoring programs to identify unreported political contributions (and avoid getting surprised by an SEC staffer who has done their homework by checking the same data).

As these ten myths illustrate, the precise wording of the Rule is incredibly important to understanding its implications and determining how to avoid violations. The myths also illustrate that there are a wide variety of practice implications for investment advisers to navigate when making political contributions.

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