Political Contributions by Certain Investment Advisers (SIFMA AMG)

Summary

SIFMA AMG provided comments to the SEC on the Commission’s proposal to rescind Rule 206(4)-5 under the Investment Advisers Act of 1940, the so-called “political contributions rule” or “pay-to-play rule” (the “Rule”), together with the related recordkeeping requirements under Rule 204-2. SIFMA AMG strongly supports the Commission’s proposal and are pleased to join the letter submitted by a coalition of trade associations. We write separately to emphasize several key themes.

Excerpt

Executive Summary:

• The Rule is not necessary or tailored to its public policy objective
• The Rule’s requirements and strict liability standard impose significant and unjustified costs and impedes the exercise of constitutionally protected speech
• Enforcement has focused on administrative glitches rather than actual corruption
• Recission of the Rule does not leave the risk unaddressed
• Recission rather than amendment is the better course

1. The Rule is not necessary or tailored to its public policy objective

The Commission adopted the Rule in 2010 to address concerns that political contributions could improperly influence the selection of investment advisers by state and local government entities (i.e., so-called “pay-to-play practices”). More than fifteen years of experience administering and complying with the Rule demonstrates that its restrictive, strict-liability framework is not reasonably designed to achieve that objective. Moreover, the Rule is not necessary because a robust framework of laws and regulations adequately addresses this risk. Good government suggests regularly revisiting rules to confirm they are appropriately calibrated and this Rule falls short.

2. The Rule’s requirements and strict liability standard impose significant and unjustified costs and impedes the exercise of constitutionally protected speech

The Rule needlessly injects the adviser into the political activities of personnel and limitations on personnel of their personal participation in the political process. Requiring personnel (and their families) to seek approval from their employer for political contributions inherently creates a chilling effect for a constitutionally protected activity.

It also precludes adviser staff from running for office on their own because of the limitations on their ability to raise funds from friends and colleagues. Effectively excluding investment adviser personnel from public service is not an optimal public policy result. While difficult to quantify, both are real costs and harms with no corresponding benefit.

In addition, the Rule imposes substantial compliance costs and operational burdens on advisers and their personnel, restricts participation in the political process, impedes hiring and promotion decisions, and can deprive government investors of access to their preferred investment advisers.