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SEC Proposes Pay to Play Rules for Investment Advisers

Fall 1999

The SEC recently published for comment a new rule and rule amendments under the Investment Advisers Act of 1940 (the "Advisers Act") that would address "pay to play" practices in the investment management industry. 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 any of its partners, executive officers or solicitors make a contribution to certain elected officials or candidates. The proposed rule changes would require an adviser that has government clients to maintain certain records of the political contributions made by the adviser or any of its partners, executive officers or solicitors. If adopted as proposed, the new rule and rule changes would become effective on the date they are adopted (i.e., there would be no transition period). Any comments on the proposed rule and proposed rule changes, including whether there should be a transition period between adoption and effectiveness, must be received by the SEC by November 1, 1999.

Prohibitions of Proposed Rule 206(4)-5
Proposed Rule 206(4)-5 would prohibit investment advisers from providing advice for compensation to a state or local government, agency or instrumentality or government pension plan or other collective government fund ("government entity") for two years after the adviser or any of its partners, executive officers or solicitors, or any political action committee controlled by the adviser or any of its partners, executive officers or solicitors, makes a political contribution to an elected official or candidate of the government entity, including state treasurers, comptrollers or other officials who can influence the selection of the adviser. A contribution made by a partner, executive officer or solicitor of an adviser would also 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. The proposed rule includes a de minimis exception for contributions of $250 or less by partners, executive officers and solicitors of an adviser to an elected official or candidate if the person making the contribution is entitled to vote for the official or candidate.

Proposed Recordkeeping Requirements Under Rule 204-2
The proposed amendments to Rule 204-2 would require registered investment advisers with government clients to keep records of political contributions made by the adviser, its partners, executive officers and solicitors. Specifically, the proposed amendments would require an adviser to make and keep a list of its partners, executive officers and solicitors, the states in which the adviser has, or is seeking, government clients, the identity of those clients and the contributions made by the adviser, its partners, executive officers and solicitors to government officials and candidates.

Investment Advisers Covered by the Proposed Rule and Related Amendments
Investment advisers registered with the SEC would be subject to the prohibition and the recordkeeping requirements. The prohibitions under the proposed rule, but not the recordkeeping requirements, would also apply to investment advisers exempt from registration under Section 203(b) of the Advisers Act, which includes advisers who had fewer than 15 clients during the last 12 months. The proposed rule and related amendments would not apply to state registered advisers.

If you have any questions regarding the SEC's proposed pay to play rules or would like to provide comments on the proposed rule and related amendments to the SEC, please do not hesitate to contact any of the members of Godfrey & Kahn's Investment Management Practice Group listed below at (414) 273-3500.

Scott A. Moehrke Pamela M. Krill Renee Hardt Torr
Carol A. Gehl Dennis F. Connolly Ellen R. Drought

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