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Pay-to-Play Tips and Reminders

By Kimberly Versace, Chief Compliance Officer, National Real Estate Advisors, LLC*

June 29, 2023

Increasingly, it seems as though the political cycle – and accompanying campaign fundraising – never ends. However, activity undoubtedly increases as we approach high-profile national elections, in particular, presidential elections. As individuals declare their candidacies and the primary season begins to heat up, this is a good time for compliance professionals to refresh their understanding of Rule 206(4)-5 (the Pay-to-Play Rule) under the Investment Advisers Act of 1940, as amended (Advisers Act) and to remind personnel of the high-stakes nature of non-compliance.

Pay-to-Play Rule Recap

The Pay-to-Play Rule was adopted in 2010 because government officials responsible for selecting investment advisers had been awarding business on behalf of public pension funds and similar government entities based on campaign contributions made by advisers. In the adopting release, the SEC indicated that the rule’s purpose is to “ensure that adviser selection is based on merits, not on the amount of money given to a particular candidate for office.”[i] Notably, the Pay-to-Play Rule’s application is not limited to SEC-registered investment advisers; it also applies to exempt reporting advisers and foreign private advisers exempt from SEC registration.

First Amendment considerations precluded the SEC from adopting outright prohibitions on political contributions by advisers and their personnel. Instead, the Pay-to-Play Rule imposes a two-year “cooling off” period, during which an investment adviser is prohibited from collecting fees from a government entity if the adviser or certain of its personnel have made an impermissible political contribution to a relevant government official (as defined). The rule allows for the following de minimis contributions below the specified amounts, which the SEC perceived to be too low to result in improper influence: (i) $350 per election cycle for candidates for whom the donor is eligible to vote; and (ii) $150 for other candidates for office.

The Pay-to-Play Rule was adopted pursuant to Section 206 of the Advisers Act, and therefore violation is considered a fraudulent, deceptive, or manipulative act. Moreover, the SEC has demonstrated its seriousness in aggressively pursuing violations of the Pay-to-Play Rule, as discussed more fully below.

Scope of the Rule: Government Officials

The Pay-to-Play Rule is targeted specifically at state and local government officials. The rule’s restrictions are triggered if an impermissible contribution is made to an individual with influence over hiring the adviser who, at the time of the contribution, holds a state or local elective office or is a candidate for such office, including a candidate who has won an election but has not yet been sworn in.

Contributions to federal officials and candidates generally are not covered by the Pay-to-Play Rule. An important exception to the exclusion occurs where an individual is campaigning for federal office while currently serving in a state or local government position. A contribution to a sitting governor running for U.S. president, or a city council member running for U.S. Congress, is therefore covered by the rule. The individual need not be at the top of the ticket to trigger the Pay-to-Play Rule. For example, a donation to the Trump-Pence ticket in 2016 would have been covered by the rule because Mike Pence was governor of Indiana at the time of the race.

The Pay-to-Play Rule’s definition of government “official” does not comprehensively capture all government officials in every state or local position. By its terms, the definition covers only those state and local officials who “are directly or indirectly responsible for, or can influence the outcome of, the hiring of an investment adviser by a government entity,” as well as those who have authority to appoint such officials. However, given the definition’s broad language and the multitude of different state and municipal laws and rules, it is difficult to clearly identify which state and local officials are within or outside the rule’s scope. As a practical matter, an investment adviser will likely want to cover all state and local officials within its political contributions policies, rather than risk an inadvertent violation.

Who Is a Covered Associate?

Similarly, the Pay-to-Play Rule does not explicitly cover all investment adviser employees. It applies only to contributions by the adviser or its “covered associates,” which generally includes two categories of personnel: (1) those who control the adviser (any general partner, managing member or executive officer, or other individual with a similar status or function), and (2) those who solicit government entities for the adviser, together with their direct and indirect supervisors. A political action committee (PAC) controlled by the adviser, or by individuals who fit in (1) or (2), is also the adviser’s covered associate.

Again, there are practical challenges in applying the rule as narrowly as drawn. For example, identifying those who directly or indirectly supervise other covered associates requires an adviser to run up the supervisory chain, which can capture a large number of employees. Independent contractors may fall within the definition even if an adviser does not directly employ them. And employees often change positions or receive promotions that move them into covered associate roles. Due to the look-back provision discussed below, a contribution made prior to a promotion can nonetheless trigger the cooling off period under the rule.

As a result, many advisers apply pay-to-play procedures to all personnel as if they are covered associates. Note that applying procedures to all personnel does not bring them within the scope of the Pay-to-Play Rule as covered associates. Thus, if an employee makes a contribution in violation of the policy, in certain instances, and subject to the language of the firm’s policies and procedures, a firm’s compliance personnel (Compliance) may conclude upon review that the employee is not, in fact, a covered associate and no rule violation has occurred. It would be wise to seek advice of counsel, and of course the policy violation should be addressed regardless of whether the employee is covered by the rule.

Importance of the Look-Back Provision

The Pay-to-Play Rule’s look-back provision is an important aspect of the rule. Under the rule, an adviser may not provide advisory services to a government entity for compensation within two years after a contribution to an official of the government entity by the adviser or a covered associate. Significantly, this restriction applies even if the individual who made the contribution was not a covered associate at the time of the contribution but became one within two years after making it. For employees who do not solicit advisory business, an exception in the rule cuts the look-back period to six months.

The SEC’s case against Asset Management Group of Bank of Hawaii in September 2022 illustrates the risks.[ii] In July 2018, an officer of Bank of Hawaii made a campaign contribution to the incumbent governor running for re-election in Hawaii. At the time of the contribution, the officer was not a covered associate within the definition of the Pay-to-Play Rule. However, two months later, in September 2018, the officer became an indirect supervisor of Asset Management Group of Bank of Hawaii employees who solicit investment advisory services, making him a covered associate. The SEC applied the look-back provision and brought an action against the firm for violating the Pay-to-Play Rule. In the settled order, the SEC noted that the governor of Hawaii had the ability to influence the selection of investment advisers for the University of Hawaii, an existing client of the adviser. Accordingly, the firm was prohibited from receiving advisory fees from University of Hawaii for the cooling off period once the officer became a covered associate.

The Asset Management Group case underscores the importance of implementing procedures that provide Compliance with transparency into political contributions by all employees, regardless of whether they currently fit within the definition of covered associate. Additionally, promotion processes should incorporate an assessment of whether an employee’s new role is a covered associate position and confirmation that no contributions have been made that would be problematic under the rule.

Applying the Pay-to-Play Rule to New Hires

Further, special consideration should be given to new hires because contributions they made prior to coming on board (within two years for a covered associate role in which the individual will solicit advisory services or six months otherwise) may trigger the rule. However, discrimination based on political affiliation or political activities raises material employment law considerations. As a general matter, hiring decisions should be made prior to requesting political contribution information from applicants. There may be situations where it would be appropriate to withdraw or alter an offer based on a new hire’s political contributions, but these would be very narrowly tailored to situations where the firm would otherwise suffer harm (e.g., the firm would be required to pause compensation from an existing client or prevented from obtaining new business due to prior contributions by the individual). Regulatory and employment counsel should be consulted if any such situation arises, whether in connection with a new hire or promotion of an existing employee to a covered associate position.

Volunteering and Fundraising

Generally, the Pay-to-Play Rule does not limit the ability of adviser personnel to engage in campaign volunteer activities. However, the rule prohibits advisers and their covered associates from coordinating or soliciting (1) contributions to an official of a government entity to which the adviser provides or is seeking to provide advisory services or (2) payments to any political party of a State or locality where the adviser is providing or seeking to provide advisory services to a government entity. An adviser’s policies and procedures should address volunteer activities and require pre-clearance of any proposed activities related to fundraising, including hosting events.

Do Not Do Anything Indirectly That You May Not Do Directly

It is self-evident that one should not attempt to circumvent federal securities laws and rules by indirect action. Nonetheless, in adopting the Pay-to-Play Rule, the SEC saw fit to include paragraph 206(4)-5(d), which provides explicitly that it is unlawful for an adviser or its covered associate to do anything indirectly which, if done directly, would constitute a violation of the rule.

A question that frequently arises is whether an investment adviser must apply its political contributions policies and procedures to family members of employees. The Pay-to-Play Rule does not cover family members of covered associates. However, the SEC emphasized in the Adopting Release[iii] that an adviser and its covered associates may not funnel payments through family members or other third parties, such as friends, consultants, or companies affiliated with them. An adviser may elect to require reporting and/or pre-clearance for political contributions made by immediate family members living in the same household as an employee, tracking the parameters of the personal securities reporting rules. However, in respect of First Amendment considerations, many advisers are reluctant to broaden application of procedures in that manner. Note, however, that a contribution by a spouse or domestic partner who shares finances and has joint accounts with an employee is likely to be considered a contribution made by the employee. Pre-clearance procedures and training should address this point.

Likewise, a chain of contributions through PACs made for the purpose of avoiding the Pay-to-Play Rule would also violate the rule’s prohibitions against doing anything indirectly that would be prohibited if done directly. Industry best practices include pre-clearance of contributions to PACs, and a Compliance review to ensure that contributions are not directed to particular candidates. Many PACs will provide a representation letter certifying as to the way funds are applied.

State and Local Rules Are Not Preempted

In the regulation of political contributions, keep in mind that SEC rules do not preempt applicable state and local rules, which may be more restrictive than the Pay-to-Play Rule. Compliance should be familiar with all applicable rules and consult local resources as needed.

Strict Liability With Very Little Room for Foot Faults

Violations of the Pay-to-Play Rule are judged on what is essentially a strict liability standard, with no requirement that bad intent or actual improper influence be shown. For example, within the past year, the SEC brought several pay-to-play cases against investment advisers even where the advisers had pre-existing relationships with the relevant government entity clients that were established long before a political contribution was made.[iv] In one case, the contribution was made 12 years after the public pension fund invested in a private fund managed by the adviser. Moreover, the fund was a closed-end vehicle with no redemption rights. In other words, the decision to engage the adviser had long since been made and there was really no opportunity for the adviser to improperly influence the investor at the time of the contribution. Yet, as the SEC noted, no “quid pro quo or actual intent to influence an elected official or candidate” is required to establish a violation of the Pay-to-Play Rule. The adviser was censured and ordered to pay a $70,000 civil money penalty.[v]

The Pay-to-Play Rule does offer two potential paths for relief if a mistake is made. First, Rule 206(4)-5(b)(3) provides an exception for certain returned contributions, but its availability is quite narrow. The contribution must (1) not have exceeded $350, (2) have been discovered by the adviser within four months of the contribution, and (3) be returned within 60 days of discovery by the adviser. In addition, there are limits on the number of times an adviser may use the exception, per employee and across the firm. Notwithstanding good faith efforts to obtain the return of a contribution, an adviser that cannot meet these criteria may be found to have violated the rule.[vi]

Second, where the above-described exception is unavailable, an adviser may seek an exemption from the SEC as provided in Rule 206(4)-5(e). However, the decision whether to grant an exemption is entirely within the SEC’s discretion and may take a substantial amount of time. In the interim, an adviser must refrain from collecting compensation from the client (or place it in escrow) pending a decision. Of course, there is no guarantee an exemption will be granted.

In sum, once an impermissible contribution is made, it is exceedingly difficult to walk back, even if it was a mistake and the adviser makes all good faith efforts to correct it. As a result, even a small contribution can cause an adviser to forego substantial fees or new business or risk an enforcement action.

Implementing Robust Controls

Given the potential consequences of foot faults and mistakes, it is critical for advisers to implement robust controls around political contributions.

While the Pay-to-Play Rule itself is somewhat technical and complex, an effective compliance program for addressing the rule can be straightforward and should include the following basic elements:

Pre-clearance and reporting

  • Pre-empt issues – Pre-clearance allows Compliance to screen proposed contributions (and fundraising or soliciting activities) and identify potential issues before it is too late.
  • Scale to risk – An adviser with large public pension fund investors may take a conservative approach by requiring pre-clearance of all contributions whether state, local or federal and regardless of size, and prohibiting contributions in most cases. An adviser that currently has no government entity clients may perceive less risk and rely on employees to pre-clear above the de minimis An adviser that does not, and is confident it will never, have government entity clients may be comfortable allowing contributions and foreclosing the possibility of future business (at least in some jurisdictions). That adviser may determine to simply require reporting.
  • Make reporting mandatory – Among other required records, an adviser must maintain a record of all political contributions made by the adviser or any of its covered associates to a government official under the rule. To meet this requirement, personnel must report all such contributions.


  • New hires – All new hires should receive training on the firm’s political contributions policies and procedures when they join the firm. As discussed above, it is important to collect information about a new hire’s prior contributions.
  • Annual training – Annual compliance training should include a refresher on pay-to-play requirements.
  • Compliance reminders – Reminders, especially ahead of more active political cycles, go a long way to keeping the team on track.

Compliance testing and oversight

  • Public database searches – Compliance can leverage public databases to periodically search for political contributions that have not been reported and/or pre-cleared per firm policy. It is important to maintain a schedule of employees, with their state of residence (which is also a required record), to streamline searching and avoid false positives.
  • Electronic communications reviews can also uncover unreported contributions.

Of course, violations of firm policy should be promptly addressed and analyzed, in consultation with senior management and counsel as appropriate, to determine if a violation of the Pay-to-Play Rule has occurred or measures must be taken (e.g., ensuring no new client from a particular state is onboarded) to avoid such violation.


*Kimberly Versace currently serves as chief compliance officer of National Real Estate Advisors, LLC. She may be reached at or 202-973-2790.

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the IAA. This article is for general information purposes and is not intended to be and should not be taken as legal or other advice.


[i] Political Contributions by Certain Investment Advisers, SEC Rel. No. IA-3043, 75 Fed. Reg. 41018, 41023 (July 14, 2010) (Adopting Release).

[ii] Asset Management Group of Bank of Hawaii, Rel. No. IA-6127, 5-6 (Sept. 15, 2022).

[iii] Adopting Release at 96.

[iv] For example, in September 2022, the SEC charged four separate investment advisers with violation of the Pay-to-Play Rule. The cases were settled and each of the firms was censured and subject to a significant civil money penalty. See Asset Management Group at 5-6 (Sept. 15, 2022); Canaan Management, LLC, Rel. No. IA-6126, 4-5 (Sept. 15, 2022); Highland Capital Partners, LLC, Rel. No. IA-6128, 4-5 (Sept. 15, 2022); StarVest Management, Inc., Rel. No. IA-6129, 4-5 (Sept. 15, 2022).

[v] StarVest at 3.

[vi] See Canaan, supra note iv (adviser obtained return of contribution, but it was greater than $350 and beyond 60 days); Highland, supra note iv (adviser sought and obtained return of a $1,000 contribution).


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