• Vice President Kamala Harris announced Minnesota Governor Tim Walz as her running mate for the upcoming Presidential election. Because Governor Walz is an “official” for purposes of the SEC’s pay-to-play rule under the Investment Advisers Act of 1940, political contributions to, and fundraising for, the Harris campaign may raise issues for investment advisers that manage or are seeking to manage the assets of Minnesota state public pension plans.

• Broker-dealers, swap dealers, municipal securities dealers and municipal advisors are subject to similar pay-to-play rules adopted by FINRA, the CFTC, the SEC and the MSRB.

• As election day approaches, advisers and other covered entities should continue to be aware of the potential issues associated with political contributions, fundraising and other political activities by their personnel

Today, Vice President Kamala Harris announced Minnesota Governor Tim Walz as her running mate for the upcoming Presidential election. Because Governor Walz is an “official” for purposes of Rule 206(4)-5 under the Advisers Act (Pay-to-Play Rule), political contributions to, and fundraising for, the Harris campaign are now subject to the prohibitions and restrictions under the rule. Advisers that manage or are seeking to manage the assets of Minnesota state public pension plans will be impacted.

In particular, Governor Walz is a covered official under the Pay-to-Play Rule with respect to certain state government entities, namely the Minnesota State Board of Investment, which manages assets for several plans, including the Minnesota State Retirement System, the Minnesota Teachers Retirement Association and the Minnesota Public Employees Retirement Association (collectively, the Minnesota State Retirement Plans). Because the U.S. President and Vice President are elected jointly, a political contribution to, or fundraising for, the Harris campaign is considered a contribution to, or fundraising for, Governor Walz as well.

Accordingly, a contribution to the Harris campaign by an adviser subject to the Pay-to-Play Rule or its “covered associates” risks triggering a two-year ban – colloquially known as a “time out” – from receiving compensation from Minnesota State Retirement Plans as well as a potential enforcement action should that time out period be violated.

The Pay-to-Play Rule, which imposes severe consequences for missteps even in the absence of any quid pro quo arrangement, continues to be an area of focus for the Securities and Exchange Commission. For example, in April 2024, the SEC settled charges with an investment adviser brought under the Pay-to-Play Rule stemming from a $4,000 campaign contribution to an official of the Minnesota State Board of Investment that did not appear to contemplate any intent to influence the official.¹ Advisers and other covered entities subject to similar pay-to-play rules (e.g., broker-dealers, swap dealers, municipal securities dealers and municipal advisors) should be attentive to the political contributions of their personnel. This is especially important given the strict liability nature of the Pay-to-Play Rule as well as the low dollar de minimis carve-out of $350 under the rule for Presidential campaigns.²

Pay-to-Play Rule

The Pay-to-Play Rule prohibits an adviser from providing investment advisory services for compensation to a state or local public pension plan or other “government entity” for two years if the adviser or its “covered associates” make political contributions over a de minimis threshold to certain officials with authority over the government entity or officials who may appoint or influence such officials. This provision of the rule applies to an adviser that provides advisory services directly to a government entity (e.g., through a separately managed account) as well as indirectly through “covered investment pools.”³ The two-year prohibition on receiving compensation – colloquially known as a “time out” – also has an anti-circumvention provision such that the adviser and its covered associates are prohibited from doing anything indirectly that would be prohibited if done directly (e.g., directing a spouse to contribute to an official to avoid directly violating the Pay-to-Play Rule).⁴ The Pay-to-Play Rule imposes strict liability – that is, a non-de minimis contribution could trigger an automatic time out, even in the absence of any quid pro quo arrangement, although there is a limited exemption process if an adviser discovers a violation after it has already occurred.

The Pay-to-Play Rule also prohibits advisers and their covered associates from certain fundraising activities, namely soliciting from others (including political action committees) or coordinating contributions to an official of a state or local public pension plan or other government entity to which the adviser is providing or seeking to provide investment advisory services. Violations of this prohibition would not trigger a time out, however.

Compliance Considerations

Treatment of Contributions prior to the Announcement

Immediately following President Biden’s announcement to drop out of the upcoming Presidential election, the Harris campaign was reported to receive a wave of contributions. Generally, contributions to the Harris campaign that were made prior to the selection of Governor Walz as Vice President Harris’s running mate should not be covered by the Pay-to-Play Rule because at the time of these contributions the campaign did not include a sitting state or local official.

De Minimis Exception

The Pay-to-Play Rule contains a de minimis exception for contributions by natural person covered associates that do not exceed $350 in the aggregate for contributions to campaigns in which the contributor is permitted to vote and $150 for contributions to campaigns in which the contributor is not permitted to vote. All U.S. citizens entitled to vote in the Presidential election are therefore able to avail themselves of the $350 limit with respect to a donation to the Harris campaign. The pay-to-play rule to which municipal securities dealers and municipal advisors are subject (MSRB Rule G-37) includes a lower de minimis threshold ($250).

Look Back and Look Forward Period

The Pay-to-Play Rule covers contributions by persons who become covered associates within two years after the contribution was made, regardless of whether the person was an associated person of the adviser at the time the contribution. Accordingly, advisers should be attentive to personnel who join their firm or whose responsibilities change, including by way of a job promotion, such that they become a covered associate when they were not previously at the time of a political contribution to a covered official. Advisers must also “look forward” with respect to covered associates who cease to qualify as covered associates or leave the firm. Accordingly, dismissing a covered associate that made a triggering contribution does not relieve the adviser from the two-year time out.

In-Kind Contributions and Volunteer Activity

A contribution may include money or anything of value, including an “in-kind” contribution (e.g., providing one’s home to be used for a fundraiser or providing firm resources to be used for campaign activity). However, volunteer activity by covered associates generally is not covered by the Pay-to-Play Rule if: (i) the adviser did not solicit the volunteer activity; (ii) the adviser’s resources were not used; and (iii) the volunteer work occurred during non-work hours, the volunteer was using vacation time or the adviser did not otherwise pay the volunteer’s salary during the volunteer activity.

Other Federal Pay-to-Play Rules

There are other federal rules that are similar to the Pay-to-Play Rule, which include:

• FINRA Rule 2030 (applicable to broker-dealers).
• CFTC Rule 23.451 (applicable to swap dealers).
• MSRB Rule G-37 (applicable to municipal securities dealers and municipal advisors).
• SEC Rule 15Fh-6 (applicable to security-based swap dealers).

The compliance concerns applicable to the Pay-to-Play Rule are also applicable to these rules.

Other Campaigns

In addition to the Harris campaign, there are many other federal, state and local campaigns that may be subject to the Pay-to-Play Rule and the other federal pay-to-play rules. These campaigns may also be subject to state and local pay-to-play rules. Accordingly, as election day approaches, advisers and other covered entities should continue to be aware of the potential issues associated with contributions, fundraising and other political activities by their personnel.

1. In the Matter of Wayzata Investment Partners LLC, SEC Release No. 6590 (April 15, 2024). SEC Commissioner Hester Peirce has criticized the Pay-to-Play Rule as “an exceedingly blunt instrument” that “does not require any evidence of an actual quid pro quo, or even evidence that the adviser was seeking a quid pro quo,” and noted that the rule “does not require any assessment of whether the official receiving the contribution realistically could influence the decision to hire an investment adviser, or whether the contribution itself reasonably could be expected to influence the official.” SEC Commissioner Hester M. Peirce, Laudable Ends, Poorly Pursued: Statement Regarding Recent Pay-to-Play Rule Settlements (Sept. 15, 2022).

2. For additional information regarding the Pay-to-Play Rule as well as other issues associated with public pension plan investors, please see Dechert OnPoint, Preparing for the 2024 Elections: Pay-to-Play and Other Considerations for Managers of Public Pension Plan Assets.

3. The term “covered investment pool” generally includes hedge funds, private equity funds, venture capital funds and collective investment trusts, as well as registered investment companies (e.g., mutual funds) that are investment options of a participant-directed plan or program of a government entity (e.g., “529 plans”).

4. Political contributions to political parties, political action committees and similar committees and organizations raise unique considerations.