In this Summary: Introduction; The SEC’s pay-to-play rule; Prong 1: Political contributions; Prong 2: Third-party solicitations and fundraising; Prong 3: The catch-all; Recordkeeping requirements of the rule; State laws and regulations; New York; California; and Practice tips.

Private equity advisers that are either registered with the Securities and Exchange Commission (SEC) or ‘exempt but reporting’ are also subject to Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act). The rule, more commonly known as the ‘pay-to-play rule’, effectively limits the ability of an investment adviser and its high-level employees to make political contributions or provide gifts to political figures and candidates that could award the adviser business contracts.

Since the rule was first adopted in July 2010, it has been interpreted by SEC staff, amended and, most recently, the focus of no-action relief. Numerous state and local governments have also proposed and/or adopted similar legislation or regulations that either prohibit investment advisers and their employees from making contributions to political figures, or require advisers and their soliciting personnel to register as lobbyists prior to competing for government contracts. As a result, before a private equity adviser seeks to do any business with or manage any assets for a government entity, it must assure itself that it is in compliance with both the SEC’s pay-to-play rule (a complicated enough task in its own right) and any applicable state or local statutes or rules.