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Pay to Play: Rule 206(4)-5

Pay to Play: Rule 206(4)-5

 

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Welcome, thank you all for joining our webinar today hosted by MyComplianceOffice and Cipperman Compliance Services. With that I'll hand it over to Todd. Thank you.

 

Our polling question one which is, "Does your firm engage in revenue sharing? If you do, do you pay or receive?" You can poll away, and I'll wait a minute, and we'll see the results. That's interesting, so 40 percent ... Next time we do this we'll ask do you plan on changing that over time.

 

Let's talk about pay to play, and again as I said upfront what I'm talking about pay to play is this concept of trying to get public planned business through some form of intermediary that you're paying to get that business. Certainly not something new. What's relatively new is this rule 20645 on the advisors act, which regulates investment advisory firms, and whether and how they can pay a third party solicitor. I'm going to walk through the pay to play rule, which is extremely technical and detailed. For those of you that allow your people to make political contributions I highly recommend reading the rule, or at least the description of the rule, because there's a lot here. Everything here is in quotes, because these definitions are what's critical to the rule. What's prohibited? You're essentially not allowed to take fees for advisory services with a government entity, advisory service for a government entity if in the prior two years you made a contribution to an official of that government entity. That's the basic rule, and also the solicitor, we talked about it in the prior period about whether that solicitor has to be registered in the 20645 case that solicitor does need to be a registered investment advisor, or broker dealer, so there's no middle ground there.

 

There's some back door stuff you also can't coordinate a political contribution, you can't do it inadvertent. Sort of behind the back. Let's get into definitions, because there's been a lot of discussion about these what is a contribution. Well, it's very broad, very broad. Anything of value, anything of value made for the purpose of influencing any federal, state, or local office, I'm going to get to that in a minute because federal is a little strange, because you really can't be involved with a pension plan at the federal level so that's a little bit limited, but I would focus on state or local office. Payment of a debt incurred with an election, or the payment of any transition, or inaugural expenses. By the way anything of value is not just ... It can be services as well, we're going to talk about the Goldman Sachs case in a little bit.

 

What is a covered associate, who in your firm is covered? Any of the execs, GPs, managing members, exec officers, et cetera, or any solicitor who solicits government entities. Also, really important to understand that two year look back can apply to someone who made a contribution when they were not a covered associate. Maybe it was made even before they worked for your firm, or they got promoted. You have to look at their political contributions in the prior two year period to see if you can do work for that government entity, it's very, very draconian. What is a government entity? A government entity is really, despite what they said about payments to federal it's any state or political sub division of the state, because those are the ones that can actually influence a plan.

 

What's the official, what is an official that would be prohibited? This is where things get a little bit esoteric, it's any person including a part of the election committee who was at the time of the contribution, you ready, an incumbent, a candidate, a successful candidate of the government entity. If the office itself is direct or indirectly responsible for the outcome of hiring an investment advisor by that government entity. It can be panels, it could be groups, but if there's any kind of influence over that that's a problem. Or that person has the authority, governor or treasurer, to appoint a person who has responsibility to indirectly influence the outcome of hiring investment advisors. This is very, very broad, very, very broad. There is a de minimis rule, you can contribute 350 dollars to a candidate if you're in that district to vote, and 150 dollars if you're outside of that district. For those of you that have been in the municipal world this was a copy of rule G37, MSRB rule G37, very similar. The only difference here of course is MSRB rule is about municipals, this is about any security. By the way for all these definitions these SEC will give exceptive relief in certain situations. You are able to go to them if you have a problem, and see if you get ... They have given exemptive relief, so that's something to think about if you have a big issue.

 
 
 
 
 
 
 
 
 
 
 
 

This webinar was co-hosted with Cipperman Compliance Services, LLC

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