Many states and municipalities have adopted laws and regulations that affect how investment managers may solicit investment advisory business, including investment in sponsored public and private funds, from the state agencies and municipalities that administer employee benefit plans and other state investment vehicles. This Q&A seeks to highlight some of the issues relating to soliciting business from, or doing business with, these instrumentalities and also seeks to explain some of the important differences between state and local laws and the SEC’s pay-to-play rule under the Investment Advisers Act of 1940, Rule 206(4)-5.
Q1: We are an SEC-registered investment adviser and comply with the SEC pay-to-play rule. If we comply with the SEC rule, must we also comply with state and municipal laws relating to pay-to-play?
A1: Yes; the SEC pay-to-play rule does not preempt federal, state and local pay-to-play, lobbying and related requirements, and there are significant restrictions imposed by the federal government, states, municipalities, governmental pension plans and other authorities that often exceed SEC requirements.
Q2: Who is restricted under state laws from making political contributions? Are they the same persons that fall within the definition of Covered Associates under the SEC rule?
A2: There is no uniformity among jurisdictions as to who is covered by pay-to-play or similar restrictions against seeking to obtain government business by making campaign or other contributions to elected officials. Some state restrictions are more expansive than the SEC rule and may include, in addition to employees who solicit government entities, affiliates and third-party solicitors and marketers.
Q3: We have heard that the SEC exception from the two-year time-out look-back (to only a six-month look-back for a natural person who joins an adviser and does not solicit clients for that adviser) and the natural person de minimis dollar contribution exception (of $350 per election to any one official for whom a person is entitled to vote or $150 to other officials) may be different in various states; is that right?
A3: Yes; these exemptions may not be available or may vary widely in detail, depending on the jurisdiction. For example:
Q4: What types of contributions are restricted under state laws?
A4: Many state statutes and regulations are far more restrictive than the SEC rule (which applies to any gifts or other contributions of value made for the purpose of influencing any election for federal, state or local office). For example:
Q5: What individuals in government entities are restricted from receiving gifts or contributions under state laws?
A5: Once again, state laws vary from jurisdiction to jurisdiction and also vary from the SEC rule (which applies to any person – or that person’s election committee – who is at the time of the contribution an incumbent, a candidate or a successful candidate for elective office directly or indirectly responsible for, or influential over, the hiring of an adviser, or with authority to appoint a person with that authority). For example:
Q6: How do state laws restrict the activities of solicitors and placement agents?
A6: States and other jurisdictions restrict activities related to the hiring of third-party placement agents (regardless of the SEC rule’s permitted use of certain registered solicitors) in various manners. In addition, certain plans may also adopt their own policies that go beyond the scope of any statutory restrictions. Examples include the following:
Q7: Is it true that our investment management activities could be considered lobbying under state law?
A7: Yes; certain activities related to contracting with a government entity for providing investment management services (or investing in a fund sponsored by the investment manager) may trigger state lobbyist registration considerations. For example:
Q8: If lobbyist registration is required, who is required to register?
A8: If registration is required, the person or entity required to register varies from jurisdiction to jurisdiction. For example, in some cases, the marketing employee who lobbies on behalf of an investment manager is required to register as a lobbyist, while in other cases, the investment manager entity registers as a lobbyist and may be required to list marketing employees who lobby on behalf of the investment manager on the investment manager’s registration statement.
Q9: Are there common exemptions from state lobbying registration requirements that we might rely on?
A9: Yes; if a state requires an investment manager or placement agent to register as a lobbyist in order to solicit business from a state agency or plan, they may also provide for exemptions. Common exemptions from registration as a lobbyist that exist in some states include the following:
Q10: What are the consequences of registering with a state as a lobbyist?
A10: Common requirements that apply to state registered lobbyists include the following:
Q11: What are the consequences of failing to register with a state as a lobbyist?
A11: Potential consequences may include:
Q12: Are there any additional state and/or plan-specific disclosure requirements?
A12: Yes; state disclosure requirements are often broader than those under the SEC pay-to-play rule. Also, specific plans may have adopted their own policies in additional to any applicable state-level requirements. Investment managers doing business or seeking to do business with state plans may be required to make disclosures to state boards of ethics or state elections enforcement commissions or other agencies, in addition to making disclosures to the plans with whom they wish to do business, and the information disclosed may be publicly available (for example, posted online) in some circumstances.
Q13: Where and/or how do we find the applicable state laws or a particular plan’s policies?
A13: Applicable requirements appear in state and local statutes and regulations and often include formal and informal positions taken by municipalities, cities, counties and the state or local pension plans themselves. Sometimes positions appear in minutes of meetings of public officials or standardized contractual provisions or may only be clarified by direct communications with governing bodies. Many of these laws are in a state of flux and are subject to change.
Q14: What are some of the steps we should take to be sure we are in compliance?
A14: Affirmative steps should be taken to monitor and achieve compliance with the various state and local requirements concerning lobbyist registration (including for internal marketing activities), placement agent use, political contributions and gifts and entertainment, including the following:
Q15: Has information already been compiled setting forth the requirements relating to various state and local plans?
A15: As of the date of this Q&A, K&L Gates LLP attorneys have researched requirements relating to the following state and local plans, and in certain cases, entities that administer state and/or local plans, with respect to multiple issues: pay-to-play; campaign contributions; lobbying; use of placement agents; and gifts and entertainment, including any pre-contractual disclosure requirements, ongoing contractual disclosure requirements and penalties for violating these requirements:
Plan or Entity
New York State
New York City
Please feel free to contact the authors of this Q&A or your K&L Gates relationship lawyer if you have any questions relating to these requirements.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm’s clients.