Pay-to-play rule one more reason to steer clear of the topic; but what about right to free speech?
The impact of a new regulation that curtails the ability of advisers to make political donations may be limited by the fact that many advisers already avoid electoral activities.
Advisers tend to follow the rule that it's best to not to bring up religion and politics in conversations with clients.
Roger Hewins, president of Hewins Financial Advisors LLC, said that getting involved in politics is dangerous.
“My wearing a passionate set of beliefs on my sleeve would upset people, some of whom might not do business with us,” Mr. Hewins wrote in an e-mail. “In fact, we have had people Google us and make an issue out of our personal donations. I feel a strong sense of responsibility to all of the people in our company who work so hard, and to the clients who need our help, and so I am willing to keep as low a profile as is reasonably possible politically.”
The new Securities and Exchange Commission regulation is designed to stop attempts to curry favor with government officials who can influence the selection of advisers for municipal securities and public-pension funds.
Under the regulation, advisers are prohibited from making political contributions above a certain amount to candidates in a position to hire advisers. They are limited to $350 per election cycle for candidates for whom the adviser is eligible to vote and $150 for those outside the advisers' voting area.
The regulation also limits soliciting donations for a candidate, a practice known as “bundling,” and requires advisers to maintain records of political contributions. Starting in September, third-party organizations that drum up government business for advisers will be required to register as advisers and also fall under the new rule.
Advisers who violate any of the restrictions, and subsequently gain work after making a contribution, will be barred from being paid for providing government advisory services for two years — the so-called death penalty.
Advisers who are politically active worry that firms will place blanket political restrictions on everyone — including those who don't work on government accounts.
That would mean that someone who is used to attending $500- or $1000-a-plate political fundraisers may have to stay at home now. The restrictions will start to bite as early as this fall, when many mayoral and other local elections will be held. Next year is prime election season, with many governors on the ballot.
John Levins, a principal at Levins & Associates LLC, does not intend to be politically active over the next year, even though his state is one of the epicenters of politics in a presidential cycle.
“If one goes in what's perceived as the wrong direction on your political views, you might lose clients,” Mr. Levins said. “Once you get involved in politics, it makes your life and your business much more complicated. We don't want to do that up here.”
One solution that seems to be emerging is pre-clearance for political donations, according to David Tittsworth, executive director of the Investment Adviser Association. Under such a system, an adviser would have to notify the chief compliance officer before making a contribution.
“A lot of firms are utilizing that approach,” Mr. Tittsworth said.
The pay-to-play regulation, which went into effect in March, is still new enough that no one is sure how advisory businesses will sort out who is a covered associate and how to ensure that they and others comply.
Terry Reilly, who is of counsel at Montgomery McCracken, Walker & Rhoads LLP, said he advises firms not to be overly broad in implementing the rule, because they could inadvertently tread on free-speech rights.
“I haven't seen a lot of headache,” Mr. Reilly said of compliance efforts so far. “They're trying to get their arms wrapped around it right now.”
In the meantime, advisers are treading carefully in any form of political communication with clients because of the toxic partisan atmosphere that has developed in Washington. That extends to client letters about the burgeoning federal deficit and debt.
“We have received some [limited] feedback that we were getting too political, for example, when we candidly acknowledged that the current government spending plan was simply unsustainable and large [budget] cuts were unavoidable,” Mr. Hewins said. “Never mind that the presidents' bipartisan deficit commission said exactly that. I engage these people and have been fairly successful at getting them to calm down and focus on the issues, not the politics.”
