Pay-to-play 'death penalty' scaring the life out of advisers

For most political campaigns, the 2012 election cycle is well under way, with candidates scrambling for cash. But investment advisers who do business with government entities are trying to stay out of the electoral action. Many fear they might unintentionally violate a new regulation designed to curtail attempts to curry favor with officials who can influence the selection of advisers for municipal securities and public-pension funds. An adviser who works in a state known for passionate politics intends to play it safe and stay out of the electoral fray — beyond casting his own ballot. “You have to approach this upcoming election in 2012 very, very carefully,” said John Levins, a principal at Levins & Associates in Manchester, N.H. “There are too many political, economic and government agendas on the table that will fire up compliance-related matters.” He said the potential aftermath of making any kind of political contribution makes it not worth the trouble. “It will put you into the audit — and you want to avoid that at all costs,” Mr. Levins said. “It's not in the best interest of the investment industry to get involved, whether it be on the federal or state level.” Under the regulation, an adviser is prohibited from being paid for services for a government client for two years after making a political contribution above a small amount — $350 per election for candidates for whom an adviser is eligible to vote, and $150 for those outside of his or her voting area. The regulation bans soliciting donations for a candidate, a process called “bundling.” Another aspect of the rule that goes into effect in September requires that third-party organizations that drum up government business for an adviser also register as advisers so that they fall under the new rule. Advisers also must maintain records of political contributions. A violation could lead to a two-year “death penalty” on government advisory services. The Securities and Exchange Commission promulgated the political-contribution curbs to ensure that the hiring of advisers to manage public funds is “based on the best interests of the plans and their beneficiaries, not kickbacks and favors,” SEC Chairman Mary Schapiro said when the regulation was proposed last summer. Experts say that the rule is complicated. For instance, it requires that firms review two years' worth of the giving history of anyone who will be covered by the donation limits. That means that a career-changing adviser, who may have previously worked at an auto dealership and contributed to local political candidates, could trigger the “death penalty” if he works on government accounts. The steep penalty could encourage firms to enforce the political-activity curbs on all their advisers, not just those who are covered by pay-to-play. “The rule almost requires that advisers take this broader approach because of the unique look-back feature,” said Ki Hong, a partner at Skadden Arps Slate Meagher & Flom LLP. In doing so, advisers could find that their ability to contribute to political candidates or participate in party work is forbidden. “There may be some employees who feel they're being disenfranchised,” Mr. Hong said. For the moment, many are erring on the side of caution. “There are a lot of nuances of the rule that make it difficult and complex,” said David Tittsworth, executive director of the Investment Adviser Association. “It is definitely a topic of discussion among a lot of firms out there.” One adviser hopes that the pay-to-play rule evens the playing field for government business. Diane Pearson, an adviser and shareholder at Legend Financial Advisors Inc., said that her firm has been on the losing end of the competition for government business because other advisers have had some kind of relationship with a member of an advisory board to a municipal account. “From a pricing standpoint, we're always competitive,” Ms. Pearson said. The new rule “may open up some windows for us.”