In this sub-section, we will discuss the ethical implications and regulations surrounding political contributions made by investment advisers and their representatives. We will explore the rules that govern these contributions, the potential conflicts of interest they may create, and the consequences of violating these rules.
Which of the following is considered a political contribution?
Correct!
Not Correct
Select an option above to see an explanation here.
A) Donating to a political candidate's campaign is a political contribution. B) A gift to a client's spouse is not a political contribution but may create a conflict of interest. C) A payment for research services is not a political contribution but may be part of a soft dollar arrangement. D) A fee paid to a third-party solicitor is not a political contribution but may be subject to regulation under Rule 206(4)-5.
What is the purpose of the two-year time-out rule?
A) The two-year time-out rule does not address gifts and entertainment. B) The two-year time-out rule does not address soft dollars. C) The two-year time-out rule does not address insider trading. D) The two-year time-out rule is designed to deter investment advisers from engaging in pay-to-play practices by prohibiting them from providing advisory services to government entities for two years after making a political contribution.
In the 1990s, a major investment bank was found to have made significant political contributions to state officials responsible for selecting underwriters for municipal bond offerings. This led to increased scrutiny of the industry and the eventual adoption of Rule G-37 by the Municipal Securities Rulemaking Board, which restricts political contributions by municipal securities dealers.
Which of the following is NOT a requirement under Rule 206(4)-5?
A) Rule 206(4)-5 requires investment advisers to maintain records of political contributions made by covered associates. B) Rule 206(4)-5 requires investment advisers to disclose any potential conflicts of interest arising from political contributions. C) Rule 206(4)-5 does not require investment advisers to obtain pre-approval for political contributions made by covered associates. Still, they must comply with the two-year time-out and de minimis exception rules. D) Rule 206(4)-5 prohibits investment advisers from engaging in pay-to-play practices.
An investment adviser's covered associate makes a $5,000 contribution to a candidate running for mayor in a city where the adviser is seeking to manage the city's pension fund. This contribution may trigger the two-year time-out, preventing the adviser from providing services to the city's pension fund for two years.
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Example Series 65 Example Practice Question
This is a stretch, but consider the following device for remembering Rule 206(4)-5, often called the Pay to Play Rule in the Investment Advisers Act of 1940. Think of... - 20 as 'Score' (a term used in the past to refer to 20, like in Lincoln's Gettysburg Address) - 6 as 'Kick' - 4 as 'For' - 5 as 'High' This creates the phrase "Score Kick For High." Imagine a game where the player has to 'kick' to score, and if they want to win (or get the 'play'), they have to kick it high, referring to making large contributions: "Pay to Play," get it?
- $De minimis exception$: A political contribution of $350 or less per election to a candidate for whom the contributor is entitled to vote, or $150 or less per election to a candidate for whom the contributor is not entitled to vote. - $Two-year time-out$: A two-year ban on receiving compensation for providing advisory services to a government entity after making a political contribution to an official of that entity. - $Prohibition on soliciting contributions$: Investment advisers and their covered associates are prohibited from soliciting contributions for a government official who can influence the selection of the adviser.
- $De minimis exception example$: An investment adviser contributes $300 to a local mayoral candidate for whom they are entitled to vote. This contribution falls within the de minimis exception and does not trigger the two-year time-out. - $Two-year time-out example$: An investment adviser contributes $500 to a state governor who can influence the selection of investment advisers for the state's pension fund. This contribution triggers the two-year time-out, and the adviser is banned from receiving compensation for providing advisory services to the state for two years. - $Prohibition on soliciting contributions example$: An investment adviser asks their clients to contribute to the campaign of a state treasurer who can influence the selection of investment advisers for the state's pension fund. This action violates the prohibition on soliciting contributions.