SEC Adopts Pay-To-Play Rule for Investment Advisers

July 15, 2010


On June 30, 2010, the Securities and Exchange Commission (“SEC”) adopted its new “pay-to-play” rule (“the Rule”)[1] prohibiting investment advisers from receiving compensation for providing advisory services to state and local government clients within two years after a contribution to certain government officials is made by the adviser, key executives and employees of the adviser (“covered employees”), or any political action committee (“PAC”) controlled by the adviser or its covered employees (“covered PAC”).  The Rule also prohibits advisers from engaging in political fundraising activities for certain elected officials or candidates in jurisdictions where the adviser is providing or seeking government business.  In addition, the Rule imposes new recordkeeping and disclosure requirements.

In a welcome departure from its rule proposal,[2] the SEC dropped from the Rule the proposed ban on the use of all third parties to solicit advisory business and public pension fund investments.  Instead, the Rule allows covered advisers to use a third-party solicitor, as long as that solicitor is both (i) registered either as a broker-dealer or as an investment adviser (“regulated persons”) and (ii) subject to the Rule or a comparable pay-to-play regime promulgated by a registered national securities organization, i.e., the Financial Industry Regulatory Authority (“FINRA”).[3]

Advisers covered by the Rule (“covered advisers”) will have until March 14, 2011 to adopt and implement policies and procedures in compliance with the Rule.[4]  Covered advisers to registered investment companies have additional time — until September 13, 2011 — to comply.[5]  All covered advisers have until September 13, 2011 to comply with the restriction on the use of third-party solicitors.[6]  For ease of reference, we have included a list of the Rule’s key compliance dates at the end of this alert.

I.  The Two-Year Ban on Compensation

Rule 206(4)-5(a)(1) under the Advisers Act prohibits a covered adviser from receiving compensation for advisory services provided to a government entity for a two-year period after the adviser, any of its covered employees, or any covered PAC makes a political contribution to a public official of a government entity, or a candidate for such office, who is or will be in a position to influence the award of advisory business (the “two-year ban”).[7]  While there are limited exceptions and exemptions to the two-year ban,[8] it is a strict liability rule:  inadvertent violations trigger the ban, regardless of the donor’s intent, necessitating comprehensive and rigorous compliance measures.  The two-year ban will not be triggered, however, unless all of its elements are met.

Specifically, there must be a

  • contribution made in connection with an election
  • by the covered adviser, a covered employee, or a covered PAC [9]
  • to a covered official
  • of a government entity to which the adviser provides advisory services.

Thus, a contribution made by an employee who does not meet the Rule’s definition of a covered employee will not implicate the ban.  Similarly, a contribution by a covered employee to a public official who is not a “covered official” will not trigger the two-year ban.

Our experience with MSRB Rule G-37 — the federal pay-to-play rule applicable to municipal dealers and the rule upon which this Rule has been based — is that the determination as to whether a contribution to a government official has triggered the two-year ban is compliance-intensive and requires a strong understanding of each element of the two-year ban.  Each element is discussed in more detail below.

a.  Contribution

As a threshold matter, not all political contributions implicate the two-year ban, but rather only those that are made in connection with an election.  For purposes of the Rule, “contribution” means a gift, subscription, loan, advance, or deposit of money or anything of value made for the purpose of influencing an election for federal, state, or local office, including any payments for debts incurred in such an election.  A contribution also includes transition or inaugural expenses incurred by a successful candidate for state or local office.[10]

Neither charitable donations nor an employee’s volunteer activities on behalf of a campaign are typically considered to be contributions.  If, however, an employee spends time on a campaign during business hours or otherwise uses the resources of the adviser (e.g., providing office space for events or using the adviser’s computers, telephones, etc.), then such activities could be considered providing an in-kind contribution under the Rule.

b.  Covered Advisers

An adviser will be covered by the Rule if (i) it is an SEC-registered investment adviser or a private adviser exempt from registration under section 203(b)(3) of the Advisers Act (the “private adviser exemption”)[11] and (ii) it provides advisory services to a government entity.[12]  This includes providing advisory services to a government entity

  • directly, such as through advising or managing a government plan or a separate account of a government entity, including a retirement plan for the benefit of government employees; or
  • indirectly, through covered investment pools, including
    • unregistered pooled investment vehicles such as hedge funds, private equity funds, venture capital funds, or collective investment trusts — in which a government entity invests or is solicited to invest;[13] or
    • registered pooled investment vehicles including registered investment fund products but only if they are included as investment options of a participant-directed plan or program of a government entity in which participants select among pre-established investment options that a government official has directly or indirectly selected as investment choices for participants (such as a mutual fund included as an investment option in a 529 college savings plan, 403(b) retirement plan, or 457 retirement plan).[14]

The Private Fund Investment Advisers Registration Act of 2010 (“PFIARA”), as part of the larger financial reform bill, was approved by the Senate today and is awaiting the President’s signature.[15]  PFIARA eliminates the private adviser exemption under section 203(b)(3) of the Advisers Act and in its place provides several limited registration exemptions, including a very limited exemption from registration for foreign advisers.[16]  The result is that most U.S. and foreign investment advisers to private investment funds, including hedge funds and private equity funds, will be required to register with the SEC under the Advisers Act.  Because the foreign private adviser exemption under PFIARA falls under section 203(b)(3) of the Advisers Act, exempt foreign advisers will be “covered advisers” for purposes of the Rule.  Advisers to “venture capital funds,”[17] however, will not meet the Rule’s definition of “covered adviser” because they will be exempt from registration under section 203(l) — not 203(b)(3) — of the Advisers Act.  Given the references to venture capital funds in the Adopting Release, we believe this is a technical oversight by the SEC and will likely be remedied shortly upon the enactment of the financial reform bill.

c.  Covered Employees

Executives and employees covered by the Rule include

  • the adviser’s general partners, managing members, “executive officers,” and other individuals with a similar status or function; and
  • employees who solicit government entities as clients or for investments, or anyone who directly or indirectly supervises such employees.[18]

“Executive officers” include

  • the adviser’s president;
  • any vice president in charge of a principal business unit, division or function (such as sales, administration, or finance);
  • any other officer who performs a policy-making function for the adviser; and
  • any other person who performs similar policy-making functions for the adviser.[19]

Companies that are “related persons” to the adviser (i.e., “directly or indirectly, controlling or controlled by the investment adviser,” or “under common control with the investment adviser”) and employees of such companies are not covered by the Rule, unless such persons are engaged in activities on behalf of a covered adviser which give rise to “covered employee” status.  Consistent with recent developments in the Rule G-37 context,[20] the SEC made clear in the Adopting Release that “whether a person is a covered [employee] ultimately depends on the activities of the individual and not his or her title.”[21]

Accordingly, in determining whether a person is a covered employee, it will be necessary for covered advisers to employ a functional, not formal, approach.  If an employee performs a policymaking function for the adviser, then he or she is a covered employee regardless of title or position within the corporate family.  Similarly, anyone who is in the chain of supervision for employees who solicit government entities will be considered a covered employee under the Rule, even if the supervisor is employed by the parent or an affiliate of the adviser.

The “Look-Back” and “Look-Forward” Provisions – New Hires, Internal Promotions or Transfers, and Exiting Employees

When any person becomes a “covered employee,” the adviser must “look back” in time to that person’s contributions to determine whether the two-year ban will be triggered.  A two-year look-back will be required for new, covered employees who solicit for the adviser.  A six-month look-back will apply to all other covered employees, i.e., those not engaged in solicitation activities for the adviser but who are nonetheless “covered.”[22]

Thus, if prior to assuming a covered employee position for an adviser, an individual makes a contribution to a covered official (e.g., a governor), then the adviser will be prohibited from receiving compensation for providing advisory services to the relevant government entity until two years (or six months for non-solicitors) have passed from the date of the contribution.

Similarly, advisers must “look forward” for the contributions made by covered employees who cease to be covered employees, either through internal transfer or by leaving the firm.  This means that an adviser remains subject to the two-year ban for the entire two years from the time of the contribution, regardless of whether the covered employee remains a covered employee or separates from the adviser.

Therefore, in developing an effective compliance program, it is not sufficient to address only the contributions of existing covered employees.  Instead, advisers will have to incorporate political contribution review into procedures for internal transfers, promotions, hiring, and departing covered employees.

d.  Covered Officials

For purposes of the Rule, a covered official means any person (including any election committee for the person) who was at the time of the contribution, an incumbent, candidate, or a successful candidate for an elective office of a government entity, and the office has the authority to

  • select, or influence the selection of, an investment adviser; or
  • appoint a person who selects, or can influence the selection of, an adviser.[23]

The determination of whether an elective office has the requisite authority requires examination of the official duties of that office and often an exhaustive analysis of the authority exercised by officials appointed by the holders of the elective office.  Governors, Treasurers and Comptrollers, for example, will almost always be covered officials because these offices frequently provide the holder with the capacity to appoint officials that can select, or influence the selection of, investment advisers.  Other officials, such as Lieutenant Governors or State Attorneys General, will be covered officials in some jurisdictions but not others depending on the constitutional and statutory authority of their offices.

Based on our experience with Rule G-37, such “covered official” determinations can tax an adviser’s compliance resources, particularly if the adviser or its covered employees are politically active.  It is therefore important that an adviser accurately assess the level of political activity in the firm and ensure that it has adequate compliance resources to carry out its policies and procedures under the Rule.

e.  Government Entity

“Government entity” is defined under the Rule as any state or political subdivision of a state, including

  • any agency, authority, or instrumentality of the state or political subdivision;
  • a pool of assets sponsored or established by the state or political subdivision, or any agency, authority, or instrumentality;
  • a plan or program of a government entity; and
  • officers, agents, or employees of the state or political subdivision or any agency, authority, or instrumentality thereof, acting in their official capacity.[24]

Thus, while the rule does apply to the provision of advisory services to public officials, it does so only when such officials are acting in an official capacity.  Providing advisory services to officials who are acting in their personal capacity, such as advising managed accounts for public officials’ personal funds, would not be covered by the Rule.

f.  Exceptions and Exemptions to the Two-Year Ban

De Minimis Contributions

The Rule permits covered employees (but not the covered adviser or a covered PAC) to contribute up to $350 per election per candidate if the covered employee was entitled to vote for the candidate at the time of the contribution, or up to $150 per election per candidate for whom the covered employee was not entitled to vote at the time of the contribution.[25]

Automatic Exception for Returned Contributions

The Rule includes a safe harbor for contributions which (i) do not exceed $350 and (ii) are returned (a) within four months of the contribution and (b) within sixty calendar days of the adviser discovering the contribution.[26]  When all the criteria are met, this safe harbor may be invoked without seeking or obtaining the SEC’s approval, although covered advisers must disclose their reliance upon this exception in its reports to the SEC.[27]  This exception, however, is only available three times in a calendar year for companies with more than 50 employees and only twice in a calendar year for companies with 50 employees or fewer.[28]  Moreover, the exception is only available once per employee for as long as the employee is employed by the adviser.[29]

Discretionary Exemption

In addition, the SEC may within its discretion conditionally or unconditionally exempt an adviser from the two-year ban on a case-by-case basis where “necessary or appropriate.”[30]  When determining whether to grant an exemption, the SEC will consider (among other factors)

  • whether the exemption furthers the public interest;
  • whether the investment adviser (i) had reasonable compliance programs in place prior to the contribution, (ii) did not know of the contribution when it was made, and (iii) upon learning of the contribution, took all available steps to obtain return of the contribution and other appropriate remedial measures;
  • whether the contributor was a covered employee, or seeking such employment, at the time of the contribution;
  • the timing and nature of the contribution;
  • the nature of the election; and
  • the contributor’s apparent intent or motive in making the contribution.[31]

As a practical matter, although the SEC’s comments suggest it is open to the possibility of case-by-case relief, our experience with exemption requests under MSRB Rule G-37 suggests that such requests under the Rule will be infrequently granted.  Indeed, the SEC’s Release suggests that it does not believe exemptions will be an important feature of its implementation of the Rule:  the SEC forecasts that it will receive only seven exemption requests annually.[32]

II.  Prohibition on “Conduiting”

The Rule prohibits covered advisers from doing anything indirectly that would be prohibited if done directly.[33]  Thus, advisers and their covered employees are prohibited from making “conduit” contributions to covered officials through third parties, including through family members, affiliates, or other persons or entities.  For example, a covered employee cannot make a contribution to a PAC with the intention or understanding that the PAC will make a corresponding contribution to a covered official.

From a compliance perspective, it is important to be sensitive to the appearance of conduiting.  The SEC has specifically raised concerns about conduiting contributions through family members, and, accordingly, advisers will need to adopt policies and procedures to address family member contributions.[34]  Advisers must similarly examine covered employees’ contributions to PACs and political parties.  The SEC has suggested that the diligence required by the MSRB with respect to Rule G-37 would be appropriate for covered advisers in most cases.[35]  For example, in diligencing contributions made to a PAC, an adviser will need to ask for representations as to how the PAC expends contributions and will need to review the PAC’s recent contribution and expenditure history.

III.  Prohibition on Political Fundraising

The Rule also bans advisers or covered employees from “bundling” contributions, paying a third-party to solicit contributions, or otherwise coordinating or soliciting another person or PAC to contribute to either

  • a covered official or
  • a political party in the state or locality where the adviser seeks advisory business.[36] 

In other words, the Rule flatly prohibits advisers and covered employees from hosting fundraisers or otherwise engaging in political fundraising for covered officials and state and local political parties.

IV.  Prohibition on the Use of Unregistered Third-Party Solicitors

As noted above, third-party solicitors must be “regulated persons,” i.e., either an investment adviser subject to the Rule or an SEC-registered broker-dealer subject to similar pay-to-play restrictions imposed by FINRA.[37]  The activities of the third-party solicitor will determine whether the solicitor should be registered as a broker-dealer or an investment adviser, as these licensing categories are not interchangeable.

a.  Broker-Dealer Solicitors (“Placement Agents”)

A third-party solicitor engaged in the placement or sale of private fund interests with public pension plans is engaged in a brokerage activity, i.e., the solicitation and sale of a security.  Section 15 of the Securities Exchange Act of 1934 (“Exchange Act”) generally requires that persons engaged in this activity be registered as broker-dealers, or become associated persons of a registered broker-dealer.  This is the case for both internal and third-party solicitors.  Indeed, in a recent speech, Andrew “Buddy” Donahue, the Director of the SEC’s Division of Investment Management, urged participants in the private fund industry who were not currently registered as, or associated with, a registered broker-dealer to “carefully consider whether they should be.”  He expressed concerns that private fund participants may “be inappropriately claiming to rely on exemptions or interpretive guidance to avoid broker-dealer registration.”[38]  Covered advisers that use third-party placement agents or internal marketing teams to place fund interests with government entities therefore should reevaluate whether their third-party or internal placement agents currently must be registered as, or licensed with, a registered broker-dealer.  Moreover, although the Rule allows covered advisers a reprieve from the restrictions on the use of third-partly solicitors until September 13, 2011, advisers and third-party solicitors may already be subject to existing registration requirements as broker-dealers or investment advisers.

As noted above, the SEC asked FINRA to promulgate a pay-to-play rule applicable to SEC and FINRA-registered broker-dealer placement agents,[39] and FINRA has indicated that it is preparing a pay-to-play rule for broker-dealer placement agents “as rigorous and as expansive” as the Rule.[40]  FINRA’s proposal has not yet been released, however; we therefore will discuss the potential new regime for placement agents in more detail in a future alert.

b.  Advisory Solicitors

A third-party solicitor engaged in obtaining or retaining a government client for, or referring a government client to, an adviser, will be required to become a registered investment adviser (and therefore subject to the Rule) and to comply with all relevant aspects of the Advisers Act, including the so-called “Cash Solicitation Rule.”[41]  The Rule also includes a technical amendment to the Cash Solicitation Rule that addresses the special prohibitions that apply to solicitation activities involving government entity clients.

V.  Recordkeeping Requirement for Political Contributions

In addition to the pay-to-play prohibition, the Rule modifies the books and records requirements under the Advisers Act to require registered advisers that provide advisory services to government entities to maintain certain additional records.  Beginning on March 14, 2011 (or September 13, 2011 for advisers to registered investment companies that are covered investment pools),[42] such advisers must maintain records of

  • the names, titles, and business and residence addresses of all covered associates of the investment adviser;
  • all government entities advised and all government entities investing in a covered investment pool, in the past five years (looking back no further than September 13, 2010); and
  • details of direct and indirect political contributions made by the adviser and its covered associates and covered PACs to covered officials, state and local political parties, and any PAC, state or federal.[43]

On September 13, 2011, the adviser must also begin recording the names and addresses of any third-party solicitors used to solicit government entities.[44]

Because the Rule modifies existing record keeping obligations under the Advisers Act, the new records requirements do not apply to advisers who are exempt from registration under section 203(b)(3) of the Act.  As noted above, however, many advisers currently relying on the private adviser exemption under section 203(b)(3) of the Advisers Act, will shortly become subject to the Advisers Act, including its recordkeeping rules.

VI.  Compliance Recommendations

In light of the breadth and substantial penalties associated with the Rule, a covered adviser will need to adopt comprehensive policies and procedures as well an appropriate training program to ensure compliance with all aspects of the Rule.  In developing an effective compliance program, an adviser can draw on the policies and procedures developed over the years by municipal dealers in the Rule G-37 context.  Effective pay-to-play compliance measures under Rule G-37 that can be adapted include

  • “ring fencing” all covered employees by requiring them to pre-clear their political contributions through the compliance officer or his or her designee;
  • creating and implementing intake and separation procedures to screen potential hires, internal transfers, promotions, and departures for persons who may be entering or exiting “covered employee” status;
  • developing a checklist of the required elements for analyzing whether a political donation triggers the two-year ban;
  • creating and implementing due diligence procedures to protect against conduiting or the appearance of conduiting; and
  • training covered employees and critical legal and compliance staff on key aspects of the Rule.

Covered advisers should begin immediately putting in place their compliance programs.  It can take a number of months to create, implement and train covered employees on the pay-to-play policies and procedures.  In addition, the process of ring fencing the universe of covered employees can be time consuming, particularly for advisers with large numbers of employees who are geographically dispersed.

Based on the foregoing, advisers should stay aware of the following compliance deadlines

  • September 13, 2010:  The Rule formally goes into effect.  Although there is a grace period before the Rule’s prohibitions and recordkeeping requirements apply to covered advisers, we recommend that covered advisers begin to track their contracts with government entities as of this date because such contracts ultimately will be subject to the Rule’s recordkeeping requirements.
  • March 14, 2011:  Covered advisers, except for covered advisers to registered investment companies, become subject to the following
    • Covered advisers, covered employees, and covered PACs’ contributions as of this date will potentially implicate the Rule’s prohibitions.  Contributions by any of these covered parties made prior to this date are not subject to the Rule.
    • Covered advisers become subject to the recordkeeping requirements and need to begin to disclose required contract and contribution information.  With respect to the required disclosure of contracts, covered advisers must disclose all contracts held since September 13, 2010, but will not need to provide information for contracts held prior to that date.
    • Covered advisers’ compliance policies and procedures must be adopted and implemented.
  • September 13, 2011:
    • The Rule’s recordkeeping requirements go into effect for advisers to registered investment companies that are covered investment pools.
    • The Rule’s restrictions and recordkeeping requirements related to third-party solicitors go into effect for all covered advisers.

*   *   *



If you would like to discuss this matter further, please contact Barbara Stettner at (202) 383-5283, Charles Borden at (202) 383-5269, any of the following lawyers, or your primary contact at O’Melveny & Myers LLP.

Barbara A. Stettner


Charles Borden


Bill Satchell


Christopher Salter


Murray Simpson


David Sandler


Seth Davis


Dean Collins


John Daghlian


PhilIip Isom


Ilan Nissan


Kathryn Sanders



[1] Political Contributions by Certain Investment Advisers, 75 Fed. Reg. 41,018 (July 14, 2010) (to be codified at 17 C.F.R. pt. 275), available at http://edocket.access.gpo.gov/2010/pdf/2010-16559.pdf (hereinafter “Adopting Release”).  The Rule, promulgated under the Investment Advisers Act of 1940 (“Advisers Act”), amends 17 C.F.R. §§ 275.204-2 and 275.206(4)-3, and adds § 275.206(4)-5.

[2] See generally Political Contributions by Certain Investment Advisers, Investment Advisers Act Release No. 2910 (Aug. 3, 2009), available at http://sec.gov/rules/proposed/2009/ia-2910.pdf (hereinafter “Proposed Rule”); Comment Letter of the Securities Industry and Financial Markets Association (Oct. 5, 2009), available at http://www.sifma.org/comments/index.aspx?ID=140048.

[3] Adopting Release, 75 Fed. Reg. at 41,041-42.  FINRA announced in a letter to SEC staff that it will soon subject broker-dealer placement agents to a separate but comparable pay-to-play regime.  See Letter from Richard G. Ketchum, Chairman & Chief Executive Officer, FINRA, to Andrew J. Donohue, Director, Division of Investment Management, SEC (Mar. 15, 2010), available at http://www.sec.gov/comments/s7-18-09/s71809-260.pdfSee also Letter from Andrew J. Donohue, Director, Division of Investment Management, SEC, to Richard G. Ketchum, Chairman & Chief Executive Officer, FINRA (Dec. 18, 2009), available at http://www.sec.gov/comments/s7-18-09/s71809-252.pdf.

[4] Adopting Release, 75 Fed. Reg. at 41,018.

[5] Id.

[6] Id.

[7] 17 C.F.R. § 275.206(4)-5(a)(1).

[8] As discussed below in Part I.e., the Rule provides exceptions for certain de minimis and returned contributions, see 17 C.F.R. § 275.206(4)-5(b), and allows advisers to apply to the SEC for an exemption from the two-year ban, see id. § 275.206(4)-5(e).

[9] Id. § 275.206(4)-5(f)(2) (extension to employees and PACs).

[10] See id. § 275.206(4)-5(f)(1).

[11] Many advisers to private funds (including advisers or managers based outside of the U.S.) currently rely upon the “private adviser exemption” to avoid registering as an investment adviser with the SEC under the Advisers Act.  The private adviser exemption provides that if an adviser has less than 15 clients during the preceding 12 months and does not hold itself out to the public, the adviser is exempt from registration under the Advisers Act.

[12] State-registered investment advisers are exempt from the Rule, because the SEC believes the limits on the size of the assets they manage makes it unlikely that state-registered advisers will manage a significant amount of assets for states and local governments.

[13] 17 C.F.R. §§ 275.206(4)-5(c), 275.206(4)-5(f)(3).  A “covered investment pool” is defined under the Rule as either (i) an investment company registered under the Investment Company Act “that is an investment option of a plan or program of a government entity,” or (ii) a company that is relying upon the exclusions in sections 3(c)(1), (c)(7), and (c)(11) of that Act.  Id. § 275.206(4)-5(f)(3).

[14] Id. § 275.206(4)-5(f)(3). As framed, because a 403(b) plan is (and, indirectly, the various included sub-funds are) “selected” by a government official, it seems likely that the investment adviser of a mutual fund that is an option of the 403(b) plan would be a covered adviser even if that investment adviser has no role in marketing the plan to government entities.

[15] Restoring American Financial Stability Act of 2010, H.R. 4173, 111th Cong. (2010), available at http://thomas.loc.gov/cgi-bin/query/??c111:s.3217.

[16] PFIARA exempts from registration “foreign private advisers,” defined as investment advisers that:  (i) have no place of business in the U.S.; (ii) do not generally hold themselves out to the public in the U.S.; (iii) have fewer than 15 clients and investors in the U.S.; and (iv) have less than $25,000,000 of aggregate assets under management attributable to clients and investors in the U.S. in private funds.  Id. § 403.

[17] The SEC will have six months to adopt final rules defining the term “venture capital fund” and crafting the exemption.  Id. § 407.

[18] 17 C.F.R. § 275.206(4)-5(f)(2).

[19] Id. § 275.206(4)-5(f)(4).

[20] See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: JP Morgan Securities, Inc., Exchange Act Release No. 61734 (Mar. 18, 2010), available at http://www.sec.gov/litigation/investreport/34-61734.htm (“This Report serves to remind the financial community that placing an executive who supervises the activities of a broker, dealer or municipal securities dealer outside of the corporate governance structure of such broker, dealer or municipal securities dealer does not prevent  the application of MSRB Rule G-37 to that individual’s conduct.”).

[21] 75 Fed. Reg. at 41,031-32 n.179.

[22] 17 C.F.R. § 275.206(4)-5(b)(2).

[23] Id. § 275.206(4)-5(f)(6).

[24] Id. § 275.206(4)-5(f)(5).

[25] Id. § 275.206(4)-5(b)(1).

[26] Id. § 275.206(4)-5(b)(3).

[27] Id. § 275.204-2(a)(18)(ii)(D).

[28] Id. § 275.206(4)-(5)(b)(3)(ii).  For registered covered advisers, the number of employees will be determined by what an adviser reports on its annual updating amendment to Form ADV (17 C.F.R. § 279.1).

[29] Id. § 275.206(4)-(5)(b)(3)(iii).

[30] Id. § 275.206(4)-5(e).

[31] Id. § 275.206(4)-5(e).

[32] Adopting Release, 75 Fed. Reg. at 41,057.

[33] 17 C.F.R. § 275.206(4)-5(d).

[34] Adopting Release, 75 Fed. Reg. at 41,044.

[35] See id. at 41,054-55 (assessing compliance costs of Rule by reference to Rule G-37).  See generally MSRB Rule G-37 Questions and Answers, available at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/General/Rule-G37-Frequently-Asked-Questions.aspx.

[36] 17 C.F.R. § 275.206(4)-5(a)(2).  It should be noted that this prohibition is actually broader than the prohibition on contributions, which does not prohibit direct contributions to political parties unless specifically directed at a covered official.

[37] See note 3 above.

[38] Andrew J. Donohue, Director, Division of Investment Management, SEC, Keynote Address at the ALI-ABA Compliance Conference (June 3, 2010), available at http://www.sec.gov/news/speech/2010/spch060310ajd.htm.

[39] See Letter from Andrew J. Donohue, Director, Division of Investment Management, SEC, to Richard G. Ketchum, Chairman & Chief Executive Officer, FINRA (Dec. 18, 2009), available at http://www.sec.gov/comments/s7-18-09/s71809-252.pdf.

[40] Adopting Release, 75 Fed. Reg. at 41,042; Letter from Richard G. Ketchum, Chairman & Chief Executive Officer, FINRA, to Andrew J. Donohue, Director, Division of Investment Management, SEC (Mar. 15, 2010), available at http://www.sec.gov/comments/s7-18-09/s71809-260.pdf.

[41] 17 C.F.R. § 275.206(4)-3(e); Adopting Release, 75 Fed. Reg. at 41,050-51.

[42] Adopting Release, 75 Fed. Reg. at 41,018.

[43] 17 C.F.R. § 275.204-2(a)(18).

[44] Adopting Release, 75 Fed. Reg. at 41,051.