The SEC pay-to-play rule is a two-year fee holiday, so the price of one political cheque is every fee the government investor pays, multiplied by the months left.
Under the SEC's pay-to-play rule, a political contribution above the de minimis amount by an adviser or a covered associate to an official of a government investor bars the adviser from being paid for advising that investor for two years. For an illustrative adviser whose state pension client pays 1,530,000 a year in management fees across two funds, a 1,000 contribution costs 3,060,000 of forgone fees, 3,060 times the gift. Kept at 350 by someone entitled to vote for the candidate, the same gift costs nothing.
Worked in full in The Private Fund Compliance Officer by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Rule 206(4)-5 under the Advisers Act is not a fine schedule; it is a fee holiday. The arithmetic matters because the decision it informs is made by people outside compliance: a partner asked to support a friend's campaign, a new hire whose donations predate the firm. A compliance officer who can say what one cheque costs in fees, rather than citing the rule, gets pre-clearance taken seriously. The rule applies to registered advisers, exempt reporting advisers and foreign private advisers, and a private fund adviser is caught through the funds: an investment by a government plan in a covered investment pool is treated as advising the government entity.
| Item | Value |
|---|---|
| Plan commitment to Fund III (investment period, fee on commitments) | 60,000,000 |
| Fund III management fee rate | 1.75% |
| Plan commitment to Fund II | 40,000,000 |
| Plan's share of Fund II invested capital (fee base after the investment period) | 32,000,000 |
| Fund II management fee rate | 1.50% |
| Time-out after a triggering contribution | 24 months |
| De minimis per election: entitled to vote for the official / not entitled | 350 / 150 |
The official is an elected state treasurer who sits on the pension board and so can influence the hiring of an adviser. The contribution is made by a covered associate: a partner, an executive officer, an employee who solicits government entities, or a political action committee the adviser controls.
Annual compensation at risk = Σ (government investor's fee base in each fund × that fund's fee rate)
Fees forgone = annual compensation at risk × months of time-out remaining ÷ 12
In Excel: =SUMPRODUCT(bases,rates)*months/12. The time-out runs two years from the date of the contribution, not from the date the firm finds it, so for a contribution made before a person joined, only the unexpired part applies.
| Fund | Fee base | Rate | Annual fee |
|---|---|---|---|
| Fund III | 60,000,000 | 1.75% | 1,050,000 |
| Fund II | 32,000,000 | 1.50% | 480,000 |
| Total, per year | 1,530,000 | ||
| Two-year time-out | 3,060,000 |
A 1,000 contribution, 650 over the 350 limit, puts 3,060,000 of fees out of reach, or 127,500 for every month of the time-out. The adviser does not have to stop managing the funds; the plan's capital stays in them. What it cannot do is take compensation attributable to the plan's interest, which in a pooled fund means waiving the plan's share of the management fee for the period. Whether carried interest earned during the time-out is also caught is a question for counsel, and it can make the figure much larger.
The plan is 15.0 per cent of a 400,000,000 Fund III. The waiver is borne by the manager, not the other investors: their fees do not change. The cost lands entirely on the management company's fee-related earnings.
| Facts | Months of time-out | Fees forgone |
|---|---|---|
| Covered associate gives 350 to a candidate she can vote for | 0 | 0 |
| Non-voter gives 300, found within 4 months, refunded within 60 days of discovery | 0 | 0 |
| Covered associate gives 1,000 today | 24 | 3,060,000 |
| New hire who will solicit gave 1,000 18 months before joining | 6 | 765,000 |
| New hire who will not solicit gave 1,000 8 months before joining | 0 | 0 |
Three features drive the table. The de minimis amounts are per election, and primary and general elections count separately. A contribution of 300 by someone not entitled to vote for the official is 150 over the limit, but a contribution of 350 or less that is discovered within four months and refunded within 60 days of discovery can be cured, a relief the rule allows only a limited number of times a year. And the look-back for new covered associates is two years for people who will solicit government entities and six months for those who will not: the same 1,000 costs 765,000 or nothing depending on the new hire's role.
Price the time-out as two years of every fee the government investor pays: 3,060,000 here, against a gift of 1,000. Put that figure in the pre-clearance policy and the onboarding questionnaire. The interest-bearing side of fee errors is worked in a fee overcharge refund with interest, and the free workbook and working documents for this book include the fee and expense testing behind a compliance programme.
350 per election to an official the contributor is entitled to vote for, and 150 per election otherwise, with primary and general elections counted separately. Above it, the two-year time-out applies. For the illustrative adviser that is the difference between nothing and 3,060,000 of forgone fees from a state pension paying 1,530,000 a year.
Yes. Rule 206(4)-5 covers registered advisers, exempt reporting advisers and foreign private advisers, and treats a government plan's investment in a covered investment pool as advisory services to the government entity. In practice the adviser waives the plan's share of fees for the time-out: 1,050,000 a year from Fund III and 480,000 from Fund II in the illustrative case.
Yes, through the look-back: two years for a new covered associate who will solicit government entities, six months for one who will not. The time-out runs from the contribution date, so a 1,000 gift made 18 months before a soliciting hire joins leaves 6 months, worth 765,000 of fees for the illustrative adviser.
This article is one calculation from The Private Fund Compliance Officer. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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