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Want a job in investment management? Watch your political contributions

November 22, 2011

Interested in working for an investment manager? Or already in the industry and thinking about changing firms?

Rule #1: Be careful with your political contributions. You may not be eligible for the job of your dreams if you’ve given too much money to the wrong candidates.

Here’s why:

The pay to play rule. . .

In July, 2010, the SEC adopted Rule 206(4)-5 – titled “Political Contributions by Certain Investment Advisers,” but known as the “pay to play” rule. The rule is designed to prevent investment advisers from winning money management business from government clients (the “play” part) by making political contributions to officials in that government (the “pay” part).

Under the rule, if an investment advisory firm makes a contribution to a state or local official, it can’t accept any compensation from that official’s government for managing money – and that’s for 2 years after the contribution, a period that play-to-pay aficionados call the “time out.” The time-out sanctions also apply to contributions made by the firm’s executives, by managers in policy-making positions and by salespeople. Each firm determines exactly who qualifies as a “covered associate” subject to the rule.

. . . has a “look back”. . .

The pay-to-play rule has a “look back” provision, requiring that investment advisers check the contribution history of anyone who has just become a covered associate – either through a new hire or as the result of the promotion. This look-back period is 6 months for most positions – but 2 years for individuals who will be soliciting clients. If a new covered associate has made a contribution during the look back period, the time-out provisions apply.

So this is your nightmare scenario: There’s an opening at Avon Hill Asset Management for a VP to head the finance department, a covered associate position. You’re perfect for the job – but last month you made a $500 contribution to the governor’s successful reelection campaign. Avon Hill runs money for the state pension plan – so it won’t hire you. If it did, it wouldn’t be able to be paid by the state for its services.

. . . so don’t get locked out.

Fortunately, you can avoid getting locked out of an investment management position by following this simple guideline:

Corollary to Rule #1: Limit your contributions per election to $350 to candidates you can vote for and $150 for all others.

The SEC considers these amounts de minimis, and they don’t trigger the time-out provisions and affect a firm’s ability to get paid for running money. To keep things simple, many investment advisers prohibit their associates from making larger contributions.

Yes, the rules technically allow you to make larger contributions to political parties, political action committees and federal candidates – but the complexities of the rule could trip you up. Better to keep it simple.

And don’t get your spouse (or your mother or your brother-in-law) to make the contributions that you can’t. The rules specifically prohibit you from doing indirectly what you can’t do directly.

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