SEC Extends Compliance Date for Third-Party Solicitor Provisions of “Pay-to-Play” Rule

June 11, 2012


On June 8, 2012, the Securities and Exchange Commission extended the date on which advisers must comply with the ban on third-party solicitation in Rule 206(4)-5 under the Investment Advisers Act of 1940, also known as the “Pay-to-Play” rule. The SEC extended the compliance date from June 13, 2012 until nine months after the compliance date of the rule that the SEC will adopt regarding the registration of municipal advisor firms. Once the final rule regarding the registration of municipal advisor firms is adopted, the SEC will issue the new compliance date for the ban on third-party solicitation. The adopting release extending the deadline is available here.

Background and the Extension

On July 1, 2010, the SEC adopted the “Pay-to-Play” rule prohibiting investment advisers from providing advisory services for compensation to U.S. government entities for two years if the adviser or certain of its executives or employees have made contributions to certain elected officials or candidates. The rule applies to registered advisers, exempt reporting advisers and exempt foreign private advisers.

Under the rule, an investment adviser also cannot pay a third party to solicit U.S. government entities for investment advisory services unless the solicitor is a “regulated person” subject to prohibitions against pay-to-play conduct.[1] Under the rule, a “regulated person” includes (a) an SEC-registered adviser, (b) an SEC-registered broker-dealer, or (c) an SEC-registered “municipal advisor.” The SEC, however, has yet to finalize the definition of “municipal advisor” and the Municipal Securities Rulemaking Board–which is charged with regulating municipal advisors–has not yet adopted a pay-to-play rule for municipal advisors. Additionally, FINRA has planned to propose a rule to govern the pay-to-play conduct of registered broker-dealers, but has not yet done so.

Given that final rules covering pay-to-play conduct for municipal advisors and broker-dealers have not yet been adopted, and “in order to ensure an orderly transition for advisers and third-party solicitors as well as to provide additional time for them to adjust compliance policies and procedures after the transition,” the SEC explained that it believed it was appropriate to extend the compliance date for the “Pay-to-Play” rule’s third-party solicitation ban until nine months after the compliance date of the final rule regarding the registration of municipal advisors is adopted by the SEC.

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In this election year, regulators are likely to be closely reviewing pay-to-play-related activity. O’Melveny & Myers LLP is available to review pay-to-play policies and procedures and to advise investment advisers to ensure compliance with all aspects of the “Pay-to-Play” rule and state and local pay-to-play developments. For questions, please contact the attorneys listed above or any other O’Melveny & Myers LLP attorneys with whom you ordinarily work on related matters.

[1] Breach of the rule can result in waiver of compensation, an order that past compensation be returned, as well as other penalties.