New SEC Pay-to-Play Rules Require Certain Solicitors to Register as Investment Advisers

June 15, 2011

As a reminder, Rule 206(4)-5 under the Investment Advisers Act of 1940 requires a solicitor to register as an investment adviser with the U.S. Securities and Exchange Commission (“SEC”) if it solicits government business for an investment adviser.

SEC Rule 206(4)-5 was enacted in 2010 and is designed to curtail “pay-to-play” practices by registered investment advisers.  “Pay-to-play” is the practice of making political campaign contributions or other payments to public officials or candidates for public office in exchange for the award of any government sponsored or established investment management contract, including pension and qualified tuition plans, to an investment adviser.  To limit this practice, SEC Rule 206(4)-5 imposes a limit on the amount of money an investment adviser can donate to political officials or candidates for public office, prohibits investment advisers and its employees from soliciting campaign contributions, and requires all third party solicitors to register with the SEC as an investment adviser or broker dealer.  If an investment adviser violates SEC Rule 206(4)-5, the investment adviser will be barred from being paid for providing investment advisory services to the government entity for two years.  Please click here for more details.

As a result of this new SEC rule, any firm who solicits a government client on behalf of an investment adviser must register with the SEC.  Similarly, any registered investment adviser that provides or intends to provide investment advisory services to a government entity should update immediately its code of ethics and written supervisory procedures related to political campaign contributions.  If your firm needs any assistance registering as an investment adviser or updating its code of ethics and written supervisory procedures related to political campaign contributions, please click here to schedule a time to speak with one of our compliance consultants.

Posted by Bryan Hill
Labels: Uncategorized