On June 22, 2011, the Securities and Exchange Commission ("SEC") released amendments to Rule 206(4)-5 (the "Rule") under the Investment Advisers Act of 1940 (the "Advisers Act"), which places restrictions on political contributions by an investment advisor or its covered associates, and prohibits the engagement by an investment advisor of unregulated third party solicitors to solicit government entity clients on its behalf.
As initially adopted, investment advisors subject to the Rule
included investment advisors registered with the SEC, as well as
advisors operating under the exemption from registration provided
by Section 203(b)(3) of the Adviser's Act (the former
"private adviser" exemption, which was repealed by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act")). In order to harmonize the Rule with
the Dodd-Frank Act, the SEC has extended the application of the
Rule to include any advisor that is exempt from registration by
reason of the exemptions provided by (i) Section 203(b)(3) of the
Advisers Act, as amended by the Dodd-Frank Act (the "foreign
private adviser" exemption for non-U.S. managers with limited
U.S. activities), (ii) Section 203(l) of the Advisers Act (the
"venture capital fund adviser" exemption for managers
whose only clients are qualifying venture capital funds), or (iii)
Section 203(m) of the Advisers Act (the "private fund
adviser" exemption for managers whose sole clients are private
funds, and who manage assets of less than $150 million in the
aggregate).
In addition, the SEC amended the provisions of the Rule relating to
the use of third party solicitors by an investment advisor. The
Rule prohibits covered advisers from engaging any third party to
solicit government entities on behalf of the adviser, unless such
third party is a "regulated person" and is subject to
rules governing pay-to-play practices that are determined by the
SEC to be (i) at least as stringent as the Rule and (ii) consistent
with the objectives of the Rule.1 "Regulated
persons" were initially defined to include SEC registered
investments advisers, as well as registered broker-dealers that are
members of FINRA. The amendments expand the definition of
"regulated persons" to include a "municipal
advisor," defined as a person registered as such pursuant to
Section 15B of the Securities Exchange Act of 1934 and subject to
the rules of the Municipal Securities Rulemaking Board
("MSRB"). This expansion is intended to harmonize the
Rule with the provisions of Section 975 of the Dodd-Frank Act,
which require registration as a municipal advisor by persons that
provide certain advisory services to municipal entities or who
solicit municipal entities for advisory services offered by an
unaffiliated third party investment advisor. 2
The effective date the amendments to the Rule will be 60 days
following the date of their publication in the Federal Register.
The deadline by which investment advisors must comply with the
prohibitions relating to the use of third party solicitors, as
amended, has been extended to June 13, 2012.
Footnotes
1. Investment advisors should note that final pay-to-play rules have not yet been adopted by either FINRA or the MSRB, and as such no determination as to whether such rules meet the requirements of Rule 206(4)-5 has been made by the SEC at this time. Approval of either a registered broker/deal or a registered municipal advisor to act as a third party solicitor of government entity clients on behalf of a covered investment advisor will be subject to the SEC's approval of such rules when and as adopted.
2. The final amendment represents a departure from the SEC's earlier proposal to require that permissible third party solicitors be limited solely to registered municipal advisors, based on the SEC's recognition of the fact that an investment advisor may engage an affiliated registered broker-dealer or an affiliated registered investment advisor to solicit advisory business, which arrangement would not otherwise cause such affiliated solicitor to fall within the statutory definition of a municipal advisor.
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