The SEC’s Adoption of "Pay-to-Play" Rules for Investment Advisers

The SEC’s Adoption of "Pay-to-Play" Rules for Investment Advisers

by Cary J. Meer, Mark Mehrespand and Ben Jacqmotte

 

Excerpt:

 

On July 1, 2010, the Securities and Exchange Commission (the "SEC" or "Commission") adopted Rule 206(4)-5 (the "Rule") under the Investment Advisers Act of 1940 (the "Advisers Act") to address "pay-to-play" practices under which direct or indirect payments by investment advisers to state and local government officials are perceived to improperly influence the award of government investment business. The Rule, approved unanimously by the SEC's five commissioners, adopts unmodified certain provisions of the version of the Rule proposed on August 3, 2009 (the "Proposed Rule") while modifying others, notably rolling back the ban on using third parties to solicit government business, in response to over 250 comment letters.

 

Modeled on MSRB Rules G-37 and G-38, which address "pay-to-play" practices among municipal securities dealers, the Rule prohibits an investment adviser from (i) providing advisory services for compensation to a government entity client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates, (ii) providing direct or indirect payments to any third party that solicits government entities for advisory business unless this third party is a registered broker-dealer or investment adviser itself subject to "pay-to-play" restrictions, and (iii) soliciting from others, or coordinating, contributions to certain elected officials or candidates or payments to political parties where the adviser is providing or seeking government business.

 

The Rule's prohibitions, coupled with new recordkeeping requirements related to political contributions made by advisers or certain of their executives or employees, impose substantial new compliance burdens on advisers and provide for the loss of compensation for government advisory business for substantial periods if certain contributions are made. Advisers are required to be in compliance with most of the provisions of the Rule within six months of the effective date of the Rule, September 13, 2010 ("effective date"), except that advisers may no longer use third parties to solicit government business except in compliance with the Rule on the one-year anniversary of the effective date. [footnote omitted]


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Cary J. Meer is a partner at K & L Gates and a member of the Investment Management practice group. She focuses her practice on private investment companies, including hedge and private equity funds, negotiated mergers and acquisitions of investment advisers and broker-dealers, derivatives and related areas. Ms. Meer structures private funds as limited liability companies, limited partnerships, common trust funds and business trusts, and prepares disclosure documents and organizational documents for such entities. She advises investment advisers, private fund managers and investment companies on compliance issues. Ms. Meer also represents financial institutions with respect to private fund offerings and strategic alliances, counsels clients regarding federal securities law matters, and structures employment arrangements and stock-based executive compensation programs.


Mark Mehrespand is a partner in the Washington D.C. office of K & L Gates. Mr. Mehrespand is a partner in the securities and investment management groups. He represents investment advisers, banks, broker-dealers and other participants in the financial services industry in a practice that encompasses the major federal securities and commodities laws as well as general corporate law. In particular, Mr. Mehrespand regularly works with clients to form and operate U.S. and offshore private investment funds.


Ben Jacqmotte is a senior associate in the firm's Portland office with experience in mergers and acquisitions, corporate finance, private fund and other corporate matters. Ben advises sponsors regarding the organization and regulatory requirements of private equity and hedge funds. He also represents public and private companies in mergers and acquisitions transactions and venture capital and other investors in debt and equity investments in target companies.