SEC Finalizes Investment Adviser Pay-to-Play Rules
By Lawrence J. Hass & Matthew Nadworny
On June 30, 2010, the Securities and Exchange Commission (the SEC) voted unanimously to adopt new Rule 206(4)-5 and to amend Rule 204-2 (collectively referred to herein as the Final Rules) under the Investment Advisers Act of 1940 (the Advisers Act) in an effort to curtail pay-to-play practices by Covered Investment Advisers (as defined below) with respect to public pension plans and certain other Government Entities (as defined below), and to impose similar pay-to-play restrictions on third-party placement agents and solicitors who are retained by Covered Investment Advisers to solicit business for them from Government Entities.
Although similar in many respects to the Proposed Rules that the SEC issued in July 2009 (the Proposed Rules), the Final Rules contain many significant changes in response to the approximately 250 comment letters that the SEC received, most of which objected to various provisions in the Proposed Rules. Most significantly, the SEC has deleted its previously proposed absolute ban on the use of placement agents by Covered Investment Advisers seeking business from Government Entities and replaced it with a more lenient provision that allows Covered Investment Advisers to continue to use third-party placement agents and solicitors as long as such third-party placements agents and solicitors are either registered with the SEC as investment advisers or are registered broker-dealers and are subject to similar pay-to-play regulations that are expected to be adopted by the Financial Industry Regulatory Authority (FINRA).