As private equity professionals are well aware, Rule 206(4)-5 under the Investment Advisers Act of 1940, commonly known as the “Pay-to-Play Rule,” is of great significance to the industry because it will apply to the use of placement agents and solicitors by registered and unregistered investment advisers including private equity and hedge fund advisers. On June 8, 2012, consistent with other delays in the implementation of many financial reforms to arise out of the financial crisis, the SEC extended the compliance until at least April 2013.
Political Contributions Restriction is Unaffected
The SEC adopted the Pay-to-Play Rule in order to eliminate the perceived role that political contributions might play in decisions by state and local pension plans and other government entities to invest in private funds or to give other business to investment advisers.1 The Pay-to-Play Rule is perhaps best known for its “Two Year Timeout” provision, which prohibits an investment adviser from receiving compensation from a Government Client for two years if the adviser or certain of its employees make a political contribution to specified elected officials or candidates for office. The Two Year Timeout provision has been in effect since March 14, 2011 and was unaffected by the SEC’s action on June 8.
Solicitor Restriction Is Delayed
The Pay-to-Play Rule also contains a “Solicitor Restriction.” This restriction prohibits the ability of an investment adviser and certain of its affiliates (including private funds managed by the adviser) to compensate a third party (such as a placement agent) to solicit advisory business or an investment from a government entity unless two conditions are satisfied. First, the placement agent or other third party must be registered with the SEC as an investment adviser, broker-dealer or municipal advisor. (The registration requirement for “municipal advisors” was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act; the SEC has not yet adopted final rules implementing this provision). Second, the third party must be subject to equivalent “pay to play” restrictions.
The Solicitor Restriction compliance date had been delayed until June 13, 2012 in order to provide FINRA and the Municipal Securities Rulemaking Board sufficient time to adopt equivalent “pay to play” restrictions for broker-dealers and municipal advisors. Neither of these organizations has yet done so; the MSRB has indicated that they will not do so until the SEC issues its final municipal advisor registration rule.
In light of these delays, the SEC has extended the compliance date for the Solicitor Restriction until nine months after the compliance date of its final municipal advisor registration rule, which the SEC expects to issue in the second half of 2012. Thus, the compliance date for the Solicitor Restriction will not occur until April 2013 at the very earliest.
[1] Client Update: SEC Adopts New Pay-to-Play Rule (July 12, 2010), available at http://www.debevoise.com/newseventspubs/publications/detail.aspx?id=8200106a-2f07-49b1-a3e6-99f1b0470e06.