Pay to Play Ban on Third-Party Solicitation Now Effective

The Securities and Exchange Commission (“SEC”) adopted Rule 206(4)-5 (“Pay to Play Rule”) under the Investment Advisers Act of 1940 in 2010.  The Pay to Play Rule prohibited investment advisers from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees had made a contribution to certain elected officials or candidates. The  Pay to Play Rule also prohibited an adviser and its covered associates from providing or agreeing to provide payment to any third-party for a solicitation of advisory business from any government entity on behalf of such adviser, unless such third-party is a “regulated person” (“third-party solicitor ban”).

The effective date of the third-party solicitor ban has been extended a number of times since the Pay to Play Rule was implemented; however, effective July 31, 2015, all investment advisers providing advisory services to government clients are now subject to the third party solicitor ban, and may only pay a regulated person for solicitation of government clients (See Investment Advisers Act Release No. 4129).  The Pay to Play Rule defines a “regulated person” as an SEC-registered investment adviser, a registered broker, or dealer subject to pay to play restrictions adopted by a registered national securities association, or a registered municipal advisor subject to pay to play restrictions adopted by the Municipal Securities Rulemaking Board (“MSRB”).

Ironically, the Financial Industry Regulatory Authority (“FINRA”) is currently the only registered national securities association, and neither FINRA nor the MSRB have yet adopted pay to play rules.  To address that issue, the SEC updated the “Staff Responses to Questions About the Pay to Play Rule” to also address the third-party solicitor ban.  In that release, it was noted that until the later of (i) the effective date of such a FINRA pay to play rule or (ii) the effective date of such an MSRB pay to play rule, the SEC would not recommend enforcement action against an investment adviser or its covered associates for the payment to FINRA member firm and or a registered municipal advisor subject to MSRB.

The net impact of the release of the final compliance date for the third-party solicitor ban is that after July 31, 2015, advisory firms who pay third-party solicitors for government clients can only make such payments to other SEC investment advisers, FINRA member firms and registered municipal advisors subject to MSRB rules.