SEC Gives Registered Investment Advisers More Time to Bring Themselves Into Compliance with the “Pay-to-Play” Ban on Third-Party Solicitation

For more than two years, this blog has been covering the Securities and Exchange Commission’s foray into the world of pay-to-play regulation and the Commission’s attempt to implement federal pay-to-play restrictions for registered investment advisers. The latest chapter in this long and winding saga occurred earlier this month, when the SEC formally extended the compliance date for the third-party solicitation ban imposed by the recently-crafted amendments to Rule 206(4)-5 under the Investment Advisers Act of 1940. As a result, the formal compliance deadline, which had been set for June 13, 2012, has now been reset to a indeterminate date nine months following the compliance date set forth in the Commission’s final rules for the registration of municipal advisors, which have been proposed but not yet adopted. To put it simply – the SEC has chosen to “kick the can down the road” for a second time on pay-to-play solicitation compliance.

By way of a quick refresher, the third-party solicitation ban, which officially went into effect on September 13, 2010, effectively prohibits SEC-registered investment advisers (and certain executives and employees of such advisers) from paying any third party for the solicitation of advisory business from any governmental entity unless the solicitor is an SEC-registered investment adviser, broker-dealer or municipal advisor. In the case of broker-dealers and municipal advisors, the ban also provides that any such solicitors must be subject to the pay-to-play restrictions that are purportedly due to be adopted  in the future by either the Financial Industry Regulatory Authority (FINRA) or the Municipal Securities Rulemaking Board (MRSB).

At the time of Rule 206(4)-5’s initial adoption by the SEC, the third-party solicitation ban’s compliance date was set for September 13, 2011, thus providing registrants with a so-called transition period in which to come into conformity with the rule. This transition period was intended to provide investment advisers and third-party solicitors with sufficient time to revise their compliance policies and procedures so as to prevent future regulatory violations. Likewise, the period was designed to provide an opportunity for FINRA and the MRSB to adopt analogous pay-to-play rules and for the Commission to assess how such rules would dovetail with Rule 206(4)-5’s provisions.

Due to delays in the adoption of a FINRA pay-to-play regulation and complications in the MSRB rulemaking process caused by various provisions of the Dodd-Frank Act, the SEC made the decision last summer to move the official third-party solicitation ban compliance deadline from September 13, 2011 to June 13, 2012. The additional nine months, the Commission posited, would provide registrants with sufficient time for an orderly transition under the rules.

Fast forward to present day and the same justification is again being put forth by the SEC – this time to explain this month’s indeterminate extension of the compliance deadline. According to the SEC’s explanation in Release No. IA-3418, an orderly regulatory transition under the solicitation ban can only be accomplished through the extension of the present transition period beyond the Commission’s finalization of the new Dodd-Frank-imposed registration requirements for municipal advisor firms and subsequent to the MSRB’s re-introduction and implementation of its draft pay-to-play proposals.

What are we to make of this second round of “can kicking” on the part of the SEC? From a practical perspective, registered investment advisers and third-party solicitors now have additional time to bring their corporate compliance policies and procedures up to speed with SEC standards. The benefit of this additional time, however, is partially undone by the fact that the present compliance standards are not yet set and will not be set until the pending mishmash of regulations makes its way out of the SEC, FINRA and MSRB sausage grinders.

From a policy and political perspective, the SEC’s action is equally as ambiguous. Do we take the SEC at its word and classify both compliance extensions as necessary steps to ease the transition of businesses into an unchartered regulatory environment? Or do we simply characterize the extensions as additional examples of the federal government “kicking the can down the road” when it comes to implementing difficult actions or decisions?

Our most cynical readers likely view it as the later – patchwork political punting on the part of a governmental agency in a highly-charged election year. By contrast, our less-jaded readers may attach a more innocent explanation to the delays in implementation – after all, the SEC is forced to operate in conjunction with other entities in this instance. Whatever your particular take on the Commission’s action, however, Pay-to-Play Law Blog will be here to keep you updated and to help potential registrants understand their full compliance obligations moving forward.

Benjamin Keane

About Benjamin Keane

As a member of Dentons' Political Law, Ethics and Disclosure team, Benjamin P. Keane focuses his practice on the representation of elected officials, political candidates, PACs, political parties, corporations, non-profit organizations and other entities with respect to federal, state and local election law, political contributions, lobbying, and ethics matters.

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