FINRA reminds firms that they have this summer, only, to prepare their investment advisers ("IA's") for compliance with Rule 206(4)-5 under the Investment Advisers Act of 1940 ("IA '40 Act").  The rule curbs “pay-to-play” practices by prohibiting an IA from providing advisory services for compensation to a government client for a period of time after the adviser makes a contribution to certain elected officials or candidates.  It can be difficult for an IA to identify government investors - e.g., when shares in a covered investment company managed by the investment adviser are held through an intermediary.  In such cases, FINRA would like firms to step forward and offer additional assistance.

Specific Rule Provisions.   Adopted on 7/1/10, the rule sidelines an IA from providing advisory services for compensation to a government client for 2 years after that IA or any specified executives or employees make a contribution to certain elected officials or candidates. 

• An IA is also prohibited from providing or agreeing to provide, directly or indirectly, payment to any 3rd party for solicitation of advisory business from any government entity on behalf of the IA, unless the 3rd party meets certain criteria,  including being subject to similar pay-to-play restrictions.
• An IA is prevented from soliciting from others, or coordinating, contributions to certain elected officials or candidates, or payments to political parties when the adviser is providing or seeking government business.

When Managing Assets of a Government Entity ... through a "covered investment pool" - including a RIC or mutual fund - that's available to government employees in a participant-directed government plan or program, it's reasonable to expect that the fund’s IA will know, or reasonably can be expected to acquire information about, the identity of the government plan.  In some cases, a fund adviser may request information from intermediaries about fund holdings though omnibus accounts, in order to determine whether the omnibus account includes holdings by a participant-directed government plan or program.  

e.g. - the SEC states that it's not uncommon for participant contributions to Sections 403(b) and 457 plans to be commingled into an omnibus position that's forwarded to the fund, making it more challenging for an adviser to distinguish government entity investors from others.

9/13/11 Effect Date.   Beginning in September, IA's to registered investment companies (RICs) that are covered pools must comply with provisions of Rule 206(4)-5.  This compliance date is intended “to provide advisers to RICs sufficient time to put into place those system enhancements or business arrangements - e.g., with intermediaries, that may be necessary to identify those government plans or programs in which the funds serve as investment options.”  To the extent that the information requested is readily available, FINRA encourages firms to make reasonable efforts to cooperate with investment advisers seeking information to comply with the requirements of Rule 206(4)-5.  

FINRA Staff Contact.   Direct questions to Angela Goelzer, Office of Investment Companies Regulation - 202.728.8120.

For further details, go to:   [FINRA InfoNote, 6/6/11]