Alert June 14, 2011

FINRA Encourages Firms to Assist Investment Advisers Seeking to Identify Participant Directed Government Plan Investors in their Mutual Funds for Pay-to-Play Compliance

FINRA issued Information Notice 6/6/11 encouraging its members to make reasonable efforts to assist investment advisers seeking to identify government entity investors in the pooled investment vehicles the advisers manage as they seek to comply with Rule 206(4)-5 under the Investment Advisers Act of 1940, also known as the Pay‑to‑Play Rule.  The Pay‑to‑Play Rule generally prohibits an investment adviser from providing advisory services for compensation to a state or local governmental entity, including a public pension, retirement or 529 plan (a “Government Entity”), for two years after the adviser or certain of its personnel make a contribution to certain elected officials or candidates.  An adviser that manages specified types of pooled investment vehicles (including certain registered investment companies, hedge funds, private equity funds, venture capital funds and collective instrument trusts) must generally treat a Government Entity investor in those pools as if the adviser were providing advisory services directly to the Government Entity, subject to certain limited exceptions.  While most aspects of the Pay-to-Play Rule went into effect in March 2011, advisers have until September 13, 2011 to comply with the Rule’s requirements as to registered investment companies, which apply only if a fund is an investment option of a participant-directed Government Entity plan.  An adviser to a mutual fund seeking to identify any participant-directed Government Entity plan investors that hold fund shares through intermediaries (e.g., broker-dealers that maintain omnibus accounts) will need not only to identify intermediaries that maintain fund accounts and query them regarding underlying participant-directed Government Entity plan investors, but also to put in place mechanisms to address those relationships going forward.  (For an in-depth discussion of the Pay-to-Play Rule, see the July 9, 2010 Goodwin Procter Alert.)