Alert September 13, 2011

SEC Staff Allows Alternative Approach to Recordkeeping under Pay to Play Requirements Related to Pooled Investment Vehicles

The staff of the SEC’s Division of Investment Management issued a letter to the Investment Company Institute providing no-action relief for an alternative method of complying with a provision of the SEC’s recordkeeping requirements under the Investment Advisers Act of 1940 (the “Advisers Act”) that was adopted in conjunction with Rule 206(4)-5, the “pay to play” rule under the Advisers Act which addresses political contributions by investment advisers and certain of their personnel.  Among other things, Rule 204-2(a)(18)(i)(B) under the Advisers Act generally requires a registered investment adviser to keep a list of all government entities which are or were investors in any registered investment company that is an investment option of a plan or program of a government entity (“Covered Investment Pool”) to which the adviser provides or has provided investment advisory services, as applicable, in the past five years, but not prior to September 13, 2010.  The compliance date for this requirement is September 13, 2011.

In summary, the no-action relief permits an adviser to maintain the following records in lieu of those required under the strict terms of Rule 204-2(a)(18)(i)(B):

  • Each government entity that invests in a Covered Investment Pool whose account can reasonably be identified as being held in the name of or for the benefit of the government entity on the records of the Covered Investment Pool or its transfer agent;

  • Each government entity whose account was identified as that of a government entity – at or around the time of the initial investment – to the adviser or one of its “client servicing employees” (with specific responsibility for servicing a particular government entity), “regulated persons” (as defined in Rule 206(4)-5) or “covered associates” (as defined in Rule 206(4)-5);

  • Each government entity that sponsors or establishes a qualified tuition program pursuant to Section 529 of the Internal Revenue Code of 1986 (a “529 Plan”)and has selected a specific Covered Investment Pool as an option to be offered by that 529 Plan; and

  • Each government entity that has been solicited to invest in a Covered Investment Pool either (i) by a covered associate or regulated person of the adviser; or (ii) by an intermediary or affiliate of the Covered Investment Pool if a covered associate, regulated person, or client servicing employee of the adviser participated in or was involved in such solicitation, regardless of whether such government entity invested in the Covered Investment Pool.