The U.S. Securities and Exchange Commission (SEC) on June 8,
2012 extended for an undefined period the compliance deadline for
portions of rule 206(4)-5 (Rule) under the Investment Advisers Act
of 1940 (Advisers Act) that would limit an adviser's ability to
pay compensation, directly or indirectly, to third parties
(including, for this purpose, affiliated companies of the adviser
and their employees) for soliciting business from public retirement
systems and other state and local government entities. See Advisers Act Release No. 3418 (June 8, 2012)
(PDF). The limitations, once in place, will prohibit an adviser
from paying compensation to finders, solicitors, or placement
agents that are not registered with the SEC as either investment
advisers, broker-dealers or municipal advisors.
The third-party compensation limitations under the Rule now will
take effect nine months after the compliance date for final rules
to be adopted by the SEC relating to the definition and
registration of "municipal advisors" under Section 15B of
the Securities Exchange Act of 1934 (Exchange Act). However, it is
uncertain when the SEC will adopt these rules. The SEC also is
waiting to approve new pay-to-play rules expected to be submitted
by the Financial Industry Regulatory Authority (FINRA) and
Municipal Securities Rulemaking Board (MSRB) that will govern the
conduct of registered broker-dealers and municipal advisors,
respectively, who solicit public retirement plans. These new rules
will establish limits on political contributions for broker-dealers
and municipal advisors and are likely to be controversial.
Advisers should continue to monitor developments at the SEC. They
also should be cautious when entering into agreements with finders
or consultants who are not registered with the SEC as either
investment advisers, broker-dealers or municipal advisors
— if the agreements include compensation related to
investments by public retirement plans. Finally, advisers must be
aware of limitations under state or local law, as well as
retirement plan policies, that can affect these arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
