• 
• 
• 
• 
• 
  • Publications
  • Events
• 

The new rule

The new rule, 206(4)-5, imposes restrictions on the activities of investment advisers, including unregistered investment advisers and "covered associates" (generally defined to include principals and other key employees of the adviser), and also imposes significant new recordkeeping requirements. The new rule has three main restrictive components:

• Investment advisers are prohibited from providing advisory services for compensation, either directly or through certain pooled investment vehicles, to a government entity (including all state and local governments, their agencies and instrumentalities, and all public pension plans and other collective funds) for two years after the adviser or any of its covered associates makes a political contribution to an elected official or candidate for office of that government entity who has the power to influence the selection of advisory services.  The SEC has emphasized in its release for the new rule that the two year time-out only applies to paid advisory services, and the adviser may continue to, and in fact may even be required to in accordance with their fiduciary duties, to provide unpaid advisory services during the two year time-out period.
  
  
• Investment advisers and their covered associates are prohibited from soliciting or bundling contributions from others on behalf of an elected official or candidate for office who is in a position to influence the selection of advisory services for any governmental entity.
  
  
• Investment advisers are prohibited from paying third-party placement agents to solicit governmental advisory business on behalf of the investment adviser, unless the third-party is itself subject to pay to play rules (i.e., a registered investment adviser or registered broker-dealer).
  
  

Does the rule apply to me?

The rule applies to registered investment advisers, advisers who are currently exempt from registration under the private investment adviser exemption due to having fewer than 15 clients, and advisers that manage assets of a governmental entity through certain pooled investment vehicles ("covered investment pools"). The rule does not, however, apply to small advisers with less than $25 million of assets under management that are not registered with the SEC, or to advisers not registered with the SEC in reliance on exemptions other than the private investment adviser exemption.  So, hedge fund and private equity fund managers with $25 million of assets under management must comply with this rule.

Covered associates include anyone with management control over the investment adviser (e.g., a general partner or executive officer of the adviser or certain affiliates of the adviser), and any employees who solicit government entities or who supervise employees who engage in such solicitation.  There is a de minimis exemption available ($350 per election, per candidate for elections in which the individual is entitled to vote, and $150 per election, per candidate otherwise) as well as a "returned contribution" exemption to permit individuals to exercise their free speech rights. The rule provides for a six month "look back" period (or two years for any covered associate who solicits government clients) for newly hired or promoted covered associates, so that any contributions made by that covered associate within that period are attributed to the investment adviser.

New recordkeeping rules

Investment advisers subject to the rule must also keep records necessary to demonstrate to the SEC examination staff its compliance with the rule, including detailed information regarding all direct and indirect contributions and payments made by the investment adviser and its covered associates, lists of covered associates and third-party placement agents engaged to solicit government advisory business on behalf of the adviser, and information spanning back five years regarding all government entities to which the adviser has provided advisory services (including through a covered investment pool).  The new recordkeeping requirements and the restrictions described above will force affected investment advisers to adopt new compliance policies and procedures.

Effective date

The rule becomes effective on September 13, 2010 and investment advisers must be in compliance with its provisions by March 13, 2011 (or, in the case of investment advisers to covered investment pools, by September 13, 2011).  The ban on engaging third-party placement agents who are not themselves subject to pay to play rules will take effect on September 13, 2011.

Registered investment advisers and fund mangers should enhance their compliance functions and adopt appropriate procedures to track, monitor and restrict campaign contributions.

For more information on these issues or other investment adviser matters, please contact Irwin Kishner at (212) 592-1435 or ikishner@herrick.com, Patrick Sweeney at (212) 592-1547 or psweeney@herrick.com, Richard Morris at (212) 592-1432 or rmorris@herrick.com, or Irwin Latner at (212) 592-1558 or ilatner@herrick.com.

Copyright © 2010 Herrick, Feinstein LLP. Investment Adviser Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.