SEC Grants No-Action Relief From Pay-to-Play Recordkeeping Rules
Investment Management Update
Date: September 16, 2011
The Securities and Exchange Commission (SEC) issued a no-action letter on September 12, 2011 to the Investment Company Institute (ICI) that provides conditional relief from the recordkeeping requirements of Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act) to registered investment advisers who advise registered investment companies that are investment options of a plan or program of a government entity (Covered Investment Pool). The ICI had requested relief from this requirement.
Under Rule 206(4)-5, an investment adviser is required to comply with Rule 204-2(a)(18)(i)(B) under the Advisers Act, which generally requires a registered investment adviser to make and maintain a list of all government entities that are or were an investor in a Covered Investment Pool to which the investment adviser provides or has provided investment advisory services. In its request for relief, the ICI explained that investment advisers may not know the identity of all government entities invested in a Covered Investment Pool because a government entity may hold the shares through one or more omnibus accounts in such a way that the government entity is unknown to the adviser, the registered investment company or its transfer agent.1 This lack of transparency, the ICI argued, impedes the ability of advisers to comply with Rule 204(a)(18)(i)(B) with regard to these accounts.
In granting no-action relief, the SEC staff approved an alternative method for investment advisers to comply with the requirements of Rule 204-2(a)(18)(i)(B) without piercing omnibus accounts or seeking information from omnibus accountholders. Under this method, an adviser is considered to be in compliance with the recordkeeping requirements of Rule 204-2(a)(18)(i)(B) if it maintains a list that includes:
- 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 such 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,2 regulated persons or covered associates;3
- Each government entity that sponsors or establishes a 529 Plan and has selected a specific Covered Investment Pool as an option to be offered by such 529 Plan; and
- Each government entity that has been solicited to invest in a Covered Investment Pool by either (1) a covered associate or regulated person of the adviser; or (2) 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.
The letter notes that a government entity may be identified to a client servicing employee, regulated person or covered associate in a variety of ways, including:
- Disclosure by the plan's sponsor, agents or participants to the adviser's covered associate, regulated person or client servicing employee;
- The adviser's covered associate, regulated person or client servicing employee becoming aware that an affiliate of the Covered Investment Pool is providing services to such plan or government entity; or
- A third-party distributor directly informing the adviser's covered associate, regulated person or client servicing employee.
1The ICI conceded that advisers generally know of larger government entities investing directly in Covered Investment Pools, government entities sponsoring 529 plans that offer one or more Covered Investment Pools, and government entities that an adviser targets in its marketing.
2A "client servicing employee" is defined in the no-action letter as a person who provides, on behalf of the adviser or the Covered Investment Pool, specialized client services to a government entity that invests in a Covered Investment Pool. This definition does not encompass employees of the adviser who have incidental contact with a variety of shareholders or who service a variety of clients as part of their normal course of business without being assigned specific responsibility to service a particular accountholder (e.g., call center representatives). To the extent that a Covered Investment Pool or its adviser subcontracts its client servicing responsibilities, an adviser must obtain this information from its subcontractor.