On September 12, 2011, the SEC staff issued a no-action letter stating that the Division of Investment Management would not recommend enforcement action under the “pay-to-play” recordkeeping requirements of the Advisers Act against investment advisers to registered funds that comply with alternative recordkeeping requirements. Under the “pay-to-play” recordkeeping requirements, an investment adviser is required to maintain records of all government entities that are, or were, investors in any covered investment pool (including registered funds) to which the adviser provides, or has provided, investment advisory services in the past five years, but not prior to September 13, 2010.
In recognition that a government entity may hold shares of a registered fund through one or more omnibus accounts, the SEC staff granted no-action relief from the “pay-to-play” recordkeeping requirements applicable to an investment adviser to a registered fund that is an investment option of a plan or program of a government entity (a “Covered Investment Pool”). In order to rely on the no-action relief, an investment adviser to a Covered Investment Pool is required to make and maintain a list or other record that includes:
- each government entity that invests in a Covered Investment Pool, where the account of the government entity can reasonably be identified as being held in the name, or for the benefit, of the government entity on the records of the Covered Investment Pool or its transfer agent;
- each government entity, the account of which 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, regulated persons or covered associates (all as defined in the no-action letter or the “pay-to-play” rule);
- 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 the 529 plan; and
- the government entity that has been solicited to invest in a Covered Investment Pool either by (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, or was involved, in the solicitation, regardless of whether the government entity invested in the Covered Investment Pool.
The no-action letter specifically notes that, for purposes of the granted relief, a Covered Investment Pool does not include any company that would be an investment company but for the exclusions provided by Sections 3(c)(1), 3(c)(7) or 3(c)(11) of the 1940 Act. The no-action letter also notes that the granted relief only applies to the portion of the “pay-to-play” recordkeeping requirements relating to Covered Investment Pools, and investment advisers are otherwise required to make and maintain a list of all government entities to which the adviser provides, or has provided, investment advisory services.