The Staff of the SEC recently granted no- action relief to the Investment Company Institute (ICI) concerning certain recordkeeping requirements related to the SEC’s “pay-to-play” rules.16 Generally, the SEC’s pay-to-play rules prohibit an investment adviser from providing advisory services for compensation to a government entity within two years after the adviser, or certain of its employees or third-party solicitors, makes a contribution to certain candidates or elected offi cials.17 In connection with adopting the pay-to-play rules, the SEC also adopted Rule 204-2(a)(18)(i)(B) under the Investment Advisers Act of 1940, as amended, which generally requires registered investment advisers to maintain a list of all government entities to which the adviser has provided advisory services, or which are or were investors in any covered investment pool18 to which the investment adviser provides or has provided investment advisory services in the past fi ve years (but not prior to September 13, 2010).
In its no-action request, ICI explained to the Staff of the SEC that a government entity may hold shares in a registered investment company (an investment company registered under the Investment Company Act of 1940, as amended (Investment Company Act)) through one or more omnibus accounts in such a way that such government entity is wholly unknown to the adviser of such registered investment company. Further, the ICI stated that “[t]his lack of transparency is impeding the ability of . . . advisers to comply” with the new recordkeeping requirements with respect to such accounts. To address this concern, the Staff of the SEC agreed not to bring enforcement actions against advisers to registered investment companies who make and keep a list or other record that includes:
- Each government entity that invests in a registered investment company whose account can reasonably be identifi ed as being held in the name of or for the benefi t of the government entity on the records of the registered investment fund or its transfer agent;
- Each government entity whose account was identifi ed 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;
- Each government entity that sponsors or establishes a 529 Plan and has selected a specifi c registered investment company as an option to be offered by such 529 Plan; and
- Each government entity that has been solicited to invest in a registered investment company either (i) by a covered associate or regulated person of the adviser; or (ii) by an intermediary or affi liate of the registered investment company 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 registered investment company.
It should be noted that ICI’s no-action letter only applies to advisers to entities registered under the Investment Company Act and not to all “covered investment pools.” The SEC, in its no-action response, purposely “excludes a category of company that is included in the defi nition of ‘covered investment pool’ for purposes of Rule 204-2(a)(18)(i)(B), namely, any company that would be an investment company under section 3(a) of the Investment Company Act but for the exclusion provided from that defi nition by section 3(c)(1), section 3(c)(7) or section 3(c)(11) of the Investment Company Act. This category is excluded for purposes of this letter” because ICI (whose members are registered investment companies) limited its request for no-action assurance to investments in registered investment companies. It is not known whether the SEC would give similar no-action relief to registered investment advisers of unregistered 3(c)(1) and 3(c)(7) funds.