On Sept. 12, 2011, the Securities and Exchange Commission (the Commission) staff issued a no-action letter to the Investment Company Institute (ICI) stating that it would not recommend the Commission institute an enforcement action under Rule 204-2(a)(18) (i)(B) (the Government Plan Recordkeeping Rule) under the Investment Advisers Act of 1940, as amended, (the Act) against an investment adviser to a Covered Investment Pool (defined below) if the adviser makes and keeps an alternative set of records that are set forth in the no-action letter. This no-action letter resolves significant ambiguity as to how investment advisers were going to comply with the Government Plan Recordkeeping Rule in cases where government entities hold positions in Covered Investment Pools through intermediaries on an omnibus account basis.
The Government Plan Recordkeeping Rule was adopted in connection with the Commission’s adoption of Rule 206(4)-5 under the antifraud provisions of the Act, which prohibits “pay to play” conduct. Rule 206(4)-5 prohibits an investment adviser from providing advisory services for compensation to a government client for two years after the adviser or certain of its employees (Covered Associates) or third-party solicitors (Regulated Persons) make a contribution to certain candidates or elected officials.
The Government Plan Recordkeeping Rule generally requires, as relevant here, that registered investment advisers make and keep a record of all government entities that are, or were, investors in any registered investment company that is an investment option of a plan or program of a government entity (Covered Investment Pool) to which such adviser provides or has provided investment advisory services in the past five years, but not prior to Sept. 13, 2010. The compliance date for this requirement was Sept. 13, 2011.
In addition to the recordkeeping requirements of the Government Plan Recordkeeping Rule, Rule 204-2(a)(18)(i) also requires that an investment adviser maintain the following records:
- A list of all Covered Associates, which are persons who typically make political contributions and who have a direct economic tie to the adviser’s relationship with government clients;
- A list of all Regulated Persons that the adviser pays, directly or indirectly, to solicit government clients; and
- A list of direct and indirect political contributions that the adviser, its Covered Associates or Regulated Persons make to officials of a government entity, political parties or political action committees.
ICI Request for Relief
The ICI noted in its no-action request that the Government Plan Recordkeeping Rule, as adopted, did not address situations in which a governmental entity invests in a Covered Investment Pool through an omnibus account that is maintained by an intermediary unaffiliated with the investment adviser to the Covered Investment Pool. In these cases, the ICI noted, the investment adviser may not know that the governmental entity was an investor in the Covered Investment Pool. As a result of this lack of transparency, the ICI requested, and the Commission staff granted conditional relief, that enforcement action not be recommended against investment advisers who maintain the following records:
- A list of government entities that invest in a Covered Investment Pool whose accounts can be reasonably identified on the records of the Covered Investment Pool or its transfer agent;
- A list of government entities whose accounts have been identified as such to the adviser, its client servicing employees, Regulated Persons or Covered Associates at or around the time of the initial investment;
- A list of government entities that sponsor or establish a 529 Plan for which a specific Covered Investment Pool is an option to be offered by such plan; and
- A list of government entities that have been solicited to participate in a Covered Investment Pool by a (i) Covered Associate of the adviser, (ii) Regulated Person of the adviser, or (iii) intermediary or affiliate of the Covered Investment Pool if a Covered Associate, Regulated Person, or client servicing employee of the adviser was involved in such solicitation. Under this requirement, such government entities must be included in the list whether or not they invested in the Covered Investment Pool.