Division of Investment Management Releases Responses to Questions About the Pay to Play Rule and Part 2 of Form ADV

Two of the more significant final rules adopted by the SEC over the past year were the new “pay to play” rule adopted on July 1, 2010, and the amendments to Part 2 of Form ADV adopted on July 28, 2010. The Pay to Play Rule (Rule 206(4)-5 of the Advisers Act), among other things, generally prohibits investment advisers from providing advisory services for compensation to a government client for two years after the adviser or its employees make a contribution to certain elected officials or candidates. The amendments to Form ADV Part 2 generally require investment advisers to provide new and prospective clients with a narrative brochure and brochure supplements written in plain English, replacing the check-the-box format previously required.

Last week, the staff of the SEC’s Division of Investment Management issued responses to various questions with respect to these new rules and rule amendments. The staff’s guidance comes just in time since the compliance date for certain recordkeeping requirements under the Pay to Play Rule was March 14, 2011, and advisers with a fiscal yearend of December 31 must file the new Form ADV Part 2A no later than March 31, 2011. The Staff Responses to Questions About the Pay to Play Rule cover such topics as Compliance Dates; Definitions of “Covered Associate,” “Government Entity,” and “Official”; Use of Third-Party Solicitors, and other matters. The Staff Responses to Questions About Part 2 of Form ADV address such topics as Compliance Dates for Part 2A and 2B; Preparing, Filing, and Delivering Brochures; Covered Persons for Brochure Supplements; and Preparation and Delivery of Brochure Supplements. The staff will update the information from time to time with responses to additional questions or to make other modifications.

Although the staff makes clear that the responses represent the views of the Division and are not rules and regulations, the information can be of use in interpreting and understanding these important rules. Firms should carefully review the staff’s responses for an indication of how the SEC interprets some of the complexities of the new rules and what is expected of firms in order to comply with the Pay to Play Rule and the new Form ADV Part 2. The staff’s guidance sheds some much-needed light on many of the vague aspects of the rules.

For additional information on the Pay to Play Rule or the amendments to Part 2 of Form ADV, please contact us at (619) 278-0020 to schedule your consultation.


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