PAY TO PLAY RESTRICTIONS ON MUTUAL FUND ADVISERS



New SEC regulations attempt to address "pay-to-play" practices by investment advisers and their current and potential government clients. These regulations prohibit an investment adviser from providing advisory services for compensation to a government client for two (2) years after the investment adviser (or its executives or employees) has made a political contribution to certain elected officials or candidates.

 

These new "pay-to-play" rules impose detailed reporting and recordkeeping requirements on investment advisers. Among the requirements, an investment adviser is expected to maintain information about the identies of government entities invested in a mutual fund managed by the adviser. In many cases, this information is not easily accessed by a fund because of the widespread use of omnibus accounts, in which broker-dealers and other intermediaries convert investor-level accounts onto their own accounting platforms and retain control over all investor identity and transaction information. This lack of transparency within omnibus accounts makes it difficult, if not impossible, for mutual funds to comply with this new SEC regulation.

 

The trade association for the mutual fund industry, the Investment Company Institute, has strongly recommended that the SEC remedy this situation by requiring broker-dealers and other persons subject to the SEC's jurisdiction to provide investment advisers and funds with the account information the adviser is required by law to have in order to comply with the SEC's pay-to-play rule.

 

CMFI believes that the SEC should require broker-dealers to provide full transparency within omnibus accounts--on a real-time basis--as it would resolve this issue and the many other regulatory problems that omnibus accounting has caused.  For example mutual funds are not able to uniformly enforce their short-term trading policies within these non-transparent accounts. And money market funds are not able to develop robust programs to evaluate the liquidity needs of their investors because of a lack of information about the identities and transactions of investors in these accounts.       

  • SEC No Action Letter on Its Pay to Play Rule
    On September 12, 2011, the SEC's Division of Investment Management sent a "no action" letter to the Investment Company Institute, regarding the recordkeeping requirements of the agency's recent "pay to play" rule. This SEC letter permits investment advisers to significantly reduce their recordkeeping obligations under this rule because of a lack of transparency into third-party omnibus accounts.

New SEC regulations attempt to address "pay-to-play" practices by investment advisers and their current and potential government clients. These regulations prohibit an investment adviser from providing advisory services for compensation to a government client for two (2) years after the investment adviser (or its executives or employees) has made a political contribution to certain elected officials or candidates.

 

These new "pay-to-play" rules impose detailed reporting and recordkeeping requirements on investment advisers. Among the requirements, an investment adviser is expected to maintain information about the identies of government entities invested in a mutual fund managed by the adviser. In many cases, this information is not easily accessed by a fund because of the widespread use of omnibus accounts, in which broker-dealers and other intermediaries convert investor-level accounts onto their own accounting platforms and retain control over all investor identity and transaction information. This lack of transparency within omnibus accounts makes it difficult, if not impossible, for mutual funds to comply with this new SEC regulation.

 

The trade association for the mutual fund industry, the Investment Company Institute, has strongly recommended that the SEC remedy this situation by requiring broker-dealers and other persons subject to the SEC's jurisdiction to provide investment advisers and funds with the account information the adviser is required by law to have in order to comply with the SEC's pay-to-play rule.

 

CMFI believes that the SEC should require broker-dealers to provide full transparency within omnibus accounts--on a real-time basis--as it would resolve this issue and the many other regulatory problems that omnibus accounting has caused.  For example mutual funds are not able to uniformly enforce their short-term trading policies within these non-transparent accounts. And money market funds are not able to develop robust programs to evaluate the liquidity needs of their investors because of a lack of information about the identities and transactions of investors in these accounts.       

Document Title: 
SEC No Action Letter on Its Pay to Play Rule
Document Desc: 
On September 12, 2011, the SEC's Division of Investment Management sent a "no action" letter to the Investment Company Institute, regarding the recordkeeping requirements of the agency's recent "pay to play" rule. This SEC letter permits investment advisers to significantly reduce their recordkeeping obligations under this rule because of a lack of transparency into third-party omnibus accounts.