SEC Adopts Rule to Curtail 'Pay to Play' Practices Involving State and Local Government Entities

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The U.S. Securities and Exchange Commission ("SEC") has adopted Rule 206(4)-5 (the "Pay to Play Rule") under the Investment Advisers Act of 1940 ("Advisers Act") to curtail what the SEC believes presents "pay to play" practices and arrangements involving state and local government entities, including public pension plans. The SEC also adopted certain amendments to the recordkeeping requirements under Rule 204-2 (the "Recordkeeping Rule") and the cash solicitation rule under Rule 206(4)-3 (the "Cash Solicitation Rule").

The new Pay to Play Rule was published in the Federal Register on July 14, 2010. The new Rule and the amendments to the Recordkeeping Rule and the Cash Solicitation Rule become effective on September 13, 2010. Compliance with the Pay to Play Rule generally is required for covered investment advisers by March 14, 2011, except that covered investment advisers are not required to comply with the Pay to Play Rule's prohibition on paying third parties to solicit business from state and local government entities except in compliance with the Pay to Play Rule until September 13, 2011. September 13, 2011 also is the compliance date for covered investment advisers to registered investment companies that are covered investment pools. Covered investment advisers must comply with the amended Recordkeeping Rule by the same date that their compliance with the Pay to Play Rule is required. Finally, compliance with the amended Cash Solicitation Rule is required by September 13, 2011.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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