Last week the Securities and Exchange Commission issued a Final Rule extending the date by which investment advisers are required to comply with the ban on the use of third-party marketers under Rule 206(4)-5 (the Federal Pay-to-Play Rule”). This ban had been set to go into effect this Wednesday, June 13.

The ban will now take effect nine months after the SEC issues a final rule defining the term, “municipal advisor,” and creating a process for municipal advisors to register with the SEC (under the 1934 Securities and Exchange Act).  The  rule regarding municipal advisors is expected to be issued later this year.  The proposed rule was issued in December, 2010, and an interim final rule is set to expire on September 30, 2012.

The Federal Pay-to-Play Rule went into effect last year and, among other things, restricts the ability of investment advisers, and their “covered associates,” to make political contributions to candidates and elected officials who have the ability to influence investment decisions by government entities, primarily public pension funds.  A prohibited contribution triggers a two-year ban on compensation.

The Federal Pay-to-Play Rule also prohibits an adviser from paying any third-party to solicit advisory business from a government entity on its behalf unless the third-party is an SEC-registered investment adviser or a registered broker or dealer subject to pay-to-play restrictions adopted by a registered national securities association, like the Financial Industry Regulatory Authority.  FINRA has yet to implement a pay-to-play rule that meets these requirements.  In
addition, after proposing and then withdrawing pay-to-play rules for municipal advisors, the Municipal Securities Rulemaking Board has indicated it plans to resubmit a pay-to-play proposal once the SEC finalizes the definition of a “municipal advisor.”

Thus, the SEC’s decision will give FINRA and the MSRB time to continue their rulemakings
prior to implementation of the ban on third party marketers.