Monday, September 26, 2011

Paper Lion Ahead for SEC's Pay-to-Play Exemption?

On March 14, the SEC's pay-to-play rule will come into effect and there is growing concern that the rule's exemption for accidental violations will result in an administrative hailstorm. The rule allows an advisor to apply to the SEC for an order exempting it from application of the two-year ban. Under such provision, the SEC can exempt advisers from the time out requirement where the adviser discovers triggering contributions after they have been made, and when imposition of the prohibition is unnecessary to achieve the rule's intended purpose. An exemption would be based on the facts and circumstances of each applicant, including the SEC's consideration of factors such as whether the adviser had a compliance program in place.

The SEC estimated that seven advisers would apply for the exemption each year, a number that several attorneys have speculated as too low given the number of investment advisers affected. On the other hand, the SEC utilized FINRA's data on exemption applications to calculate the estimate, and investment advisers have had several months to digest and prepare for the rule. Either way, whether March will come in like a lamb or a lion for the SEC is anyone's guess.

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