Wednesday, August 23, 2017

SEC updates pay to play rule FAQ for capital acquisition brokers

By Amanda Maine, J.D.

The SEC has issued an update to its staff response to questions about Investment Advisers Act Rule 206(4)-5, known as the “pay to play” rule. The rule prohibits certain investment advisers from providing investment advisory services for compensation to a government client (or to an investment vehicle in which a government entity invests) for two years after the adviser or certain of its executives or employees makes a campaign contribution to certain elected officials or candidates who can influence the selection of certain investment advisers. FINRA adopted its own rules modeled on the SEC rules in August 2016.

Capital acquisition brokers.
The Commission’s most recent update concerns a set of FINRA rules that apply only to firms that meet the definition of “capital acquisition broker” (CAB). CABs are registered broker-dealers that engage in a limited range of activities, including distribution and solicitation activities with government entities on behalf of investment advisers.

The third-party solicitation ban became effective in July 2015, but because FINRA had not yet adopted pay to play rules at that time, the Division of Investment Management indicated that it would not recommend enforcement action until FINRA enacted its pay to play rules. FINRA’s pay to play rules were approved by the SEC in August 2016, with the Division relief provided to firms to expire on August 20, 2017.

The latest SEC guidance on the pay to play rule includes an inquiry as to whether the Division would recommend enforcement action for the payment of any person that is a CAB to solicit a government entity for investment advisory services. FINRA had filed a proposed rule change with the SEC that would apply the FINRA pay to play rules to CABs on August 18, 2017. The staff reply clarifies that until the rules subjecting CABs to the FINRA pay to play rules are effective, the Division would not recommend that an enforcement action be undertaken under the SEC’s Rule 206(4)-5.