The SEC plans to issue orders finding “pay-to-play” restrictions imposed by the Municipal Securities Rulemaking Board (MSRB) and the Financial Industry Regulatory Authority (FINRA) are at least as stringent as the commission’s own rules.
The approvals are necessary to implement a key part of the SEC’s 2010 rules preventing financial professionals who want to sell advisory services to government clients from influencing the process through political contributions.
The SEC on August 25, 2016, provided notice of the upcoming orders in Release No. IA-4512, Political Contributions by Certain Investment Advisers: Ban on Third-Party Solicitation; Notice of Order With Respect to MSRB Rule G-37, and Release No. IA-4511, Political Contributions by Certain Investment Advisers: Ban on Third-Party Solicitation; Notice of Order With Respect to FINRA Rule 2030.
The SEC in 2010 finalized its pay-to-play rules under the Investment Advisers Act of 1940 in Release No. IA-3043, Political Contributions by Certain Investment Advisers, which prohibits an investment adviser from providing services to a government client for two years following a campaign contribution to certain officials with influence over the that adviser’s hiring.
The rules also barred an advisor from paying a third party to solicit business from a government entity, unless that third-party was an SEC-registered investment adviser, a broker-dealer subject to FINRA’s pay-to-play rules, or a municipal adviser subject to the MSRB’s restrictions. For that third-party ban to become fully effective, the SEC needed to determine that FINRA’s and MSRB’s pay-to-play rules were at least as stringent as its own.
The staff from the SEC’s Division of Investment Management in June 2015 said it would not recommend enforcement of the third-party solicitation ban until after the effective dates of both the MSRB and FINRA rules.
The MSRB in December 2015 proposed to place municipal advisers under its existing pay-to-play prohibitions, which already covered brokers, dealers and municipal securities dealers. The MSRB rules are in Release No. 34-76763, Notice of Filing of a Proposed Rule Change Consisting of Proposed Amendments to Rule G-37, on Political Contributions and Prohibitions on Municipal Securities Business, Rule G-8, on Books and Records, Rule G-9, on Preservation of Records, and Forms G-37 and G-37x.
Municipal advisers, professionals who advise state and local governments on bond issuances and other financial decisions, were subjected to a new regulatory framework through the Dodd-Frank Act. The 2010 Wall Street reform law requires muni advisers to register with the SEC, adhere to a fiduciary standard, and follow MSRB rules.
The MSRB pay-to-play changes went into effect on August 17, after they were “deemed to have been approved” under Dodd-Frank Section 916, which mandates that proposals by self-regulatory organizations (SROs), such as the MSRB, are approved if the commission does not take action within a set period. The SEC did not hold a vote on the MSRB rules.
FINRA proposed its own pay-to-play rules for broker-dealers in December. The SEC on August 25 issued an order approving those changes in Release No. 34-78683, Order Approving a Proposed Rule Change to Adopt FINRA Rule 2030 and FINRA Rule 4580 to Establish "Pay-To-Play" and Related Rules.
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