On August 25, the Securities and Exchange Commission (SEC) issued notices (Notices) to the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board (MSRB and together with FINRA, SROs) stating that it intends to approve pay-to-play rules proposed by both. In the Notices, the SEC elaborated that the proposals impose substantially equivalent or more stringent restrictions than the SEC’s existing pay-to-play rule. Because the SEC already has a pay-to-play rule (17 CFR 275.206(4)-5 (Rule 206(4)-5)), the SROs cannot pass their own separate pay-to-play rules unless the SEC approves them.
Rule 206(4)-5 prohibits investment advisers registered with the SEC and advisers that are required to be so registered from receiving any compensation for providing investment advice to a government entity (which includes all state and local governments, agencies, and instrumentalities and government-sponsored plans, including public pension plans) or government official (which includes any person who was, at the time of the contribution, an incumbent, candidate or successful candidate for elective office of a government entity, if the office is directly or indirectly responsible for, or can influence (or has authority to appoint any person who can influence) the outcome of, the hiring of an investment adviser by a government entity), within two years after a contribution has been made by the adviser or one of its covered associates to such entity or official.
Rule 206(4)-5 defines “contribution” broadly to include a gift, subscription, loan, advance, deposit of money or anything of value made for the purpose of (1) influencing (including by paying a campaign debt) a federal, state or local election; or (2) paying transition or inaugural expenses incurred by successful candidates for state or local office. However, contributions to a political action committee (PAC) do not implicate Rule 206(4)-5; provided that, such contributions are not attributable to a specific candidate; provided further that, an adviser or its covered associate may not solicit contributions from PACs on behalf of government officials to which the adviser is providing or seeking to provide investment advice. A “covered associate” includes: (i) any general partner, managing member or executive officer, or other individual with a similar status or function; (ii) any employee who solicits a government entity for the investment adviser and any person who supervises, directly or indirectly, such employee; and (iii) PACs controlled by the investment adviser or a covered associate.
Notably, under Rule 206(4)-5 advisers must look back in time to determine whether a covered associate has made a triggering contribution prior to becoming a covered associate. Pursuant to the lookback provision, depending on whether a covered associate solicits clients for the adviser, contributions made by such covered associate will be attributed to an adviser if those contributions were made within the prior two years or six months. In addition, there are exemptions for certain de minimis contributions of $350 or $150 per covered associate per election depending on whether the covered associate is entitled to vote in the relevant election, and Rule 206(4)-5 contains a cure provision for certain “inadvertent” contributions that do not exceed $350 per government official, per election. Moreover, under Rule 206(4)-5 advisers must keep chronological records of contributions and payments identifying each contributor and recipient, the amounts and dates of each contribution or payment, and whether a contribution was subject to Rule 206(4)-5’s cure for inadvertent contributions.
FINRA proposed Rule 2030 on December 29, 2015. Rule 2030 will prohibit a member firm and its covered associates from engaging in distribution activities or solicitation activities, on behalf of an unaffiliated registered investment adviser, with a government entity or government official to which the member firm or its covered associate has made political contributions within the past two years. Rule 2030 includes provisions similar to those in Rule 206(4)-5 including: (1) that a member firm or its covered associate may not solicit any PAC to make contributions to a government official in respect of which the member firm is engaging in, or seeking to engage in, distribution or solicitation activities on behalf of an unaffiliated registered investment adviser; (2) de minimis exemptions; (3) a lookback for certain associated persons (though it will not cover contributions made prior to the effective date of Rule 2030); and (4) consistent definitions of associated person, government entity and government official. In addition, FINRA adopted Rule 4580 that requires covered members to maintain books and records related to Rule 2030.
Similarly, on December 16, 2015, the MSRB proposed changes to its existing pay to play rule (Rule G-37) to extend its application to municipal advisors. Prior to the proposed changes, Rule G-37 only applied to brokers, dealers and municipal securities dealers. Once amended, Rule G-37 will also ban municipal advisors from soliciting certain government business within the two years after a contribution. Rule G-37 includes provisions similar to those in Rule 206(4)-5 including: (1) a lookback for certain associated persons; (2) de minimis exemptions; (3) definitions of “government municipality” and “official” that are consistent with “government entity” and “government official”; and (4) a prohibition on soliciting or coordinating payments from a PAC to a government municipality where the dealer or municipal advisor is engaging, or is seeking to engage in, municipal securities business or municipal advisory business, as applicable.
To See SEC Rule 206(4)-5, click here.
To see the Notice for FINRA Rule 2030, click here.
To see the Notice for MSRB Rule G-37, click here.