On September 29, the Securities and Exchange Commission approved the rule proposal of the Financial Industry Regulatory Authority to subject capital acquisition brokers (CABs) to the same pay-to-play restrictions already applicable to non-CAB member firms. As explained in more detail in this Katten advisory, CABs are FINRA members that are engaged in a limited range of broker-dealer activities, such as advising firms on capital raising and corporate restructuring or acting as a private placement agent to institutional investors (subject to certain conditions). CABs elect to be treated as such and are subject to a separate set of streamlined FINRA rules.
The SEC’s pay-to-play rules prohibit an investment adviser and its covered associates from providing or agreeing to provide payment to any person to solicit a government entity for investment advisory services on behalf of the investment adviser, unless the person is a “regulated person.” The SEC defines a “regulated person” to include a FINRA member firm subject to a FINRA pay-to-play rule. FINRA’s new rule clarifies that CABs are subject to FINRA’s pay-to-play rules, and CABs, therefore, constitute “regulated persons.” Once the rule takes effect, an investment adviser and its covered associates could make payments to a CAB to solicit a government entity for investment advisory services. Certain pay-to-play recordkeeping requirements will also apply to CABs.