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.

More information is available in the SEC release available here. Additional information on the rule proposal is available in the August 25 edition of the Corporate & Financial Weekly Digest.