The US Securities and Exchange Commission (SEC) has approved a proposal by the Financial Industry Regulatory Authority (FINRA) to adopt Capital Acquisition Broker Rules 203 (engaging in distribution and solicitation activities with government entities) and 458 (books and records requirements for government distribution and solicitation activities)1. Last year the SEC and FINRA took similar action to adopt “pay-to-play” and recordkeeping rules concerning political contributions. The new proposal applies those rules to FINRA member firms that are governed by the Capital Acquisition Broker Rules and engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers.
Capital Acquisition Brokers (CABs) are firms that engage in a limited range of activities, which includes advising companies and private equity funds on capital raising and corporate restructuring and acting as placement agents for sales of unregistered securities to institutional investors under limited conditions. The use of placement agents in soliciting investments by public pension systems and other government funds has come under increasing scrutiny. Under the new rules, CABs are subject to the same restrictions on pay-to-play activities as non-CAB member firms. On April 14, 2017, a set of FINRA rules for firms that meet the definition of CABs and that elect to be governed under those rules became effective. However, while the CAB Rules subject CABs to a number of FINRA rules, they do not expressly provide that the pay-to-play and recordkeeping rules previously adopted by FINRA (Rules 2030 and 4580, respectively) apply to CABs. The new CAB rules sought to make clear that CABs are subject to FINRA’s pay-to-play and recordkeeping rules. The release from the SEC concerning this rule change noted that these rules are not new but are merely a clarification of a previously ambiguous rule.
The SEC’s pay-to-play rule prohibits investment advisers from paying a third party, including an affiliate entity, to solicit government entities for investment advisory services unless that party is a registered investment adviser subject to the SEC’s pay-to-play rule, a municipal adviser subject to MSRB Rule G-37 or a registered broker-dealer complying with FINRA’s pay-to-play rules (including the new CAB rule described above).
1 The SEC approved Capital Acquisition Broker Rules 203 and 458 on August 18, 2017 (SEC Release No. 34-81438). FINRA will announce the effective date of these rules in a Regulatory Notice published on its website by November 28, 2017, and the effective date will be 30 days after publication.