FINRA, MSRB Pay-to-Play Rules on SEC Approval Path

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By Antoinette Gartrell

Aug. 29 — Municipal advisors and broker-dealer firms will have to wait two years before doing business with government entities to which they've made political contributions, under rule changes awaiting Securities and Exchange Commission approval.

The SEC said in Aug. 25 notices that it intends to approve the rules proposed by the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board, unless it receives a request for a hearing on the matters by Sept. 19.

The agency said it will issue orders finding that the self-regulatory organizations' rules impose “substantially equivalent or more stringent restrictions” on municipal advisors and broker-dealers than its own pay-to-play rule. When the SEC already has a rule on a topic, SROs can't have their own separate rule unless the commission makes that determination.

Two Year Ban

Currently, the SEC's pay-to-play rule prohibits an investment adviser from providing advisory services to a government entity for two years after making a political contribution to an official of the entity. It also prohibits an investment adviser from soliciting contributions for a government official or the official's political party at the same time the adviser is providing services to the government entity for which the official works.

FINRA Rule 2030, modeled on the agency's rule, was proposed late last year (248 SLD, 12/29/15). The rule seeks to prohibit a member firm from engaging in distribution or solicitation activities on an investment adviser's behalf with a government entity to which the firm has made political contributions within the past two years.

Comments on the proposal were a mixed bag (22 SLD, 2/3/16). Although most supported the proposal, some raised concerns ranging from the constitutionality of the proposed limits to requests for more stringency. In March, the commission instituted formal proceedings to determine whether or not to approve the self-regulatory organization's pay-to-play plan (63 SLD, 4/1/16).

Likewise, in December 2015, the MSRB proposed changes to Rule G-37 to impose a two year ban on municipal advisors from making political contributions to state and local officials in exchange for the award of municipal advisory business (242 SLD, 12/17/15). Previously, the rule only applied to brokers, dealers and municipal securities dealers.

Circuit Court Action

In related developments, the MSRB's rule is the target of lawsuits by the Tennessee and Georgia Republican parties claiming the restrictions violate their First Amendment rights (72 SLD, 4/14/16). They also argue that the SEC and MSRB exceeded their authority and haven't demonstrated a sufficient legal interest in restricting political contributions.

To contact the reporter on this story: Antoinette Gartrell in Washington at agartrell@bna.com

To contact the editor responsible for this story: Phyllis Diamond at pdiamond@bna.com

For More Information

To view the Notice of Intent for MSRB Rule G-37, visit: https://www.sec.gov/rules/other/2016/ia-4512.pdf.

To view the Notice of Intent for FINRA Rule 2030, visit: https://www.sec.gov/rules/other/2016/ia-4511.pdf.

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