The SEC has approved new FINRA Rules 2030 and 4580 establishing pay-to-play requirements for broker-dealers marketing to government entities on behalf of investment advisers.
FINRA Rule 2030, titled “Engaging in Distribution and Solicitation Activities with Government Entities,” prohibits “covered members” from engaging in distribution or solicitation activities if those activities are:
- For compensation,
- With a state or local government entity,
- On behalf of an SEC-registered investment adviser, and
- Within 2 years after the member firm or one of its covered associates makes a contribution to an official of that government entity.
In other words, a broker-dealer acting as a placement agent for an investment adviser is subject to a “2-year time out” after making a contribution to an official of a state or local government. During that time out, the broker-dealer can’t be paid for selling or marketing to that government entity.
The FINRA rule applies to broker-dealers affiliated with an investment adviser. Unaffiliated broker-dealers are already required to register with the Municipal Securities Rulemaking Board as municipal advisors and are subject to the MSRB’s pay-to-play rule.
The model for the new rule is the SEC’s Rule 206(4)-5, which addresses the pay-to-play practices of investment advisers. By extending substantially equivalent restrictions to placement agents, FINRA explains that it hopes to create a “comprehensive regime” around distribution of investment advisory services to government entities.
FINRA Rule 4580, title “Books and Records Requirements for Government Distribution and Solicitation Activities,” imposes related recordkeeping requirements.