SEC OKs FINRA Rule on Capital Acquisition Brokers’ Pay-to-Play Activities

Government plan solicitors can ‘continue their activities on behalf of RIAs by submitting to the lighter CAB regulatory regime,’ says Cipperman

FINRA building in New York. (Photo: Ron Pechtimaldjian) FINRA building in New York. (Photo: Ron Pechtimaldjian)

The Securities and Exchange Commission approved Monday new Financial Industry Regulatory Authority rules allowing capital acquisition brokers to engage in distribution and solicitation activities for RIAs consistent with the anti-pay-to-play rules.

The rules become effective on Dec. 6.

Rule 206(4)-5 of the Investment Advisers Act restricts advisors from engaging solicitors for certain government entities.

“The new rules allow advisors to retain CABs consistent with previously adopted FINRA rules governing distribution and solicitation activities,” explained Cipperman Compliance Services.

The newly approved rules “allow government plan solicitors to continue their activities on behalf of RIAs by submitting to the lighter CAB regulatory regime,” and represent “a loosening of the rules that appeared very restrictive in the wake of Rule 206(4)-5’s adoption,” Cipperman added.

CABs are limited purpose FINRA member firms that are subject to less regulation but must limit their activities to investment banking-type activities such as advising companies on capital raising and acting as a placement agent.

CABs' range of activities include essentially 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.

“Member firms that elect to be governed under the CAB rule set are not permitted, among other things, to carry or maintain customer accounts, handle customers’ funds or securities, accept customers’ trading orders, or engage in proprietary trading or market-making,” the SEC explained.

In January 2010, the SEC adopted Rule 206(4)-5 addressing pay-to-play practices by investment advisors. The SEC Pay-to-Play Rule prohibits, in part, an advisor and its covered associates from providing or agreeing to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of the investment advisor unless the person is a “regulated person” under FINRA rules. 

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