While advisors welcome the “much-needed clarity” provided by the Securities and Exchange Commission in its June 25 frequently asked questions (FAQ) regarding compliance with a new provision in its pay-to-play rule, the FAQ “effectively renders” the formal July 31 compliance date “a nonevent,” says Karen Barr, president and CEO of the Investment Adviser Association.
Why? “Because the SEC says it won’t be enforcing the ban on advisors’ use of third parties to solicit business from government entities” until the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board “finalize their pay-to-play rules governing the third-party solicitors and those rules become effective.”
However, it’s unclear when FINRA and MSRB will act. A FINRA spokesperson says the self-regulator hopes to file a final rule soon, but couldn’t provide a specific date.
Barr says that as IAA noted in its comment letter to FINRA, “we have concerns over some of the requirements in FINRA’s pay-to-play rule proposal related to affiliates of investment advisors. We are hopeful that FINRA will address these concerns in its final rule.”
Pay-to-play rules adopted in 2010 prohibit an advisor from providing advisory services for compensation to a government client for two years after the advisor or certain of its executives or employees (“covered associates”) make a contribution to certain elected officials or candidates.
The new rule, Rule 206(4)-5, prohibits an advisor and its covered associates from providing or agreeing to provide, directly or indirectly, payment to any third party for a solicitation of advisory business from any government entity on behalf of such advisor, unless that party is a “regulated person” (“third-party solicitor ban”).
Rule 206(4)-5 defines a “regulated person” as an SEC-registered investment advisor, a registered broker or dealer subject to pay to play restrictions adopted by a registered national securities association, or a registered municipal advisor subject to pay-to-play restrictions adopted by the Municipal Securities Rulemaking Board.
When the Commission added municipal advisors to the definition of regulated person, the SEC also extended the third-party solicitor ban’s compliance date to June 13, 2012. However, at the time the final municipal advisor registration rule was not in effect, so the SEC extended the third-party solicitor ban’s compliance date from June 13, 2012 to nine months after the compliance date of the final rule, which is July 31. Last June, the SEC charged Philadelphia-area private equity firm TL Ventures Inc. with violating pay-to-play rules by continuing to receive advisory fees from the city and state pension funds within two years after an associate made a $2,500 campaign contribution to a Philadelphia mayoral candidate and a $2,000 campaign contribution to the governor of Pennsylvania.
That was the SEC’s first case under the 2010 pay-to-play rules, which prohibit investment advisors from providing advisory services for pay – either directly to a government client or through a pooled investment vehicle – for two years following a campaign contribution by the firm or certain associates to political candidates or officials in a position to influence the selection or retention of advisors to manage public pension funds or other government client assets.
TL Ventures agreed to settle the charges by paying nearly $300,000.
As the SEC explained at the time, the mayoral position appoints three of the nine members of the Philadelphia Board of Pensions and Retirement. “Therefore, a mayor can influence the hiring of investment advisors for the public pension fund. The 11-member board of Pennsylvania’s state retirement system includes six gubernatorial appointees. Therefore, a governor can influence the hiring of investment advisors for the public pension fund,” the SEC stated.
— Check out FINRA Proposes Pay-to-Play Rules on ThinkAdvisor.