SIFMA Submits Comments on FINRA's Proposed Pay-to-Play Rules

SIFMA submitted a comment letter to FINRA regarding the latter's proposed pay-to-play rules.

The proposed rules would regulate the activities of FINRA member firms that engaged in distribution or solicitation activities for compensation with government entities on behalf of investment advisers that provided or were seeking to provide investment advisory services to such government entities. FINRA's proposed pay-to-play rules (Proposed Rules 2271, 2390 and 4580) are intended to address the so-called "Regulated Person Requirement" of Advisers Act Rule 206(4)-5 (the "SEC Rule"), which will prohibit an investment adviser and its covered associates from providing payment to a FINRA member firm to solicit a government entity for investment advisory services on behalf of the investment adviser unless the member firm is subject to a FINRA pay-to-play rule.

Although SIFMA welcomed the extent to which the proposed rules reflect the terms of the SEC Rule, SIFMA focused on those aspects of the proposed rules that diverge from the equivalent SEC Rule.

SIFMA explained that if FINRA member firms are not subject to an SEC-approved pay-to-play rule by the April 1, 2015 effective date of the Regulated Person Requirement, they will be effectively banned from engaging in solicitation activity covered by the SEC Rule. SIFMA echoed FINRA's concern that a disruption of these solicitation activities would be harmful "not only to the covered members themselves but also to the investment advisers and government entities that rely on them." SIFMA stated, however, that certain aspects of FINRA's proposed pay-to-play rules "are neither required by, nor necessary to effectuate, the Regulated Person Requirement." SIFMA thus recommended that FINRA:

• eliminate the disclosure requirements of Proposed Rule 2271 or remove them from this rulemaking for consideration on a separate track;
• harmonize key terms and recordkeeping requirements with the SEC pay-to-play rules; and
• remove the mandatory disgorgement provision from FINRA's proposed pay-to-play rule 2390.

See: SIFMA Comment Letter.Related news: FINRA Requests Comment on a Proposal to Establish a "Pay-to-Play" Rule (FINRA Reg. Notice 14-50) (with Lofchie Comment) (November 14, 2014).