FINRA Requests Comments on a Proposal to Establish a "Pay-to-Play" Rule (FINRA Reg. Notice 14-50)

FINRA issued a Regulatory Notice requesting comment on a proposal to establish three "pay-to-play" rules.

The proposed rules, which "respond" to Advisers Act Rule 206(4)-5 ("Political Contributions by Certain Investment Advisers"), would regulate the activities of member firms that engage in distribution or solicitation activities for compensation with government entities. Specifically the proposed rule affects investment advisers that "provide or are seeking to provide investment advisory services to such government entities within two years after a contribution to an official of the government entity is made by the member firm or a covered associate."

Proposed FINRA Rule 2271 would establish new disclosure requirements that require, among other things, a covered member engaging in distribution or solicitation activities for compensation with a government entity on behalf of one or more investment advisers to make specified disclosures, in writing, to the government entity regarding each investment adviser.

Proposed FINRA Rule 2390 is modeled closely after the SEC Pay-to-Play rule; however, the new rule imposes "substantially equivalent or more stringent restrictions on member firms engaging in distribution or solicitation activities" than do the SEC rules.

Proposed FINRA Rule 4580 would require covered members that engage in distribution or solicitation activities with a government entity on behalf of any investment adviser that provides, or is seeking to provide, investment advisory services to such government entity to maintain books and records that would allow FINRA to examine for compliance with proposed Rules 2271 and 2390. The proposed Rule 4580 would require, among other things, that covered members maintain a list of:

• the names, titles and business and residence addresses of all covered associates;
• the name and business address of each investment adviser on behalf of which the covered member has engaged in distribution or solicitation activities with a government entity within the past five years (but not prior to the rule’s effective date);
• the name and business address of all government entities with which the covered member has engaged in distribution or solicitation activities on behalf of an investment adviser within the past five years (but not prior to the rule’s effective date); and
• all direct or indirect contributions made by the covered member or any of its covered associates to an official of a government entity, or direct or indirect payments to a political party of a state or political subdivision thereof, or to a PAC.

Comments on the proposal must be submitted by December 15, 2014.