United States: FINRA Proposes Applying Pay-To-Play Rules To Capital Acquisition Brokers

FINRA filed with the SEC a proposed rule change that would apply "pay-to-play" rules to firms that are governed by the "capital acquisition broker" rule set ("CABs").

FINRA pay-to-play rules ( FINRA Rules 2030 and  4580) were adopted to regulate the activity of member firms that receive compensation in exchange for engaging in distribution or solicitation activities with government entities (e.g., prohibiting member firms from engaging in distribution or solicitation activities with a government entity if political contributions have been made to such entity).

Separately, FINRA  adopted a set of rules for firms that meet requirements to be considered as CABs and choose to be governed by that set of rules. According to FINRA, "CABs are member firms that engage in a limited range of activities, 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." These firms are subjected to a number of restrictions, including not being permitted "to carry or maintain customer accounts, handle customers' funds or securities, accept customers' trading orders, or engage in proprietary trading or market-making."

While CABs are required to adhere to a number of existing FINRA rules, the rule set did not specifically apply FINRA's pay-to-play rules to CABs. As such, FINRA is proposing to add CAB Rules 203 (Engaging in Distribution and Solicitation Activities with Government Entities) and 458 (Books and Records Requirements for Government Distribution and Solicitation) to specify that all CABs are subject to FINRA'a pay-to-play rules. FINRA stated that the effective date of the rule change will be announced in a Regulatory Notice to be published within 60 days of the SEC approval date. The effective date will be set for no later than 30 days after publication of the Regulatory Notice.

Commentary / Steven Lofchie

Maintaining the CAB rule set is largely a waste of regulatory resources. Rather than adopting, and now having to maintain the CAB rules FINRA should have amended the existing rules to make clear that certain requirements were irrelevant to firms doing a very limited business.

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