Late last year (December 24, 2015), the Financial Industry Regulatory Authority (FINRA) submitted a proposed rule to the U.S. Securities and Exchange Commission (SEC) for adoption. If adopted in its final form, FINRA Rule 2030(a) will restrict the ability of FINRA member firms to provide client solicitation activities on behalf of registered investment advisers that provide (or seek to provide) investment management services to governmental entities.
The proposed FINRA rule is modeled after SEC Rule 206(4)-5 under the Investment Advisers Act of 1940, a pay-to-play rule that covers investment advisers and certain of their employees. The proposed FINRA rule would also impose a two-year “time out” on the earning of compensation for solicitation engagements in connection with a governmental entity on behalf of an investment adviser when the FINRA member firm or one of its “covered” associates makes a disqualifying contribution to an official of that governmental entity. In order for the FINRA rule to come into play, the political contribution must be more than $30 in an election year or more than $150 in a non-election year. If the political contribution was inadvertent or made by mistake, the rule allows the broker-dealer to cure the violation without penalty if a refund of the donation is received within a four month period of the initial contribution that caused the violation.
Provided the SEC does not seek to deny or require revisions to the proposed FINRA rule after the end of the comment period, which closed on January 20, 2016, the rule would likely be in place prior to the 2016 election cycle.
As a result, broker-dealer FINRA member firms will need to monitor employees who are included under the coverage of the rule to ensure that their compliance and recordkeeping systems are up-to-task in order to avoid violations of the rule.
In addition, registered investment advisers, while engaging broker-dealers and their representatives to solicit prospective government clients on their behalf, should include appropriate representations with any engagement letter to solicit such clients. This would ensure that they are aware that the broker-dealer and its representatives are in compliance with the rule.