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FINRA Prepares New Pay-to-Play Rules

Financial Industry Regulatory Authority is in the midst of drafting rules prohibiting broker-dealers who are also third-party marketers from making political contributions to certain government officials.

The Financial Industry Regulatory Authority is in the midst of drafting rules prohibiting broker-dealers who are also third-party marketers from making political contributions to certain government officials as part of the Securities and Exchange Commission’s larger, year-long effort to address pay to play activities in the pension fund world.

The SEC commissioners are expected to vote on finalizing the rules, which are modeled on existing rules governing the municipal securities underwriting business, at some point during the second quarter.

Late last year, Andrew “Buddy” Donohue, director of the SEC’s Division of Investment Management, wrote a letter to FINRA chairman and CEO Richard Ketchum asking whether the SRO would be willing to draft some rules on third party marketing in the event the SEC’s IM staff decided to include in its final recommendations a provision to exempt broker-dealers from any placement agent ban. “It occurs to us that an exception to the ban for registered broker-dealers acting as legitimate placement agents might be feasible if FINRA were to implement rules that would prohibit pay to play activities by those persons,” Donohue wrote, according to a copy of the letter on the SEC’s website.

Last month, Ketchum wrote Donohue back saying he was “delighted to state that we are in a position to promulgate such a rule.”

“We believe that the FINRA proposal should impose regulatory requirements on member broker dealer placement agents as rigorous and as expansive as would be imposed by the SEC on investment advisers” Ketchum said in the letter.

By having FINRA ready to roll with rules to govern third-party marketing, the SEC staff gives itself the option of recommending to the Commission both a blanket ban and a broker-dealer exception, leaving the door open for BDs to serve as placement agents so long as they stipulate to FINRA rules which presumably would disallow, for periods of time, making political contributions to persons from whom the marketers are soliciting business.

Last month, Donohue told II newsletter Compliance Reporter that SEC staff may recommend that money managers be allowed to use third-party marketers so long as those third parties themselves are subjected to some regulatory regime, either the SEC or FINRA.

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