New Pay-to-Play Rules Add Restrictions to Municipal Advisors and Broker-Dealers Involved in Political Contributions

Under new pay-to-play rules, which the SEC officially approved in late October, municipal advisors and broker-dealers will need to stand pat for two years before entering into business with any government entity if they’ve made political contributions to that entity.  

The SEC’s current rule, which had gone unenforced, prohibits investment advisors from providing advisory services to a government entity for a two-year period following a political contribution made by the investment advisor to an official of the entity. Additionally, it prohibits an investment advisor from soliciting contributions for a government official to the official’s political party during the same period that the advisor is providing services to the government entity for which the official is employed.

The new set of rules, proposed by the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB), build on the SEC’s rules for the self-regulatory organization’s (SRO) membership.

FINRA’s proposed rules, FINRA Rule 2030, modeled on the SEC’s existing rule, and FINRA Rule 4580, which covers reporting requirements, were initially proposed in December 2015. They aim to prohibit a member firm from engaging in distribution of solicitation activities on an investment advisor’s behalf with a government entity to which the firm has made political contributions within the past two years. This period is referred to as a “cooling off” period. The new rules, which come into effect August 20, 2017, do not ban or limit the amount of political contributions that a member firm can make.

Similarly, the MSRB’s changes to Rule G-37 will impose a two-year ban on municipal advisors from making political contributions to state and local officials in exchange for the award of municipal advisory business. Under the previous Rule G-37, restrictions only applied to brokers, dealers and municipal securities dealers. The amended rule, which the SEC deemed approved in February 2016, became effective in August.

Both FINRA Rule 2030 and the changes to Rule G-37 have been met with mixed reactions – largely from Republican party candidates. While many have supported the changes, some parties have raised concerns that the new rules infringe their constitutional rights. The MSRB rule change, for example, has been the subject of litigation: The Tennessee and Georgia Republican parties have claimed that the newly imposed restrictions violate their First Amendment rights, and that the two SROs have stepped over their authoritative boundaries.

Under FINRA Rule 4580, covered members and covered associates (those FINRA members for which FINRA Rule 2030 will apply), will be required to maintain records that will allow FINRA to examine compliance with FINRA Rule 2030.

Leading up to the implementation of the new rule, FINRA members should begin identifying any covered members or associates with financial ties to governmental entity clients, and should consider modifying supervisory procedures to ensure compliance with new requirements under the new rules.