Securities Litigation

Last Friday, FINRA proposed pay-to-play prohibitions that parallel and implement similar Investment Adviser Act provisions in Rule 206(4)-5. That IA Rule prohibits investment advisers from paying third-parties to solicit government-entity advisory clients unless the solicitor is a "regulated person" subject to similar pay-to-play provisions. The SEC adopted the IA Rule in July 2010, but this particular requirement wasn't triggered until the Commission's adoption of the Municipal Advisor Rule, which became effective this past July 1. FINRA's proposed Rules are modeled after the MSRB's original pay-to-play prohibition, Rule G-37, in effect since 1994. It also was the template for the newer IA rule. Proposed Rule 2390(a) imposes a two-year business ban (or "time out" from paid distribution or solicitation) after any contribution to an official of a government-entity by the covered member or its covered associate. Unlike the MSRB and IA rules, the FINRA proposal adds a new "disgorgement" feature requiring repayment of any compensation received in violation of the Rule, in addition to any other penalties that might be imposed. Proposed Rule 2271 mandates a slate of written disclosures to government-entities regarding the solicitor's role, relationship, compensation and conflicts. Proposed Rule 4580 imposes companion record-keeping requirements. The short one-month comment period expires Dec. 15. FINRA's proposal comes as MSRB seeks to expand its Rule G-37 pay-to-play prohibition to Municipal Advisors as well. MSRB Reg. Notice 2014-15 (Aug. 2014). I wrote about that proposal here. Together, the suite of parallel regulations seek to prohibit government-entity pay-to-play practices among investment advisors, broker-dealer solicitors or distributors, municipal-finance professionals and municipal advisors. The D.C. District Court recently rejected a court challenge to the IA pay-to-play rule for jurisdictional reasons. FINRA Reg. Notice 14-50 (Nov. 14, 2014) is here. The text of the proposed rule is here. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. © 2014 by Thomas K. Potter, III (all rights reserved)