FINRA recently released Regulatory Notice 17-37 regarding the SEC’s approval of pay-to-play and related recordkeeping rules for Capital Acquisition Brokers (“CABs”). CABs can be defined as member firms that advise companies and private equity funds regarding raising capital and corporate restructuring. CABs also serve as “placement agents for sales of unregistered securities to institutional investors under limited conditions.” Those member firms that are governed under the CAB rules do not accept trading orders from customers or carry or maintain customer accounts. CABs are also not permitted to handle funds or securities belonging to customers and they cannot engage in proprietary trading or market-making.
In the summer of 2010, the SEC adopted a rule under the Investment Advisers Act of 1940, which addressed pay-to-play practices by investment advisers. The rule (Rule 206(4)-5) prohibits an investment adviser and “covered associates from providing or agreeing to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of the investment adviser.” The exception to this rule is that a “regulated person” (i.e., a member firm that has not made political contributions) may receive such payments. The SEC required that in order for the regulated person to receive the payments, the Commission had to determine via order, that then proposed FINRA rules, imposed substantially equivalent or more restrictions on member firms than those imposed on investment advisers by the SEC. In addition, the rules had to be consistent with the objectives of the SEC Pay-to-Play Rule.
Based on this framework, the SEC approved FINRA Rules 2030 and 4580 which regulate the activities of member firms that engage in distribution or solicitation activities with government entities on behalf of investment advisers. Since FINRA Rules 2030 and 4580 do not apply to CABs expressly, FINRA adopted a set of rules (CAB Rules 203 and 458) specifically for CABs, to address pay-to-play and recordkeeping.
CAB Rules 203 and 458 establish that CABs are subject to FINRA’s pay-to-play and recordkeeping rules. As a result, CABs, like non-CAB member firms, may engage in distribution and solicitation activities with government entities on behalf of investment advisers, as they are “regulated persons”.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.