Last week the SEC’s Office of Compliance Inspections and Examinations issued a National Examination Risk Alert for brokers, dealers and municipal securities dealers regarding compliance with Municipal Securities Rulemaking Board (MSRB) Rule G-37. The Risk Alert noted that recent SEC examiners have observed practices that raise concerns whether firms are adequately complying with all of their obligations under the MSRB’s “pay-to-play” rules.
Although this Risk Alert specifically relates to brokers, dealers and municipal securities dealers subject to MRSB rules, it should be noted that investment advisers are subject to similar “pay-to-play” restrictions under SEC Rule 206(4)-5.
Concerns identified by examiners include:
- Compliance with the Rule’s ban on doing business with a municipal issuer within two years of a political contribution to officials of the issuer by any of the firm’s municipal finance professionals;
- Possible recordkeeping violations;
- Failure to file accurate and complete required forms with regulators regarding political contributions; and
- Inadequate supervision.
The Risk Alert goes on to note several practices certain firms are engaging in to minimize the potential for violations of the Rule. These practices include:
- Training professionals on the requirements of the MSRB’s “pay-to-play” regulations;
- Requiring firm employees to certify on an annual or other periodic basis that they understand all requirements regarding political contributions;
- Having the firm actively search for political contributions made by employees to detect contributions that might violate the contribution restrictions; and
- Pre-clearing political contributions by firm employees and, in some cases, family members.
That the SEC highlighted these practices suggests that the agency will expect a similar approach to compliance by investment advisors. At the same time, as we discussed in another recent post, certain practices encouraged by the SEC may be at odds with protections afforded by state employment laws.
In sum, risks are high for firms subject to pay-to-play rules, with a careful approach to compliance the best protection.