Tag: MSRB

Pay to Play and Cash Solicitations

The Securities and Exchange Commission extended the date by which registered investment advisers must comply with the ban on third-party solicitation in Rule 206(4)-5 under the Investment Advisers Act. The SEC is extending the compliance date in order to ensure an orderly transition. Since solicitors will need to registered as an investment adviser or a broker/dealer or a municipal advisor.

Part of the rule was reliant on FINRA coming up with a rule to meet the requirements under the definition of “registered person” in 206(4)-5(f)(9)(ii)(B) for broker-dealers. FINRA has not done that yet. (Isn’t FINRA supposed to be more effective than the SEC?)

It’s not just FINRA, the the Municipal Securities Rulemaking Board has not finished its rules for municipal advisers under 206(4)-5(f)(9)(iii).

My IACCP symposium also raised the limitations in Rule 206(4)-3. That rule prohibits the use of solicitors in fundraising unless certain requirements are met. The rule specifically refers to “clients” with no further elaboration. For a private fund, that raises the distinction between the fund as a client and the fund investors as limited partners in the fund.

Fortunately, there is an interpretative letter ruling on the topic

We believe that Rule 206(4)-3 generally does not apply to a registered investment adviser’s cash payment to a person solely to compensate that person for soliciting investors or prospective investors for, or referring investors or prospective investors to, an investment pool managed by the adviser.

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Placement Agent Limitations on Gifts

The Municipal Securities Rulemaking Board is continuing to tighten the limits on what placement agents can do as part of their fundraising activities for private funds.  Dodd-Frank created a new category of “municipal advisors” and placed them under the regulatory oversight of the MSRB. If your fund uses a placement agent and has government-sponsored investors or is seeking government-sponsored investors then they need to be registered with the MSRB and you need to pay attention to these rules.

The MSRB is proposing a new limitation in Rule G-20:

(a) General Limitation on Value of Gifts and Gratuities.

(ii) Municipal advisors.  No municipal advisor shall, directly or indirectly, give or permit to be given any thing or service of value, including gratuities, in excess of $100 per year to a person other than an employee or partner of such municipal advisor, if such payments or services are in relation to the municipal advisory activities of (including but not limited to solicitation of potential engagements on behalf of) the municipal advisor.

(b) Normal Business Dealings. Notwithstanding the foregoing, the provisions of section (a) of this rule shall not be deemed to prohibit occasional gifts of meals or tickets to theatrical, sporting, and other entertainments hosted by the broker, dealer, municipal securities dealer, or municipal advisor; the sponsoring by the broker, dealer, municipal securities dealer, or municipal advisor of legitimate business functions that are recognized by the Internal Revenue Service as deductible business expenses; or gifts of reminder advertising; provided, that such gifts shall not be so frequent or so extensive as to raise any question of propriety.

Amendments to Rule G-8 and Rule G-9 would require a municipal advisor to keep a record of each gift or gratuity given and keep those records for six years.

Even though the MSRB is seeking comments on the proposed changes, I’m skeptical they will be changed. They are merely taking the existing limitations for municipal securities dealers and porting them over to the new class of municipal advisors.

From the fund managers perspective, it would make sense to make sure that your placement agent is complying with the rules and to get copies of their records.

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Pay to Play Rules for Placement Agents

The SEC imposed strict limitations on the ability of investment advisers to make political contributions when their clients include government bodies when it issued Rule 206(4)-5. They don’t want government investment decisions decided campaign contributions. This limitation also applies to private investment funds under the language of the rule and the changes to the Investment Advisers Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The SEC carried this limitation over to placement agents used by investment advisers. The placement agent needs to be subject to similar limitations. That means the placement agent would need to be a registered investment adviser or otherwise regulated. At first the SEC expected FINRA to create a new rule to govern pay-to play. Instead, Section 975 of Dodd-Frank Wall Street Reform and Consumer Protection Act created a new category of regulated persons called a “municipal adviser.” This new category will regulated by the Municipal Securities Rulemaking Board.

The MSRB has issued a proposed draft of new Rule G-42 that would limit a placement agent’s ability to make political contributions.

One major difference between this draft of Rule G-42 and SEC Rule 206(4)-5 is the definition of de minimis political contribution. The SEC allows a contribution of $350 per election cycle for candidate you can vote for or $150 for a candidate you can’t vote for. The MSRB definition would be $250 for candidate that you can vote for.

Violating the rule means you are banned from

  • engaging in municipal advisory business with a municipal entity for compensation,
  • soliciting third-party business from a municipal entity for compensation, or
  • receiving compensation for the solicitation of third-party business from a municipal entity,

for two years after any contribution to an official of such municipal entity in excess of the de minimis amount.

Proposed Rule G-42 for municipal advisers is similar to Rule G-37 for those in the municipal securities business. I expect that comments will argue that the de minimis amount should match up with the SEC’s de minimis amount.

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Placement Agents and the MSRB

In addition to laying out the changes to Form ADV, in Release No. IA-3110 the SEC also took a slightly different course on regulating placement agents. Rule 206(4)-5, released in July 2010, required placement agents to either be registered with the SEC as an investment adviser and subject to the limitation on campaign contributions, or register with FINRA. The FINRA registration was subject to enactment of a similar pay-to-play rule by FINRA.

The SEC has abandoned FINRA for the MSRB when it comes to regulating placement agents that interact with government sponsored plans.

Section 975 of Dodd-Frank Wall Street Reform and Consumer Protection Act created a new category of regulated persons called a “municipal adviser.” This new category will regulated by the Municipal Securities Rulemaking Board.

The MSRB is undertaking a rule-making to subject municipal advisers to the pay-to-play rules in place for municipal securities dealers under MSRB Rule G-37.

“Municipal advisors” include businesses and individuals that advise municipal entities concerning municipal financial products and municipal securities, as well as businesses and individuals who solicit certain types of business from municipal entities on behalf of unrelated broker-dealers, municipal advisors, or investment advisers.

In comparing the de minimis amounts under Rule 206(4)-5 and MSRB Rule G-37, the MSRB only allows for contributions up to $250 for candidates the person can actually vote for. The SEC rule is $350 for a candidate you can vote for and $150 for a candidate you can’t vote for. Both have a two-year ban for violation of the rules.

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