MSRB Pay-to-Play Rule Expanded, Opening Door to Enforcement

By Kevin Glandon on February 18, 2016

On Wednesday, the Municipal Securities Rulemaking Board (MSRB) announced that its expanded pay-to-play rules will cover municipal advisors, including third-party solicitors, as of August 17, 2016.

As we noted previously and discussed during Covington’s Corporate Political Activity & Government Affairs Compliance Conference earlier this month, the MSRB has been drafting an expansion to its pay-to-play rule, Rule G-37.

Within the past few days, the MSRB received approval from the Securities and Exchange Commission (SEC) to extend its pay-to-play rule. The new rule introduces a number of technical changes, but, essentially, it extends the rule to prohibit a municipal advisor from engaging in advisory work for a municipal government within two years after a covered person associated with the municipal advisor makes a political contribution to covered municipal officials. The prohibition also applies if the advisor engages a third-party solicitor and the third-party solicitor has made a covered contribution within the past two years. The MSRB rule retains its exception for contributions of $250 or less per election to officials for whom the contributor is entitled to vote. In addition to restrictions on contributions, the rule limits solicitation of payments to covered officials and political parties.By way of background, when the SEC proposed its own pay-to-play rule regarding contributions by investment advisers, it recognized that contributions by third-party solicitors hired by investment advisers could raise many of the same issues. To address this concern, the SEC rule limits the use of third-party solicitors to certain persons, including those regulated by the MSRB and those regulated by the Financial Industry Regulatory Authority (FINRA)—but only if the MSRB and FINRA adopt a pay-to-play policy that passes muster before the SEC. Given that neither body had finalized its pay-to-play rule, the SEC indicated that staff would not recommend enforcement.

Now that the MSRB’s rule is set to go into effect this summer, we will be watching the progress of the FINRA rule. At this point, the SEC is expected to act on the FINRA rule before April. Expect the SEC’s temporary reprieve on enforcement to end this year once both MSRB and FINRA rules are in effect, which is on track to happen this fall.