Will FINRA step in to prevent a ban
on placement agents working with government investors?
You may remember that last August,
the SEC published a proposed rule that would create a prohibition on paying a
third party, such as a placement agent, to solicit a government client on
behalf of the investment adviser: IA-2910. The rule has generated lots of comments.
The intent of the proposed rule is to prevent "pay-to-play" scandals. A noble
and worthy goal.
The SEC seems to be softening its
position on the placement agent ban. In a December 18 letter, the SEC asked FINRA if they would
interested in crafting some rules for registered broker-dealers in dealing with
government investors. Legitimate placement agents (such as FINRA-registered
broker-dealers) "could be subject to separate regulations that might restrict
their ability to engage in pay to play activities on behalf of their investment
It took three months, but FINRA
responded to the SEC with a "yes".
"I am delighted to state that we are
in a position to promulgate such a rule. We believe that the FINRA proposal
should impose regulatory requirements on member broker-dealer placement agents
as rigorous and as expansive as would be imposed by the SEC on investment advisers.
We believe that a regulatory scheme targeting improper pay to play practices by
broker-dealers acting on behalf of investment advisers is both a viable
solution to a ban on certain private placement agents serving a legitimate
It sounds like SEC is getting closer
on making a decision about its pay to play rule. Perhaps the FINRA rule will
make it easier to deal with.
In the interest of disclosure, my
company uses placement agents in its dealings with investors, including
For additional commentary on developments in
compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.