November 30, 2021

Volume XI, Number 334

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November 29, 2021

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Enforcement, Clarity Delayed for FINRA Pay-to-Play and Third Party Solicitation Rules

The Securities and Exchange Commission announced Tuesday that it will allow further comment on a pay-to-play rule proposed by the Financial Industry Regulatory Authority (FINRA).

As we discussed previously, if the SEC approves FINRA’s pay-to-play rule, it would clarify that investment advisers are allowed to hire third party solicitors if they are subject to FINRA or Municipal Securities Rulemaking Board (MSRB) pay-to-play rules.  The SEC has indicated that it will hold off on enforcement of the third party solicitor provision until both FINRA and the MSRB rules go into effect.  If the FINRA rule had simply been adopted, the reprieve on enforcement would have ended this fall.

What impact will this decision have?  Most likely, delay of the inevitable.  Unless the federal pay-to-play landscape is radically altered, we expect the SEC and FINRA to reach agreement on a pay-to-play rule.  The most likely impact of the SEC’s announcement is to delay resolution of the SEC’s rule regarding the hiring of third party solicitors until later in the fall this year or into next year.  The SEC’s reprieve on enforcement is likely to continue until the matter is resolved.

Why is the SEC allowing comment?  One reason may be to protect itself against a legal challenge through careful consideration of comments critiquing FINRA’s proposed rule on First Amendment and other grounds.  One reason to suspect this is so is that critiques of the FINRA proposed rule are similar to those raised in a recent law suit that sought to overturn the SEC’s pay-to-play rule, and in a petition asking for the SEC’s rule to be repealed.

As the SEC proceeds with consideration of the FINRA rule and the petition to repeal the SEC rule, we may see further development of important statutory and constitutional questions regarding the viability of pay-to-play laws, as discussed in the Wagner case.

© 2021 Covington & Burling LLPNational Law Review, Volume VI, Number 91
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About this Author

Kevin Glandon, Insurance litigation attorney, Covington
Associate

Kevin Glandon represents clients in complex, high-stakes litigation, primarily as an advocate for policyholders seeking recovery. He also aids clients in responding to congressional investigations and counsels clients regarding sensitive and nuanced questions of political and election law in civil, criminal, ethics, and internal investigation matters.

Mr. Glandon’s expertise in political and election law includes the Federal Election Campaign Act, the Securities and Exchange Commission’s pay-to-play rules, Senate and House ethics rules, and numerous state and...

202-662-5003
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