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News September 10, 2012 Issue

OCIE Issues Risk Alert on Compliance With Pay to Play Rules by Brokers and Municipal Securities Dealers

The rules may be a bit different, but the compliance risks are strikingly similar.

On August 31, the SEC’s Office of Compliance Inspections and Examinations issued the latest in its series of National Examination Risk Alerts, this one focused on "‘Pay-to-Play’ Prohibitions for Brokers, Dealers and Municipal Securities Dealers under MSRB Rules."

If you’re a dual registrant or are affiliated with a broker-dealer, the alert – at least the staff observations of compliance weaknesses – is worth a read.

The risk alert contains observations of areas of concern, such as:

  • Poor tracking of the two-year time out that may have resulted in engaging in prohibited business transactions;
  • Incomplete or inaccurate records of covered personnel; and
  • Failures in appropriate supervision.

"Once a firm has designed procedures to ensure compliance with the rules, it must also implement those procedures," observed the alert.

The risk alert also offers observations on various approaches to compliance with the prohibitions. "Other practices besides those described below may be appropriate to consider, and some of the practices may not be applicable to a particular firm’s business," said the alert.

The alert elaborates on practices including:

  • Training programs;
  • Self-certification of compliance on an annual basis;
  • Internet, email, social media, instant messaging and other forms of electronic surveillance;
  • Methods for pre-clearance or restriction of contributions; and
  • Separation of functions to ensure employees are protected from "adverse actions" that could be taken on the basis of their political preferences.