
[Federal Register Volume 81, Number 171 (Friday, September 2, 2016)]
[Proposed Rules]
[Pages 60653-60654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20889]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-4511; File No. S7-16-16]


Political Contributions by Certain Investment Advisers: Ban on 
Third-Party Solicitation; Notice of Order With Respect to FINRA Rule 
2030

AGENCY: Securities and Exchange Commission.

ACTION: Notice of intent to issue order.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') intends to issue an order pursuant to section 206 of the 
Investment Advisers Act of 1940 (the ``Advisers Act'') and rule 206(4)-
5 thereunder (the ``SEC Pay to Play Rule'') finding that Financial 
Industry Regulatory Authority (``FINRA'') rule 2030 (the ``FINRA Pay to 
Play Rule''), which was approved by the Commission on August 25, 2016, 
imposes substantially equivalent or more stringent restrictions on 
brokers-dealers than the SEC Pay to Play Rule imposes on investment 
advisers and is consistent with the objectives of the SEC Pay to Play 
Rule.

DATES: Hearing requests should be received by the Commission by 5:30 
p.m. on September 19, 2016.

ADDRESSES: Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-1090.

FOR FURTHER INFORMATION CONTACT: Sirimal R. Mukerjee, Senior Counsel, 
Melissa Roverts Harke, Senior Special Counsel, or Sara Cortes, 
Assistant Director, at (202) 551-6787 or IArules@sec.gov, Investment 
Adviser Regulation Office, Division of Investment Management, 
Securities and Exchange Commission, 100 F Street NE., Washington, DC 
20549-8549.

SUPPLEMENTARY INFORMATION:

Hearing or Notification of Hearing

    An order will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary. Hearing requests should be received by the Commission by 
5:30 p.m. on September 19, 2016. Pursuant to rule 0-5 under the 
Advisers Act, hearing requests should state the nature of the writer's 
interest, any facts bearing upon the desirability of a hearing on the 
matter, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the Commission's Secretary.
    The Commission intends to issue an order under the Advisers Act.\1\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 80b. Unless otherwise noted, all references to 
statutory sections are to the Advisers Act, and all references to 
rules under the Advisers Act, including rule 206(4)-5, are to Title 
17, Part 275 of the Code of Federal Regulations [17 CFR part 275].
---------------------------------------------------------------------------

I. Background

    The Commission adopted the SEC Pay to Play Rule [17 CFR 275.206(4)-
5] under the Advisers Act [15 U.S.C. 80b] to prohibit an investment 
adviser from providing advisory services for compensation to a 
government client for two years after the adviser or certain of its 
executives or employees (``covered associates'') make a contribution to 
certain elected officials or candidates.\2\ Rule 206(4)-5 also 
prohibits an adviser and its covered associates from providing or 
agreeing to provide, directly or indirectly, payment to any third-party 
for a solicitation of advisory business from any government entity on 
behalf of such adviser, unless such third-party is a ``regulated 
person'' (``third-party solicitor ban'').\3\ Rule 206(4)-5 defines a 
``regulated person'' as an SEC-registered investment adviser,\4\ a 
registered broker or dealer subject to pay to play restrictions adopted 
by a registered national securities association that prohibit members 
from engaging in distribution or solicitation activities if certain 
political contributions have been made,\5\ or a registered municipal 
advisor subject to pay to play restrictions adopted by the Municipal 
Securities Rulemaking Board (the ``MSRB'') that prohibit members from 
engaging in distribution or solicitation activities if certain 
political contributions have been made.\6\ In addition, in order for a 
broker-dealer or municipal advisor to be a regulated person under rule 
206(4)-5, the Commission must find, by order, that these pay to play 
rules: (i) Impose substantially equivalent or more stringent 
restrictions on broker-dealers or municipal advisors than the SEC Pay 
to Play Rule imposes on investment

[[Page 60654]]

advisers; and (ii) are consistent with the objectives of the SEC Pay to 
Play Rule.\7\
---------------------------------------------------------------------------

    \2\ Political Contributions by Certain Investment Advisers, 
Investment Advisers Act Rel. No. 3043 (July 1, 2010) [75 FR 41018 
(July 14, 2010)] (``SEC Pay to Play Rule Release'').
    \3\ See id. at section II.B.2.(b). See also 17 CFR 275.206(4)-
5(a)(2)(i)(A).
    \4\ See 17 CFR 275.206(4)-5(f)(9)(i).
    \5\ See 17 CFR 275.206(4)-5(f)(9)(ii). While rule 206(4)-5 
applies to any registered national securities association, FINRA is 
currently the only registered national securities association under 
section 19(a) of the Securities Exchange Act of 1934 [15 U.S.C. 
78s(b)] (the ``Exchange Act''). As such, for convenience, we will 
refer directly to FINRA in this Notice when describing the exception 
for certain broker-dealers from the third-party solicitor ban.
    \6\ See 17 CFR 275.206(4)-5(f)(9)(iii).
    \7\ See 17 CFR 275.206(4)-5(f)(9).
---------------------------------------------------------------------------

    Rule 206(4)-5 became effective on September 13, 2010 and the 
compliance date for the third-party solicitor ban was set to September 
13, 2011.\8\ When the Commission added municipal advisors to the 
definition of regulated person, the Commission also extended the third-
party solicitor ban's compliance date to June 13, 2012.\9\ In the 
absence of a final municipal advisor registration rule, the Commission 
extended the third-party solicitor ban's compliance date from June 13, 
2012 to nine months after the compliance date of the final rule,\10\ 
which was July 31, 2015.\11\ On June 25, 2015, the Commission issued 
notice of the July 31, 2015 compliance date.\12\
---------------------------------------------------------------------------

    \8\ See SEC Pay to Play Rule Release, supra footnote 2, at 
section III.
    \9\ See Rules Implementing Amendments to the Investment Advisers 
Act of 1940, Investment Advisers Act Rel. No. 3221 (June 22, 2011) 
[76 FR 42950 (July 19, 2011)], at section II.D.1.
    \10\ See Political Contributions by Certain Investment Advisers: 
Ban on Third-Party Solicitation; Extension of Compliance Date, 
Investment Advisers Act Rel. No. 3418 (June 8, 2012) [77 FR 35263 
(June 13, 2012)].
    \11\ The final date on which a municipal advisor must file a 
complete application for registration was October 31, 2014. See 
Registration of Municipal Advisors, Exchange Act Rel. No. 70462 
(Sept. 20, 2013) [78 FR 67468 (Nov. 12, 2013)], at section V.
    \12\ See Political Contributions by Certain Investment Advisers: 
Ban on Third-Party Solicitation; Notice of Compliance Date, 
Investment Advisers Act Rel. No. 4129 (June 25, 2015) [80 FR 37538 
(July 2, 2015)]. On June 25, 2015, the Division of Investment 
Management published an FAQ that provides that the Division would 
not recommend enforcement action to the Commission against any 
investment adviser or its covered associates for the payment to any 
third person to solicit a government entity for investment advisory 
services until the later of (i) the effective date of the FINRA Pay 
to Play Rule or (ii) the effective date of a pay to play rule 
adopted by the MSRB. See http://www.sec.gov/divisions/investment/pay-to-play-faq.htm#1.4.
---------------------------------------------------------------------------

    On December 16, 2015, FINRA filed with the Commission the proposed 
rule change relating to the FINRA Pay to Play Rule, which the 
Commission published for notice and comment in the Federal Register on 
December 30, 2015 pursuant to section 19(b)(1) of the Exchange Act and 
rule 19b-4 thereunder.\13\ The Commission received ten comment letters, 
from nine different commenters, in response to the FINRA Pay to Play 
Rule Notice. On February 8, 2016, FINRA extended the time period by 
which the Commission must approve or disapprove the FINRA Pay to Play 
Rule or institute proceedings to determine whether to approve or 
disapprove the rule change to March 29, 2016. On March 28, 2016, FINRA 
filed a letter with the Commission stating that it had considered the 
comments received by the Commission in response to the FINRA Pay to 
Play Rule Notice and that FINRA is not intending to make changes to the 
proposed rule text in response to comments received. On March 29, 2016, 
pursuant to delegated authority, the Commission published an order 
instituting proceedings under section 19(b)(2)(B) of the Exchange Act 
to determine whether to approve or disapprove the FINRA Pay to Play 
Rule, and solicited additional comment. The Commission received an 
additional four comments in response to the order instituting 
proceedings. On July 6, 2016, FINRA submitted a letter responding to 
all comments and to the order instituting proceedings. After 
considering the proposed rule change, the comments received and FINRA's 
responses to the comments, the Commission issued an order on August 25, 
2016, approving the proposed rule change pursuant to section 19(b)(2) 
of the Exchange Act.\14\
---------------------------------------------------------------------------

    \13\ See Self-Regulatory Organizations; Financial Industry 
Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule 
Change To Adopt FINRA Rule 2030 and FINRA Rule 4580 To Establish 
``Pay-To-Play'' and Related Rules, Exchange Act Rel. No. 76767 (Dec. 
24, 2015) [80 FR 81650 (Dec. 30, 2015)] (the ``FINRA Pay to Play 
Rule Notice'').
    \14\ See Self-Regulatory Organizations; Financial Industry 
Regulatory Authority, Inc.; Order Approving a Proposed Rule Change 
to Adopt FINRA Rule 2030 and FINRA Rule 4580 to Establish ``Pay-To-
Play'' and Related Rules, Exchange Act Rel. No. 78683 (Aug. 25, 
2016).
---------------------------------------------------------------------------

II. Discussion of Order

    Pursuant to section 206 of the Advisers Act and rule 206(4)-
5(f)(9)(ii)(B) thereunder, the Commission is providing notice \15\ that 
the Commission intends to issue an order finding that the FINRA Pay to 
Play Rule (i) imposes substantially equivalent or more stringent 
restrictions on brokers-dealers than the SEC Pay to Play Rule imposes 
on investment advisers and (ii) is consistent with the objectives of 
the SEC Pay to Play Rule. The FINRA Pay to Play Rule imposes 
substantially similar requirements for its member firms as the SEC Pay 
to Play Rule imposes on investment advisers. For example, the FINRA Pay 
to Play Rule:
---------------------------------------------------------------------------

    \15\ See section 211(c) of the Advisers Act (requiring the 
Commission to provide appropriate notice and opportunity for hearing 
for orders issued under the Advisers Act).
---------------------------------------------------------------------------

     Prohibits a covered member from engaging in distribution 
or solicitation activities for compensation with a government entity on 
behalf of an investment adviser that provides or is seeking to provide 
investment advisory services to such government entity within two years 
after a contribution to an official of the government entity is made by 
the covered member or a covered associate (including a person who 
becomes a covered associate within two years or, under certain 
circumstances, six months after the contribution is made); \16\
---------------------------------------------------------------------------

    \16\ See FINRA Pay to Play Rule Notice, supra footnote 13, at 
81651.
---------------------------------------------------------------------------

     Prohibits a covered member or covered associate from 
coordinating or soliciting any person or political action committee to 
make any (i) contribution to an official of a government entity in 
respect of which the covered member is engaging in, or seeking to 
engage in, distribution or solicitation activities on behalf of an 
investment adviser or (ii) payment to a political party of a state or 
locality of a government entity with which the covered member is 
engaging in, or seeking to engage in, distribution or solicitation 
activities on behalf of an investment adviser; \17\
---------------------------------------------------------------------------

    \17\ See id. at 81653.
---------------------------------------------------------------------------

     Provides that it shall be a violation of the rules for any 
covered member or any of its covered associates to do anything 
indirectly that, if done directly, would result in a violation of the 
rule; \18\
---------------------------------------------------------------------------

    \18\ See id. at 81654.
---------------------------------------------------------------------------

     Provides that a covered member that engages in 
distribution or solicitation activities with a government entity on 
behalf of a covered investment pool in which a government entity 
invests or is solicited to invest shall be treated as though the 
covered member was engaging in or seeking to engage in distribution or 
solicitation activities with the government entity on behalf of the 
investment adviser to the covered investment pool directly; and \19\
---------------------------------------------------------------------------

    \19\ See id.
---------------------------------------------------------------------------

     Provides exceptions under, and an exemption provision in 
respect of, the rule similar to those in rule 206(4)-5.\20\
---------------------------------------------------------------------------

    \20\ See id. In addition, FINRA adopted rule 4580 that requires 
covered members to maintain books and records related to the FINRA 
Pay to Play Rule.
---------------------------------------------------------------------------

    The Commission believes that the rule imposes substantially 
equivalent or more stringent restrictions on broker-dealers than rule 
206(4)-5 imposes on investment advisers and would be consistent with 
the objectives of rule 206(4)-5.

    By the Commission.

    Dated: August 25, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-20889 Filed 9-1-16; 8:45 am]
 BILLING CODE 8011-01-P


