
[Federal Register Volume 82, Number 163 (Thursday, August 24, 2017)]
[Notices]
[Pages 40181-40183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-17910]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81438; File No. SR-FINRA-2017-027]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
Capital Acquisition Broker Rules 203 (Engaging in Distribution and 
Solicitation Activities With Government Entities) and 458 (Books and 
Records Requirements for Government Distribution and Solicitation 
Activities)

August 18, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on August 17, 2017, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by FINRA. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt Capital Acquisition Broker Rules 203 
(Engaging in Distribution and Solicitation Activities with Government 
Entities) and 458 (Books and Records Requirements for Government 
Distribution and Solicitation Activities) that would apply established 
``pay-to-play'' and related rules to the activities of member firms 
that have elected to be governed by the Capital Acquisition Broker 
(``CAB'') Rules and that engage in distribution or solicitation 
activities for compensation with government entities on behalf of 
investment advisers.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
FINRA Pay-to-Play Rules
    In July 2010, the SEC adopted Rule 206(4)-5 under the Investment 
Advisers Act of 1940 addressing pay-to-play practices \3\ by investment 
advisers (the ``SEC Pay-to-Play Rule'').\4\ The SEC Pay-to-Play Rule 
prohibits, in part, an investment adviser and its covered associates 
from providing or agreeing to provide, directly or indirectly, payment 
to any person to solicit a government entity for investment advisory 
services on behalf of the investment adviser unless the person is a 
``regulated person.'' \5\ A ``regulated person'' includes a member 
firm, provided that: (a) FINRA rules prohibit member firms from 
engaging in distribution or solicitation activities if political 
contributions have been made; and (b) the SEC finds, by order, that 
such rules impose substantially equivalent or more stringent 
restrictions on member firms than the SEC Pay-to-Play Rule imposes on 
investment advisers and that such rules are consistent with the 
objectives of the SEC Pay-to-Play Rule.\6\
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    \3\ ``Pay-to-play'' practices typically involve a person making 
cash or in-kind political contributions (or soliciting or 
coordinating others to make such contributions) to help finance the 
election campaigns of state or local officials or bond ballot 
initiatives as a quid pro quo for the receipt of government 
contracts. See FINRA Regulatory Notice 16-40 (October 2016) at 9, 
note 1.
    \4\ See Investment Advisers Act Release No. 3043 (July 1, 2010), 
75 FR 41018 (July 14, 2010) (S7-18-09) (Political Contributions by 
Certain Investment Advisers) (``SEC Pay-to-Play Rule Adopting 
Release''). See also Investment Advisers Act Release No. 3221 (June 
22, 2011), 76 FR 42950 (July 19, 2011) (S7-36-10) (Rules 
Implementing Amendments to the Investment Advisers Act of 1940); 
Investment Advisers Act Release No. 3418 (June 8, 2012), 77 FR 35263 
(June 13, 2012) (S7-18-09) (Political Contributions by Certain 
Investment Advisers; Ban on Third Party Solicitation; Extension of 
Compliance Date).
    \5\ See Investment Advisers Act Rule 206(4)-5(a)(2)(i)(A), 17 
CFR 275.206(4)-5(a)(2)(i)(A).
    \6\ See Investment Advisers Act Rule 206(4)-5(f)(9), 17 CFR 
275.206(4)-5(f)(9). A ``regulated person'' also includes SEC-
registered investment advisers and SEC-registered municipal 
advisors, subject to specified conditions.
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    Based on this regulatory framework, on August 25, 2016, the SEC 
approved FINRA Rules 2030 and 4580 to establish a comprehensive regime 
to regulate the activities of member firms that engage in distribution 
or solicitation activities with government entities on behalf of 
investment advisers.\7\ On September 20, 2016, the SEC, by order, found 
that FINRA Rule 2030 imposes substantially equivalent or more stringent 
restrictions on member firms than the SEC Pay-to-Play Rule imposes on 
investment advisers and is consistent with the objectives of the SEC 
Pay-to-Play Rule.\8\ These rules enable member firms to continue to 
engage in distribution and solicitation activities with government 
entities on behalf of investment advisers while at the same time 
deterring member firms from engaging in pay-to-play practices.
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    \7\ See Securities Exchange Act Release No. 78683 (August 25, 
2016), 81 FR 60051 (August 31, 2016) (SR-FINRA-2015-056) (Approval 
Order). See also Securities Exchange Act Release No. 76767 (December 
24, 2015), 80 FR 81650 (December 30, 2015) (SR-FINRA-2015-056) 
(Proposing Release).
    \8\ See Investment Advisers Act Release No. 4532 (September 20, 
2016), 81 FR 66526 (September 28, 2016) (S7-16-16).
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    In October 2016, FINRA published a Regulatory Notice announcing 
Commission approval of FINRA Rules 2030 and 4580.\9\ The Notice also 
announced that Rules 2030 and 4580 will become effective on August 20, 
2017.
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    \9\ See FINRA Regulatory Notice 16-40 (October 2016).
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FINRA Capital Acquisition Broker Rules
    On August 18, 2016, the SEC approved \10\ a separate set of FINRA 
rules for firms that meet the definition of a ``capital acquisition 
broker'' and that elect to be governed under this rule set. CABs are 
member firms that engage in a limited range of activities, essentially 
advising companies and private equity funds on capital raising and 
corporate restructuring, and acting as placement agents for sales of 
unregistered securities to institutional investors under limited 
conditions. Member firms that elect to be governed under the CAB rule 
set are not permitted, among other things, to carry or maintain 
customer accounts, handle customers' funds or securities, accept 
customers' trading orders, or engage in proprietary trading or market-
making.
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    \10\ See Securities Exchange Act Release No. 78617 (August 18, 
2016), 81 FR 57948 (August 24, 2016) (SR-FINRA-2015-054) (Order 
Approving Rule Change as Modified by Amendment Nos. 1 and 2 to Adopt 
FINRA Capital Acquisition Broker Rules).
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    The CAB Rules became effective on April 14, 2017. In order to 
provide new CAB applicants with lead time to apply for FINRA membership 
and obtain the necessary qualifications and registrations, CAB Rules 
101-125 became effective on January 3, 2017.

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Addition of FINRA Pay-to-Play Rules to CAB Rulebook
    The CAB Rules subject CABs to a number of FINRA Rules, but do not 
expressly provide that FINRA Rules 2030 and 4580 apply to CABs. FINRA 
believes that the CAB Rules should be clarified to reflect that FINRA 
Rule 2030 and the related record-keeping requirements of FINRA Rule 
4580 apply to CABs. As stated above, the SEC Pay-to-Play Rule 
prohibits, in part, an investment adviser and its covered associates 
from providing or agreeing to provide, directly or indirectly, payment 
to any person to solicit a government entity for investment advisory 
services on behalf of the investment adviser unless the person is a 
``regulated person.'' The SEC Pay-to-Play Rule defines a ``regulated 
person'' to include a member firm subject to a FINRA pay-to-play rule.
    The proposed rule change would make clear that CABs are subject to 
FINRA's pay-to-play rule and, therefore, that CABs, similarly to non-
CAB member firms, are ``regulated persons'' that can engage in 
distribution and solicitation activities with government entities on 
behalf of investment advisers in accordance with the SEC's Pay-to-Play 
Rule, while at the same time deterring CABs from engaging in pay-to-
play practices.
    To make this clarification, FINRA proposes the addition of CAB Rule 
203, which would provide that all capital acquisition brokers are 
subject to FINRA Rule 2030. CAB Rule 458 would provide that all capital 
acquisition brokers are subject to FINRA Rule 4580.
Effective Date
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 30 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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    \11\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule change would make clear that 
CABs are subject to the same regime that regulates the activities of 
non-CAB member firms that engage in distribution or solicitation 
activities with government entities on behalf of investment advisers, 
while deterring CABs from engaging in pay-to-play practices. In the 
absence of this proposed rule change, under the SEC's Pay-to-Play Rule, 
CABs could be prohibited from receiving compensation for engaging in 
distribution and solicitation activities with government entities on 
behalf of investment advisers following the effective date of FINRA 
Rule 2030 because the rule set for CABs does not expressly provide that 
FINRA Rule 2030 applies to CABs. FINRA believes that clarifying that 
FINRA Rule 2030 and the related record-keeping requirements of FINRA 
Rule 4580 apply to CABs is a more effective regulatory response to the 
concerns identified by the SEC regarding third-party solicitations than 
an outright ban on such activity. Thus, the proposed rule change is 
intended to make clear that CABs, similarly to non-CAB member firms, 
are ``regulated persons'' that can engage in distribution and 
solicitation activities with government entities on behalf of 
investment advisers in accordance with the SEC Pay-to-Play rule, while 
at the same time deterring such firms from engaging in pay-to-play 
practices.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. While CABs have a more limited 
scope of permitted activities relative to other member firms, they 
still may engage, for example, in providing advice to municipalities 
either as issuer or as participant in the issuance. The proposed rule 
change would allow CABs to be subject to the same pay-to-play rules as 
other non-CAB member firms. As such, the economic impacts associated 
with this proposal are all contemplated in the Economic Impact 
Assessment accompanying the filing of FINRA Rules 2030 and 4580. In 
this regard, FINRA's Economic Impact Assessment in the Proposing 
Release for FINRA Rules 2030 and 4580 considered the impact on all 
FINRA member firms, including firms that at that time engaged solely in 
activities that were later deemed permissible for CABs.\12\
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    \12\ See supra note 7. See also Securities Exchange Act Release 
No. 76767 (December 24, 2015), 80 FR 81650, 81656-81658 (December 
30, 2015) (SR-FINRA-2015-056) (at the time of the Economic Impact 
Assessment, the SEC had not approved the separate set of rules for 
CABs).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2017-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2017-027. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the

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proposed rule change between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2017-027 and should be 
submitted on or before September 14, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-17910 Filed 8-23-17; 8:45 am]
 BILLING CODE 8011-01-P


