
[Federal Register Volume 82, Number 192 (Thursday, October 5, 2017)]
[Notices]
[Pages 46559-46561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21413]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81781; File No. SR-FINRA-2017-027]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving 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)

September 29, 2017.

I. Introduction

    On August 17, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt Capital Acquisition 
Broker Rules 203 (Engaging in Distribution and Solicitation Activities 
with Government

[[Page 46560]]

Entities) and 458 (Books and Records Requirements for Government 
Distribution and Solicitation Activities). These rules would apply 
established ``pay-to-play'' and related recordkeeping rules to the 
activities of member firms that have elected to be governed by the 
Capital Acquisition Broker (``CAB'') \3\ Rules and that engage in 
distribution or solicitation activities for compensation with 
government entities on behalf of investment advisers.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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. See FINRA 
Regulatory Notice 16-37 (October 2016), at 1.
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    The proposed rule change was published for comment in the Federal 
Register on August 24, 2017.\4\ The public comment period closed on 
September 14, 2017. No comment letters were received in response to the 
Notice. This order approves the proposed rule change.
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    \4\ See Exchange Act Release No. 81438 (August 17, 2017), 82 FR 
40181 (August 24, 2017) (Notice of Filing of a Proposed Rule Change 
Relating to Capital Acquisition Broker Rules 203 and 458) 
(``Notice'').
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II. Description of the Proposed Rule Change

    As discussed in the Notice and described below, the proposed rule 
change seeks to clarify that FINRA's existing pay-to-play rules and 
related recordkeeping requirements apply to CABs. Under the proposed 
rules, CABs would be subject to the same restrictions designed to halt 
pay-to-play practices as non-CAB member firms, which would effectively 
allow them to engage in distribution and solicitation activities with 
government entities on behalf of investment advisers.\5\
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    \5\ ``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 as a quid pro quo for 
the award of government contracts. See FINRA Regulatory Notice 16-40 
(October 2016) at 9, note 1.
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A. 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 by investment 
advisers (the ``SEC Pay-to-Play Rule'').\6\ 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.'' \7\ 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.\8\
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    \6\ See Investment Advisers Act Release No. 3043 (July 1, 2010), 
75 FR 41018 (July 14, 2010) (Political Contributions by Certain 
Investment Advisers). See also Investment Advisers Act Release No. 
3221 (June 22, 2011), 76 FR 42950 (July 19, 2011) (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) (Political Contributions by Certain Investment 
Advisers; Ban on Third Party Solicitation; Extension of Compliance 
Date).
    \7\ See Investment Advisers Act Rule 206(4)-5(a)(2)(i)(A), 17 
CFR 275.206(4)-5(a)(2)(i)(A).
    \8\ 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 the framework of the SEC Pay-to-Play Rule, FINRA proposed 
Rules 2030 and 4580, which establish a comprehensive regime to regulate 
the activities of FINRA member firms that engage in distribution or 
solicitation activities with government entities on behalf of 
investment advisers, and to deter member firms from engaging in pay-to-
play practices.\9\ The SEC approved these rules on August 25, 2016,\10\ 
and later found that Rule 2030 imposes substantially equivalent or more 
stringent restrictions on member firms than the SEC Pay-to-Play Rule 
imposes on investment advisers, and that it is consistent with the 
objectives of the SEC Pay-to-Play Rule.\11\ Rules 2030 and 4580 became 
effective on August 20, 2017.\12\
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    \9\ See Securities Exchange Act Release No. 76767 (December 24, 
2015), 80 FR 81650 (December 30, 2015).
    \10\ See Securities Exchange Act Release No. 78683 (August 25, 
2016), 81 FR 60051 (August 31, 2016).
    \11\ See Investment Advisers Act Release No. 4532 (September 20, 
2016), 81 FR 66526 (September 28, 2016).
    \12\ See FINRA Regulatory Notice 16-40 (October 2016).
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B. FINRA CAB Rules

    On August 18, 2016, the SEC approved a separate set of FINRA rules 
for firms that meet the definition of a CAB and that elect to be 
governed under this rule set.\13\ 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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    \13\ See Securities Exchange Act Release No. 78617 (August 18, 
2016), 81 FR 57948 (August 24, 2016) (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.

C. 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. As 
explained by FINRA in the Notice, the proposed rule change sought to 
make clear that CABs are subject to FINRA's pay-to-play rule, which 
would make CABs, like non-CABs, ``regulated persons'' that are subject 
to restrictions designed to halt pay-to-play practices and thus 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.
    To make this clarification, FINRA proposed the addition of CAB 
Rules 203 and 458 to the CAB rule book. CAB Rule 203 would provide that 
all capital acquisition brokers are subject to existing FINRA Rule 
2030. CAB Rule 458 would provide that all capital acquisition brokers 
are subject to existing FINRA Rule 4580.

III. Comment Summary

    As noted above, no comment letters were received on the proposed 
rule change.

IV. Discussion and Commission Findings

    After careful review of the proposed rule change, the Commission 
finds that the proposal is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder that are 
applicable to a national securities association.\14\ The Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(6) of the Exchange Act,\15\ which requires, among other things, 
that FINRA rules be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable

[[Page 46561]]

principles of trade, and, in general, to protect investors and the 
public interest. Specifically, the Commission finds that the proposed 
rule change is consistent with the Exchange Act for the reasons 
expressed in the Order Approving a Proposed Rule Change to Adopt FINRA 
Rule 2030--namely, that this proposed rule will discourage CABs, like 
non-CAB member firms, from engaging in pay-to-play practices that may 
create market distortions, impede a free and open market, and harm 
investors and the public interest.\16\
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    \14\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78o-3(b)(6).
    \16\ See Securities Exchange Act Release No. 78683 (August 25, 
2016), 81 FR at 60063 (August 31, 2016).
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    The Commission agrees with FINRA that the proposed rule change will 
clarify that CABs and non-CAB member firms are subject to the same rule 
regime as they engage in distribution or solicitation activities with 
government entities on behalf of investment advisers. Without the 
proposed rule change, under the SEC's Pay-to-Play Rule, CABs could not 
be retained by investment advisers to engage in distribution and 
solicitation activities with government entities on their behalf 
because the rule set for CABs does not expressly provide that FINRA 
Rule 2030 applies to CABs. The Commission also agrees with FINRA that 
having such rules in place will deter CABs from engaging in pay-to-play 
practices, and that clarifying the application of FINRA Rules 2030 and 
4580 to CABs is a more effective regulatory response to concerns 
regarding third-party solicitations than an outright ban on such 
activity.
    Lastly, the Commission agrees with FINRA that the proposed rule 
change will not result in any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. In the Notice, FINRA explained that the proposed rule change would 
subject CABs to the same pay-to-play rules as non-CAB member firms, and 
therefore, the economic impacts associated with the proposal were 
contemplated in the Economic Impact Assessment accompanying the filing 
of FINRA Rules 2030 and 4580. 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.\17\
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    \17\ See Securities Exchange Act Release No. 76767 (December 24, 
2015), 80 FR 81650, 81656-81658 (December 30, 2015) (at the time of 
the Economic Impact Assessment, the SEC had not approved the 
separate set of rules for CABs).
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    Taking into consideration the foregoing, the Commission believes 
that the proposal is consistent with the Exchange Act. The Commission 
believes that the proposal will help protect investors and the public 
interest by, among other things, clarifying that CABs and non-CAB 
member firms are subject to the same rule regime as they engage in 
distribution or solicitation activities with government entities on 
behalf of investment advisers, and by deterring pay-to-play practices. 
Accordingly, the Commission believes that the approach proposed by 
FINRA is appropriate and designed to protect investors and the public 
interest, consistent with Section 15A(b)(6) of the Exchange Act and the 
rules and regulations thereunder.

V. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the 
Exchange Act \18\ that the proposal (SR-FINRA-2017-027), be and hereby 
is approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman
Assistant Secretary.
[FR Doc. 2017-21413 Filed 10-4-17; 8:45 am]
 BILLING CODE 8011-01-P


