Federal Register / Vol. 82, No. 192 / Thursday, October 5, 2017 / Notices 46559 

20 Id. 

21 Id. 

22Notice, 82 FR at 40177. 

23 Id. NSCC states that Members which are not 

rated by the CRRM are not subject to the CNS Fails 

Charge; however, these Members can be placed on 

the Watch List as deemed necessary by NSCC to 

protect itself and its Members. Id. 

24Rules, supra note 4. 

25Notice, 82 FR at 40176. 

26 Id. 

27 15 U.S.C. 78s(b)(2)(C). 

28 15 U.S.C. 78q–1(b)(3)(F); 17 CFR 240.17Ad– 

22(e)(23)(i). 

29 15 U.S.C. 78q–1(b)(3)(F). 

30 Id. 

31 17 CFR 240.17Ad–22(e)(23)(i). 

32 Id. 

33 15 U.S.C. 78q–1. 

34 In approving the proposed rule change, the 

Commission considered the proposals’ impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

35 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

Member that is rated 7 on the CRRM, 

NSCC charges 20 percent of the 

Member’s aggregate CNS Fails 

Positions.20

NSCC explains that of the 20 percent 

charge, 10 percent is imposed pursuant 

to Procedure XV, Section I.(A)(1)(f) of 

the Rules, which describes NSCC’s 

current CNS Fail Charge,21 while the 

remaining 10 percent of the charge is 

imposed pursuant to Procedure XV, 

Section I.(B)(1) of the Rules, which 

authorizes NSCC’s to require Members 

on the Watch List to make additional 

Clearing Fund deposits as determined 

by NSCC.22 To clarify NSCC’s current 

practices with respect to the assessment 

and collection of the CNS Fails Charge 

in the Rules, NSCC proposes to amend 

the Rules to clearly state that, for any 

Member that is rated 7 on the CRRM, 

the CNS Fails Charge would be 20 

percent of the Member’s aggregate CNS 

Fails Positions.23

C. Detailed Description of the Proposed 

Rule Changes 

To effectuate the proposed change, 

NSCC proposes to amend Rule 1 of the 

Rules 24 to add a definition for CNS 

Fails Position. The proposed definition 

would provide that the term ‘‘CNS Fails 

Position’’ means either a Long Position 

or a Short Position that did not settle on 

the Settlement Date.25 NSCC is also 

proposing to amend Procedure XV, 

Section I.(A)(1)(f) of the Rules to 

provide that a Member’s Clearing Fund 

contribution shall include an amount 

that is calculated by multiplying the 

current market value for such Member’s 

aggregate CNS Fails Positions by (i) 5 

percent for Members rated 1 through 4 

on the CRRM; (ii) 10 percent for 

Members rated 5 or 6 on the CRRM; or 

(iii) 20 percent for Members rated 7 on 

the CRRM.26

II. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Act 27

directs the Commission to approve a 

proposed rule change of a selfregulatory organization if it finds that 

such proposed rule change is consistent 

with the requirements of the Act and 

rules and regulations thereunder 

applicable to such organization. The 

Commission believes the proposal is 

consistent with Act, specifically Section 

17A(b)(3)(F) of the Act and Rule 17Ad– 

22(e)(23)(i) 28 under the Act, as 

discussed below. 

A. Consistency With Section 

17A(b)(3)(F) 

Section 17A(b)(3)(F) of the Act, 

requires, in part, that NSCC’s Rules be 

designed to promote the prompt and 

accurate clearance and settlement of 

securities transactions.29

The proposed rule change would 

clarify and provide additional 

transparency to NSCC members 

regarding NSCC’s current practices 

surrounding the assessment and 

collection of the CNS Fails Charges 

associated with each Member. 

Specifically, the proposed Rule would 

clearly state that Members with a CRRM 

rating of 7 are charged 20 percent of the 

Member’s aggregate CNS Fails Positions 

(instead of the less transparent approach 

of charging 10 percent pursuant to the 

CNS Fails Charge and 10 pursuant to a 

separate Watch List charge). By doing 

so, this proposed rule change would 

help the Rules to be more transparent, 

accurate, and clear, which would better 

enable Members to understand their 

respective rights and obligations with 

respect to their NSCC membership and, 

in turn, support NSCC’s clearance and 

settlement of securities transactions. 

Therefore, the Commission believes that 

the proposed rule change related to the 

CNS Fails Charge would promote the 

prompt and accurate clearance and 

settlement of securities transactions, 

consistent with Section 17A(b)(3)(F) of 

the Act.30

B. Consistency With Rule 17Ad– 

22(e)(23)(i) 

Rule 17Ad–22(e)(23)(i) under the Act 

requires NSCC to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

publicly disclose all relevant rules and 

material procedures.31

As described above, the proposed rule 

change seeks to clarify in NSCC’s Rules 

the current practices with respect to the 

assessment and collection of the CNS 

Fails Charge. Specifically, NSCC 

proposes to amend the Rules to include 

a definition for CNS Fails Position and 

clearly state NSCC’s current practices 

regarding the assessment and collection 

of the CNS Fails Charge, including the 

percentages that NSCC charges Members 

according to their CRRM rating. In doing 

so, the Commission believes that 

proposed rule change would help 

promote disclosure of relevant rules and 

material procedures relating to the CNS 

Fails Charge, consistent with Rule 

17Ad–22(e)(23)(i) under the Act.32

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposal is 

consistent with the requirements of the 

Act, in particular the requirements of 

Section 17A of the Act 33 and the rules 

and regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act, that 

proposed rule change SR–NSCC–2017– 

015 be, and hereby is, approved.34

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.35

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–21409 Filed 10–4–17; 8:45 am] 

BILLING CODE 8011–01–P 

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 


ethrower on DSK3G9T082PROD with NOTICES
46560 Federal Register / Vol. 82, No. 192 / Thursday, October 5, 2017 / Notices 

3CABs 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. 

4See 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’’). 

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. 

6See 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). 

7See Investment Advisers Act Rule 206(4)– 

5(a)(2)(i)(A), 17 CFR 275.206(4)–5(a)(2)(i)(A). 

8See 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. 

9See Securities Exchange Act Release No. 76767 

(December 24, 2015), 80 FR 81650 (December 30, 

2015). 

10See Securities Exchange Act Release No. 78683 

(August 25, 2016), 81 FR 60051 (August 31, 2016). 

11See Investment Advisers Act Release No. 4532 

(September 20, 2016), 81 FR 66526 (September 28, 

2016). 

12See FINRA Regulatory Notice 16–40 (October 

2016). 

13See 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). 

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). 

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. 

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. 

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

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 Payto-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

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

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 marketmaking. 

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-toPlay 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 


ethrower on DSK3G9T082PROD with NOTICES
Federal Register / Vol. 82, No. 192 / Thursday, October 5, 2017 / Notices 46561 

16See Securities Exchange Act Release No. 78683 

(August 25, 2016), 81 FR at 60063 (August 31, 

2016). 

17See 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). 

18 15 U.S.C. 78s(b)(2). 

19 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3A ‘‘Participant’’ is a ‘‘member’’ of the Exchange 

for the purposes of the Act. See CHX Article 1, Rule 

1(s). 

4The Exchange notes that Nasdaq Stock Market 

(‘‘Nasdaq’’) permits its members to provide 

Sponsored Access to a ‘‘Sponsored Participant,’’ 

which may be a non-broker-dealer, subject to the 

requirements of Nasdaq Rule 4615. According to 

Nasdaq, a ‘‘Sponsored Participant’’ may be a 

member, non-member, a broker-dealer or not a 

broker-dealer, such as ‘‘a hedge fund, mutual fund, 

bank or insurance company.’’ See Exchange Act 

Release No. 76449 (November 17, 2015), 80 FR 

73011, 73012 (November 23, 2015) (SR–NASDAQ– 

2015–140). 

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 nonCAB 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

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

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. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.19

Eduardo A. Aleman 

Assistant Secretary. 

[FR Doc. 2017–21413 Filed 10–4–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81764; File No. SR–CHX– 

2017–13] 

Self-Regulatory Organizations; 

Chicago Stock Exchange, Inc.; Notice 

of Filing and Immediate Effectiveness 

of Proposed Rule Change Related to 

Sponsored Access 

September 29, 2017. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 2 thereunder, 

notice is hereby given that on 

September 15, 2017, the Chicago Stock 

Exchange, Inc. (‘‘CHX’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by the Exchange. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

CHX proposes to amend the Rules of 

the Exchange (‘‘CHX Rules’’) related to 

Sponsored Access. The text of this 

proposed rule change is available on the 

Exchange’s Web site at (www.chx.com) 

and in 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, the 

CHX included statements concerning 

the purpose of and basis for the 

proposed rule changes 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. The 

CHX 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 

Changes 

1. Purpose 

The Exchange proposes to amend 

CHX Rules to effect the following 

changes: 

• Amend Article 1, Rule 1 to adopt 

the following defined terms: 

‘‘Sponsoring Participant,’’ ‘‘Sponsored 

Person’’ and ‘‘Sponsored Access.’’ 

• Amend Article 5, Rule 3 to permit 

Sponsoring Participants to provide 

Sponsored Access to the Exchange to 

Sponsored Persons, subject to enhanced 

requirements. Current Article 5, Rule 3 

only permits Sponsoring Participants to 

provide authorized access to the 

Exchange’s trading facilities to nonParticipant 3 broker-dealers. The 

proposal would permit Participants, 

non-Participants, broker-dealers and 

firms that are not broker-dealers to 

receive Sponsored Access to the 

Exchange.4


ethrower on DSK3G9T082PROD with NOTICES