Document ID: SEC-2016-0575-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-04-04T04:00Z

[Federal Register Volume 81, Number 64 (Monday, April 4, 2016)]
[Notices]
[Pages 19260-19269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07513]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77465; File No. SR-FINRA-2015-056]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Instituting Proceedings To Determine Whether to 
Approve or Disapprove Proposed Rule Change To Adopt FINRA Rule 2030 and 
FINRA Rule 4580 to Establish ``Pay-To-Play'' and Related Rules

March 29, 2016.

I. Introduction

    On December 16, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act,'' ``Exchange Act'' or ``SEA'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to adopt FINRA Rules 
2030 (Engaging in Distribution and Solicitation Activities with 
Government Entities) and 4580 (Books and Records Requirements for 
Government Distribution and Solicitation Activities) to establish 
``pay-to-play'' \3\ and related rules that would regulate the 
activities of member firms 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\ ``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.
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    The proposed rule change was published for comment in the Federal 
Register on December 30, 2015.\4\ The Commission received ten comment 
letters, from nine different commenters, in response to the proposed 
rule change.\5\ On February 8, 2016, FINRA extended the time period in 
which the Commission must approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine whether 
to approve or disapprove the proposed rule change to March 29, 2016.\6\ 
On March 28, 2016, FINRA filed a letter with the Commission stating 
that it has considered the comments received by the Commission, and 
that FINRA is not intending to make changes to the proposed rule text 
in response to the comments.\7\ The Commission is publishing this order 
to institute proceedings pursuant to Exchange Act Section 19(b)(2)(B) 
\8\ to determine whether to approve or disapprove the proposed rule 
change.
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    \4\ See Exchange Act Rel. No. 76767 (Dec. 24, 2015), 80 FR 81650 
(Dec. 30, 2015) (File No. SR-FINRA-2015-056) (``Notice'').
    \5\ See Letters from David Keating, President, Center for 
Competitive Politics (``CCP''), dated Jan. 20, 2016 (``CCP 
Letter''); Clifford Kirsch and Michael Koffler, Sutherland Asbill & 
Brennan LLP, for the Committee of Annuity Insurers (``CAI''), dated 
Jan. 20, 2016 (``CAI Letter No. 1''); Clifford Kirsch and Michael 
Koffler, Sutherland Asbill & Brennan LLP, for the CAI, dated Feb. 5, 
2016 (``CAI Letter No. 2''); David T. Bellaire, Executive Vice 
President and General Counsel, Financial Services Institute 
(``FSI''), dated Jan. 20, 2016 (``FSI Letter''); Tamara K. Salmon, 
Assistant General Counsel, Investment Company Institute (``ICI''), 
dated Jan. 20, 2016 (``ICI Letter''); Patrick J Moran, Esq., dated 
Dec. 29, 2015 (``Moran Letter''); Gary A. Sanders, Counsel and Vice 
President, National Association of Insurance and Financial Advisors 
(``NAIFA''), dated Jan. 20, 2016 (``NAIFA Letter''); Judith M. Shaw, 
President, North American Securities Administrators Association, 
Inc. (``NASAA''), dated Jan. 20, 2016 (``NASAA Letter''); Hugh D. 
Berkson, President, Public Investors Arbitration Bar Association 
(``PIABA''), dated Jan. 20, 2016 (``PIABA Letter''); and H. 
Christopher Bartolomucci and Brian J. Field, Bancroft PLLC, for the 
New York Republican State Committee and the Tennessee Republican 
Party (``State Parties''), dated Jan. 20, 2016 (``State Parties 
Letter'').
    \6\ See Letter from Victoria Crane, Associate General Counsel, 
FINRA, to Lourdes Gonzalez, Assistant Director, Sales Practices, 
Division of Trading and Markets, Securities and Exchange Commission, 
dated Feb. 8, 2016.
    \7\ See Letter from Victoria Crane, Associate General Counsel, 
FINRA, to Brent J. Fields, Secretary, Securities and Exchange 
Commission, dated Mar. 28, 2016 (``FINRA Response Letter''). The 
FINRA Letter 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.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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    Institution of proceedings does not indicate that the Commission 
has

[[Page 19261]]

reached any conclusions with respect to the proposed rule change, nor 
does it mean that the Commission will ultimately disapprove the 
proposed rule change. Rather, as discussed below, the Commission seeks 
additional input on the proposed rule change and issues presented by 
the proposal.

II. Description of the Proposed Rule Change \9\

    As described more fully in the Notice, FINRA is proposing a pay-to-
play rule, Rule 2030,\10\ that FINRA states is modeled on the 
Commission's Rule 206(4)-5 under the Investment Advisers Act of 1940 
(``Advisers Act''), which addresses pay-to-play practices by investment 
advisers (the ``SEC Pay-to-Play Rule'').\11\ The SEC Pay-to-Play Rule, 
among other things, prohibits 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.'' \12\ A ``regulated person,'' as 
defined in the SEC Pay-to-Play Rule, includes a FINRA 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.\13\ Therefore, based on this regulatory framework, FINRA is 
proposing its own pay-to-play rule to enable its member firms to 
continue to engage in distribution and solicitation activities for 
compensation with government entities on behalf of investment advisers, 
while at the same time deterring its member firms from engaging in pay-
to-play practices.\14\ FINRA also believes that its proposed rule would 
establish a comprehensive regime to regulate the activities of its 
member firms that engage in distribution or solicitation activities 
with government entities on behalf of investment advisers and would 
impose substantially equivalent restrictions on FINRA member firms 
engaging in distribution or solicitation activities to those the SEC 
Pay-to-Play Rule imposes on investment advisers.\15\
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    \9\ The proposed rule change, as described in this Item II, is 
excerpted, in part, from the Notice, which was substantially 
prepared by FINRA. See supra note 4.
    \10\ See Notice, 80 FR at 81650-51 (citing Advisers Act Release 
No. 3043 (July 1, 2010), 75 FR 41018 (July 14, 2010) (Political 
Contributions by Certain Investment Advisers) (``SEC Pay-to-Play 
Rule Adopting Release'')).
    \11\ FINRA also published the proposed rule change in Regulatory 
Notice 14-50 (Nov. 2014) (``Regulatory Notice 14-50'') and sought 
comment on the proposal. FINRA states that commenters were generally 
supportive of the proposed rule change, but also expressed some 
concerns. As such, FINRA revised the proposed rule change as 
published in Regulatory Notice 14-50 in response to those comments. 
As described more fully in the Notice, FINRA believes that the 
revisions it made more closely align FINRA's proposed rule with the 
SEC Pay-to-Play Rule and help reduce cost and compliance burden 
concerns raised by commenters. See Notice, 80 FR at 81651, n. 16.
    \12\ See Notice, 80 FR at 81650, 81656. See also SEC Pay-to-Play 
Rule 206(4)-5(a)(2)(i)(A).
    \13\ See Notice, 80 FR at 81650, n. 6 (citing SEC Pay-to-Play 
Rule 206(4)-5(f)(9)).
    \14\ See Notice, 80 FR at 81651, 81656.
    \15\ See id. at 81651, 81656.
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    Furthermore, FINRA is proposing Rule 4580, which would impose 
recordkeeping requirements on FINRA member firms in connection with its 
pay-to-play rule that would allow examination of member firms' books 
and records for compliance with the pay-to-play rule.\16\ FINRA 
believes that its proposed Rule 4580 is consistent with similar 
recordkeeping requirements imposed on investment advisers in connection 
with the SEC Pay-to-Play Rule.\17\
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    \16\ See id. at 81651, 81655-56.
    \17\ See id. at 81655, n. 60 (citing Advisers Act Rule 204-
2(a)(18) and (h)(1)).
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    The following is an overview of some of the key provisions in 
FINRA's proposed rules.

A. Proposed Rule 2030(a): Limitation on Distribution and Solicitation 
Activities

    Proposed Rule 2030(a) would prohibit 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 
after the contribution is made.\18\ FINRA states that the terms and 
scope of the prohibitions in proposed Rule 2030(a) are modeled on the 
SEC Pay-to-Play Rule.\19\
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    \18\ See Notice, 80 FR at 81651.
    \19\ See id. (citing SEC Pay-to-Play Rule 206(4)-5(a)(1)).
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    FINRA explains that proposed Rule 2030(a) would not ban or limit 
the amount of political contributions a covered member or its covered 
associates could make.\20\ Rather, FINRA states that, consistent with 
the SEC Pay-to-Play Rule, the proposed rule would impose a two-year 
``time out'' on engaging in distribution or solicitation activities for 
compensation with a government entity on behalf of an investment 
adviser after the covered member or its covered associates make a 
contribution to an official of the government entity.\21\ According to 
FINRA, the two-year time out period is intended to discourage covered 
members from participating in pay-to-play practices by requiring a 
cooling-off period during which the effects of a political contribution 
on the selection process can be expected to dissipate.\22\
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    \20\ See Notice, 80 FR at 81651.
    \21\ See id.
    \22\ Id.
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1. Distribution Activities
    FINRA states that, based on the definition of ``regulated person'' 
in the SEC Pay-to-Play Rule, it is required to adopt a rule that 
prohibits its member firms from engaging in distribution activities (as 
well as solicitation activities) with government entities if political 
contributions have been made.\23\ FINRA also notes that certain 
language in the SEC Pay-to-Play Rule Adopting Release further supports 
the inclusion of distribution activities by broker-dealers in a FINRA 
pay-to-play rule.\24\
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    \23\ See id. at 81660-61 (explaining that FINRA believes its 
proposed rule must apply to member firms engaging in distribution 
activities and that FINRA did not revise the proposed rule to remove 
references to the term distribution as requested by comments 
received in response to Regulatory Notice 14-50).
    \24\ See id. at 81660-61 (citing SEC Pay-to-Play Rule Adopting 
Release, 75 FR 41018, 41040 n. 298 where, according to FINRA, the 
Commission ``clarif[ied] under what circumstances distribution 
payments would violate the SEC's Pay-to-Play Rule'').
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    However, FINRA also explains that, based on the definition of a 
``covered investment pool'' in proposed Rule 2030(g)(3),\25\ the 
proposed rule would not apply to distribution activities related to 
registered investment companies that are not investment options of a 
government entity's plan or program.\26\ Therefore, the proposed rule 
would apply to distribution activities involving unregistered pooled

[[Page 19262]]

investment vehicles such as hedge funds, private equity funds, venture 
capital funds, and collective investment trusts, and registered pooled 
investment vehicles such as mutual funds, but only if those registered 
pools are an investment option of a participant-directed plan or 
program of a government entity.\27\ FINRA also notes that, consistent 
with the SEC Pay-to-Play Rule, to the extent mutual fund distribution 
fees are paid by the fund pursuant to a 12b-1 plan, such payments would 
not be prohibited under the proposed rule as they would not constitute 
payments by the fund's investment adviser.\28\ However, if the adviser 
pays for the fund's distribution out of its ``legitimate profits,'' the 
proposed rule would generally be implicated.\29\
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    \25\ See id. at 81654, n. 46 (proposed Rule 2030(g)(3) defines a 
``covered investment pool'' to mean: ``(A) Any investment company 
registered under the Investment Company Act that is an investment 
option of a plan or program of a government entity, or (B) Any 
company that would be an investment company under Section 3(a) of 
the Investment Company Act but for the exclusion provided from that 
definition by either Section 3(c)(1), 3(c)(7) or 3(c)(11) of that 
Act'').
    \26\ See Notice, 80 FR at 81661, nn. 105-106 (explaining that 
the proposed rule would not apply to distribution activities 
relating to all registered pooled investment vehicles).
    \27\ See id. at 81661. See also id. at 81651, n. 17 and 81654, 
n. 46.
    \28\ See id. at 81661.
    \29\ See id. (noting, among other things, that ``for private 
funds, third parties are often compensated by the investment adviser 
or its affiliated general partner'').
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2. Solicitation Activities
    FINRA also states that, consistent with the SEC Pay-to-Play Rule, 
proposed Rule 2030(g)(11) defines the term ``solicit'' to mean: ``(A) 
With respect to investment advisory services, to communicate, directly 
or indirectly, for the purpose of obtaining or retaining a client for, 
or referring a client to, an investment adviser; and (B) With respect 
to a contribution or payment, to communicate, directly or indirectly, 
for the purpose of obtaining or arranging a contribution or payment.'' 
\30\ FINRA also notes that, although the determination of whether a 
particular communication would be a solicitation would depend on the 
facts and circumstances relating to such communication, as a general 
proposition FINRA believes that any communication made under 
circumstances reasonably calculated to obtain or retain an advisory 
client would be considered a solicitation unless the circumstances 
otherwise indicate that the communication does not have the purpose of 
obtaining or retaining an advisory client.\31\
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    \30\ See id. at 81651, n. 18. See also id. at 81653, n. 40.
    \31\ See id.
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B. Proposed Rule 2030(b): Prohibition on Soliciting and Coordinating 
Contributions

    Proposed Rule 2030(b) would also prohibit a covered member or 
covered associate from coordinating or soliciting any person or 
political action committee (PAC) to make any: (1) 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 (2) 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.\32\ FINRA states that this provision is modeled on a similar 
provision in the SEC Pay-to-Play Rule \33\ and is intended to prevent 
covered members or covered associates from circumventing the proposed 
rule's prohibition on direct contributions to certain elected officials 
such as by ``bundling'' a large number of small employee contributions 
to influence an election, or making contributions (or payments) 
indirectly through a state or local political party.\34\
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    \32\ See id. at 81654. See also id. at 81662.
    \33\ See id. at 81654 (citing SEC Pay-to-Play Rule 206(4)-
5(a)(2)).
    \34\ See Notice, 80 FR at 81654.
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C. Proposed Rule 2030(c): Exceptions

    FINRA's proposed pay-to-play rule contains three exceptions from 
the proposed rule's prohibitions: (1) De minimis contributions, (2) new 
covered associates, and (3) certain returned contributions.\35\ FINRA 
states that these exceptions are modeled on similar exceptions in the 
SEC Pay-to-Play Rule.\36\
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    \35\ See id.
    \36\ See id. (citing SEC Pay-to-Play Rule 206(4)-5(b)).
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1. De Minimis Contribution Exception
    Proposed Rule 2030(c)(1) would except from the rule's restrictions 
contributions made by a covered associate who is a natural person to 
government entity officials for whom the covered associate was entitled 
to vote at the time of the contributions, provided the contributions do 
not exceed $350 in the aggregate to any one official per election.\37\ 
However, if the covered associate was not entitled to vote for the 
official at the time of the contribution, the contribution must not 
exceed $150 in the aggregate per election.\38\ FINRA states that, 
consistent with the SEC Pay-to-Play Rule, under this exception, primary 
and general elections would be considered separate elections.\39\ FINRA 
also explains that this exception is based on the theory that such 
contributions are typically made without the intent or ability to 
influence the selection process of the investment adviser.\40\
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    \37\ See Notice, 80 FR at 81655.
    \38\ See id.
    \39\ See id. (citing SEC Pay-to-Play Rule Adopting Release, 75 
FR 41018, 41034).
    \40\ See Notice, 80 FR at 81655.
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2. Exception for Certain New Covered Associates
    The proposed rule would attribute to a covered member contributions 
made by a person within two years (or, in some cases, six months) of 
becoming a covered associate. However, proposed Rule 2030(c)(2) would 
provide an exception from the proposed rule's restrictions for covered 
members if a natural person made a contribution more than six months 
prior to becoming a covered associate of the covered member unless the 
covered associate engages in, or seeks to engage in, distribution or 
solicitation activities with a government entity on behalf of the 
covered member.\41\ FINRA states that this exception is consistent with 
the SEC Pay-to-Play Rule \42\ and is intended to balance the need for 
covered members to be able to make hiring decisions against the need to 
protect against individuals marketing to prospective employers their 
connections to, or influence over, government entities the employer 
might be seeking as clients.\43\ FINRA also provides, with respect to 
the ``look back'' provisions in the proposed rules generally, the 
following illustrations of how the ``look back'' provisions work: if, 
for example, the contributions were made more than two years (or six 
months for new covered associates) prior to the employee becoming a 
covered associate, the time out has run.\44\ According to FINRA, 
however, if the contribution was made less than two years (or six 
months, as applicable) from the time the person becomes a covered 
associate, the proposed rule would prohibit the covered member that 
hires or promotes the contributing covered associate from receiving 
compensation for engaging in distribution or solicitation activities on 
behalf of an investment adviser from the hiring or promotion date until 
the applicable period has run.\45\ FINRA also states that the ``look 
back'' provisions are designed to prevent covered members from 
circumventing the rule by influencing the selection process by hiring 
persons who have made political contributions.\46\
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    \41\ See id.
    \42\ See id. (citing SEC Pay-to-Play Rule 206(4)-5(b)(2)).
    \43\ See Notice, 80 FR at 81655.
    \44\ See id.
    \45\ See id.
    \46\ See id. at 81653, 81655.

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[[Page 19263]]

3. Exception for Certain Returned Contributions
    Proposed Rule 2030(c)(3) would provide an exception from the 
proposed rule's restrictions for covered members if the restriction is 
due to a contribution made by a covered associate and: (1) The covered 
member discovered the contribution within four months of it being made; 
(2) the contribution was less than $350; and (3) the contribution is 
returned within 60 days of the discovery of the contribution by the 
covered member.\47\ FINRA explains that, consistent with the SEC Pay-
to-Play Rule, this exception would allow a covered member to cure the 
consequences of an inadvertent political contribution.\48\ The proposed 
rule would also provide that covered members with 150 or fewer 
registered representatives would be able to rely on this exception no 
more than two times per calendar year, while covered members with more 
than 150 registered representatives would be permitted to rely on this 
exception no more than three times per calendar year.\49\ Furthermore, 
a covered member would not be able to rely on an exception more than 
once with respect to contributions by the same covered associate 
regardless of the time period, which is consistent with similar 
provisions in the SEC Pay-to-Play Rule.\50\
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    \47\ See id. at 81655.
    \48\ See id.
    \49\ See id. FINRA notes that these limitations are consistent 
with similar provisions in the SEC Pay-to-Play Rule 206(4)-5(b)(3), 
although the SEC Pay-to-Play Rule includes different allowances for 
larger and smaller investment advisers based on the number of 
employees they report on Form ADV. See id. at 81655, n. 59.
    \50\ See Notice, 80 FR at 81655.
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D. Proposed Rule 2030(d): Prohibitions as Applied to Covered Investment 
Pools

    Proposed Rule 2030(d)(1) provides that a covered member that 
engages in distribution or solicitation activities with a government 
entity on behalf of a covered investment pool \51\ 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.\52\ Proposed Rule 2030(d)(2) provides that an investment 
adviser to a covered investment pool in which a government entity 
invests or is solicited to invest shall be treated as though that 
investment adviser were providing or seeking to provide investment 
advisory services directly to the government entity.\53\ FINRA states 
that proposed Rule 2030(d) is modeled on a similar prohibition in the 
SEC Pay-to-Play Rule and would apply the prohibitions of the proposed 
rule to situations in which an investment adviser manages assets of a 
government entity through a hedge fund or other type of pooled 
investment vehicle.\54\ Therefore, according to FINRA, the provision 
would extend the protection of the proposed rule to public pension 
plans that access the services of investment advisers through hedge 
funds and other types of pooled investment vehicles sponsored or 
advised by investment advisers as a funding vehicle or investment 
option in a government-sponsored plan, such as a 529 plan.\55\
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    \51\ See id. at 81654, n. 46 (proposed Rule 2030(g)(3) defines a 
``covered investment pool'' to mean: ``(A) Any investment company 
registered under the Investment Company Act that is an investment 
option of a plan or program of a government entity, or (B) Any 
company that would be an investment company under Section 3(a) of 
the Investment Company Act but for the exclusion provided from that 
definition by either Section 3(c)(1), 3(c)(7) or 3(c)(11) of that 
Act'').
    \52\ See Notice, 80 FR at 81654, n. 47 (FINRA notes that, 
consistent with the SEC Pay-to-Play Rule, under the proposed rule, 
if a government entity is an investor in a covered investment pool 
at the time a contribution triggering a two-year time out is made, 
the covered member must forgo any compensation related to the assets 
invested or committed by the government entity in the covered 
investment pool) (citing SEC Pay-to-Play Rule Adopting Release, 75 
FR 41018, 41047).
    \53\ See Notice, 80 FR at 81654, n. 48 (FINRA states that it 
added proposed Rule 2030(d)(2) in response to comments on Regulatory 
Notice 14-50 to clarify, for purposes of the proposed rule, the 
relationship between an investment adviser to a covered investment 
pool and a government entity that invests in the covered investment 
pool).
    \54\ See id. at 81654 (citing SEC Pay-to-Play Rule 206(4)-5(c)).
    \55\ See Notice, 80 FR at 81654 (citing SEC Pay-to-Play Rule 
Adopting Release, 75 FR 41018, 41044, which discusses the 
applicability of the SEC Pay-to-Play Rule to covered investment 
pools).
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E. Proposed Rule 2030(e): Prohibition on Indirect Contributions or 
Solicitations

    Proposed Rule 2030(e) provides that it shall be a violation of Rule 
2030 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.\56\ FINRA states that this provision is consistent with a 
similar provision in the SEC Pay-to-Play Rule \57\ and would prevent a 
covered member or its covered associates from funneling payments 
through third parties, including, for example, consultants, attorneys, 
family members, friends or companies affiliated with the covered member 
as a means to circumvent the proposed rule.\58\ FINRA also notes that, 
consistent with guidance provided by the SEC in connection with SEC 
Pay-to-Play Rule 206(4)-5(d), proposed Rule 2030(e) would require a 
showing of intent to circumvent the rule in order for such persons to 
trigger the two-year ``time out.'' \59\
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    \56\ See Notice, 80 FR at 81654.
    \57\ See id. (citing SEC Pay-to-Play Rule 206(4)-5(d)).
    \58\ See Notice, 80 FR at 81654 (citing SEC Pay-to-Play Rule 
Adopting Release, 75 FR 41018, 41044, which discusses direct and 
indirect contributions or solicitations).
    \59\ See Notice, 80 FR at 81654.
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F. Proposed Rule 2030(f): Exemptions

    Proposed Rule 2030(f) includes an exemptive provision for covered 
members, modeled on the exemptive provision in the SEC Pay-to-Play 
Rule, that would allow covered members to apply to FINRA for an 
exemption from the proposed rule's two-year time out.\60\ As proposed, 
FINRA states that this provision would allow FINRA to exempt covered 
members, either conditionally or unconditionally, from the proposed 
rule's time out requirement where the covered member discovers 
contributions that would trigger the compensation ban after they have 
been made, and when imposition of the prohibition would be unnecessary 
to achieve the rule's intended purpose.\61\ In determining whether to 
grant an exemption, FINRA would take into account varying facts and 
circumstances, outlined in the proposed rule, that each application 
presents (e.g., the timing and amount of the contribution, the nature 
of the election, and the contributor's apparent intent or motive in 
making the contribution).\62\ FINRA notes that this provision would 
provide covered members with an additional avenue by which to seek to 
cure the consequences of an inadvertent violation by the covered member 
or its covered associates that falls outside the limits of one of the 
proposed rule's exceptions.\63\
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    \60\ See id. at 81654-55.
    \61\ See id. at 81655.
    \62\ See id.
    \63\ See id.
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G. Proposed Rule 2030(g): Definitions

    The following is an overview of some of the key definitions in 
FINRA's proposed rules.
1. Contributions
    Proposed Rule 2030(g)(1) defines ``contribution'' to mean any gift, 
subscription, loan, advance, deposit of money, or anything of value 
made for the purpose of influencing the election for a federal, state 
or local office, and includes any payments for debts incurred in such 
an election or

[[Page 19264]]

transition or inaugural expenses incurred by a successful candidate for 
state or local office.\64\ FINRA states that this definition is 
consistent with the SEC Pay-to-Play Rule.\65\ FINRA also states that it 
would not consider a donation of time by an individual to be a 
contribution, provided the covered member has not solicited the 
individual's efforts and the covered member's resources, such as office 
space and telephones, are not used.\66\ FINRA further states that it 
would not consider a charitable donation made by a covered member to an 
organization that qualifies for an exemption from federal taxation 
under the Internal Revenue Code, or its equivalent in a foreign 
jurisdiction, at the request of an official of a government entity to 
be a contribution for purposes of the proposed rule.\67\
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    \64\ See id. at 81652.
    \65\ See id.
    \66\ See id. (citing SEC Pay-to-Play Rule Adopting Release, 75 
FR 41018, 41030).
    \67\ See Notice, 80 FR at 81652.
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2. Covered Associates
    Proposed Rule 2030(g)(2) defines the term ``covered associates'' to 
mean: ``(A) Any general partner, managing member or executive officer 
of a covered member, or other individual with a similar status or 
function; (B) Any associated person of a covered member who engages in 
distribution or solicitation activities with a government entity for 
such covered member; (C) Any associated person of a covered member who 
supervises, directly or indirectly, the government entity distribution 
or solicitation activities of a person in subparagraph (B) above; and 
(D) Any political action committee controlled by a covered member or a 
covered associate.'' \68\ FINRA states that, as also noted in the SEC 
Pay-to-Play Rule Adopting Release, contributions made to influence the 
selection process are typically made not by the firm itself, but by 
officers and employees of the firm who have a direct economic stake in 
the business relationship with the government client.\69\ For example, 
contributions by an ``executive officer of a covered member'' (as 
defined in proposed Rule 2030(g)(5)) would trigger the two-year time 
out.\70\ FINRA also notes that whether a person is an executive officer 
would depend on his or her function or activities and not his or her 
title.\71\ In addition, FINRA states that a covered associate would 
include a PAC controlled by the covered member or any of its covered 
associates, as a PAC is often used to make political contributions.\72\ 
FINRA explains that it would consider a ``covered member'' (as defined 
in proposed Rule 2030(g)(4)) or its covered associates to have 
``control'' over a PAC if the covered member or covered associate has 
the ability to direct or cause the direction of governance or 
operations of the PAC.\73\
---------------------------------------------------------------------------

    \68\ Id. at 81653, n. 37.
    \69\ See id. (citing SEC Pay-to-Play Rule Adopting Release, 75 
FR 41018, 41031).
    \70\ See Notice, 80 FR at 81653.
    \71\ See id.
    \72\ See id.
    \73\ See id.
---------------------------------------------------------------------------

3. Official of a Government Entity
    FINRA explains that an ``official'' (as defined in proposed Rule 
2030(g)(8)) of a ``government entity'' (as defined in proposed Rule 
2030(g)(7))--both of which FINRA states are consistent with the SEC 
Pay-to-Play Rule definitions--would include an incumbent, candidate or 
successful candidate for elective office of a government entity if the 
office is directly or indirectly responsible for, or can influence the 
outcome of, the hiring of an investment adviser or has authority to 
appoint any person who is directly or indirectly responsible for, or 
can influence the outcome of, the hiring of an investment adviser.\74\ 
FINRA also explains that government entities would include all state 
and local governments, their agencies and instrumentalities, and all 
public pension plans and other collective government funds, including 
participant-directed plans such as 403(b), 457, and 529 plans.\75\
---------------------------------------------------------------------------

    \74\ See id. at 81652.
    \75\ See id.
---------------------------------------------------------------------------

    FINRA further states that the two-year time out would be triggered 
by contributions, not only to elected officials who have legal 
authority to hire the adviser, but also to elected officials (such as 
persons with appointment authority) who can influence the hiring of the 
adviser.\76\ FINRA notes that it is the scope of authority of the 
particular office of an official, not the influence actually exercised 
by the individual that would determine whether the individual has 
influence over the awarding of an investment advisory contract under 
the definition.\77\
---------------------------------------------------------------------------

    \76\ See id.
    \77\ See id. (citing SEC Pay-to-Play Rule Adopting Release, 75 
FR 41018, 41029 (discussing the terms ``official'' and ``government 
entity'').
---------------------------------------------------------------------------

H. Proposed Rule 4580: Recordkeeping Requirements

    Proposed Rule 4580 would require covered members that engage in 
distribution or solicitation activities with a government entity on 
behalf of any investment adviser that provides or is seeking to provide 
investment advisory services to such government entity to maintain 
books and records that would allow FINRA to examine for compliance with 
its pay-to-play rule.\78\ FINRA states that this provision is 
consistent with similar recordkeeping requirements imposed on 
investment advisers in connection with the SEC Pay-to-Play Rule.\79\ 
The proposed rule would also require covered members to maintain a list 
or other record of certain specific information.\80\ FINRA states that 
the proposed rule would, among other things, require that the direct 
and indirect contributions or payments made by the covered member or 
any of its covered associates be listed in chronological order and 
indicate the name and title of each contributor and each recipient of 
the contribution or payment, as well as the amount and date of each 
contribution or payment, and whether the contribution was the subject 
of the exception for returned contributions in proposed Rule 2030.\81\
---------------------------------------------------------------------------

    \78\ See Notice, 80 FR at 81655.
    \79\ See id. (citing Advisers Act Rule 204-2(a)(18) and (h)(1)).
    \80\ See Notice, 80 FR at 81655-56.
    \81\ See id.
---------------------------------------------------------------------------

III. Summary of Comments

    As noted above, the Commission received ten comment letters, from 
nine different commenters, on the proposed rule change.\82\ Six 
commenters generally expressed support for FINRA's proposal.\83\ 
However, five of those commenters, while generally expressing support 
for the goals of the proposal, also raised certain concerns regarding 
various aspects of the proposal as drafted and recommended amendments 
to the proposal.\84\ The other three commenters did not support the 
proposed rule as drafted based largely on concerns involving the First 
Amendment to the U.S. Constitution.\85\ These comments are summarized 
below.\86\ On March 28, 2016, FINRA filed a letter with the Commission 
stating that it has considered the comments received by the Commission, 
and that FINRA is not intending to make

[[Page 19265]]

changes to the proposed rule text in response to the comments.\87\
---------------------------------------------------------------------------

    \82\ See supra note 5. CAI submitted two separate comment 
letters. See CAI Letter No. 1 and CAI Letter No. 2.
    \83\ See CAI Letter No. 1; CAI Letter No. 2; FSI Letter; ICI 
Letter; NAIFA Letter; NASAA Letter; and PIABA Letter.
    \84\ See CAI Letter No. 1; CAI Letter No. 2; FSI Letter; NAIFA 
Letter; NASAA Letter; and PIABA Letter. ICI did not raise additional 
concerns, but states that it is satisfied with FINRA's revisions and 
responses to the proposal as drafted in Regulatory Notice 14-50. See 
ICI Letter.
    \85\ See CCP Letter; Moran Letter; and State Parties Letter.
    \86\ For further detail, the comments that the Commission 
received on the Notice are available on the Commission's Web site at 
http://www.sec.gov/comments/sr-finra-2015-056/finra2015056.shtml.
    \87\ See FINRA Response Letter, supra note 7.
---------------------------------------------------------------------------

A. First Amendment Comments

    As noted above, three commenters oppose the proposed rule as 
drafted based on First Amendment concerns.\88\ One commenter simply 
noted that he thinks FINRA may have some First Amendment issues and 
suggested that FINRA consider raising the amount and restricted 
political donations limitations to Congressional committee members that 
might influence government decision-making in the relevant area.\89\
---------------------------------------------------------------------------

    \88\ See CCP Letter; Moran Letter; and State Parties Letter.
    \89\ See Moran Letter.
---------------------------------------------------------------------------

    Another commenter urged the Commission to reject FINRA's proposal 
because, according to that commenter, it impermissibly restricts core 
political speech in violation of the First Amendment.\90\ As more fully 
explained in the commenter's letter, this commenter makes the following 
general arguments in support of its position: (1) That FINRA's proposal 
is not narrowly tailored to achieve a compelling government interest 
and thus cannot survive First Amendment scrutiny and (2) that the 
Commission should examine FINRA's proposal on its own merits and should 
not take comfort from the opinion of the United States Court of Appeals 
for the DC Circuit in Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995), 
which upheld MSRB's Rule G-37 against a First Amendment challenge.\91\ 
More specifically, this commenter also makes the following arguments 
regarding FINRA's proposal, including that: (i) The proposed 
contributions limits are too low to allow citizens to exercise their 
constitutional right to participate in the political process; (ii) the 
rule discriminates between contributions to a candidate for whom an 
individual is entitled to vote and other candidates and cannot be 
squared with the Supreme Court's decision in McCutcheon v. FEC, 134 S. 
Ct. 1434 (2014); (iii) FINRA did not consider less restrictive 
alternatives; (iv) the ``look-back'' provisions are overbroad and 
insufficiently tailored to support the governmental interest claimed to 
be served by these rules; (v) the rules are preempted, with respect to 
federal elections, by the Federal Election Campaign Act; (vi) the rules 
are impermissibly vague and overbroad; and (vii) the rules are 
overbroad as applied to independent broker-dealers and their registered 
representatives who operate as independent contractors because they are 
not are tailored to the manner in which services are provided by 
financial advisors in the independent broker-dealer model.\92\
---------------------------------------------------------------------------

    \90\ See CCP Letter (also urging rejection of MSRB's proposed 
amendments to its pay-to-play rules, MSRB Rule G-37).
    \91\ See CCP Letter.
    \92\ See id.
---------------------------------------------------------------------------

    Similarly, another commenter opposes FINRA's proposed rule, stating 
that the proposal is unlawful and unconstitutional.\93\ This commenter 
makes the following general arguments in support of its position. 
First, the commenter claims that the proposal is unlawful as it is 
ultra vires because Congress did not empower entities like FINRA--nor 
agencies like the SEC--to regulate federal political contributions and 
the proposal is a direct effort to deter member firms and their 
employees from engaging in conduct that is protected by the First 
Amendment and permitted by federal statute.\94\ As more fully explained 
in the commenter's letter, this commenter makes the following claims in 
support of its argument, including that: (i) Campaign finance 
regulation has long been the exclusive province of Congress and the 
Federal Election Commission; (ii) Congress' comprehensive regime of 
political contribution limits forecloses FINRA's effort to regulate the 
same conduct; and (iii) even assuming Congress' contribution limits 
regime does not preclude FINRA from enacting its own rules, the 
proposal exceeds FINRA's authority to issue rules ``designed to prevent 
fraudulent and manipulative acts and practices[.] '' \95\ Second, the 
commenter also claims that the proposal violates the First 
Amendment.\96\ In support of this argument, the commenter states that 
FINRA cannot show that the proposal's restrictions are necessary to 
further a sufficiently important interest, and do so in a sufficient 
tailored manner.\97\ As more fully explained in the commenter's letter, 
this commenter makes the following claims in support of its argument, 
including that: (i) The proposal severely burdens First Amendment 
rights and, therefore, FINRA bears an exceedingly high burden in 
establishing the constitutionality of the proposal; (ii) FINRA openly 
acknowledges that its proposal is a broad prophylactic measure that 
deters constitutionally protected conduct even when the government has 
no legitimate interest in doing so; (iii) the Blount opinion overlooked 
the disparate impact that a restriction like the FINRA proposal has on 
candidates; and (iv) the Blount opinion also did not discuss the 
constitutionality of anything comparable to the FINRA proposal's 
prohibition on coordinating or soliciting contributions ``to a 
political party of a State or locality where the investment adviser is 
providing or seeking to provide investment advisory services to a 
government entity.'' \98\
---------------------------------------------------------------------------

    \93\ See State Parties Letter (attaching its opening and reply 
appellate briefs filed in the Republican State Committee v. SEC, No. 
14-1194 on Dec. 22, 2014 and Feb. 4, 2015, respectively).
    \94\ See State Parties Letter.
    \95\ See id. (quoting 15 U.S.C. 78o-3(b)(6)).
    \96\ See State Parties Letter.
    \97\ See id.
    \98\ See id.
---------------------------------------------------------------------------

    Although not expressly opposing the proposed rules on First 
Amendment grounds, two other commenters also raise First Amendment 
comments.\99\ One of these commenters submits that Rule 2030 is not 
closely drawn in terms of the conduct it prohibits, the persons who are 
subject to its restrictions, and the circumstances in which it is 
triggered.\100\ This commenter claims that the proposed rule's 
ambiguity may contravene one of the ``key animating principles of the 
Commission in crafting the [SEC Pay-to-Play Rule]'' which, according to 
the commenter, was to ensure its rule was narrowly tailored to serve a 
compelling governmental interest, namely, the elimination of pay-to-
play practices by investment advisers by preventing fraudulent acts and 
practices in the market for the provision of investment advisory 
services to government entities.\101\ Another commenter states that the 
proposed rules may ``inadvertently capture activity that does not 
present the risk of quid pro quo corruption,'' and this commenter 
believes that FINRA must ``define the contours of its proposal as 
clearly and distinctly as possible to avoid an unnecessary limitation 
on one's First Amendment rights, especially in the area of political 
speech.'' \102\
---------------------------------------------------------------------------

    \99\ See CAI Letter No. 1 and FSI Letter.
    \100\ See CAI Letter No. 1 (arguing that ``[f]ailing to meet 
this objective of the [SEC Pay-to-Play Rule] would appear to be 
fatal to Rule 2030 inasmuch as the [SEC Pay-to-Play Rule] requires 
the Commission to find, by order, that Rule 2030 meets the 
objectives of the [SEC Pay-to-Play Rule]'').
    \101\ See CAI Letter No. 1 (stating that in adopting the SEC 
Pay-to-Play Rule, ``the Commission demonstrated its sensitivity to, 
and careful consideration of, potential First Amendment concerns 
because of the Rule's potential impact on political 
contributions'').
    \102\ FSI Letter.
---------------------------------------------------------------------------

B. Variable Annuity-Related Comments

    Two commenters raised concerns regarding the application of the 
proposed rules to variable annuities.\103\

[[Page 19266]]

Both of these commenters requested, as a threshold matter, that FINRA 
confirm that Rule 2030 would not apply to variable annuities.\104\ In 
support of one of these commenter's request that the proposed rule 
should not apply to the sales of variable annuity contracts which are 
supported by a separate account that invests in mutual funds, the 
commenter argues that the nature of variable annuities and the way 
investment options are selected does not implicate the investment 
advisory solicitation activities contemplated by the SEC Pay-to-Play 
Rule.\105\ This same commenter claims that the relationship between a 
variable annuity contract holder and the investment adviser to a mutual 
fund supporting the variable annuity does not rise to a level such that 
it should implicate a pay-to-play obligation.\106\ Another one of these 
commenter's claims, in support of its argument that Rule 2030 should 
not apply to variable annuities, is that compliance with Rule 2030 
would be impractical for broker-dealers selling variable annuities in 
the government market.\107\ This commenter also argues, for example, 
that a covered member selling a variable annuity, particularly where 
the separate account is a registered as a unit investment trust, cannot 
fairly be seen to be engaging in solicitation activities on behalf of 
all of the investment advisers and sub-advisers that manage the covered 
investment pools available as investment options under the separate 
account and subaccounts.\108\
---------------------------------------------------------------------------

    \103\ See CAI Letter No. 1 and FSI Letter. See also CAI Letter 
No. 2 (reflecting CAI's suggested revisions to the certain language 
in some of FINRA's proposed rules).
    \104\ See CAI Letter No. 1 and FSI Letter.
    \105\ See FSI Letter (claiming that applying the proposed rule 
to variable annuities will significantly increase the compliance 
burden and as such may limit the options our members make available 
to 403(b) and 457 plans).
    \106\ See FSI Letter.
    \107\ See CAI Letter No. 1.
    \108\ See id.
---------------------------------------------------------------------------

    One of these commenters also requests that proposed Rule 2030 be 
modified to, among other things, clarify that the distribution of a 
two-tiered product such as a variable annuity is not solicitation 
activity for an investment adviser and sub-advisers managing the funds 
available as investment options.\109\ Furthermore, this same commenter 
states that if FINRA or the Commission determines that broker-dealers 
selling variable annuities constitute solicitation activities for 
purposes of Rule 2030, that determination raises a host of interpretive 
questions that, in this commenter's view, will require further guidance 
from FINRA or the Commission.\110\
---------------------------------------------------------------------------

    \109\ See id.
    \110\ See id.
---------------------------------------------------------------------------

C. Comments Regarding the Scope of the Proposed Rule

    Two commenters also expressed concern that proposed rule 2030(d) 
would, in their view, re-characterize ``ordinary'' or ``customary'' 
distribution activities for covered investment pools as the 
solicitation of clients on behalf of the investment adviser to the 
covered investment pools.\111\ One of these commenters requests that 
such customary distribution activity by member firms for covered 
investment pools sold to government entities not be treated as 
solicitation activity for an investment adviser for purposes of Rule 
2030 simply because an investment adviser provides advisory services to 
a covered investment pool that is available as an investment 
option.\112\ As more fully explained in the commenter's letter, the 
commenter claims, for example, that proposed Rule 2030(d) would recast 
``traditional'' broker-dealer activity (i.e., the offer and sale of 
covered investment pool securities pursuant to a selling or placement 
agent agreement) into something it is not: The solicitation of 
investment advisory services on behalf of an investment adviser.\113\ 
This commenter also claims that the decision in Goldstein v. SEC, 451 
F.3d 873 (D.C. Cir. 2006) and the Commission staff's interpretive 
position under Advisers Act Rule 206(4)-3 make proposed Rule 2030(d) 
impractical, as it would put selling firms in a contradictory position 
under FINRA rules and Advisers Act rules.\114\ This commenter states 
that a broker-dealer that offers and sells interests in a mutual fund 
or private fund cannot be characterized as soliciting on behalf of the 
investment adviser to a covered investment pool.\115\
---------------------------------------------------------------------------

    \111\ See CAI Letter No. 1 and FSI Letter.
    \112\ See CAI Letter No. 1.
    \113\ See id.
    \114\ See id.
    \115\ See id.
---------------------------------------------------------------------------

    Similarly, another commenter expressed concern with the apparent 
application of proposed Rule 2030(d) to traditional brokerage sales of 
mutual funds and variable annuities to participant-directed government-
sponsored retirement plans.\116\ As more fully explained in the 
commenter's letter, this commenter states that it continues to be 
concerned that the provisions in proposed Rule 2030(d) ``go beyond that 
which is required under Rule 206(4)-5(a)(2)(i) and Rule 206(4)-5(c) to 
the detriment of investors.'' \117\ This same commenter also claims 
that mutual fund sales, as well as variable annuity sales, should be 
excluded, claiming that the proposed rules serve to redefine the sale 
of mutual funds as solicitation by a broker-dealer on behalf of an 
investment adviser and also conflicts with the realities of 
conventional mutual fund selling agreements.\118\
---------------------------------------------------------------------------

    \116\ See FSI Letter.
    \117\ FSI Letter.
    \118\ See id.
---------------------------------------------------------------------------

D. Comments Regarding the Inclusion of Distribution Activity in the 
Proposed Rule

    One commenter generally expressed concern that Rule 2030 is 
unnecessarily ambiguous regarding the term distribution activities in 
Rule 2030(a).\119\ This commenter claims that it is unclear what 
distribution activities ``with'' a government entity would be 
prohibited, what compensation is covered by the proposed rule and who 
must pay it, and when a member firm might be deemed to be acting ``on 
behalf of'' an investment adviser.\120\ For example, this commenter 
states that the ambiguity of Rule 2030 may result in its misapplication 
in a variety of contexts.
---------------------------------------------------------------------------

    \119\ See CAI Letter No. 1.
    \120\ See id.
---------------------------------------------------------------------------

    This commenter also claims that, while the SEC Pay-to-Play Rule 
requires regulated persons to be subject to rules that prohibit them 
from engaging in certain distribution activities if certain political 
contributions have been made, Rule 206(4)-5 does not mandate the use of 
the term ``distribution'' in describing the conduct prohibited by the 
proposed rule, and suggested revised rule text reflecting that 
assertion.\121\
---------------------------------------------------------------------------

    \121\ See CAI Letter No. 1 and CAI Letter No. 2 (reflecting 
CAI's suggested revisions to certain language in some of FINRA's 
proposed rules).
---------------------------------------------------------------------------

    The commenter believes that its suggested revisions would, among 
other things, eliminate the potential concern that a selling firm might 
violate Rule 2030 unknowingly due to being deemed to be acting on 
behalf of investment advisers or sub-advisers of underlying funds with 
which it has no relationship.\122\
---------------------------------------------------------------------------

    \122\ See CAI Letter No. 1 (claiming that the commenter's 
suggested revisions would not result in any inappropriate narrowing 
of the scope of Rule 2030).
---------------------------------------------------------------------------

E. Comments Regarding Defined Terms Used in the Proposed Rules

    Two commenters requested clarification of certain defined terms 
used in the proposed rules.\123\ One commenter urged FINRA, or the 
Commission, to clarify the meaning of

[[Page 19267]]

the term ``instrumentality'' as it is used in the definition of 
``government entity.'' \124\ This commenter claims that, without 
additional guidance, covered members will continue to struggle with 
whether a contribution to a given entity should be treated as a 
contribution to an instrumentality of a state or state agency, thus 
triggering the two-year time out.\125\ This same commenter also asked 
for clarification as to whether each and every ``contribution'' (as 
defined in proposed Rule 2030(g)(1)) is, by definition, also a 
``payment'' (as defined in proposed Rule 2030(g)(9)).\126\
---------------------------------------------------------------------------

    \123\ See CAI Letter No. 1 and NAIFA Letter.
    \124\ See CAI Letter No. 1 (claiming that CAI's members have 
struggled to understand the contours of this term in the context of 
the SEC Pay-to-Play Rule).
    \125\ See id.
    \126\ See CAI Letter No. 1 (discussing Notice, 80 FR at 81654, 
n. 41: ``Consistent with the SEC Pay-to-Play Rule, FINRA is 
including the broader term ``payments,'' as opposed to 
``contributions,'' to deter a cover member from circumventing the 
proposed rule's prohibitions by coordinating indirect contributions 
to government officials by making payments to political parties'').
---------------------------------------------------------------------------

    Another commenter requests that FINRA clarify the definition of a 
``covered associate'' and clarify and delineate the positions that 
would qualify someone as a covered ``official.'' \127\ This commenter 
clams that, in response to the same definition of ``covered associate'' 
as used in the SEC Pay-to-Play Rule, many investment advisers and 
broker dealers have classified all of their representatives as covered 
associates regardless of whether they actually engage in the 
solicitation activity specified in the definition.\128\ This commenter 
believes that additional clarification on when an associated person of 
a covered member would (or would not) qualify as a ``covered 
associate'' would ease compliance burdens, curtail overly broad limits 
on legitimate political activity, and increase the consistency of 
procedures amongst member firms who seek to comply with both the letter 
and the spirit of the proposed rule.\129\ This same commenter requests 
additional details or guidance from the Commission with respect to this 
definition of ``official'' because, according to that commenter, that 
definition has caused, and will continue to spark confusion over 
exactly what offices subject the holder to be classified as an 
``official'' given that the term is defined the same way in the SEC 
Pay-to-Play Rule.\130\
---------------------------------------------------------------------------

    \127\ See NAIFA Letter.
    \128\ See id.
    \129\ See id.
    \130\ See id.
---------------------------------------------------------------------------

F. Comments Regarding PAC Contributions That Trigger the Anti-
Circumvention Provision of the Proposed Rule

    This commenter also claims that statements made by FINRA in the 
Notice regarding the proposed rule's anti-circumvention provision, 
proposed Rule 2030(e), combined with statements made in SEC staff 
guidance concerning whether contributions through PACs would violate 
the SEC Pay-to-Play Rule and section 208(d) of the Advisers Act, have 
the ability to chill contributions to PACs.\131\ This commenter claims, 
for example, that prospective contributors who simply want to donate to 
a PAC have been hesitant to or restricted from doing so out of fear 
that they may be making an indirect contribution in violation of the 
SEC Pay-to-Play Rule.\132\ Accordingly, this commenter requests further 
guidance from the Commission on the factors by which contributions to 
PACs would or would not trigger the anti-circumvention provision of the 
proposed rule.\133\
---------------------------------------------------------------------------

    \131\ See id.
    \132\ See id.
    \133\ See id.
---------------------------------------------------------------------------

G. Comments Regarding the De Minimis Exception Under Proposed Rule 
2030(c)

    Several commenters raised concerns regarding the de minimis 
contribution exception under proposed Rule 2030(c)(1). One commenter 
requested that the $350 and $150 amounts ``be raised substantially'' in 
both SEC Pay-to-Play Rule and in proposed Rule 2030(c)(1), and further 
requested that the $350 limitation on the proposed exception for 
returned contributions under proposed Rule 2030(c)(3), be eliminated in 
both the SEC Pay-to-Play Rule and in FINRA's proposed rule.\134\
---------------------------------------------------------------------------

    \134\ See CAI Letter No. 1.
---------------------------------------------------------------------------

H. Comments Regarding the Grandfathering of Existing Accounts and 
Contracts

    One commenter requested that FINRA clarify the application of the 
proposed rule to existing government entity accounts or contracts.\135\ 
This commenter requests that, in the event that FINRA does not amend 
the application of its proposed rule to covered investment pools (as 
requested by this same commenter), FINRA apply the proposed rule only 
to accounts and variable contracts opened after the effective 
date.\136\
---------------------------------------------------------------------------

    \135\ See FSI Letter.
    \136\ See id.
---------------------------------------------------------------------------

I. Comments Regarding Application of the Proposed Rules to the 
Independent Business Model

    One commenter claims that its members will face difficulties in 
attempting to comply with the proposed rules, and that these 
difficulties stem, primarily, from a requirement for independent firms 
to implement a rule that is premised on the notion that solicitation of 
clients is performed pursuant to a centralized process controlled by 
the management of a registered investment adviser.\137\ This same 
commenter claims that the lack of clarity as to the application of the 
SEC Pay-to-Play Rule to its members' business model, and the scope of 
government officials that trigger the requirements, has led some firms 
to adopt aggressive compliance programs that prohibit political 
contributions.\138\ Accordingly, this commenter claims that absent 
clarity concerning the application of the proposed rule to the 
brokerage services provided to 403(b) and 457 plans, its members will 
be faced with the choice of either adopting similarly aggressive 
policies or prohibiting sales to government-sponsored retirement 
plans.\139\
---------------------------------------------------------------------------

    \137\ See FSI Letter (claiming FSI believes that the SEC Pay-to-
Play Rule has inadvertently captured non-corrupting activity and it 
fears that the proposed rule may do the same).
    \138\ See id.
    \139\ See id.
---------------------------------------------------------------------------

J. Comments Regarding Proposed Rule 4580: Books and Records 
Requirements

    One commenter claims that it continues to believe that not all 
payments to political parties or PACs should have to be maintained 
under the books and records requirements of proposed Rule 4580.\140\ 
Rather, this commenter believes that only payments to political parties 
or PACs where the covered member or a covered associate (i) directs the 
political party or PAC to make a contribution to an official of a 
government entity which the covered member is soliciting on behalf of 
an investment adviser or (ii) knows that the political party or PAC is 
going to make a contribution to an official of a government entity 
which the covered member is soliciting on behalf of an investment 
adviser, should have to be maintained.\141\ This commenter states that, 
while it appreciates FINRA's rationale for proposed Rule 4580, it 
believes the costs and burdens associated with the request far outweigh 
the benefits to FINRA in ensuring compliance with the rule and will 
lead

[[Page 19268]]

to periodic ``fishing expeditions'' by FINRA examiners.\142\
---------------------------------------------------------------------------

    \140\ See CAI Letter No. 1.
    \141\ See id.
    \142\ See id.
---------------------------------------------------------------------------

K. Comments Requesting More Stringent Requirements in the Proposed 
Rules

    Two commenters suggested including more stringent requirements in 
FINRA's proposed rule.\143\ First, both commenters request that FINRA 
expand the applicability of its proposed rules to include state-
registered investment advisers.\144\ More specifically, one of these 
commenters suggests that FINRA include state-registered investment 
advisers in its definition of ``investment adviser'' for the purposes 
of its proposed rule.\145\ These commenters note, for example, that 
FINRA states in the Notice that relatively few state-registered 
investment advisers manage public pension plans.\146\ However, one of 
these commenters believes that this alone does not justify permitting 
FINRA-member firms that do manage public pension plans, but happen to 
work with smaller investment advisers, to engage in pay-to-play 
activities with no repercussions.\147\ One of these commenters also 
claims that state-registered investment advisers now include larger 
firms and, therefore, it is much more likely that state-registered 
investment advisers advise or manage public pension plans or similar 
funds.\148\
---------------------------------------------------------------------------

    \143\ See NASAA Letter and PIABA Letter.
    \144\ See NASAA Letter and PIABA Letter.
    \145\ See NASAA Letter.
    \146\ See NASAA Letter and PIABA Letter.
    \147\ See PIABA Letter.
    \148\ See NASAA Letter.
---------------------------------------------------------------------------

    Second, these same two commenters request that FINRA include a 
mandatory disgorgement provision for violations of its proposed 
rule.\149\ These commenters state that they are disappointed that FINRA 
removed the mandatory disgorgement provisions from the proposal as 
outlined in FINRA's Regulatory Notice 14-50.\150\ These commenters 
believe that a mandatory disgorgement provision would act as a 
significant deterrent to engaging in pay-to-play schemes, and it should 
remain in FINRA's final rule.\151\
---------------------------------------------------------------------------

    \149\ See NASAA Letter and PIABA Letter.
    \150\ See NASAA Letter and PIABA Letter.
    \151\ See NASAA Letter and PIABA Letter.
---------------------------------------------------------------------------

    Finally, one of these commenters believes that the current two-year 
cooling-off period in the proposal should be at least four years.\152\ 
This commenter believes that the two-year cooling-off period does not 
adequately reduce the incentive for FINRA member firms to make 
political contributions in order to obtain pay-to-play advantages.\153\ 
This commenter states FINRA should start with the most comprehensive 
rule, and that it would welcome the deterrent effect of a four-year 
cooling off period.\154\
---------------------------------------------------------------------------

    \152\ See PIABA Letter.
    \153\ See id.
    \154\ See id.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether To Approve or Disapprove SR-FINRA-
2015-056 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Exchange Act 
Section 19(b)(2)(B) to determine whether the proposed rule change 
should be approved or disapproved.\155\ Institution of proceedings 
appears appropriate at this time in view of the legal and policy issues 
raised by the proposal. As noted above, institution of proceedings does 
not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the proposed rule change, 
including the comments received, and provide the Commission with 
additional comment to inform the Commission's analysis as to whether to 
approve or disapprove the proposal.
---------------------------------------------------------------------------

    \155\ 15 U.S.C. 78s(b)(2). Exchange Act Section 19(b)(2)(B) 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
The time for conclusion of the proceedings may be extended for up to 
an additional 60 days if the Commission finds good cause for such 
extension and publishes its reasons for so finding or if the self-
regulatory organization consents to the extension.
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    Pursuant to Exchange Act Section 19(b)(2)(B),\156\ the Commission 
is providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from, commenters with regard to the proposed 
rule change's consistency with Section 15A of the Exchange Act, and in 
particular Sections 15A(b)(6) and 15A(b)(9). Exchange Act Section 
15A(b)(6) \157\ 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. In addition, Exchange Act 
Section 15A(b)(9) \158\ requires that FINRA rules not impose any 
unnecessary or inappropriate burden on competition.
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    \156\ 15 U.S.C. 78s(b)(2)(B).
    \157\ 15 U.S.C. 78o-3(b)(6).
    \158\ 15 U.S.C. 78o-3(b)(9).
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V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues raised by the proposed rule change. In particular, the 
Commission invites the written views of interested persons on whether 
the proposed rule change is inconsistent with Sections 15A(b)(6) and 
15A(b)(9), or any other provision, of the Exchange Act, or the rules 
and regulations thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval that would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\159\
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    \159\ Exchange Act Section 19(b)(2), as amended by the 
Securities Acts Amendments of 1975, Pub. L. 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments by April 25, 2016 concerning whether the proposed rule change 
should be approved or disapproved. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
May 19, 2016. 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-2015-056 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-2015-056. 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

[[Page 19269]]

change that are filed with the Commission, and all written 
communications relating to the 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 10:00 a.m. and 3:00 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 publicly available.
    All submissions should refer to File Number SR-FINRA-2015-056 and 
should be submitted on or before April 25, 2016. If comments are 
received, any rebuttal comments should be submitted by May 19, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\160\
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    \160\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07513 Filed 4-1-16; 8:45 am]
 BILLING CODE 8011-01-P