Document ID: SEC-2016-1568-0001
Agency: sec
Document Type: Proposed Rule
Title: Political Contributions by Certain Investment Advisers; Ban on Third-Party Solicitation
Posted Date: 2016-09-02T04:00Z

[Federal Register Volume 81, Number 171 (Friday, September 2, 2016)]
[Proposed Rules]
[Pages 60651-60653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20890]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-4512; File No. S7-17-16]

Political Contributions by Certain Investment Advisers: Ban on 
Third-Party Solicitation; Notice of Order With Respect to MSRB Rule G-
37

AGENCY: Securities and Exchange Commission.

ACTION: Notice of intent to issue order.

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

SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') intends to issue an order pursuant to section 206 of the 
Investment Advisers Act of 1940 (the ``Advisers Act'') and rule 206(4)-
5 thereunder (the ``SEC Pay to Play Rule'') finding that the Municipal 
Securities Rulemaking Board (``MSRB'') rule G-37 (the ``MSRB Pay to 
Play Rule'') imposes substantially equivalent or more stringent 
restrictions on municipal advisors than the SEC Pay to Play Rule 
imposes on investment advisers and is consistent with the objectives of 
the SEC Pay to Play Rule.

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

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

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

SUPPLEMENTARY INFORMATION:

Hearing or Notification of Hearing

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

[[Page 60652]]

the issues contested. Persons who wish to be notified of a hearing may 
request notification by writing to the Commission's Secretary.
    The Commission intends to issue an order under the Advisers Act.\1\
---------------------------------------------------------------------------

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

I. Background

    The Commission adopted the SEC Pay to Play Rule [17 CFR 275.206(4)-
5] under the Advisers Act [15 U.S.C. 80b] to prohibit an investment 
adviser from providing advisory services for compensation to a 
government client for two years after the adviser or certain of its 
executives or employees (``covered associates'') make a contribution to 
certain elected officials or candidates.\2\ Rule 206(4)-5 also 
prohibits an adviser and its covered associates from providing or 
agreeing to provide, directly or indirectly, payment to any third-party 
for a solicitation of advisory business from any government entity on 
behalf of such adviser, unless such third-party is a ``regulated 
person'' (``third-party solicitor ban'').\3\ Rule 206(4)-5 defines a 
``regulated person'' as an SEC-registered investment adviser,\4\ a 
registered broker or dealer subject to pay to play restrictions adopted 
by a registered national securities association that prohibit members 
from engaging in distribution or solicitation activities if certain 
political contributions have been made,\5\ or a registered municipal 
advisor subject to pay to play restrictions adopted by the MSRB that 
prohibit members from engaging in distribution or solicitation 
activities if certain political contributions have been made.\6\ In 
addition, in order for a broker-dealer or municipal advisor to be a 
regulated person under rule 206(4)-5, the Commission must find, by 
order, that these pay to play rules: (i) Impose substantially 
equivalent or more stringent restrictions on broker-dealers or 
municipal advisors than the SEC Pay to Play Rule imposes on investment 
advisers; and (ii) are consistent with the objectives of the SEC Pay to 
Play Rule.\7\
---------------------------------------------------------------------------

    \2\ Political Contributions by Certain Investment Advisers, 
Investment Advisers Act Rel. No. 3043 (July 1, 2010) [75 FR 41018 
(July 14, 2010)] (``SEC Pay to Play Rule Release'').
    \3\ See id. at section II.B.2.(b). See also 17 CFR 275.206(4)-
5(a)(2)(i)(A).
    \4\ See 17 CFR 275.206(4)-5(f)(9)(i).
    \5\ See 17 CFR 275.206(4)-5(f)(9)(ii).
    \6\ See 17 CFR 275.206(4)-5(f)(9)(iii). On June 22, 2011, the 
Commission amended the SEC Pay to Play Rule to add municipal 
advisors to the definition of ``regulated persons.'' See Rules 
Implementing Amendments to the Investment Advisers Act of 1940, 
Investment Advisers Act Rel. No. 3221 (June 22, 2011) [76 FR 42950 
(July 19, 2011)] (``Municipal Advisor Addition Release''). The 
Commission adopted final rules with respect to the registration of 
municipal advisors on September 20, 2013. See Registration of 
Municipal Advisors, Exchange Act Rel. No. 70462 (Sept. 20, 2013) [78 
FR 67468 (Nov. 12, 2013)] (``Municipal Advisor Registration 
Release'').
    \7\ See 17 CFR 275.206(4)-5(f)(9).
---------------------------------------------------------------------------

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

    \8\ See SEC Pay to Play Rule Release, supra footnote 2, at 
section III.
    \9\ See Municipal Advisor Addition Release, supra footnote 6, at 
section II.D.1.
    \10\ See Political Contributions by Certain Investment Advisers: 
Ban on Third-Party Solicitation; Extension of Compliance Date, 
Investment Advisers Act Rel. No. 3418 (June 8, 2012) [77 FR 35263 
(June 13, 2012)].
    \11\ The final date on which a municipal advisor must file a 
complete application for registration was October 31, 2014. See 
Municipal Advisor Registration Release, supra footnote 6, at section 
V.
    \12\ See Political Contributions by Certain Investment Advisers: 
Ban on Third-Party Solicitation; Notice of Compliance Date, 
Investment Advisers Act Rel. No. 4129 (June 25, 2015) [80 FR 37538 
(July 2, 2015)]. On June 25, 2015, the Division of Investment 
Management published an FAQ that provides that the Division would 
not recommend enforcement action to the Commission against any 
investment adviser or its covered associates for the payment to any 
third person to solicit a government entity for investment advisory 
services until the later of (i) the effective date of a pay to play 
rule adopted by the Financial Industry Regulatory Authority or (ii) 
the effective date of a pay to play rule adopted by the MSRB. See 
http://www.sec.gov/divisions/investment/pay-to-play-faq.htm#1.4.
---------------------------------------------------------------------------

    On December 16, 2015, the MSRB filed with the Commission proposed 
amendments to the MSRB Pay to Play Rule to extend its application to 
municipal advisors, which the Commission published for notice and 
comment on December 23, 2015 pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Exchange Act'') and rule 19b-4 
thereunder.\13\ On February 17, 2016, the MSRB published a regulatory 
notice announcing that the proposed amendments to the MSRB Pay to Play 
Rule were deemed approved by the Commission under section 19(b)(2)(D) 
of the Exchange Act on February 13, 2016 and the effective date of the 
rule is August 17, 2016.\14\ Prior to its amendment, the MSRB Pay to 
Play Rule only applied to brokers, dealers and municipal securities 
dealers.
---------------------------------------------------------------------------

    \13\ See Self-Regulatory Organizations; Municipal Securities 
Rulemaking Board; Notice of Filing of a Proposed Rule Change 
Consisting of Proposed Amendments to Rule G-37, on Political 
Contributions and Prohibitions on Municipal Securities Business, 
Rule G-8, on Books and Records, Rule G-9, on Preservation of 
Records, and Forms G-37 and G-37x, Exchange Act Rel. No. 76763 (Dec. 
24, 2015) [80 FR 81710 (Dec. 30, 2015)] (the ``MSRB Pay to Play 
Release'').
    \14\ On August 4, 2016, the MSRB published a regulatory notice 
announcing that it filed with the Commission an amendment to the 
MSRB Pay to Play Rule, effective on August 17, 2016, to clarify that 
contributions by persons who become associated with a dealer and 
become municipal finance professionals of the dealer, if made prior 
to August 17, 2016, are subject to the two-year look-back and may 
subject a dealer to a prohibition on municipal securities business. 
This amendment does not change the rule's application to municipal 
advisors. See MSRB Files Amendment to Rule G-37 to Clarify its 
Application to Contributions before August 17, 2016, Regulatory 
Notice 2016-18, dated August 4, 2016, available at http://msrb.org/
~/media/Files/Regulatory-Notices/Announcements/2016-18.ashx?n=1. A 
dealer may become subject to a ban on municipal securities business 
for a period of two years from the making of a contribution, even if 
the contribution is made by a person who, although not a municipal 
finance professional of the dealer at the time of the contribution, 
becomes a municipal financial professional of the dealer within two 
years of making the contribution (frequently referred to as the 
``two-year look-back''). See Proposed Rule Change to Clarify an 
Existing Requirement in Rule G-37 Regarding the Two-Year Look-Back, 
SR-MSRB-2016-10 (Aug. 4, 2016), available at http://msrb.org/~/
media/Files/SEC-Filings/2016/MSRB-2016-10.ashx.
---------------------------------------------------------------------------

II. Discussion of Order

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

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

     Prohibit a municipal advisor from engaging in municipal 
advisory business with a municipal entity for two years, subject to 
exceptions, following the making of a contribution to certain officials 
of the municipal entity by the municipal advisor, a municipal advisor 
professional of the municipal advisor, or a political action committee 
controlled

[[Page 60653]]

by the municipal advisor or a municipal advisor professional of the 
municipal advisor; \16\
---------------------------------------------------------------------------

    \16\ MSRB Pay to Play Release, supra footnote 13, at 81712.
---------------------------------------------------------------------------

     Prohibit municipal advisors and municipal advisor 
professionals from soliciting contributions, or coordinating 
contributions, to certain officials of a municipal entity with which 
the municipal advisor is engaging, or seeking to engage, in municipal 
advisory business; \17\
---------------------------------------------------------------------------

    \17\ Id.
---------------------------------------------------------------------------

     Prohibit municipal advisors and certain municipal advisor 
professionals from soliciting payments, or coordinating payments, to 
political parties of states and localities with which the municipal 
advisor is engaging in, or seeking to engage in, municipal advisory 
business; \18\
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

     Prohibit municipal advisors and municipal advisor 
professionals from committing indirect violations of the MSRB Pay to 
Play Rule; \19\
---------------------------------------------------------------------------

    \19\ Id.
---------------------------------------------------------------------------

     Extend applicable interpretive guidance under the existing 
MSRB pay to play rule to municipal advisors; \20\ and
---------------------------------------------------------------------------

    \20\ Id.
---------------------------------------------------------------------------

     Include a new defined term (``municipal advisor third-
party solicitor'') for municipal advisors that undertake a solicitation 
of a municipal entity on behalf of a third-party dealer, municipal 
advisor or investment adviser. Certain aspects of the rule will apply 
to this distinct type of municipal advisor.
    The Commission believes that the rule imposes substantially 
equivalent or more stringent restrictions on municipal advisors than 
rule 206(4)-5 imposes on investment advisers and would be consistent 
with the objectives of rule 206(4)-5.

    By the Commission.

    Dated: August 25, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-20890 Filed 9-1-16; 8:45 am]
 BILLING CODE 8011-01-P