Document ID: SEC-2015-2182-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.,
Posted Date: 2015-12-30T05:00Z

[Federal Register Volume 80, Number 250 (Wednesday, December 30, 2015)]
[Notices]
[Pages 81650-81664]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32894]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76767; File No. SR-FINRA-2015-056]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt 
FINRA Rule 2030 and FINRA Rule 4580 To Establish ``Pay-To-Play'' and 
Related Rules

December 24, 2015.
    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\ notice is hereby given that on December 16, 2015, 
Financial Industry Regulatory Authority, Inc. filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been substantially prepared by FINRA. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rules 2030 (Engaging in 
Distribution and Solicitation Activities with Government Entities) \3\ 
and 4580 (Books and Records Requirements for Government Distribution 
and Solicitation Activities) to establish ``pay-to-play'' \4\ 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.
---------------------------------------------------------------------------

    \3\ FINRA published the proposed rule change as FINRA Rule 2390 
in Regulatory Notice 14-50 (Nov. 2014) (``Regulatory Notice 14-
50''). FINRA has determined that the proposed rule change is more 
appropriately categorized under the FINRA Rule 2000 Series relating 
to ``Duties and Conflicts.''
    \4\ ``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.
---------------------------------------------------------------------------

    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
Background & Discussion
    In July 2010, the SEC adopted Rule 206(4)-5 under the Investment 
Advisers Act of 1940 (``Advisers Act'') addressing pay-to-play 
practices by investment advisers (the ``SEC Pay-to-Play Rule'').\5\ The 
SEC Pay-to-Play Rule prohibits an investment adviser from providing 
advisory services for compensation to a government entity for two years 
after the adviser or its covered associates make a contribution to an 
official of the government entity, unless an exception or exemption 
applies. In addition, it prohibits an investment adviser from 
soliciting from others, or coordinating, contributions to government 
entity officials or payments to political parties where the adviser is 
providing or seeking to provide investment advisory services to a 
government entity.
---------------------------------------------------------------------------

    \5\ See 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''). See also 
Advisers Act Release No. 3221 (June 22, 2011), 76 FR 42950 (July 19, 
2011) (Rules Implementing Amendments to the Investment Advisers Act 
of 1940); 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).
---------------------------------------------------------------------------

    The SEC Pay-to-Play Rule also 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.'' A ``regulated person'' includes a 
member firm, provided that: (a) FINRA rules prohibit member firms from 
engaging in distribution or solicitation activities if political 
contributions have been made; and (b) the SEC finds, by order, that 
such rules impose substantially equivalent or more stringent 
restrictions on member firms than the SEC Pay-to-Play Rule imposes on 
investment advisers and that such rules are consistent with the 
objectives of the SEC Pay-to-Play Rule.\6\ The SEC stated that this SEC 
ban on third-party solicitations would be effective nine months after 
the compliance date of a final rule adopted by the SEC by which 
municipal advisors must register under the Exchange Act.\7\ The SEC 
adopted such a final rule on September 20, 2013, with a compliance date 
of July 1, 2014.\8\
---------------------------------------------------------------------------

    \6\ See SEC Pay-to-Play Rule 206(4)-5(f)(9). A ``regulated 
person'' also includes SEC registered investment advisers and SEC-
registered municipal advisors, subject to specified conditions.
    \7\ See Advisers Act Release No. 3418 (June 8, 2012), 77 FR 
35263 (June 13, 2012).
    \8\ See Exchange Act Release No. 70462 (Sept. 20, 2013), 78 FR 
67468 (Nov. 12, 2013) (Registration of Municipal Advisors). On June 
25, 2015, the SEC issued notice of the compliance date for its third 
party solicitation ban as July 31, 2015. See Advisers Act Release 
No. 4129 (June 25, 2015), 80 FR 37538 (July 1, 2015). In addition, 
staff of the Division of Investment Management added Question I.4 to 
its Staff Responses to Questions About the Pay to Play Rule stating, 
among other things, that until the later of (i) the effective date 
of a FINRA pay-to-play rule or (ii) the effective date of an MSRB 
pay-to-play rule, the Division of Investment Management would not 
recommend enforcement action to the Commission against an investment 
adviser or its covered associates under SEC Pay-to-Play Rule 206(4)-
5(a)(2)(i) for the payment to any person to solicit a government 
entity for investment advisory services. See https://www.sec.gov/divisions/investment/pay-to-play-faq.htm. See also infra Effective 
Date, for a more detailed discussion regarding the effective date of 
FINRA Rules 2030 and 4580.

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

[[Page 81651]]

    Based on this regulatory framework, FINRA is proposing a pay-to-
play rule, Rule 2030, modeled on the SEC Pay-to-Play Rule that would 
impose substantially equivalent restrictions on member firms engaging 
in distribution or solicitation activities to those the SEC Pay-to-Play 
Rule imposes on investment advisers. FINRA is also proposing rules that 
would impose recordkeeping requirements on member firms in connection 
with political contributions.\9\
---------------------------------------------------------------------------

    \9\ In connection with the adoption of the SEC Pay-to-Play Rule, 
the Commission also adopted recordkeeping requirements related to 
political contributions by investment advisers and their covered 
associates. See Advisers Act Rule 204-2(a)(18) and (h)(1).
---------------------------------------------------------------------------

    The proposed rules would establish a comprehensive regime to 
regulate the activities of member firms that engage in distribution or 
solicitation activities with government entities on behalf of 
investment advisers. FINRA believes that establishing requirements for 
member firms that are modeled on the SEC's Pay-to-Play-Rule is a more 
effective regulatory response to the concerns the SEC identified in the 
SEC Pay-to-Play Rule Adopting Release regarding third-party 
solicitations than an outright ban on such activity. For example, in 
the SEC Pay-to-Play Rule Adopting Release, the SEC stated that 
solicitors \10\ or ``placement agents'' \11\ have played a central role 
in actions that it and other authorities have brought involving pay-to-
play schemes.\12\ The SEC noted that in several instances, advisers 
allegedly made significant payments to placement agents and other 
intermediaries to influence the award of advisory contracts.\13\ The 
SEC also acknowledged the difficulties that advisers face in monitoring 
or controlling the activities of their third-party solicitors.\14\ 
Accordingly, the proposed rules are intended to enable member firms to 
continue to engage in distribution and solicitation activities with 
government entities on behalf of investment advisers while at the same 
time deterring member firms from engaging in pay-to-play practices.\15\
---------------------------------------------------------------------------

    \10\ ``Solicitors'' typically locate investment advisory clients 
on behalf of an investment adviser. See Advisers Act Release No. 
2910 (Aug. 3, 2009), 74 FR 39840, 39853 n.137 (Aug. 7, 2009) 
(Political Contributions by Certain Investment Advisers).
    \11\ ``Placement agents'' typically specialize in finding 
investors (often institutional investors or high net worth 
investors) that are willing and able to invest in a private offering 
of securities on behalf of the issuer of such privately offered 
securities. See id.
    \12\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41037 (discussing the reasons for proposing a ban on using third 
parties to solicit government business).
    \13\ See id.
    \14\ See id.
    \15\ In response to a request from SEC staff, FINRA previously 
indicated its intent to prepare rules for consideration by the SEC 
that would prohibit its member firms from soliciting advisory 
business from a government entity on behalf of an adviser unless the 
member firms comply with requirements prohibiting pay-to-play 
practices. See Letter from Andrew J. Donohue, Director, Division of 
Investment Management, SEC, to Richard G. Ketchum, Chairman & CEO, 
FINRA (Dec. 18, 2009), available at http://www.sec.gov/comments/s7-18-09/s71809-252.pdf (requesting whether FINRA would consider 
adopting a rule preventing pay-to-play activities by registered 
broker-dealers acting as legitimate placement agents on behalf of 
investment advisers). See also Letter from Richard G. Ketchum, 
Chairman & CEO, FINRA, to Andrew J. Donohue, Director, Division of 
Investment Management, SEC (Mar. 15, 2010), available at http://www.sec.gov/comments/s7-18-09/s71809-260.pdf (stating ``[w]e believe 
that a regulatory scheme targeting improper pay to play practices by 
broker-dealers acting on behalf of investment advisers is . . . a 
viable solution to a ban on certain private placement agents serving 
a legitimate function'').
---------------------------------------------------------------------------

    FINRA sought comment on the proposed rule change in Regulatory 
Notice 14-50.\16\ As discussed further in Item II.C below, commenters 
were generally supportive of the proposed rule change, but also 
expressed some concerns. In considering the comments, FINRA has engaged 
in discussions with SEC staff. In addition, as discussed in Item II.B 
below, FINRA has engaged in an analysis of the potential economic 
impacts of the proposed rule change. As a result, FINRA has revised the 
proposed rule change as published in Regulatory Notice 14-50. In 
particular, as discussed in more detail in Item II.C, FINRA has 
determined not to propose a disclosure requirement for government 
distribution and solicitation activities at this time. In addition, 
FINRA has determined not to propose a disgorgement requirement as part 
of the pay-to-play rule. FINRA believes that these revisions will more 
closely align FINRA's proposed pay-to-play rule with the SEC Pay-to-
Play Rule and help reduce cost and compliance burden concerns raised by 
commenters.
---------------------------------------------------------------------------

    \16\ See supra note 3.
---------------------------------------------------------------------------

    The proposed rule change, as revised in response to comments on 
Regulatory Notice 14-50, is set forth in further detail below.
Proposed Pay-to-Play Rule
A. Two-Year Time Out
    Proposed Rule 2030(a) would prohibit a covered member from engaging 
in distribution \17\ or solicitation \18\ 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). As discussed in more detail 
below, the terms and scope of this prohibition are modeled on the SEC 
Pay-to-Play Rule.\19\
---------------------------------------------------------------------------

    \17\ As discussed in Item II.C below, FINRA is not eliminating 
the term ``distribution'' from the proposed rule as suggested by 
some commenters. Thus, subject to the limitations discussed in Item 
II.C, the proposed rule would apply to covered members engaging in 
distribution (as well as solicitation) activities with government 
entities. Specifically, the proposed rule would apply to 
distribution activities involving unregistered pooled 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.
    \18\ 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.'' 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, 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. See also infra note 40.
    \19\ See SEC Pay-to-Play Rule 206(4)-5(a)(1).
---------------------------------------------------------------------------

    The proposed rule would not ban or limit the amount of political 
contributions a covered member or its covered associates could make. 
Instead, it 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. Consistent with the two-year time out in the SEC 
Pay-to-Play Rule, the two-year time out in the proposed rule 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.

[[Page 81652]]

1. Covered Members
    Proposed Rule 2030(g)(4) defines a ``covered member'' to mean ``any 
member except when that member is engaging in activities that would 
cause the member to be a municipal advisor as defined in Exchange Act 
Section 15B(e)(4), SEA Rule 15Ba1-1(d)(1) through (4) and other rules 
and regulations thereunder.'' As noted above, the SEC Pay-to-Play Rule 
includes within its definition of ``regulated person'' SEC-registered 
municipal advisors, subject to specified conditions.\20\ Specifically, 
the SEC Pay-to-Play Rule prohibits an investment adviser from providing 
or agreeing to provide, directly or indirectly, payment to an SEC-
registered municipal advisor unless the municipal advisor is subject to 
a Municipal Securities Rulemaking Board (``MSRB'') pay-to-play 
rule.\21\
---------------------------------------------------------------------------

    \20\ See supra note 6.
    \21\ See SEC Pay-to-Play Rule 206(4)-5(a)(2)(i)(A) and 206(4)-
5(f)(9).
---------------------------------------------------------------------------

    A member firm that solicits a government entity for investment 
advisory services on behalf of an unaffiliated investment adviser may 
be required to register with the SEC as a municipal advisor as a result 
of such activity.\22\ Under such circumstances, MSRB rules applicable 
to municipal advisors, including any pay-to-play rule adopted by the 
MSRB, would apply to the member firm.\23\ On the other hand, if the 
member firm solicits a government entity on behalf of an affiliated 
investment adviser, such activity would not cause the firm to be a 
municipal advisor. Under such circumstances, the member firm would be a 
``covered member'' subject to the requirements of proposed Rule 
2030.\24\
---------------------------------------------------------------------------

    \22\ See Exchange Act Section 15B(e)(9) and Rule 15Ba1-1(n) 
thereunder (defining ``solicitation of a municipal entity or 
obligated person'' to mean ``a direct or indirect communication with 
a municipal entity or obligated person made by a person, for direct 
or indirect compensation, on behalf of a broker, dealer, municipal 
securities dealer, municipal advisor, or investment adviser . . . 
that does not control, is not controlled by, or is not under common 
control with the person undertaking such solicitation for the 
purpose of obtaining or retaining an engagement by a municipal 
entity or obligated person of a broker, dealer, municipal securities 
dealer, or municipal advisor for or in connection with municipal 
financial products, the issuance of municipal securities, or of an 
investment adviser to provide investment advisory services to or on 
behalf of a municipal entity.'')
    \23\ On August 18, 2014, the MSRB issued a Regulatory Notice 
requesting comment on draft amendments to MSRB Rule G-37, on 
political contributions made by brokers, dealers and municipal 
securities dealers and prohibitions on municipal securities 
business, to extend the rule to cover municipal advisors. See MSRB 
Regulatory Notice 2014-15 (Aug. 2014). MSRB Rule G-37 was approved 
by the Commission in 1994 and, since that time, has prohibited 
brokers, dealers and municipal securities dealers engaging in 
municipal securities business from participating in pay-to-play 
practices. See Exchange Act Release No. 33868 (Apr. 7, 1994), 59 FR 
17621 (Apr. 13, 1994) (Order Approving File No. SR-MSRB-94-2).
    \24\ FINRA notes that a person that is registered under the 
Exchange Act as a broker-dealer and municipal advisor, and under the 
Advisers Act as an investment adviser could potentially be a 
``regulated person'' for purposes of the SEC Pay-to-Play Rule. Such 
a regulated person would be subject to the rules that apply to the 
services the regulated person is performing. See also supra note 23 
(noting that brokers, dealers and municipal securities dealers 
engaging in municipal securities business are subject to MSRB Rule 
G-37).
---------------------------------------------------------------------------

2. Investment Advisers
    The proposed rule would apply to covered members acting on behalf 
of any investment adviser registered (or required to be registered) 
with the SEC, or unregistered in reliance on the exemption available 
under Section 203(b)(3) of the Advisers Act for foreign private 
advisers, or that is an exempt reporting adviser under Advisers Act 
Rule 204-4(a).\25\ Thus, it would not apply to member firms acting on 
behalf of advisers that are registered with state securities 
authorities instead of the SEC, or advisers that are unregistered in 
reliance on exemptions other than Section 203(b)(3) of the Advisers 
Act. The proposed rule's definition of ``investment adviser'' is 
consistent with the definition of ``investment adviser'' in the SEC 
Pay-to-Play Rule.\26\
---------------------------------------------------------------------------

    \25\ See proposed Rule 2030(g)(7).
    \26\ See SEC Pay-to-Play Rule 206(4)-5(a)(1). FINRA notes that, 
consistent with the SEC Pay-to-Play Rule, the proposed rule would 
not apply to state-registered investment advisers as few of these 
smaller firms manage public pension plans or other similar funds. 
See also infra note 98 and accompanying text.
---------------------------------------------------------------------------

3. Official of a Government Entity
    An official of a government entity 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.\27\ 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),\28\ 457,\29\ and 529 
plans.\30\
---------------------------------------------------------------------------

    \27\ Consistent with the SEC Pay-to-Play Rule, proposed Rule 
2030(g)(8) defines an ``official'' to mean ``any person (including 
any election committee for the person) who was, at the time of the 
contribution, an incumbent, candidate or successful candidate for 
elective office of a government entity, if the office: (A) Is 
directly or indirectly responsible for, or can influence the outcome 
of, the hiring of an investment adviser by a government entity; or 
(B) 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 by a government entity.''
    \28\ A 403(b) plan is a tax-deferred employee benefit retirement 
plan established under Section 403(b) of the Internal Revenue Code 
of 1986 (26 U.S.C. 403(b)).
    \29\ A 457 plan is a tax-deferred employee benefit retirement 
plan established under Section 457 of the Internal Revenue Code of 
1986 (26 U.S.C. 457).
    \30\ A 529 plan is a ``qualified tuition plan'' established 
under Section 529 of the Internal Revenue Code of 1986 (26 U.S.C. 
529). Consistent with the SEC Pay-to-Play Rule, proposed Rule 
2030(g)(6) defines a ``government entity'' to mean ``any state or 
political subdivision of a state, including: (A) Any agency, 
authority or instrumentality of the state or political subdivision; 
(B) A pool of assets sponsored or established by the state or 
political subdivision or any agency, authority or instrumentality 
thereof, including but not limited to a ``defined benefit plan'' as 
defined in Section 414(j) of the Internal Revenue Code, or a state 
general fund; (C) A plan or program of a government entity; and (D) 
Officers, agents or employees of the state or political subdivision 
or any agency, authority or instrumentality thereof, acting in their 
official capacity.''
---------------------------------------------------------------------------

    Thus, 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. As 
noted in the SEC Pay-to-Play Rule Adopting Release, a person appointed 
by an elected official is likely to be subject to that official's 
influences and recommendations. 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.\31\
---------------------------------------------------------------------------

    \31\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41029 (discussing the terms ``official'' and ``government entity'').
---------------------------------------------------------------------------

4. Contributions
    The proposed rule's time out provisions would be triggered by 
contributions made by a covered member or any of its covered 
associates. A contribution would include a 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, 
including any payments for debts incurred in such an election. It would 
also include transition or inaugural expenses incurred by a successful 
candidate for state or local office.\32\

[[Page 81653]]

Consistent with the SEC Pay-to-Play Rule, FINRA 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.\33\ Similarly, FINRA 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,\34\ 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.\35\
---------------------------------------------------------------------------

    \32\ Consistent with the SEC Pay-to-Play Rule, proposed Rule 
2030(g)(1) defines a ``contribution'' to mean ``any gift, 
subscription, loan, advance, or deposit of money or anything of 
value made for: (A) The purpose of influencing any election for 
federal, state or local office; (B) Payment of debt incurred in 
connection with any such election; or (C) Transition or inaugural 
expenses of the successful candidate for state or local office.''
    \33\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41030. The SEC also noted that a covered associate's donation of his 
or her time generally would not be viewed as a contribution if such 
volunteering were to occur during non-work hours, if the covered 
associate were using vacation time, or if the adviser is not 
otherwise paying the employee's salary (e.g., an unpaid leave of 
absence). See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41030 n.157. FINRA would take a similar position in interpreting the 
proposed rule.
    \34\ Section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 
501(c)(3)) contains a list of charitable organizations that are 
exempt from Federal income tax.
    \35\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41030 (discussing the scope of the term ``contribution'' under the 
SEC Pay-to-Play Rule). Note, however, proposed Rule 2030(e) 
providing 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.
---------------------------------------------------------------------------

5. Covered Associates
    As stated 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.\36\ Accordingly, consistent with the SEC Pay-to-Play 
Rule, under the proposed rule, contributions by each of these persons, 
which the proposed rule describes as ``covered associates,'' would 
trigger the two-year time out.\37\
---------------------------------------------------------------------------

    \36\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41031.
    \37\ Consistent with the SEC Pay-to-Play Rule, proposed Rule 
2030(g)(2) defines a ``covered associate'' 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.''
---------------------------------------------------------------------------

    Contributions by an executive officer of a covered member would 
trigger the two-year time out. As discussed in Item II.C below, 
commenters requested that FINRA define the term ``executive officer'' 
for purposes of the proposed pay-to-play rule. Accordingly, consistent 
with the SEC Pay-to-Play Rule, proposed Rule 2030(g)(5) defines an 
``executive officer of a covered member'' to mean: ``(A) The president; 
(B) Any vice president in charge of a principal business unit, division 
or function (such as sales, administration or finance); (C) Any other 
officer of the covered member who performs a policy-making function; or 
(D) Any other person who performs similar policy-making functions for 
the covered member.'' Whether a person is an executive officer would 
depend on his or her function or activities and not his or her title. 
For example, an officer who is a chief executive of a covered member 
but whose title does not include ``president'' would nonetheless be an 
executive officer for purposes of the proposed rule.
    In addition, a covered associate would include a political action 
committee, or PAC, controlled by the covered member or any of its 
covered associates as a PAC is often used to make political 
contributions.\38\ Under the proposed rule, FINRA would consider a 
covered member 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.
---------------------------------------------------------------------------

    \38\ See id.
---------------------------------------------------------------------------

6. ``Look Back''
    Consistent with the SEC Pay-to-Play Rule, 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. 
This ``look back'' would apply to any person who becomes a covered 
associate, including a current employee who has been transferred or 
promoted to a position covered by the proposed rule. A person would 
become a ``covered associate'' for purposes of the proposed rule's 
``look back'' provision at the time he or she is hired or promoted to a 
position that meets the definition of a ``covered associate.''
    Thus, when an employee becomes a covered associate, the covered 
member must ``look back'' in time to that employee's contributions to 
determine whether the time out applies to the covered member. If, for 
example, the contributions were made more than two years (or, pursuant 
to the exception described below for new covered associates, six 
months) prior to the employee becoming a covered associate, the time 
out has run. 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 two-year period has run.
    In no case would the prohibition imposed be longer than two years 
from the date the covered associate made the contribution. Thus, if, 
for example, the covered associate becomes employed (and engages in 
solicitation activities) one year and six months after the contribution 
was made, the covered member would be subject to the proposed rule's 
prohibition for the remaining six months of the two-year period. This 
``look back'' provision, which is consistent with the SEC Pay-to-Play 
Rule, is designed to prevent covered members from circumventing the 
rule by influencing the selection process by hiring persons who have 
made political contributions.\39\
---------------------------------------------------------------------------

    \39\ Similarly, consistent with the SEC Pay-to-Play Rule, to 
prevent covered members from channeling contributions through 
departing employees, covered members must ``look forward'' with 
respect to covered associates who cease to qualify as covered 
associates or leave the firm. The covered associate's employer at 
the time of the contribution would be subject to the proposed rule's 
prohibition for the entire two-year period, regardless of whether 
the covered associate remains a covered associate or remains 
employed by the covered member. Thus, dismissing a covered associate 
would not relieve the covered member from the two-year time out. See 
SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41033 
(discussing the ``look back'' in that rule).
---------------------------------------------------------------------------

B. Prohibition on Soliciting and Coordinating Contributions

    Proposed Rule 2030(b) would prohibit a covered member or covered 
associate from coordinating or soliciting \40\ any

[[Page 81654]]

person or 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 \41\ 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. This 
provision is modeled on a similar provision in the SEC Pay-to-Play Rule 
\42\ 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.\43\
---------------------------------------------------------------------------

    \40\ Proposed Rule 2030(g)(11)(B) defines the term ``solicit'' 
with respect to a contribution or payment as ``to communicate, 
directly or indirectly, for the purpose of obtaining or arranging a 
contribution or payment.'' This provision is consistent with a 
similar provision in the SEC Pay-to-Play Rule. See SEC Pay-to-Play 
Rule 206(4)-5(f)(10)(ii). Consistent with the SEC Pay-to-Play Rule, 
whether a particular activity involves a solicitation or 
coordination of a contribution or payment for purposes of the 
proposed rule would depend on the facts and circumstances. A covered 
member that consents to the use of its name on fundraising 
literature for a candidate would be soliciting contributions for 
that candidate. Similarly, a covered member that sponsors a meeting 
or conference which features a government official as an attendee or 
guest speaker and which involves fundraising for the government 
official would be soliciting contributions for that government 
official. Expenses incurred by the covered member for hosting the 
event would be a contribution by the covered member, thereby 
triggering the two-year ban on the covered member receiving 
compensation for engaging in distribution or solicitation activities 
with the government entity over which that official has influence. 
Such expenses may include, but are not limited to, the cost of the 
facility, the cost of refreshments, any expenses paid for 
administrative staff, and the payment or reimbursement of any of the 
government official's expenses for the event. The de minimis 
exception under proposed Rule 2030(c)(1) would not be available with 
respect to these expenses because they would have been incurred by 
the firm, not by a natural person. See also SEC Pay-to-Play Rule 
Adopting Release, 75 FR 41018, 41043 n.328, 329 (discussing the term 
``solicit'' with respect to a contribution or payment).
    \41\ Consistent with the SEC Pay-to-Play Rule, proposed Rule 
2030(g)(9) defines the term ``payment'' to mean ``any gift, 
subscription, loan, advance or deposit of money or anything of 
value.'' This definition is similar to the definition of 
``contribution,'' but is broader, in the sense that it does not 
include limitations on the purposes for which such money is given 
(e.g., it does not have to be made for the purpose of influencing an 
election). Consistent with the SEC Pay-to-Play Rule, FINRA is 
including the broader term ``payments,'' as opposed to 
``contributions,'' to deter a covered member from circumventing the 
proposed rule's prohibitions by coordinating indirect contributions 
to government officials by making payments to political parties. See 
SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 41043 n.331 and 
accompanying text (discussing a similar approach with respect to 
restrictions on soliciting and coordinating contributions and 
payments).
    \42\ See SEC Pay-to-Play Rule 206(4)-5(a)(2).
    \43\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41043 (discussing restrictions on soliciting and coordinating 
contributions and payments).
---------------------------------------------------------------------------

    In addition, as discussed in Item II.C below, in response to a 
request for clarification from a commenter regarding the application of 
this provision of the proposed rule, FINRA notes that, consistent with 
guidance provided by the SEC in connection with SEC Pay-to-Play Rule 
206(4)-5(a)(2), a direct contribution to a political party by a covered 
member or its covered associates would not violate the proposed rule 
unless the contribution was a means for the covered member to do 
indirectly what the rule would prohibit if done directly (for example, 
if the contribution was earmarked or known to be provided for the 
benefit of a particular government official).

C. Direct or Indirect Contributions or Solicitations

    Proposed Rule 2030(e) further 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. This provision is consistent with a similar 
provision in the SEC Pay-to-Play Rule \44\ 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.\45\ In addition, as discussed in 
Item II.C below, in response to a request for clarification from a 
commenter regarding the application of this provision of the proposed 
rule, FINRA 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.
---------------------------------------------------------------------------

    \44\ See SEC Pay-to-Play Rule 206(4)-5(d).
    \45\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41044 (discussing direct and indirect contributions or 
solicitations). This provision would also cover, for example, 
situations in which contributions by a covered member are made, 
directed or funded through a third party with an expectation that, 
as a result of the contributions, another contribution is likely to 
be made by a third party to ``an official of the government 
entity,'' for the benefit of the covered member. Contributions made 
through gatekeepers thus would be considered to be made 
``indirectly'' for purposes of the rule.
---------------------------------------------------------------------------

D. 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 \46\ 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.\47\ 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.\48\
---------------------------------------------------------------------------

    \46\ Consistent with the SEC Pay-to-Play Rule, 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.'' Thus, the definition includes such unregistered 
pooled investment vehicles as hedge funds, private equity funds, 
venture capital funds, and collective investment trusts. It also 
includes 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.
    \47\ 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. See SEC Pay-to-Play Rule Adopting 
Release, 75 FR 41018, 41047.
    \48\ As discussed in Item II.C below, FINRA has 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.
---------------------------------------------------------------------------

    Proposed Rule 2030(d) is modeled on a similar prohibition in the 
SEC Pay-to-Play Rule \49\ 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. Thus, 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.'' \50\
---------------------------------------------------------------------------

    \49\ See SEC Pay-to-Play Rule 206(4)-5(c).
    \50\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41044 (discussing the applicability of the SEC Pay-to-Play Rule to 
covered investment pools).
---------------------------------------------------------------------------

E. Exceptions and Exemptions

    As discussed in more detail below, the proposed rule contains 
exceptions that are modeled on similar exceptions in the SEC Pay-to-
Play Rule for de minimis contributions, new covered associates and 
returned contributions.\51\
---------------------------------------------------------------------------

    \51\ See SEC Pay-to-Play Rule 206(4)-5(b).
---------------------------------------------------------------------------

    In addition, proposed Rule 2030(f) includes an exemptive provision 
for covered members that is modeled on the

[[Page 81655]]

exemptive provision in the SEC Pay-to-Play Rule \52\ that would allow 
covered members to apply to FINRA for an exemption from the proposed 
rule's two-year time out. Under this provision, FINRA would be able to 
exempt covered members 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. 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. 
In determining whether to grant an exemption, FINRA would take into 
account the varying facts and circumstances that each application 
presents.
---------------------------------------------------------------------------

    \52\ See SEC Pay-to-Play Rule 206(4)-5(e).
---------------------------------------------------------------------------

1. De Minimis Contributions
    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 \53\ at the time of the contributions, provided the 
contributions do not exceed $350 in the aggregate to any one official 
per election. 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. Consistent with the SEC Pay-
to-Play Rule, under both exceptions, primary and general elections 
would be considered separate elections.\54\ These exceptions are based 
on the theory that such contributions are typically made without the 
intent or ability to influence the selection process of the investment 
adviser.
---------------------------------------------------------------------------

    \53\ Consistent with the SEC Pay-to-Play Rule, for purposes of 
proposed Rule 2030(c)(1), a person would be ``entitled to vote'' for 
an official if the person's principal residence is in the locality 
in which the official seeks election. For example, if a government 
official is a state governor running for re-election, any covered 
associate who resides in that state may make a de minimis 
contribution to the official without causing a ban on the covered 
member being compensated for engaging in distribution or 
solicitation activities with that government entity on behalf of an 
investment adviser. If the government official is running for 
president, any covered associate in the country would be able to 
contribute the de minimis amount to the official's presidential 
campaign. See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41034 (discussing the applicability in the SEC Pay-to-Play Rule of 
the exception for de minimis contributions).
    \54\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41034.
---------------------------------------------------------------------------

2. New Covered Associates
    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. This provision is 
consistent with a similar provision in the SEC Pay-to-Play Rule.\55\ As 
stated in the SEC Pay-to-Play Rule Adopting Release, the potential link 
between obtaining advisory business and contributions made by an 
individual prior to his or her becoming a covered associate who is 
uninvolved in distribution or solicitation activities is likely more 
attenuated than for a covered associate who engages in distribution or 
solicitation activities and, therefore, should be subject to a shorter 
look-back period.\56\ This exception is also intended to balance the 
need for covered members to be able to make hiring decisions with 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.\57\
---------------------------------------------------------------------------

    \55\ See SEC Pay-to-Play Rule 206(4)-5(b)(2).
    \56\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41034 (discussing the applicability of the ``look back'' in the SEC 
Pay-to-Play Rule).
    \57\ See id.
---------------------------------------------------------------------------

3. 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.
    Consistent with the SEC Pay-to-Play Rule, this exception would 
allow a covered member to cure the consequences of an inadvertent 
political contribution to an official for whom the covered associate is 
not entitled to vote. As the SEC stated in the SEC Pay-to-Play Rule 
Adopting Release, the exception is limited to the types of 
contributions that are less likely to raise pay-to-play concerns.\58\ 
The prompt return of the contribution provides an indication that the 
contribution would not affect a government entity official's decision 
to award business. The 60-day limit is designed to give contributors 
sufficient time to seek the contribution's return, but still require 
that they do so in a timely manner. In addition, the relatively small 
amount of the contribution, in conjunction with the other conditions of 
the exception, suggests that the contribution was unlikely to have been 
made for the purpose of influencing the selection process. Repeated 
triggering contributions suggest otherwise. Thus, the proposed rule 
would 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. All other covered members would be 
permitted to rely on this exception no more than three times per 
calendar year. In addition, 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. These limitations 
are consistent with similar provisions in the SEC Pay-to-Play Rule.\59\
---------------------------------------------------------------------------

    \58\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41035.
    \59\ See SEC Pay-to-Play Rule 206(4)-5(b)(3). 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.
---------------------------------------------------------------------------

Proposed 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. This provision is consistent with similar 
recordkeeping requirements imposed on investment advisers in connection 
with the SEC Pay-to-Play Rule.\60\ The proposed rule would require 
covered members to maintain a list or other record of:
---------------------------------------------------------------------------

    \60\ See Advisers Act Rule 204-2(a)(18) and (h)(1).
---------------------------------------------------------------------------

     The names, titles and business and residence addresses of 
all covered associates;
     the name and business address of each investment adviser 
on behalf of which the covered member has engaged in distribution or 
solicitation activities with a government entity within the past five 
years (but not prior to the rule's effective date);
     the name and business address of all government entities 
with which the covered member has engaged in distribution or 
solicitation activities for

[[Page 81656]]

compensation \61\ on behalf of an investment adviser, or which are or 
were investors in any covered investment pool on behalf of which the 
covered member has engaged in distribution or solicitation activities 
with the government entity on behalf of the investment adviser to the 
covered investment pool, within the past five years (but not prior to 
the rule's effective date); and
---------------------------------------------------------------------------

    \61\ As discussed in Item II.C below, FINRA has added ``for 
compensation'' to proposed Rule 4580(a)(3) to clarify that, 
consistent with the SEC recordkeeping requirements, FINRA's proposed 
recordkeeping requirements would apply only to government entities 
that become clients.
---------------------------------------------------------------------------

     all direct or indirect contributions made by the covered 
member or any of its covered associates to an official of a government 
entity, or direct or indirect payments to a political party of a state 
or political subdivision thereof, or to a PAC.
    The proposed rule would 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.
Effective Date
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. FINRA intends to establish an effective date that is no 
sooner than 180 days following publication of the Regulatory Notice 
announcing Commission approval of the proposed rule change, and no 
later than 365 days following Commission approval of the proposed rule 
change. This transition period will provide member firms with time to 
identify their covered associates and government entity clients and to 
modify their compliance programs to address new obligations under the 
rules.
    Proposed Rule 2030(a)'s prohibition on 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 is made to the government entity, will not be 
triggered by contributions made prior to the effective date. Similarly, 
the prohibition will not apply to contributions made prior to the 
effective date by new covered associates to which the two years or, as 
applicable, six months ``look back'' applies.
    As of the effective date, member firms must begin to maintain books 
and records in compliance with proposed Rule 4580. Member firms will 
not be required, however, to look back for the five years prior to the 
effective date of the proposed rule to identify investment advisers and 
government entity clients in accordance with proposed Rule 4580(a)(2) 
and (a)(3).
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\62\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that the proposed rule change establishes a 
comprehensive regime to allow member firms to continue to engage in 
distribution or solicitation activities for compensation with 
government entities on behalf of investment advisers following the 
compliance date for the SEC's ban on third-party solicitations while 
deterring member firms from engaging in pay-to-play practices. In the 
absence of a FINRA pay-to-play rule, covered members will be prohibited 
from receiving compensation for engaging in distribution and 
solicitation activities with government entities on behalf of 
investment advisers. FINRA believes that establishing a pay-to-play 
rule modeled on the SEC Pay-to-Play Rule is a more effective regulatory 
response to the concerns identified by the SEC regarding third-party 
solicitations than an outright ban on such activity. At the same time, 
FINRA believes that the proposed two-year time out will deter member 
firms from engaging in pay-to-play practices and, thereby, protect 
investors and the public interest.

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

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
    As discussed above, FINRA published Regulatory Notice 14-50 to 
request comment on the proposed rule change.\63\ Regulatory Notice 14-
50 included an analysis of the economic impacts of the proposed rule 
change and requested comment regarding the analysis. The assessment 
below includes a summary of the comments received regarding the 
economic impact of the proposed rule change as set forth in Regulatory 
Notice 14-50 as well as FINRA's responses to the comments.\64\
---------------------------------------------------------------------------

    \63\ See supra note 3.
    \64\ All references to commenters are to comment letters as 
listed in Exhibit 2b and as further discussed in Item II.C of this 
filing.
---------------------------------------------------------------------------

Economic Impact Assessment
A. Need for the Rule
    As discussed above, the SEC Pay-to-Play Rule 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.'' 
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. Thus, FINRA 
must propose its own pay-to-play rule to enable member firms to 
continue to engage in distribution and solicitation activities for 
compensation with government entities on behalf of investment advisers.
B. Regulatory Objective
    The proposed rule change would establish a comprehensive regime to 
regulate the activities of member firms that engage in distribution or 
solicitation activities with government entities on behalf of 
investment advisers. FINRA aims to enable member firms to continue to 
engage in such activities for compensation while at the same time 
deterring member firms from engaging in pay-to-play practices.
C. Economic Baseline
    The baseline used to evaluate the impact of the proposed rule 
change is the regulatory framework under the SEC Pay-to-Play Rule and 
the MSRB pay-to-play rules.\65\ In the absence of the proposed rules, 
some member firms currently engaging in distribution or solicitation 
activities with government

[[Page 81657]]

entities on behalf of investment advisers may not be able to receive 
payments from investment advisers for engaging in such activities. 
Since a ``regulated person'' also includes SEC-registered investment 
advisers and SEC-registered municipal advisors that would be subject to 
MSRB pay-to-play rules, member firms dually-registered with the SEC as 
investment advisers or municipal advisors may be able to engage in 
distribution or solicitation activities for compensation with 
government entities on behalf of investment advisers.\66\
---------------------------------------------------------------------------

    \65\ See supra note 23 (discussing MSRB Rule G-37).
    \66\ See supra note 24 (noting that a regulated person that is 
registered under the Exchange Act as a broker-dealer and municipal 
advisor, and under the Advisers Act as an investment adviser would 
be subject to the rules that apply to the services the regulated 
person is performing).
---------------------------------------------------------------------------

    The member firms that would have to cease their distribution or 
solicitation activities for compensation with government entities on 
behalf of investment advisers may bear direct losses as a result of the 
loss of this business. In addition, the absence of a FINRA pay-to-play 
rule that the SEC finds by order is substantially equivalent to or more 
stringent than the SEC Pay-to-Play Rule may impact investment advisers 
and public pension plans.
    Specifically, without such a rule, there could be a decrease in the 
number of third-party solicitors which may reduce the competition in 
the market for solicitation services. Some investment advisers may need 
to search for and hire new solicitors as a result of the absence of a 
FINRA pay-to-play rule to continue their solicitation activities. Due 
to the potentially limited capacity of third-party solicitors, 
investment advisers may encounter difficulties in retaining solicitors 
or delays in solicitation services. These changes would likely increase 
the costs to investment advisers that rely on third-party solicitors to 
obtain government clients.
    To the extent that higher costs may reduce the number of investment 
advisers competing for government business, public pension plans may 
face more limited investment opportunities. In such an instance, there 
may be an opportunity cost to a government entity either as it may not 
invest its assets optimally, or when seeking capital due to limitations 
on its access to funding.
D. Economic Impacts
1. Benefits
    The proposed rule change would enable member firms to continue to 
engage in distribution or solicitation activities for compensation with 
government entities on behalf of investment advisers within the 
regulatory boundaries of the proposed rule change. The proposed rule 
change would prevent a potentially harmful disruption in the member 
firms' solicitation business, and accordingly may help member firms 
avoid some of the likely losses associated with the absence of such a 
rule change. The proposed rule change may also help promote competition 
by allowing more third-party solicitors to participate in the market 
for solicitation services, which may in turn reduce costs to investment 
advisers and improve competition for advisory services.
    The proposed rule change is intended to establish a comprehensive 
regime to allow member firms to continue to engage in distribution or 
solicitation activities with government entities on behalf of 
investment advisers while deterring member firms from engaging in pay-
to-play practices. FINRA believes the proposed rules would curb 
fraudulent conduct resulting from pay-to-play practices and, therefore, 
help promote fair competition in the market and protect public pension 
funds and investors. FINRA also believes the proposed rules would 
likely reduce the search costs of government entities and increase 
their ability to efficiently allocate capital, and thereby would 
promote capital formation.
2. Costs
    FINRA recognizes that covered members that engage in distribution 
or solicitation activities with government entities on behalf of 
investment advisers would incur costs to comply with the proposed rules 
on an initial and ongoing basis. Member firms would need to establish 
and maintain policies and procedures to monitor contributions the firm 
and its covered associates make and to ensure compliance with the 
proposed requirements. In addition, member firms that wish to engage in 
distribution or solicitation activities with government entities may 
face hiring constraints as a result of the two-year (or, in some cases, 
six months) ``look back'' provision.\67\
---------------------------------------------------------------------------

    \67\ FINRA notes, however, the availability of the exemptive 
provision in proposed Rule 2030(f) that would allow covered members 
to apply to FINRA for an exemption from the proposed rule's two-year 
time out.
---------------------------------------------------------------------------

    The compliance costs would likely vary across member firms based on 
a number of factors such as the number of covered associates, business 
models of member firms and the extent to which their compliance 
procedures are automated, whether the covered member is (or is 
affiliated with) an investment adviser subject to the SEC Pay-to-Play 
Rule, and whether the covered member is a registered municipal 
securities dealer and thus subject to MSRB pay-to-play rules.\68\ A 
small covered member with fewer covered associates may expend fewer 
resources to comply with the proposed rules than a large covered 
member. Covered members subject to (or affiliated with entities subject 
to) the SEC Pay-to-Play Rule or MSRB pay-to-play rules may be able to 
borrow from or build upon compliance procedures already in place. For 
example, FINRA estimates that approximately 400 member firms are 
currently subject to the MSRB pay-to-play rules.
---------------------------------------------------------------------------

    \68\ See supra note 23 (discussing MSRB Rule G-37).
---------------------------------------------------------------------------

    The potential burden arising from compliance costs associated with 
the proposed rules can be initially gauged from the SEC's cost 
estimates for the SEC Pay-to-Play Rule. The SEC has estimated that 
investment advisers would spend between 8 and 250 hours to establish 
policies and procedures to comply with the SEC Pay-to-Play Rule.\69\ 
The SEC further estimated that ongoing compliance would require between 
10 and 1,000 hours annually.\70\ The SEC estimated compliance costs for 
firms of different sizes. The SEC assumed that a ``smaller firm'' would 
have fewer than five covered associates that would be subject to the 
SEC Pay-to-Play Rule, a ``medium firm'' would have between five and 15 
covered associates, and a ``larger firm'' would have more than 15 
covered associates.\71\ The SEC estimated that the initial compliance 
costs associated with the SEC Pay-to-Play Rule would be approximately 
$2,352 per smaller firm, $29,407 per medium firm, and $58,813 per 
larger firm.\72\ It also estimated that the annual, ongoing compliance 
expenses would be approximately $2,940 per smaller firm, $117,625 per 
medium firm, and $235,250 per larger firm.\73\
---------------------------------------------------------------------------

    \69\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41056.
    \70\ See id.
    \71\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41055.
    \72\ See supra note 69.
    \73\ See id.
---------------------------------------------------------------------------

    In addition, the SEC estimated the costs for investment advisers to 
engage outside legal services to assist in drafting policies and 
procedures. It estimated that 75 percent of larger advisory firms, 50 
percent of medium firms, and 25 percent of smaller firms subject to the 
SEC Pay-to-Play Rule

[[Page 81658]]

would engage such services.\74\ The estimated cost included fees for 
approximately 8 hours of outside legal review for a smaller firm, 16 
hours for a medium firm and 40 hours for a larger firm, at a rate of 
$400 per hour.\75\
---------------------------------------------------------------------------

    \74\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41057.
    \75\ See id.
---------------------------------------------------------------------------

    The SEC estimated that the recordkeeping requirements of the SEC 
Pay-to-Play Rule would increase an investment adviser's burden by 
approximately 2 hours per year,\76\ which would cost the adviser $118 
per year based on the SEC's assumption of a compliance clerk's hourly 
rate of $59.\77\ In addition, the SEC estimated that some small and 
medium firms would incur one-time start-up costs, on average, of 
$10,000, and larger firms would incur, on average, $100,000 to 
establish or enhance current systems to assist in their compliance with 
the recordkeeping requirements.\78\
---------------------------------------------------------------------------

    \76\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41063.
    \77\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41061 n.541.
    \78\ See supra note 76.
---------------------------------------------------------------------------

    FINRA requested comment on the economic impacts of the proposed 
rule change as set forth in Regulatory Notice 14-50, including on 
whether the proposed rule change would impose similar compliance costs 
on member firms as the SEC estimated for investment advisers. Several 
commenters raised cost and compliance burden concerns in connection 
with the disclosure requirements set forth in Regulatory Notice 14-50, 
stating among other things, that the disclosure requirements are 
``overly burdensome and create difficult compliance challenges'' \79\ 
and that FINRA's cost estimates in Regulatory Notice 14-50 ``do not 
accurately reflect the true compliance costs associated with the 
Proposed Rules, and particularly the costs associated with the 
disclosure requirements . . . .'' \80\
---------------------------------------------------------------------------

    \79\ Monument Group.
    \80\ SIFMA.
---------------------------------------------------------------------------

    Monument Group stated that the vast majority of independent 
placement agents that would be subject to the proposed rules are small 
businesses, many of which are minority- or women-owned. Monument Group 
stated that these firms operate with focused staff and no revenues from 
other lines of business. Accordingly, Monument Group stated that 
incremental regulatory requirements that have little impact on larger 
firms can create significant resource and cost issues for these smaller 
firms. Specifically, Monument Group stated that the disclosure 
requirements would place significant and unique burdens on independent 
third-party private fund placement agents. Another commenter, 3PM, 
stated that the proposed rule change would add a new and significant 
burden on small firms in terms of the disclosure and recordkeeping 
requirements. 3PM also stated that not only would small firms be 
impacted by cost, but also by their limited personnel resources who 
would have to take on additional responsibilities to comply with the 
proposed rule change.
    Monument Group requested that FINRA consider the already existing 
state, municipal and local lobbying registration, disclosure and 
reporting requirements and pay-to-play regimes in calculating the cost 
and competitive impact of the proposed rule change. Monument Group 
stated that the proposed rule change disproportionately affects FINRA-
registered placement agents (as compared with other broker-dealers) and 
has the largest economic and anti-competitive effect on small 
independent firms.
    As discussed above and in more detail in Item II.C below, after 
considering the comments, FINRA has determined not to propose a 
disclosure requirement for government distribution and solicitation 
activities at this time. FINRA believes that this determination will 
reduce substantially the cost and compliance burden concerns raised by 
commenters regarding the proposed rule change. FINRA however may 
consider a disclosure requirement for government distribution and 
solicitation activities as part of a future rulemaking and would 
consider the economic impact of any such revised proposed disclosure 
requirement as part of that rulemaking.
    Although FINRA has determined to retain a recordkeeping 
requirement, FINRA notes that, in response to commenter concerns to 
Regulatory Notice 14-50 regarding the significant costs associated with 
maintaining lists of unsuccessful solicitations,\81\ FINRA has modified 
the proposed rule such that covered members would only be required to 
maintain lists of government entities that become clients.\82\
---------------------------------------------------------------------------

    \81\ See, e.g., 3PM.
    \82\ See proposed Rule 4580(a)(3).
---------------------------------------------------------------------------

    Since the scope of the proposed rule after the modifications is 
substantially equivalent to the SEC Pay-to-Play Rule, FINRA believes 
that the SEC's cost estimates serve as a reasonable reference for the 
potential compliance costs on member firms. In response to the question 
on the costs of engaging outside legal services to assist in drafting 
policies and procedures to comply with the proposed rule, 3PM estimated 
that the majority of member firms would spend between $1,500 and $2,500 
or approximately five to 10 hours of a professional consultant's time. 
In addition, 3PM estimated that a member firm would exert approximately 
10 to 20 additional hours of compliance oversight in connection with 
the proposed rule each year. These estimates are slightly lower than 
the SEC's estimates discussed above.
    The proposed rule is not expected to have competitive effects among 
member firms engaging in distribution or solicitation activities, since 
all member firms will be subject to the same prohibitions. Moreover, 
because the restrictions imposed by the proposed rule are substantially 
equivalent to the restrictions imposed by the SEC Pay-to-Play Rule, the 
proposed rule is not expected to create an uneven playing field between 
member firms and investment advisers. There may be a potential impact 
on the competition between member firms and municipal advisors 
depending on the differences between the proposed rule and the 
finalized MSRB rules regulating similar activities of municipal 
advisors.\83\
---------------------------------------------------------------------------

    \83\ See supra note 23.
---------------------------------------------------------------------------

E. Regulatory Alternatives
    Since the SEC requires that FINRA impose ``substantially equivalent 
or more stringent restrictions'' on member firms that wish to act as 
``regulated persons'' than the SEC Pay-to-Play Rule imposes on 
investment advisers, FINRA believes it is appropriate (and achieves the 
right balance between the costs and benefits) to model the proposed 
rule change on the SEC Pay-to-Play Rule rather than impose a regulatory 
alternative, including a more stringent regulatory alternative, on such 
member firms.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In November 2014, FINRA published the proposed rule change for 
comment in Regulatory Notice 14-50. FINRA received 10 comment letters 
in response to Regulatory Notice 14-50. A copy of Regulatory Notice 14-
50 is attached as Exhibit 2a to the proposed rule change that was filed 
with the Commission. A list of the comment letters received in response 
to Regulatory Notice 14-50 is attached as Exhibit 2b.\84\ Copies of the

[[Page 81659]]

comment letters received in response to Regulatory Notice 14-50 are 
attached as Exhibit 2c.
---------------------------------------------------------------------------

    \84\ All references to commenters are to the comment letters as 
listed in Exhibit 2b to the proposed rule change.
---------------------------------------------------------------------------

    Most commenters expressed appreciation or support for FINRA's 
decision to propose a pay-to-play rule, noting the potential disruption 
of an SEC ban on third party solicitations if FINRA were not to propose 
and adopt a pay-to-play rule. The commenters raised, however, a number 
of concerns with the proposed pay-to-play rule, as well as the related 
proposed disclosure and recordkeeping requirements. A summary of the 
comments and FINRA's responses are discussed below.\85\
---------------------------------------------------------------------------

    \85\ Comments that speak to the economic impacts of the proposed 
rule change are addressed in Item II.B above.
---------------------------------------------------------------------------

First Amendment Concerns
    CCP expressed First Amendment concerns with the proposed rule 
change. Among other things, CCP raised vagueness and over-breadth 
concerns with a number of the provisions in the proposed rule 
change,\86\ and asserted that the prohibition on soliciting and 
coordinating contributions is a ``grave infringement of the basic 
`right to associate for the purpose of speaking.' ''
---------------------------------------------------------------------------

    \86\ See CCP (discussing, among other things, the proposed 
definitions of the terms ``official of a government entity,'' 
``solicit'' and ``contribution,'' as well as the provision 
prohibiting any covered member or any of its covered associates from 
doing anything indirectly that, if done directly, would result in a 
violation of the proposed pay-to-play rule).
---------------------------------------------------------------------------

    In light of CCP raising these constitutional concerns, FINRA notes 
that the proposed pay-to-play rule does not impose any restrictions on 
making independent expenditures, ban political contributions, or 
attempt to regulate State and local elections. FINRA acknowledges that 
the two-year time out provision may affect the propensity of covered 
members and their covered associates to make political 
contributions.\87\ As discussed in Regulatory Notice 14-50 and as 
recognized by CCP, however, establishing requirements to regulate the 
activities of member firms that engage in distribution or solicitation 
activities with government entities on behalf of investment advisers is 
a more effective response to the requirements of the SEC Pay-to-Play 
Rule than an outright ban on such activity. If FINRA were not to have a 
pay-to-play rule, the result would be a ban on member firms soliciting 
government entities for investment advisory services for compensation 
on behalf of investment advisers.
---------------------------------------------------------------------------

    \87\ CCP requested that FINRA state explicitly whether the 
proposed rule would permit contributions in support of independent 
expenditures. FINRA notes that, consistent with the SEC Pay-to-Play 
Rule, the proposed rule would not in any way impinge on a wide range 
of expressive conduct in connection with elections. For example, the 
rule would not impose any restrictions on activities such as making 
independent expenditures to express support for candidates, 
volunteering, making speeches, and other conduct. See also SEC Pay-
to-Play Rule Adopting Release, 75 FR 41018, 41024 (discussing 
independent expenditures).
---------------------------------------------------------------------------

    Moreover, for an investment adviser and its covered associates to 
provide or agree to provide, directly or indirectly, payment to a 
member firm to solicit a government entity for investment advisory 
services on behalf of the investment adviser, the SEC must find that 
FINRA's pay-to-play rule imposes substantially equivalent or more 
stringent restrictions on member firms than the SEC Pay-to-Play Rule 
imposes on investment advisers and that FINRA's rule is consistent with 
the objectives of the SEC Pay-to-Play Rule. CCP suggested alternative 
approaches to the proposed pay-to-play rule that it argued would be 
``less restrictive,'' but FINRA does not believe that CCP's suggested 
less restrictive alternatives would meet the SEC's requirements. 
Accordingly, FINRA has crafted its proposal such that it is 
substantially similar to the SEC's Pay-to-Play Rule.\88\
---------------------------------------------------------------------------

    \88\ In addition, FINRA notes that, to the extent there are 
interpretive questions regarding the application and scope of the 
provisions and terms used in its pay-to-play rule, FINRA will work 
with the industry to understand the interpretive questions and 
provide additional guidance where warranted.
---------------------------------------------------------------------------

    FINRA notes that the SEC modeled the SEC Pay-to-Play Rule on 
similarly designed MSRB Rule G-37, which the United States Court of 
Appeals for the District of Columbia Circuit upheld against a First 
Amendment challenge in Blount v. SEC.\89\ As stated in the SEC Pay-to-
Play Rule Adopting Release, the Blount opinion served as an important 
guidepost in helping the SEC shape the SEC Pay-to-Play Rule.\90\ 
Similar to MSRB Rule G-37 and the SEC Pay-to-Play Rule, FINRA believes 
it has closely drawn its proposal to accomplish the goal of preventing 
quid pro quo arrangements while avoiding unnecessary burdens on the 
protected speech and associational rights of covered members and their 
covered associates. This analysis is further supported by the Court of 
Appeals for the District of Columbia Circuit's recent unanimous en banc 
decision in Wagner v. FEC, which relied on Blount to uphold against a 
First Amendment challenge a law barring campaign contributions by 
federal contractors.\91\ As detailed below, the proposed rule is 
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.
---------------------------------------------------------------------------

    \89\ 61 F.3d 938 (D.C. Cir. 1995), cert. denied, 517 U.S. 1119 
(1996).
    \90\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41023.
    \91\ Wagner v. FEC, No. 13-5162, 2015 U.S. App LEXIS 11625 (D.C. 
Cir. July 7, 2015).
---------------------------------------------------------------------------

Proposed Pay-to-Play Rule
A. Two-Year Time Out
    Consistent with Regulatory Notice 14-50, proposed Rule 2030(a) 
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. 
NASAA stated that member firms should be prohibited from engaging in 
distribution or solicitation activities on behalf of an investment 
adviser directed at any government entity for a period of four years 
following any qualifying contribution by the member firm. In addition, 
NASAA stated that if a member firm has engaged in solicitation or 
distribution activities with a government entity on behalf of an 
investment adviser, the member firm should be prohibited from making 
any qualifying contributions to that government entity for a period of 
four years following the conclusion of the solicitation or distribution 
activities. FINRA has declined to make NASAA's suggested changes. The 
proposed two-year time out is consistent with the time-out period in 
the SEC's Pay-to-Play Rule, and FINRA believes that a two-year time out 
from the date of a contribution is sufficient to discourage covered 
members from engaging in pay-to-play practices.
1. Government Entity
    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),\92\ 457,\93\ and 529 \94\ plans. CAI urged FINRA or the 
SEC to provide additional guidance as to the criteria for determining 
whether an entity is an ``instrumentality'' under the proposed rule. 
CAI noted that its members have struggled to understand the contours of 
this term in the context of the SEC Pay-to-Play Rule. As stated in 
Regulatory Notice 14-50 and above, the definition of a ``government 
entity'' is consistent with the definition of that term in the SEC Pay-
to-Play Rule. The SEC has not provided additional guidance regarding

[[Page 81660]]

the meaning of the term ``instrumentality'' in connection with its Pay-
to-Play Rule. Thus, at this time, FINRA declines to provide additional 
guidance as part of the proposed rule. FINRA recognizes, however, the 
concerns raised by CAI and will continue to discuss with the industry 
interpretive questions relating to the proposed rule change.
---------------------------------------------------------------------------

    \92\ See supra note 28.
    \93\ See supra note 29.
    \94\ See supra note 30.
---------------------------------------------------------------------------

2. Solicitation
    Consistent with Regulatory Notice 14-50, the proposed pay-to-play 
rule defines the term ``solicit'' to mean, 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, with respect to a contribution or 
payment, ``to communicate, directly or indirectly, for the purpose of 
obtaining or arranging a contribution or payment.'' \95\ CAI sought 
confirmation that the proposed rule would not apply when a covered 
member communicates with a third party and has no intent to obtain a 
client for, or refer a client to, an investment adviser (in the context 
of investment advisory services) and there is no intent to obtain or 
arrange a contribution or payment (in the context of contributions to 
officials of government entities and payments to political parties).
---------------------------------------------------------------------------

    \95\ Proposed Rule 2030(g)(11).
---------------------------------------------------------------------------

    As stated in Regulatory Notice 14-50 and above, the determination 
of whether a particular communication is a solicitation for investment 
advisory services or a contribution or payment would be dependent upon 
the specific facts and circumstances relating to such communication. As 
a general proposition, if there is no intent to obtain a client for, or 
refer a client to, an investment adviser (in the context of investment 
advisory services) or to obtain or arrange a contribution or payment 
(in the context of contributions to officials of government entities 
and payments to political parties), FINRA would not consider the 
communication to be a solicitation.\96\
---------------------------------------------------------------------------

    \96\ See supra notes 18 and 40.
---------------------------------------------------------------------------

3. Investment Advisers
    The proposed pay-to-play rule would apply to covered members acting 
on behalf of any investment adviser registered (or required to be 
registered) with the SEC, or unregistered in reliance on the exemption 
available under Section 203(b)(3) of the Advisers Act for foreign 
private advisers, or that is an exempt reporting adviser under Advisers 
Act Rule 204-4(a).\97\ NASAA and 3PM suggested that FINRA expand the 
definition of ``investment adviser'' to include state-registered 
investment advisers, stating, among other things, that it would further 
reduce the disruptions created by pay-to-play schemes. To remain 
consistent with the SEC Pay-to-Play Rule, FINRA has determined not to 
expand the scope of the proposed rule as suggested by commenters. FINRA 
notes that the SEC declined to make a similar change to its proposed 
rule, stating that it is their understanding that few of these smaller 
firms manage public pension plans or other similar funds.\98\
---------------------------------------------------------------------------

    \97\ See proposed Rule 2030(g)(7).
    \98\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41026.
---------------------------------------------------------------------------

4. Covered Associates/Executive Officers
    A ``covered associate'' includes any general partner, managing 
member or executive officer of a covered member, or other individual 
with a similar status or function.\99\ SIFMA requested that FINRA 
define the term ``executive officer'' for purposes of the proposed 
rule. Consistent with the SEC Pay-to-Play Rule and for purposes of the 
FINRA pay-to-play rule only, FINRA has added proposed Rule 2030(g)(5) 
to define an ``executive officer of a covered member'' to mean: ``(A) 
The president; (B) Any vice president in charge of a principal business 
unit, division or function (such as sales, administration or finance); 
(C) Any other officer of the covered member who performs a policy-
making function; or (D) Any other person who performs similar policy-
making functions for the covered member.''
---------------------------------------------------------------------------

    \99\ See supra note 37 (defining the term ``covered 
associate'').
---------------------------------------------------------------------------

    A covered associate also would include a PAC controlled by the 
covered member or any of its covered associates. FSI asserted that the 
restrictions on PAC contributions, and the definition of ``control'' 
with respect to covered associates are vague and potentially over-
broad. For example, FSI stated that ``[i]t is unclear whether an 
employee or executive of a member firm that holds a position on a PAC 
board of directors or other advisory committee would have `control' of 
the PAC under the Proposed Rules. It would also cover PACs that are not 
connected to the employee or executive's member firm.'' As stated in 
Regulatory Notice 14-50 and above, FINRA would consider a covered 
member 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. This position is 
consistent with the position taken by the SEC in connection with the 
SEC Pay-to-Play Rule.\100\
---------------------------------------------------------------------------

    \100\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41032 (discussing PACs).
---------------------------------------------------------------------------

5. Distribution
a. Inclusion of Distribution Activities
    Consistent with Regulatory Notice 14-50, proposed Rule 2030(a) 
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 makes a contribution to an official of the government 
entity. Some commenters questioned the meaning of the term 
``distribution'' in the context of the proposed rule. For example, 
SIFMA stated that it is their understanding ``that the phrase 
`distribution and solicitation,' as used in the SEC Pay-to-Play Rule, 
is interpreted to mean `the solicitation of investment advisory 
services.' '' CAI stated that ``[s]ince the term `distribution' has no 
meaning in the context of an investment adviser and is inconsistent 
with the personal nature of the services provided by investment 
advisers, [it] strongly recommends that FINRA eliminate each and every 
reference to the word `distribution' throughout the Notice and the 
Proposed Rules. . . . [I]t is not clear what activity the term 
`distribution' is meant to cover that is not captured by the term 
`solicitation.' ''
    The SEC Pay-to-Play Rule 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.'' \101\ The SEC Pay-to-Play Rule 
defines a ``regulated person'' to include a member firm, provided that 
FINRA rules prohibit member firms from engaging in distribution or 
solicitation activities if political contributions have been made.\102\ 
Thus, the SEC Pay-to-Play Rule requires FINRA to have a rule that 
prohibits member firms from engaging in distribution (as well as 
solicitation) activities if political contributions have been made.
---------------------------------------------------------------------------

    \101\ See SEC Pay-to-Play Rule 206(4)-5(a)(2).
    \102\ See SEC Pay-to-Play Rule 206(4)-5(f)(9)(ii)(A).
---------------------------------------------------------------------------

    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. For example, when discussing comments related 
to its proposed ban on using third parties to solicit government 
business, the SEC addressed

[[Page 81661]]

commenters' concerns that the provision would interfere with 
traditional distribution arrangements of mutual funds and private funds 
by broker-dealers, by clarifying under what circumstances distribution 
payments would violate the SEC's Pay-to-Play Rule.\103\
---------------------------------------------------------------------------

    \103\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41040 n.298 (stating that ``[m]utual fund distribution fees are 
typically paid by the fund pursuant to a 12b-1 plan, and therefore 
generally would not constitute payment by the fund's adviser. As a 
result, such payments would not be prohibited [under the SEC Pay-to-
Play Rule] by its terms. Where an adviser pays for the fund's 
distribution out of its `legitimate profits,' however, the rule 
would generally be implicated. . . . For private funds, third 
parties are often compensated by the adviser or its affiliated 
general partner and, therefore, those payments are subject to the 
rule.'')
---------------------------------------------------------------------------

    Based on the SEC's definition of ``regulated person'' as well as 
its discussion regarding the treatment of distribution fees paid 
pursuant to a 12b-1 plan, FINRA believes its proposed rule must apply 
to member firms engaging in distribution activities. Accordingly, FINRA 
has not revised the proposed rule to remove references to the term 
``distribution.'' \104\
---------------------------------------------------------------------------

    \104\ In addition, FINRA notes that many of the concerns raised 
by commenters in connection with including distribution activities 
in the proposed rule related to the additional burden associated 
with the proposed disclosure requirements and such activities. As 
discussed further below, FINRA has determined not to propose a 
disclosure rule relating to government distribution and solicitation 
activities.
---------------------------------------------------------------------------

b. Scope of Distribution Activities
    ICI requested confirmation that, with respect to mutual funds, the 
proposed rule would be triggered only when a member firm solicits a 
government entity to include a mutual fund in a government entity's 
plan or program and not when the member is selling mutual fund shares 
to a government entity. FSI asked for clarification with respect to the 
treatment of traditional brokerage activities by a financial advisor as 
``distribution or solicitation activities'' in the context of 
government entity plans.
    As discussed above, the proposed pay-to-play rule would apply to 
distribution activities by covered members. FINRA notes, however, that 
based on the definition of a ``covered investment pool,'' 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.\105\ Thus, the proposed rule would apply to 
distribution activities involving unregistered pooled 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.\106\
---------------------------------------------------------------------------

    \105\ 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.''
    \106\ Although the proposed rule would not apply to distribution 
activities relating to all registered pooled investment vehicles, 
FINRA notes the language of proposed Rule 2030(e) that ``[i]t shall 
be a violation of this Rule for any covered member or any of its 
covered associates to do anything indirectly that, if done directly, 
would result in a violation of this Rule.''
---------------------------------------------------------------------------

    CAI requested clarification that ``compensation'' in the context of 
covered investment pools does not include conventional compensation 
arrangements for the distribution of mutual funds, variable annuity 
contracts and other securities included within the definition of 
``covered investment pool.'' Consistent with the SEC Pay-to-Play Rule, 
to the extent the 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. If, however, the adviser pays for the fund's 
distribution out of its ``legitimate profits,'' the proposed rule would 
generally be implicated.\107\ For private funds, third parties are 
often compensated by the investment adviser or its affiliated general 
partner. Thus, such payments would be subject to the proposed rule. In 
addition, FINRA notes that structuring such a payment to come from the 
private fund for purposes of evading the rule would violate the 
rule.\108\
---------------------------------------------------------------------------

    \107\ For a discussion of a mutual fund adviser's ability to use 
``legitimate profits'' for fund distribution, see Investment Company 
Act of 1940 Release No. 11414 (Oct. 28, 1980), 45 FR 73898 (Nov. 7, 
1980) (Bearing of Distribution Expenses by Mutual Funds) 
(explaining, in the context of the prohibition on the indirect use 
of fund assets for distribution, unless pursuant to a 12b-1 plan, 
``[h]owever, under the rule there is no indirect use of fund assets 
if an adviser makes distribution related payments out of its own 
resources. . . . Profits which are legitimate or not excessive are 
simply those which are derived from an advisory contract which does 
not result in a breach of fiduciary duty under section 36 of the 
[Investment Company] Act.'').
    \108\ See also SEC Pay-to-Play Rule Adopting Release, 75 FR 
41018, 41040 n.298 and accompanying text. CAI also asked FINRA to 
consider afresh the SEC's position in its Pay-to-Play Rule that 
payments originating with an investment adviser should be treated as 
a payment for solicitation, regardless of the purpose or context for 
the payment. As discussed above, for purposes of the proposed rule, 
FINRA is taking a position consistent with the SEC's position in its 
Pay-to-Play Rule.
---------------------------------------------------------------------------

B. Prohibitions as Applied to Covered Investment Pools

1. General
    In Regulatory Notice 14-50, proposed Rule 2390(e) (now proposed as 
Rule 2030(d)) provided that a covered member that engages in 
distribution or solicitation activities with a government entity on 
behalf of an investment adviser to a covered investment pool 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 directly. CAI raised concerns 
regarding the application of the prohibitions of the proposed rule to 
covered investment pools stating, among other things, ``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.'' CAI reasoned that ``[t]here is 
no basis for this notion given the [SEC] staff's interpretation in the 
Mayer Brown no-action letter and the Goldstein case . . ., as well as 
the lack of any relationship between the selling firm and the 
investment adviser.'' \109\
---------------------------------------------------------------------------

    \109\ See Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006) and 
Mayer Brown LLP, SEC No-Action Letter (``Mayer Brown letter''), 
available at https://www.sec.gov/divisions/investment/noaction/2008/mayerbrown072808-206.htm#P15_323. In Goldstein, the court held that 
the SEC's ``Hedge Fund Rule,'' which would have given the SEC 
greater oversight over hedge funds, was invalid because it was 
arbitrary and in conflict with the purpose of the underlying statute 
in which the new rule was included. The court concluded that hedge 
fund investors are not clients of fund advisers for the purpose of 
the Adviser's Act registration requirement.
    In the Mayer Brown letter, SEC staff stated that Rule 206(4)-3 
generally does not apply to a registered investment adviser's cash 
payment to a person solely to compensate that person for soliciting 
investors or prospective investors for, or referring investors or 
prospective investors to, an investment pool managed by the adviser. 
The letter distinguishes between a person referring other persons to 
the adviser where the adviser manages only investment pools and is 
not seeking to enter into advisory relationships with these other 
persons (but rather the other persons will be investors or 
prospective investors in one or more of the investment pools managed 
by the adviser), versus referring other persons as prospective 
advisory clients. The letter notes that whether the rule applies 
will depend on the facts and circumstances.
---------------------------------------------------------------------------

    After considering CAI's concerns, FINRA has modified the language 
of the proposed rule to recognize the relationship between the selling 
member and the covered investment

[[Page 81662]]

pool, but also to clarify that for purposes of the proposed rule, a 
covered member engaging in distribution or solicitation activities on 
behalf of a covered investment pool 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.\110\
---------------------------------------------------------------------------

    \110\ See proposed Rule 2030(d).
---------------------------------------------------------------------------

    As stated in Regulatory Notice 14-50, proposed Rule 2390(e) (now 
proposed as Rule 2030(d)) was modeled on a similar provision in the SEC 
Pay-to-Play Rule, Rule 206(4)-5(c),\111\ and was intended to extend the 
protections of the proposed rule to government entities that access the 
services of investment advisers through hedge funds and other types of 
pooled investment vehicles sponsored or advised by investment 
advisers.\112\ As noted by CAI, however, FINRA recognizes that without 
a provision corresponding more closely to SEC Pay-to-Play Rule 206(4)-
5(c), there is nothing in the proposed rule that deems an investment 
adviser to a covered investment pool to have a direct investment 
advisory relationship with government entities investing in the pool. 
CAI noted that: ``Without such a provision, proposed rule 2390(e) would 
not apply the two year time out restriction in proposed rule 2390(a) to 
advisers to [covered investment pools]. This is because proposed Rule 
2390(a) would only apply where an investment adviser `provides or is 
seeking to provide investment advisory services to such government 
entity.' ''
---------------------------------------------------------------------------

    \111\ SEC Pay-to-Play Rule 206(4)-5(c) 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.''
    \112\ In adopting this provision, the SEC noted a commenter's 
questioning of its authority to apply the rule in the context of 
covered investment pools in light of the opinion of the Court of 
Appeals for the District of Columbia Circuit in the Goldstein case. 
See supra note 109. The SEC concluded, however, that it has 
authority to adopt rules proscribing fraudulent conduct that is 
potentially harmful to investors in pooled investment vehicles 
pursuant to Section 206(4) of the Advisers Act and, therefore, 
adopted SEC Pay-to-Play Rule 206(4)-5(c) as proposed. See SEC Pay-
to-Play Rule Adopting Release, 75 FR 41018, 41045 n.355.
---------------------------------------------------------------------------

    Accordingly, FINRA has modified the proposed rule to include 
proposed Rule 2030(d)(2) that provides that for purposes of the 
proposed rule ``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.''
2. Two-Tiered Investment Products
    CAI sought confirmation from FINRA that the proposed pay-to-play 
rule would not apply in the context of two-tiered investment products, 
such as variable annuities. CAI asserted, among other things, that 
``[o]rdinarily, there is no investment adviser providing investment 
advisory services to the separate account supporting the variable 
annuity contract, although there are investment advisers providing 
investment advisory services to the underlying mutual funds or 
unregistered investment pools.'' CAI requested clarification that a 
covered member selling two-tiered investment products is not engaging 
in solicitation activities on behalf of the investment adviser and sub-
advisers managing the underlying funds. FINRA notes that the SEC did 
not exclude specific products from the SEC Pay-to-Play Rule and, 
therefore, FINRA has determined not to exclude specific products from 
its proposed rule.

C. Disgorgement

    In Regulatory Notice 14-50, FINRA proposed a ``disgorgement'' 
provision that, among other things, would have required that the 
covered member pay, in the order listed, any compensation or other 
remuneration received by the covered member pertaining to, or arising 
from, distribution or solicitation activities during the two-year time 
out to: (A) A covered investment pool in which the government entity 
was solicited to invest, as applicable; (B) the government entity; (C) 
any appropriate entity designated in writing by the government entity 
if the government entity or covered investment pool cannot receive such 
payments; or (D) the FINRA Investor Education Foundation, if the 
government entity or covered investment pool cannot receive such 
payments and the government entity cannot or does not designate in 
writing any other appropriate entity.
    NASAA expressed support for FINRA's inclusion of a disgorgement 
provision for violations of the proposed rule. Most commenters, 
however, opposed the requirement.\113\ SIFMA stated that ``[w]hile 
disgorgement is the almost universal remedy for violations of various 
pay-to-play rules, . . . making application of the remedy mandatory 
could have the deleterious effect of dissuading covered members from 
voluntary disgorgement of fees where such members discover pay-to-play 
violations themselves.'' ICI stated that ``including disgorgement as a 
penalty is not necessary given that the SEC and FINRA both have full 
authority to require disgorgement of fees, and indeed, disgorgement has 
been the penalty universally applied (along with additional penalties) 
in enforcement actions under existing pay-to-play rules, such as MSRB 
Rule G-37 and SEC Rule 206(4)-5.''
---------------------------------------------------------------------------

    \113\ See, e.g., SIFMA, CAI and ICI.
---------------------------------------------------------------------------

    After considering the comments and, in particular, that FINRA has 
authority to require disgorgement of fees in enforcement actions, FINRA 
has determined not to include a disgorgement requirement in the 
proposed rule.

D. Prohibition on Soliciting and Coordinating Contributions

    Consistent with Regulatory Notice 14-50, proposed Rule 2030(b) 
would prohibit a covered member or covered associate from coordinating 
or soliciting any person or 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. As stated in Regulatory Notice 14-50 and above, this provision 
is modeled on a similar provision in the SEC Pay-to-Play Rule.\114\
---------------------------------------------------------------------------

    \114\ See SEC Pay-to-Play Rule 206(4)-5(a)(2).
---------------------------------------------------------------------------

    CAI sought confirmation that the proposed prohibition on soliciting 
and coordinating contributions would not apply when a contribution is 
made to a political action committee, political party or other third 
party, where there is no knowledge or indication of how such 
contribution will be used. Similar to guidance provided in the context 
of SEC Pay-to-Play Rule 206(4)-5(a)(2), FINRA notes that a direct 
contribution to a political party by a covered member or its covered 
associates would not violate the proposed rule unless the contribution 
was a means for the covered member to do indirectly what the rule would 
prohibit if done directly (for example, if the contribution was 
earmarked or known to be provided for the benefit of a particular 
government official).\115\
---------------------------------------------------------------------------

    \115\ See also SEC Pay-to-Play Rule Adopting Release, 75 FR 
41018, 41044 n.337.

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

[[Page 81663]]

E. Direct or Indirect Contributions or Solicitations

    Consistent with Regulatory Notice 14-50, proposed Rule 2030(e) 
provides that it shall be a violation of the proposed pay-to-play rule 
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. CAI requested that FINRA incorporate a knowledge and support 
requirement into this provision of the proposed rule so that it would 
be violated only if a covered member has direct knowledge of, and takes 
measures to aid and support, activities undertaken by its affiliates. 
As stated in Regulatory Notice 14-50 and above, this provision is 
modeled on SEC Pay-to-Play Rule 206(4)-5(d). Consistent with guidance 
provided by the SEC in connection with that provision, FINRA has 
clarified that it would require a showing of intent to circumvent the 
rule for a covered member or its covered associates funneling payments 
through a third party to trigger the two-year time out.\116\
---------------------------------------------------------------------------

    \116\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41044 n.340.
---------------------------------------------------------------------------

F. Exceptions

    In Regulatory Notice 14-50, FINRA included exceptions to the 
prohibition in the proposed pay-to-play rule for de minimis 
contributions and returned contributions. CAI and CCP stated that they 
believe that the $350 and $150 de minimis contribution limits are 
unreasonably low. CAI stated that it believes the $350 amount for 
returned contributions is unnecessary because ``[i]f the contribution 
is returned as is required under the exception, then no harm will 
result as both the contributor and contributee are placed in the same 
position they would have been in had no contribution been made.''
    FINRA has determined not to modify the proposed exceptions. As 
stated in Regulatory Notice 14-50 and above, the exceptions are modeled 
on similar exceptions in the SEC Pay-to-Play Rule for de minimis 
contributions and returned contributions.\117\ Moreover, FINRA believes 
that it is necessary to keep the amounts at the levels as proposed in 
Regulatory Notice 14-50 to meet the requirement in the SEC Pay-to-Play 
Rule that the restrictions in FINRA's rule must be substantially 
equivalent to, or more stringent than, the restrictions in the SEC Pay-
to-Play Rule.
---------------------------------------------------------------------------

    \117\ See SEC Pay-to-Play Rule 206(4)-5(b).
---------------------------------------------------------------------------

Proposed Recordkeeping Requirements
A. Unsuccessful Solicitations
    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 proposed pay-to-play rule. SIFMA requested that FINRA not extend 
the recordkeeping requirements to unsuccessful solicitations where the 
covered member does not receive compensation because maintaining such 
records would impose significant costs on covered members with little 
corresponding benefit. \118\
---------------------------------------------------------------------------

    \118\ See also CAI, 3PM and FSI (requesting that FINRA not apply 
the proposed recordkeeping requirements to unsuccessful 
solicitations of government entities).
---------------------------------------------------------------------------

    FINRA intends that the recordkeeping requirements of proposed Rule 
4580 be consistent with similar recordkeeping requirements imposed on 
investment advisers in connection with the SEC Pay-to-Play Rule.\119\ 
The SEC does not require investment advisers to maintain lists of 
government entities that do not become clients.\120\ Accordingly, FINRA 
has added the term ``for compensation'' to proposed Rule 4580(a)(3) to 
clarify that the proposed Rule would not apply to unsuccessful 
solicitations.
---------------------------------------------------------------------------

    \119\ See Advisers Act Rule 204-2(a)(18) and (h)(1).
    \120\ See SEC Pay-to-Play Rule Adopting Release, 75 FR 41018, 
41050.
---------------------------------------------------------------------------

B. Indirect Contributions
    Consistent with Regulatory Notice 14-50, proposed Rule 4580(a)(4) 
would require a covered member to maintain books and records of all 
direct and indirect contributions made by the covered member or any of 
its covered associates to an official of a government entity, or direct 
or indirect payments to a political party of a state or political 
subdivision thereof or to a PAC. 3PM requested that FINRA eliminate the 
requirement to maintain a list of indirect contributions, arguing that 
``requiring firms to . . . track and monitor indirect contributions 
could become extremely time consuming and costly for firms.'' CAI 
asserted that not all payments to political parties or PACs should have 
to be maintained. Instead, CAI stated that only payments to political 
parties or PACs where the covered member or 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.
    As stated in the Regulatory Notice and above, the proposed 
recordkeeping requirements are intended to allow FINRA to examine for 
compliance with its proposed pay-to-play rule. Thus, the reference to 
indirect contributions in proposed Rule 4580(a)(4) is intended to 
include records of contributions or payments a covered member solicits 
or coordinates another person or PAC to make under proposed Rule 
2030(b) (Prohibition on Soliciting and Coordinating 
Contributions).\121\ In addition, payments to political parties or PACs 
can be a means for a covered member or covered associate to funnel 
contributions to a government official without directly contributing. 
Thus, FINRA is proposing to require a covered member to maintain a 
record of all payments to political parties or PACs as such records 
would assist FINRA in identifying situations that might suggest an 
intent to circumvent the rule.\122\
---------------------------------------------------------------------------

    \121\ This interpretation is consistent with the SEC's 
interpretation of a similar provision in Advisers Act Rule 204-
2(a)(18)(i).
    \122\ ICI stated that if FINRA applies the requirements of 
proposed Rule 4580(a)(4) to a member firm holding an omnibus account 
on behalf of another broker-dealer that solicited a government 
entity, and the omnibus dealer is unaware of the broker-dealer's 
solicitation activities, the omnibus dealer will likely be unable to 
maintain records required by proposed Rule 4580. As a potential way 
in which to address this concern, ICI referenced an SEC staff no-
action relief letter that addresses a similar concern regarding the 
recordkeeping requirements related to the SEC Pay-to-Play Rule. See 
ICI referencing Investment Company Institute, SEC No-Action Letter 
dated September 12, 2011, available at http://www.sec.gov/divisions/investment/noaction/2011/ici091211-204-incoming.pdf. FINRA 
recognizes the concern raised by ICI and will address interpretive 
questions as needed regarding the application of the proposed 
recordkeeping requirements to covered members holding omnibus 
accounts on behalf of other broker-dealers that engage in 
distribution or solicitation activities with government entities.
---------------------------------------------------------------------------

Proposed Disclosure Requirements
    In Regulatory Notice 14-50, FINRA proposed Rule 2271 to require a 
covered member engaging in distribution or solicitation activities for 
compensation with a government entity on behalf of one or more 
investment advisers to make specified disclosures to the government 
entity regarding each investment adviser. Several commenters raised 
concerns regarding the proposed disclosure requirements.\123\ For

[[Page 81664]]

example, commenters raised concerns regarding the scope and timing of 
the disclosure requirements \124\ and that the requirements would be 
duplicative of existing federal and state investor protection-related 
disclosure requirements.\125\ In addition, commenters raised concerns 
regarding the costs and compliance burdens associated with the proposed 
disclosure requirements.\126\
---------------------------------------------------------------------------

    \123\ See, e.g., SIFMA, Monument Group, ICI, IAA, FSI, CAI and 
3PM.
    \124\ See, e.g., SIFMA, Monument Group, ICI, IAA, CAI and 3PM.
    \125\ See, e.g., SIFMA, Monument Group and FSI.
    \126\ See, e.g., SIFMA, Monument Group and 3PM.
---------------------------------------------------------------------------

    After considering the comments, FINRA has determined not to propose 
a disclosure rule at this time. FINRA will continue to consider whether 
such a rule would be appropriate. If FINRA determines to propose a 
disclosure rule at a later date, it would do so pursuant to FINRA's 
notice and comment rulemaking process.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-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 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 available publicly. All 
submissions should refer to File Number SR-FINRA-2015-056 and should be 
submitted on or before January 20, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\127\
---------------------------------------------------------------------------

    \127\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2015-32894 Filed 12-29-15; 8:45 am]
BILLING CODE 8011-01-P