[Federal Register Volume 81, Number 169 (Wednesday, August 31, 2016)]
[Notices]
[Pages 60051-60070]
[FR Doc No: 2016-20888]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78683; File No. SR-FINRA-2015-056]

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

August 25, 2016.

I. Introduction

    On December 16, 2015, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt FINRA Rules 2030
(Engaging in Distribution and Solicitation Activities with Government
Entities) and 4580 (Books and Records Requirements for Government
Distribution and Solicitation Activities) to establish ``pay-to-play''
\3\ and related rules that would regulate the activities of member
firms that engage in distribution or solicitation activities for
compensation with government entities on behalf of investment advisers.
Member firms serving this role--sometimes referred to as ``placement
agents'' or ``solicitors'' (collectively referred to herein as
``placement agents'')--assist investment advisers with obtaining
advisory business from such entities. In this context, pay-to-play has
historically presented a problem, including when investment advisers
retain placement agents who have made contributions to government
officials who are responsible for, or can influence the outcome of, the
selection process for investment advisers. When investment advisers are
chosen on the basis of a placement agent's political contributions,
rather than on, for example, the adviser's merit, performance, or
costs, the market and selection process for advisers becomes distorted.
Ultimately, pay-to-play harms investors and the public interest if
government entities, including public pension plans, and their
beneficiaries receive inferior services or pay higher fees.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ ``Pay-to-play practices,'' ``play-to-play arrangements'' or
``play-to-play activities,'' as referred to throughout this order,
typically involve a person making cash or in-kind political
contributions (or soliciting or coordinating others to make such
contributions) to help finance the election campaigns of state or
local officials or bond ballot initiatives as a quid pro quo for the
receipt of government contracts.
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    The proposed rule change was published for comment in the Federal
Register on December 30, 2015.\4\ The Commission received ten comment
letters, from nine different commenters, in response to the Notice.\5\
On February 8, 2016, FINRA extended the time period by which the
Commission must approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
approve or disapprove the proposed rule change to March 29, 2016.\6\ On
March 28, 2016, FINRA filed a letter with the Commission stating that
it considered the comments received by the Commission in response to
the Notice, and that FINRA is not intending to make changes to the
proposed rule text in response to the comments.\7\
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    \4\ See Exchange Act Rel. No. 76767 (Dec. 24, 2015), 80 FR 81650
(Dec. 30, 2015) (File No. SR-FINRA-2015-056) (``Notice'').
    \5\ See Letters from David Keating, President, Center for
Competitive Politics (``CCP''), dated Jan. 20, 2016 (``CCP Letter
1''); Clifford Kirsch and Michael Koffler, Sutherland Asbill &
Brennan LLP, for the Committee of Annuity Insurers (``CAI''), dated
Jan. 20, 2016 (``CAI Letter 1''); Clifford Kirsch and Michael
Koffler, Sutherland Asbill & Brennan LLP, for the CAI, dated Feb. 5,
2016 (``CAI Letter 2''); David T. Bellaire, Executive Vice President
and General Counsel, Financial Services Institute (``FSI''), dated
Jan. 20, 2016 (``FSI Letter 1''); Tamara K. Salmon, Assistant
General Counsel, Investment Company Institute (``ICI''), dated Jan.
20, 2016 (``ICI Letter''); Patrick J Moran, Esq., dated Dec. 29,
2015 (``Moran Letter''); Gary A. Sanders, Counsel and Vice
President, National Association of Insurance and Financial Advisors
(``NAIFA''), dated Jan. 20, 2016 (``NAIFA Letter''); Judith M. Shaw,
President, North American Securities Administrators Association,
Inc. (``NASAA''), dated Jan. 20, 2016 (``NASAA Letter''); Hugh D.
Berkson, President, Public Investors Arbitration Bar Association
(``PIABA''), dated Jan. 20, 2016 (``PIABA Letter''); and H.
Christopher Bartolomucci and Brian J. Field, Bancroft PLLC, for the
New York Republican State Committee and the Tennessee Republican
Party (``State Parties''), dated Jan. 20, 2016 (``State Parties
Letter 1''). The comment letters filed with the Commission in
connection with the proposed rule change are available at: http://www.sec.gov/comments/sr-finra-2015-056/finra2015056.shtml.
    \6\ See Letter from Victoria Crane, Associate General Counsel,
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Division of Trading and Markets, Commission, dated Feb.
8, 2016.
    \7\ See Letter from Victoria Crane, Associate General Counsel,
FINRA, to Brent J. Fields, Secretary, Commission, dated Mar. 28,
2016 (``FINRA Response Letter 1'').
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    On March 29, 2016, pursuant to delegated authority, the Commission
issued an order instituting proceedings pursuant to Section 19(b)(2)(B)
of the Act \8\ to determine whether to approve or disapprove the
proposed rule change,

and solicited additional comment.\9\ The Commission received an
additional four comments regarding the proceedings,\10\ including two
letters requesting an opportunity to make an oral presentation in the
proceedings.\11\ On July 6, 2016, FINRA submitted a letter responding
to all comments and to the Order Instituting Proceedings.\12\ On June
21, 2016, FINRA extended the time period by which the Commission must
determine whether to approve or disapprove the proposed rule change to
August 26, 2016.\13\
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    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 77465 (Mar. 29,
2016), 81 FR 19260 (Apr. 4, 2016) (``Order Instituting
Proceedings'').
    \10\ See Letters from David T. Bellaire, Executive Vice
President and General Counsel, FSI, dated Apr. 27, 2016 (``FSI
Letter 2''); Jason Torchinsky, Holtzman Vogel Josefiak Torchinsky
PLLC, on behalf of the Georgia Republican Party and the State
Parties, dated April 12, 2016, filed April 21, 2016 (``State Parties
Letter 2''); Allen Dickerson, Legal Director, CCP, dated April 21,
2016 (``CCP Letter 2''); Allen Dickerson, Legal Director, CCP, dated
April 15, 2016 (``CCP Letter 3'').
    \11\ See CCP Letter 2; State Parties Letter 2. The Commission
denied both requests. See Letter from Brent J. Fields, Secretary,
Commission, to Allen Dickerson, Legal Director, CCP dated July 11,
2016; Brent J. Fields, Secretary, Commission, to Jason Torchinsky,
Holtzman Vogel Josefiak Torchinsky PLLC, on behalf the State
Parties, dated July 11, 2016.
    \12\ See Letter from Victoria Crane, Associate General Counsel,
FINRA, to Brent J. Fields, Secretary, Commission, dated July 6, 2016
(``FINRA Response Letter 2''). Both of FINRA's Responses Letters are
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.
    \13\ See Letter from Victoria Crane, Associate General Counsel,
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel--Sales
Practices, Division of Trading and Markets, Commission, dated June
21, 2016.
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    This order approves the rule change as proposed. Section II
provides an overview of the rule and summarizes the rule as described
by FINRA in its filing and as published in the Notice, Section III is a
summary of the comments received and FINRA's responses, and Section IV
contains the Commission's findings in approving the proposal.

II. Description of the Proposed Rule Change \14\
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    \14\ The proposed rule change, as described in Item II, is
excerpted, in part, from the Notice, which was substantially
prepared by FINRA. See supra note 4. A more detailed description of
the proposed rule change is in the Notice.
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    As described more fully in the Notice, FINRA modeled proposed Rule
2030 \15\ on the Commission's Rule 206(4)-5 under the Investment
Advisers Act of 1940 (``Advisers Act''), which addresses pay-to-play
practices by investment advisers (the ``SEC Pay-to-Play Rule'').\16\
The SEC Pay-to-Play Rule, in part, prohibits any investment adviser
covered under the rule \17\ or any of 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 such investment adviser unless such person is a
``regulated person,'' \18\ as defined under the rule, or an executive
officer, general partner, managing member, or employee of the
investment adviser.\19\ A ``regulated person,'' as defined in the SEC
Pay-to-Play Rule, includes a registered broker-dealer, provided that:
(a) FINRA rules prohibit member firms from engaging in distribution or
solicitation activities if certain political contributions have been
made to certain public officials; and (b) the Commission 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.\20\
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    \15\ See Notice, 80 FR at 81650-51 (citing Advisers Act Release
No. 3043 (July 1, 2010), 75 FR 41018 (July 14, 2010) (Political
Contributions by Certain Investment Advisers) (``SEC Pay-to-Play
Rule Adopting Release'')).
    \16\ FINRA also published the proposed rule change in Regulatory
Notice 14-50 (Nov. 2014) (``Regulatory Notice 14-50'') and sought
comment on the proposal. FINRA states that commenters were generally
supportive of the proposed rule change, but also expressed some
concerns. As such, FINRA revised the proposed rule change as
published in Regulatory Notice 14-50 in response to those comments.
As described more fully in the Notice, FINRA believes that the
revisions it made more closely align FINRA's proposed rule with the
SEC Pay-to-Play Rule and should help reduce cost and compliance
burden concerns raised by commenters. See Notice, 80 FR at 81651
n.16.
    \17\ The SEC Pay-to-Play Rule applies to investment advisers
registered or required to be registered with the Commission, foreign
private advisers that are unregistered in reliance on Section
203(b)(3) of the Advisers Act, and exempt reporting advisers as
defined in Rule 204-4(a) under the Advisers Act. See 17 CFR
275.206(4)-5(a)(2).
    \18\ See Notice, 80 FR at 81650 n.6, 81656. See also 17 CFR
275.206(4)-5(a)(2)(i)(A).
    \19\ See 17 CFR 275.206(4)-5(a)(2)(i)(B) (or, in each case, a
person with a similar status or function to an executive officer,
general partner, or managing member of the investment adviser).
    \20\ See Notice, 80 FR at 81650 n.6 (citing 17 CFR 275.206(4)-
5(f)(9)). The definition of ``regulated person'' also includes SEC-
registered investment advisers and SEC-registered municipal
advisors, subject to specified conditions. The Commission amended
the SEC Pay-to-Play Rule to add SEC-registered municipal advisors to
the definition of ``regulated persons.'' See Rules Implementing
Amendments to the Investment Advisers Act of 1940, Investment
Advisers Act Rel. No. 3221 (June 22, 2011), 76 FR 42950 (July 19,
2011).
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    In light of this regulatory framework, FINRA proposed its own pay-
to-play rule to enable its member firms to continue to engage in
distribution and solicitation activities for compensation with
government entities on behalf of investment advisers, while subjecting
its member firms to appropriate safeguards that will discourage them
from engaging in pay-to-play practices.\21\ Because one of the
objectives of FINRA's proposal is to satisfy the ``regulated person''
definition in the SEC Pay-to-Play Rule, the elements of and terms used
in FINRA's proposal are substantially equivalent to and consistent with
the objectives of the SEC Pay-to-Play Rule.\22\ As discussed below,
this threshold objective precludes many of the modifications proposed
by commenters given that a more permissive FINRA proposal would not
meet the stringency requirements of the SEC Pay-to-Play Rule. FINRA
believes that its proposed rule would establish a comprehensive regime
to regulate the activities of its member firms that engage in
distribution or solicitation activities with government entities on
behalf of investment advisers, and would impose substantially
equivalent restrictions on FINRA member firms engaging in distribution
or solicitation activities to those that the SEC Pay-to-Play Rule
imposes on investment advisers.\23\
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    \21\ See Notice, 80 FR at 81651, 81656.
    \22\ On August 25, 2016, the Commission issued a notice stating
that it intends to issue an order pursuant to Section 206 of the
Advisers Act and SEC Pay-to-Play Rule 206(4)-5 finding that FINRA's
proposed Rule 2030 (i) imposes substantially equivalent or more
stringent restrictions on broker-dealers than the SEC Pay-to-Play
Rule imposes on investment advisers and (ii) is consistent with the
objectives of the SEC Pay-to-Play Rule.
    \23\ See Notice, 80 FR at 81651, 81656.
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    Furthermore, FINRA's proposed Rule 4580 would impose recordkeeping
requirements on FINRA member firms in connection with its pay-to-play
rule that would allow examination of member firms' books and records
for compliance with Rule 2030.\24\ FINRA believes that proposed Rule
4580 is consistent with similar recordkeeping requirements imposed on
investment advisers in connection with the SEC Pay-to-Play Rule.\25\
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    \24\ See id. at 81651, 81655-56.
    \25\ See id. at 81655 n.60 (citing Advisers Act Rule 204-
2(a)(18) and (h)(1)).
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    The following is an overview of the key provisions in FINRA's
proposed rules, as described by FINRA in the Notice.

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

    Proposed Rule 2030(a) would prohibit a covered member from engaging
in distribution or solicitation activities for compensation with a
government entity on behalf of an investment adviser that provides or
is seeking to provide investment advisory services to such government
entity within two years after a contribution to an official of the

government entity is made by the covered member or a covered associate,
including a person who becomes a covered associate within two years
after the contribution is made.\26\ FINRA states that the terms and
scope of the prohibitions in proposed Rule 2030(a) are modeled on the
SEC Pay-to-Play Rule.\27\ According to FINRA, the two-year time-out
period is intended to discourage covered members from participating in
pay-to-play practices by requiring a cooling-off period during which
the effects of a political contribution on the selection process can be
expected to dissipate.\28\
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    \26\ See Notice, 80 FR at 81651.
    \27\ See id. at 81651. See also id. at 81651 n.19 (citing 17 CFR
275.206(4)-5(a)(1)).
    \28\ Notice, 80 FR at 81651, 81659.
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    The following is an overview of some of the key terms used in
FINRA's proposed Rule 2030, as discussed by FINRA in its filing and
published in the Notice or as defined in proposed Rule 2030(g).
1. Covered Members
    The SEC Pay-to-Play Rule includes within its definition of
``regulated person'' SEC-registered municipal advisors, subject to
specified conditions.\29\ 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.\30\
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    \29\ See 17 CFR 275.206(4)-5(a)(2)(i)(A) and 17 CFR 275.206(4)-
5(f)(9).
    \30\ See supra note 29.
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    FINRA addresses the interplay between its proposed rule and the
application of the MSRB's municipal advisor pay-to-play rule by
exempting from the definition of ``covered member'' a member when it 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.'' \31\
FINRA states that 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.\32\ Under such circumstances, FINRA notes
that the MSRB rules applicable to municipal advisors, including the
pay-to-play rule adopted by the MSRB,\33\ would apply to the member
firm.\34\ 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.\35\ Under such
circumstances, the member firm would be a ``covered member'' subject to
the requirements of proposed Rule 2030.\36\ This distinction is the
result of the definitions of ``municipal advisor'' and ``solicitation
of a municipal entity or obligated person'' in the Exchange Act, which
only covers a person who is not affiliated with the broker, dealer,
municipal securities dealer, municipal advisor, or investment adviser
for whom the person is soliciting.\37\
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    \31\ Proposed Rule 2030(g)(4). See also Notice, 80 FR at 81652
(explaining that the SEC Pay-to-Play Rule includes within its
definition of ``regulated person'' SEC-registered municipal
advisors, subject to specified conditions, and 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 MSRB pay-to-play rule).
    \32\ See Notice, 80 FR at 81652.
    \33\ On February 17, 2016, the MSRB published a regulatory
notice announcing that its pay-to-play rule was deemed approved
pursuant to section 19(b)(2)(D) of the Exchange Act on February 13,
2016 and that the effective date of the rule is August 17, 2016. See
Amendments to MSRB Rule G-37 on Political Contributions and
Prohibitions on Municipal Securities Business and Related Amendments
are Deemed Approved under the Securities Exchange Act of 1934,
Regulatory Notice 2016-06, dated February 17, 2016 (the ``MSRB
Regulatory Notice''), available at http://www.msrb.org/~/media/
Files/Regulatory-Notices/Announcements/2016-06.ashx?n=1.
    \34\ See Notice, 80 FR at 81652.
    \35\ See id.
    \36\ See id. FINRA also 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 and
that such a regulated person would be subject to the rules that
apply to the services the regulated person is performing. See id. at
n.24.
    \37\ Exchange Act Section 15B(e)(4) provides that a ``municipal
advisor'' includes a person that undertakes solicitation of a
municipal entity or obligated person. 15 U.S.C. 78o-4(e)(4).
Exchange Act Section 15B(e)(9) provides that the term ``solicitation
of a municipal entity or obligated person'' means ``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 (as defined in section 202 of the Investment
Advisers Act of 1940) 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.'' 15 U.S.C. 78o-4(e)(9).
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2. Distribution Activities
    With respect to the triggering activities for FINRA's proposed Rule
2030(a), FINRA states that, based on the definition of ``regulated
person'' in the SEC Pay-to-Play Rule,\38\ it is proposing a rule that
prohibits its member firms from engaging in distribution activities (as
well as solicitation activities) for compensation with government
entities for two years after certain political contributions have been
made to certain officials.\39\ FINRA also notes, in response to certain
comments discussed below, that certain language in the SEC Pay-to-Play
Rule Adopting Release further supports the inclusion of distribution
activities by broker-dealers in FINRA's proposed Rule 2030.\40\
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    \38\ A ``regulated person,'' as defined in the SEC Pay-to-Play
Rule, includes a FINRA member firm, provided that: (a) FINRA rules
``prohibit member firms from engaging in distribution or
solicitation activities if certain political contributions have been
made;'' and (b) ``[t]he Commission finds, by order, that such rules
impose substantially equivalent or more stringent restrictions on
broker-dealers 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].'' 17 CFR 275.206(4)-5(f)(9)(ii).
    \39\ See Notice, 80 FR at 81660-61 (explaining that FINRA
believes its proposed rule must apply to member firms engaging in
distribution activities and that FINRA did not revise the proposed
rule to remove references to the term ``distribution'' as requested
by comments received in response to Regulatory Notice 14-50).
    \40\ See Notice, 80 FR at 81660. See also id. at 81661 n.103
(citing SEC Pay-to-Play Rule Adopting Release, 75 FR at 41040 n.298
where, according to FINRA, the Commission ``clarif[ied] under what
circumstances distribution payments would violate the SEC's Pay-to-
Play Rule'').
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    FINRA explains that 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
because in these circumstances a member firm is not providing or
seeking to provide investment advisory services to a government
entity.\41\ Therefore, the proposed rule would apply to distribution
activities involving unregistered pooled investment vehicles such as
hedge funds, private equity funds, venture capital funds, 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.\42\ FINRA also notes that, consistent with the SEC Pay-to-Play
Rule, to the extent mutual fund distribution fees are paid by the fund

using fund assets pursuant to a 12b-1 plan, such payments generally
would not constitute payments by the fund's investment adviser.\43\
However, if the adviser pays for the fund's distribution out of its
``legitimate profits,'' the proposed rule would generally be
implicated.\44\
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    \41\ See Notice, 80 FR at 81661 n.106 (explaining that, although
the proposed rule would not apply to distribution activities
relating to all registered pooled investment vehicles, pursuant to
proposed Rule 2030(e) ``[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'').
    \42\ See id. at 81661. See also id. at 81651 n.17 and 81654
n.46.
    \43\ See id. at 81661 n.103. See also SEC Pay-to-Play Rule
Adopting Release, 75 FR at 41040 n.298 (discussing how broker-
dealers may be compensated by advisers according to distribution
arrangements and noting 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'').
    \44\ See Notice, 80 FR at 81661 n.103 (noting, among other
things, that ``for private funds, third parties are often
compensated by the investment adviser or its affiliated general
partner''). 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).
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3. Solicitation Activities
    FINRA states that, consistent with the SEC Pay-to-Play Rule,
proposed Rule 2030(g)(11) defines the term ``solicit'' to mean:

    (A) With respect to investment advisory services, to
communicate, directly or indirectly, for the purpose of obtaining or
retaining a client for, or referring a client to, an investment
adviser; and (B) With respect to a contribution or payment, to
communicate, directly or indirectly, for the purpose of obtaining or
arranging a contribution or payment.\45\
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    \45\ Notice, 80 FR at 81651 n.18. See also id. at 81653-54 n.40.

    FINRA notes that, although the determination of whether a
particular communication would be a solicitation would depend on the
facts and circumstances relating to such communication, as a general
proposition FINRA believes that any communication made under
circumstances reasonably calculated to obtain or retain an advisory
client would be considered a solicitation unless the circumstances
otherwise indicate that the communication does not have the purpose of
obtaining or retaining an advisory client.\46\
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    \46\ See id. at 81651 n.18. See also id. at 81653-54 n.40.
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4. Investment Advisers
    Proposed Rule 2030 would apply to covered members acting on behalf
of (as defined in proposed Rule 2030(g)(7)) any investment adviser
registered (or required to be registered) with the Commission, 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).\47\ Thus,
proposed Rule 2030 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 or Advisers Act Rule
204-4(a). The proposed rule's definition of ``investment adviser'' is
consistent with the definition of ``investment adviser'' in the SEC
Pay-to-Play Rule.\48\
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    \47\ See Proposed Rule 2030(g)(7).
    \48\ See 17 CFR 275.206(4)-5(a)(1).
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5. Official of a Government Entity
    FINRA explains that an ``official'' (as defined in proposed Rule
2030(g)(8)) of a ``government entity'' (as defined in proposed Rule
2030(g)(7))--both of which FINRA states are consistent with the SEC
Pay-to-Play Rule definitions--would include an incumbent, candidate or
successful candidate for elective office of a government entity if the
office is directly or indirectly responsible for, or can influence the
outcome of, the hiring of an investment adviser or has authority to
appoint any person who is directly or indirectly responsible for, or
can influence the outcome of, the hiring of an investment adviser.\49\
FINRA also notes that it is the scope of authority of the particular
office of an official, not the influence actually exercised by the
individual, that would determine whether the individual has influence
over the awarding of an investment advisory contract under the
definition.\50\ FINRA also explains that government entities would
include all state and local governments, their agencies and
instrumentalities, and all public pension plans and other collective
government funds, including participant-directed plans such as 403(b),
457, and 529 plans.\51\
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    \49\ See Notice, 80 FR at 81652.
    \50\ See id. (citing SEC Pay-to-Play Rule Adopting Release, 75
FR at 41029 (discussing the terms ``official'' and ``government
entity'').
    \51\ See Notice, 80 FR at 81652.
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6. Contributions
    Proposed Rule 2030(g)(1) defines ``contribution'' to mean any gift,
subscription, loan, advance, deposit of money, or anything of value
made for the purpose of influencing the election for a federal, state
or local office, and includes any payments for debts incurred in such
an election or transition or inaugural expenses incurred by a
successful candidate for state or local office.\52\ FINRA states that
this definition is consistent with the SEC Pay-to-Play Rule.\53\ FINRA
also states that it would not consider a donation of time by an
individual to be a contribution, provided the covered member has not
solicited the individual's efforts and the covered member's resources,
such as office space and telephones, are not used.\54\ FINRA further
states that it would not consider a charitable donation made by a
covered member to an organization that qualifies for an exemption from
federal taxation under the Internal Revenue Code, or its equivalent in
a foreign jurisdiction, at the request of an official of a government
entity to be a contribution for purposes of the proposed rule.\55\
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    \52\ See id. at 81652.
    \53\ See id. at 81652 n.32. See also id. at 81653.
    \54\ See id. at 81653 n.33 (citing SEC Pay-to-Play Rule Adopting
Release, 75 FR at 41030).
    \55\ See Notice, 80 FR at 81653.
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7. Covered Associates
    Proposed Rule 2030(g)(2) defines the term ``covered associates'' to
mean:

    (A) Any general partner, managing member or executive officer of
a covered member, or other individual with a similar status or
function; (B) Any associated person of a covered member who engages
in distribution or solicitation activities with a government entity
for such covered member; (C) Any associated person of a covered
member who supervises, directly or indirectly, the government entity
distribution or solicitation activities of a person in subparagraph
(B) above; and (D) Any political action committee controlled by a
covered member or a covered associate.\56\
---------------------------------------------------------------------------

    \56\ Id. at 81653 n.37.

    FINRA states that, as also noted in the SEC Pay-to-Play Rule
Adopting Release, contributions made to influence the selection process
are typically made not by the firm itself, but by officers and
employees of the firm who have a direct economic stake in the business
relationship with the government client.\57\ For example, contributions
by an ``executive officer of a covered member'' (as defined in proposed
Rule 2030(g)(5)) would trigger the two-year ``time-out.'' \58\ FINRA
also notes that whether a person is an executive officer would depend
on his or her function or activities and not his or her title.\59\ In
addition, FINRA states that a covered associate would include a PAC
controlled by the covered member or any of its covered associates.\60\
FINRA explains that it would consider a ``covered member'' (as defined
in proposed Rule 2030(g)(4)) or its covered associates to have
``control'' over a PAC if the covered member or covered

associate has the ability to direct or cause the direction of
governance or operations of the PAC.\61\
---------------------------------------------------------------------------

    \57\ See id. (citing SEC Pay-to-Play Rule Adopting Release, 75
FR at 41031).
    \58\ See Notice, 80 FR at 81653.
    \59\ See id.
    \60\ See id.
    \61\ See id.
---------------------------------------------------------------------------

B. Proposed Rule 2030(b): Prohibition on Soliciting and Coordinating
Contributions

    Proposed Rule 2030(b) also would prohibit a covered member or
covered associate from soliciting or coordinating any person or
political action committee (``PAC'') to make any: (1) Contribution to
an official of a government entity in respect of which the covered
member is engaging in, or seeking to engage in, distribution or
solicitation activities on behalf of an investment adviser; or (2)
payment to a political party of a state or locality of a government
entity with which the covered member is engaging in, or seeking to
engage in, distribution or solicitation activities on behalf of an
investment adviser.\62\ FINRA states that this provision is modeled on
a similar provision in the SEC Pay-to-Play Rule \63\ and is intended to
prevent covered members or covered associates from circumventing the
proposed rule's two-year ``time-out'' by ``bundling,'' either by
soliciting a large number of contributions by employees, or by
soliciting payments to a State or local political party.\64\
---------------------------------------------------------------------------

    \62\ See id. at 81653-54. See also id. at 81662.
    \63\ See id. at 81654 n.42 (citing 17 CFR 275.206(4)-5(a)(2)).
    \64\ See Notice, 80 FR at 81654.
---------------------------------------------------------------------------

C. Proposed Rule 2030(c): Exceptions

    FINRA's proposed pay-to-play rule contains three exceptions from
the proposed rule's prohibitions: (1) de minimis contributions; (2) new
covered associates; and (3) certain returned contributions.\65\ FINRA
states that these exceptions are modeled on similar exceptions in the
SEC Pay-to-Play Rule.\66\
---------------------------------------------------------------------------

    \65\ See id.
    \66\ See id. at n.51 (citing 17 CFR 275.206(4)-5(b)).
---------------------------------------------------------------------------

1. De Minimis Contribution Exception
    Proposed Rule 2030(c)(1) would except from the rule's restrictions
contributions made by a covered associate who is a natural person to
government entity officials for whom the covered associate was entitled
to vote at the time of the contributions, provided the contributions do
not exceed $350 in the aggregate to any one official per election.\67\
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.\68\ FINRA states that, consistent with the
SEC Pay-to-Play Rule, under this exception, primary and general
elections would be considered separate elections.\69\ FINRA also
explains that this exception is based on the theory that such
contributions are typically made without the intent or ability to
influence the selection process of the investment adviser.\70\
---------------------------------------------------------------------------

    \67\ See Notice, 80 FR at 81655.
    \68\ See id.
    \69\ See id. at 81655 n.54 (citing SEC Pay-to-Play Rule Adopting
Release, 75 FR at 41034).
    \70\ See Notice, 80 FR at 81655.
---------------------------------------------------------------------------

2. Exception for Certain New Covered Associates
    The proposed rule would attribute to a covered member contributions
made by a person within two years (or, in some cases, six months) of
becoming a covered associate. However, proposed Rule 2030(c)(2) would
provide an exception from the proposed rule's restrictions for covered
members if a natural person made a contribution more than six months
prior to becoming a covered associate of the covered member unless the
covered associate engages in, or seeks to engage in, distribution or
solicitation activities with a government entity on behalf of the
covered member.\71\ FINRA states that this exception is consistent with
the SEC Pay-to-Play Rule \72\ and is intended to balance the need for
covered members to be able to make hiring decisions against the need to
protect against individuals marketing to prospective employers their
connections to, or influence over, government entities the employer
might be seeking as clients.\73\ FINRA also provides, with respect to
the ``look back'' provisions in the proposed rules generally, the
following illustrations of how the ``look back'' provisions will work:
If, for example, the contributions were made more than two years (or
six months for new covered associates) prior to the employee becoming a
covered associate, the ``time-out'' has run.\74\ According to FINRA,
however, if the contribution was made less than two years (or six
months, as applicable) from the time the person becomes a covered
associate, the proposed rule would prohibit the covered member that
hires or promotes the contributing covered associate from receiving
compensation for engaging in distribution or solicitation activities on
behalf of an investment adviser from the hiring or promotion date until
the applicable period has run.\75\
---------------------------------------------------------------------------

    \71\ See id.
    \72\ See id. at 81655 n.55 (citing 17 CFR 275.206(4)-5(b)(2)).
    \73\ See Notice, 80 FR at 81655.
    \74\ See id. at 81656.
    \75\ See id. at 81655-56.
---------------------------------------------------------------------------

3. Exception for Certain Returned Contributions
    Proposed Rule 2030(c)(3) would provide an exception from the
proposed rule's restrictions for covered members if the restriction is
due to a contribution made by a covered associate and: (1) The covered
member discovered the contribution within four months of it being made;
(2) the contribution was less than $350; and (3) the contribution is
returned within 60 days of the discovery of the contribution by the
covered member.\76\ FINRA explains that, consistent with the SEC Pay-
to-Play Rule, this exception would allow a covered member to cure the
consequences of an inadvertent political contribution.\77\ The proposed
rule also 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, while covered members with more
than 150 registered representatives would be permitted to rely on this
exception no more than three times per calendar year.\78\ Furthermore,
a covered member would not be able to rely on an exception more than
once with respect to contributions by the same covered associate
regardless of the time period, which is consistent with similar
provisions in the SEC Pay-to-Play Rule.\79\
---------------------------------------------------------------------------

    \76\ See id. at 81655.
    \77\ See id.
    \78\ See id. FINRA notes that these limitations are consistent
with similar provisions in the SEC Pay-to-Play Rule 206(4)-5(b)(3),
although the SEC Pay-to-Play Rule includes different allowances for
larger and smaller investment advisers based on the number of
employees they report on Form ADV. See id. at 81655 n.59.
    \79\ See Notice, 80 FR at 81655.
---------------------------------------------------------------------------

D. Proposed Rule 2030(d): Prohibitions as Applied to Covered Investment
Pools

    Proposed Rule 2030(d)(1) provides that a covered member that
engages in distribution or solicitation activities with a government
entity on behalf of a covered investment pool,\80\ 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.\81\ 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.\82\ FINRA states
that proposed Rule 2030(d) is modeled on a similar prohibition in the
SEC Pay-to-Play Rule and would apply the prohibitions of the proposed
rule to situations in which an investment adviser manages assets of a
government entity through a hedge fund or other type of pooled
investment vehicle.\83\ Therefore, according to FINRA, the provision
would extend the protection of the proposed rule to public pension
plans that access the services of investment advisers through hedge
funds and other types of pooled investment vehicles sponsored or
advised by investment advisers as a funding vehicle or investment
option in a government-sponsored plan, such as a 529 plan.\84\
---------------------------------------------------------------------------

    \80\ See id. at 81654 n.46 (proposed Rule 2030(g)(3) defines a
``covered investment pool'' to mean: ``(A) Any investment company
registered under the Investment Company Act that is an investment
option of a plan or program of a government entity; or (B) Any
company that would be an investment company under Section 3(a) of
the Investment Company Act but for the exclusion provided from that
definition by either Section 3(c)(1), 3(c)(7) or 3(c)(11) of that
Act'').
    \81\ See Notice, 80 FR at 81654 n.47 (FINRA notes that,
consistent with the SEC Pay-to-Play Rule, under the proposed rule,
if a government entity is an investor in a covered investment pool
at the time a contribution triggering a two-year time-out is made,
the covered member must forgo any compensation related to the assets
invested or committed by the government entity in the covered
investment pool) (citing SEC Pay-to-Play Rule Adopting Release, 75
FR at 41047).
    \82\ See Notice, 80 FR at 81654 n.48 (FINRA states that it added
proposed Rule 2030(d)(2) in response to comments on Regulatory
Notice 14-50 to clarify, for purposes of the proposed rule, the
relationship between an investment adviser to a covered investment
pool and a government entity that invests in the covered investment
pool).
    \83\ See Notice, 80 FR at 81654 n.49 (citing 17 CFR 275.206(4)-
5(c)).
    \84\ See Notice, 80 FR at 81654 n.50 (citing SEC Pay-to-Play
Rule Adopting Release, 75 FR at 41044, which discusses the
applicability of the SEC Pay-to-Play Rule to covered investment
pools).
---------------------------------------------------------------------------

    As noted above, 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 because in
these circumstances a member firm is not providing or seeking to
provide investment advisory services to a government entity.\85\ The
proposed rule would apply to distribution activities involving
unregistered pooled investment vehicles such as hedge funds, private
equity funds, venture capital funds, 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.\86\
---------------------------------------------------------------------------

    \85\ See Notice, 80 FR at 81661.
    \86\ See id.
---------------------------------------------------------------------------

E. Proposed Rule 2030(e): Prohibition on Indirect Contributions or
Solicitations

    Proposed Rule 2030(e) provides that it shall be a violation of Rule
2030 for any covered member or any of its covered associates to do
anything indirectly that, if done directly, would result in a violation
of the rule.\87\ FINRA states that this provision is consistent with a
similar provision in the SEC Pay-to-Play Rule \88\ 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.\89\ FINRA also notes
that, consistent with guidance provided by the Commission in connection
with SEC Pay-to-Play Rule 206(4)-5(d), proposed Rule 2030(e) requires a
showing of intent to circumvent the rule for such persons to trigger
the two-year ``time-out.'' \90\
---------------------------------------------------------------------------

    \87\ See Notice, 80 FR at 81654.
    \88\ See id. at n.44 (citing 17 CFR 275.206(4)-5(d)).
    \89\ See Notice, 80 FR at 81654 n.45 (citing SEC Pay-to-Play
Rule Adopting Release, 75 FR at 41044, which discusses direct and
indirect contributions or solicitations).
    \90\ See Notice, 80 FR at 81654. See also SEC Pay-to-Play Rule
Adopting Release, 75 FR at 41044 n.340 (explaining that like MSRB
Rule G-37(d), SEC Pay-to-Play Rule 206(4)-5(d) ``requires a showing
of intent to circumvent the rule for such persons to trigger the
time out'') (citing Blount, 61 F.3d at 948 (``In short, according to
the SEC, the rule restricts such gifts and contributions only when
they are intended as end-runs around the direct contribution
limitations.'')).
---------------------------------------------------------------------------

F. Proposed Rule 2030(f): Exemptions

    Proposed Rule 2030(f) includes an exemptive provision for covered
members, modeled on the exemptive provision in the SEC Pay-to-Play
Rule, that would allow covered members to apply to FINRA for an
exemption from the proposed rule's two-year ``time-out.'' \91\ As
proposed, FINRA states that this provision would allow FINRA to exempt
covered members, either conditionally or unconditionally, from the
proposed rule's time-out requirement where the covered member discovers
contributions that would trigger the compensation ban after they have
been made, and when imposition of the prohibition would be unnecessary
to achieve the rule's intended purpose.\92\ In determining whether to
grant an exemption, FINRA would take into account varying facts and
circumstances, outlined in the proposed rule, that each application
presents \93\ (e.g., the timing and amount of the contribution, the
nature of the election, and the contributor's apparent intent or motive
in making the contribution).\94\ FINRA notes that this provision would
provide covered members with an additional avenue by which to seek to
cure the consequences of an inadvertent violation by the covered member
or its covered associates that falls outside the limits of one of the
proposed rule's exceptions.\95\
---------------------------------------------------------------------------

    \91\ See Notice, 80 FR at 81654-55.
    \92\ See id. at 81655.
    \93\ See id.
    \94\ See Order Instituting Proceedings, 81 FR at 19263.
    \95\ See Notice, 80 FR at 81655.
---------------------------------------------------------------------------

G. Proposed Rule 4580: Recordkeeping Requirements

    Proposed Rule 4580 would require covered members that engage in
distribution or solicitation activities with a government entity on
behalf of any investment adviser that provides or is seeking to provide
investment advisory services to such government entity to maintain
books and records that would allow FINRA to examine for compliance with
its pay-to-play rule.\96\ FINRA states that this provision is
consistent with similar recordkeeping requirements imposed on
investment advisers in connection with the SEC Pay-to-Play Rule.\97\
The proposed rule also would require covered members to maintain a list
or other record of certain specific information.\98\ FINRA states that
the proposed rule would require, among other things, 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.\99\
---------------------------------------------------------------------------

    \96\ See id.
    \97\ See id. (citing 17 CFR 275.204-2(a)(18) and (h)(1)).
    \98\ See Notice, 80 FR at 81655-56.
    \99\ See id.
---------------------------------------------------------------------------

III. Summary of Comments and FINRA's Responses

    In response to the Notice, the Commission received ten comment
letters, from nine different commenters.\100\ Six commenters generally
express support for FINRA's

proposal.\101\ However, five of those commenters, while generally
expressing support for the goals of the proposal, also raise certain
concerns regarding various aspects of the proposal as drafted and
recommended amendments to the proposal.\102\ The other three commenters
did not support the proposed rule as drafted based largely on concerns
involving the First Amendment to the U.S. Constitution.\103\ FINRA
responded, stating that it considered the comments received by the
Commission in response to the Notice, and that FINRA is not intending
to make changes to the proposed rule text in response to the
comments.\104\
---------------------------------------------------------------------------

    \100\ See supra note 5. CAI submitted two separate comment
letters in response to the Notice. See CAI Letter 1 and CAI Letter
2.
    \101\ See CAI Letter 1; CAI Letter 2; FSI Letter 1; ICI Letter;
NAIFA Letter; NASAA Letter; and PIABA Letter.
    \102\ See CAI Letter 1; CAI Letter 2; FSI Letter 1; NAIFA
Letter; NASAA Letter; and PIABA Letter. ICI did not raise additional
concerns, but states that it is satisfied with FINRA's revisions and
responses to the proposal as drafted in Regulatory Notice 14-50. See
ICI Letter.
    \103\ See CCP Letter 1; Moran Letter; and State Parties Letter
1. Other commenters also raise certain First Amendment-related
concerns. See FSI Letter 1; and CAI Letter 1.
    \104\ See FINRA Response Letter 1.
---------------------------------------------------------------------------

    The Commission received an additional four comments in response to
the Order Instituting Proceedings.\105\ On July 6, 2016, FINRA
submitted a letter responding to all comments and to the Order
Instituting Proceedings.\106\ The comments, as well as FINRA's
responses, are summarized below.\107\
---------------------------------------------------------------------------

    \105\ See supra note 10. See also Memorandum from the Division
of Trading and Markets regarding a May 10, 2016 conference call with
representatives of CAI; Memorandum from the Division of Trading and
Markets regarding a May 19, 2016 conference call with
representatives of FSI.
    \106\ See supra note 12.
    \107\ The comments received in response to the Notice were
summarized when the Commission instituted proceedings. See supra
note 9. For further detail, the comments that the Commission
received on both the Notice and the Order Instituting Proceedings
are available on the Commission's Web site at http://www.sec.gov/comments/sr-finra-2015-056/finra2015056.shtml.
---------------------------------------------------------------------------

A. First Amendment Comments and FINRA's Responses

    As noted above, five commenters either oppose the proposed rule
\108\ or raise certain issues regarding the proposed rule as drafted
based largely on First Amendment concerns.\109\ As a general matter,
these commenters argue that FINRA's proposed rule is not narrowly
tailored to serve a compelling government interest. While acknowledging
that the D.C. Circuit upheld the constitutionality of a comparable MSRB
pay-to-play rule in Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995), which
also used analogous restrictions to discourage pay-to-play practices,
these commenters believe that Supreme Court precedent has changed since
Blount was decided.
---------------------------------------------------------------------------

    \108\ See CCP Letter 1; and State Parties Letter 1. See also CCP
Letter 2; CCP Letter 3; and State Parties Letter 2.
    \109\ See CAI Letter 1; FSI Letter 1; FSI Letter 2; and Moran
Letter.
---------------------------------------------------------------------------

    In response to these comments, FINRA states that the points raised
by the commenters do not warrant changes to, or disapproval of, its
proposed rule change.\110\ FINRA notes that the Commission has already
reviewed and rejected these arguments in a nearly identical
context.\111\ As FINRA explains, the State Parties filed an
unsuccessful lawsuit in 2014 challenging the SEC Pay-to-Play Rule on
First Amendment grounds.\112\ FINRA explains that the State Parties'
comments opposing FINRA's proposed rule reiterate the arguments
advanced in their suit against the Commission and, although the court
of appeals decided the challenge on jurisdictional grounds, the brief
that the Commission filed in the D.C. Circuit is persuasive in
demonstrating that the State Parties' arguments lack merit.\113\ FINRA
also notes that the SEC Pay-to-Play Rule, upon which FINRA's proposed
rule change is based, was modeled on pay-to-play rules that the MSRB
drafted, that the Commission approved, and that the D.C. Circuit upheld
against a constitutional challenge in Blount.\114\
---------------------------------------------------------------------------

    \110\ See FINRA Response Letter 2 at 3 (noting that FINRA's
responses to the First Amendment arguments raised by the State
Parties and CCP also address the concerns raised by CAI, FSI and
Moran). A copy of FINRA Response Letter 2 is available at: https://www.sec.gov/comments/sr-finra-2015-056/finra2015056-18.pdf.
    \111\ See id. (citing N.Y. Republican State Comm. v. SEC, 799
F.3d 1126 (D.C. Cir. 2015) (affirming dismissal of the petition for
lack of subject matter jurisdiction and also dismissing the petition
as time-barred).
    \112\ See FINRA Response Letter 2 at 3.
    \113\ See id. at 3-4.
    \114\ See id. at 5 (citing Blount, 61 F.3d at 944).
---------------------------------------------------------------------------

    Furthermore, FINRA states that the proposed rule change is
justified by a sufficiently important governmental interest to
withstand constitutional scrutiny. For example, FINRA explains that, as
in Blount, the Commission's interest in preventing fraud and in
protecting market actors from ``unfair, corrupt market practices,'' are
``not only substantial, but . . . compelling.'' \115\ FINRA also notes
that the Commission's interest in ``clean advisory markets is equally
important.'' \116\ FINRA acknowledges the D.C. Circuit's observation in
Blount that ``the link between eliminating pay-to-play practices and
the Commission's goals of `perfecting the mechanism of a free and open
market' and promoting `just and equitable principles of trade' is self-
evident.'' \117\ In addition to noting the important interests served
by its proposal, FINRA also notes that, as explained in Blount, the
proposed rule change advances this government interest by seeking to
halt an existing pay-to-play problem, even though, in terms of a
record, ``no smoking gun is needed;'' however, ``here, the conflict of
interest is apparent, the likelihood of stealth great, and the
[Commission's] purpose prophylactic.'' \118\
---------------------------------------------------------------------------

    \115\ See, e.g., FINRA Response Letter 2 at 5 (quoting Blount,
61 F.3d at 944).
    \116\ See, e.g., FINRA Response Letter 2 at 5 (quoting an
observation made in Blount that the Commission's interest ``in clean
bond markets'' is just as important as a legislature's interest ``in
clean elections'') (quoting Blount, 61 F.3d at 944)).
    \117\ See, e.g., FINRA Response Letter 2 at 5 (quoting Blount,
61 F.3d at 945).
    \118\ See, e.g., FINRA Response Letter 2 at 6 (quoting Blount,
61 F.3d at 945).
---------------------------------------------------------------------------

    FINRA further believes that the proposed rule change also is
``closely drawn'' to avoid unnecessary abridgment of associational
freedoms.\119\ FINRA explains that, like the pay-to-play rule upheld in
Blount, its proposed rule change only ``restricts a narrow range of . .
. activities for a relatively short period of time,'' and leaves
available the ``vast majority of political activities.'' \120\ For
example, FINRA notes that the proposal does not attempt to regulate
State and local elections, nor does it impose restrictions on
independent expenditures or ban political contributions, and that each
of those significant avenues for political expression remains
unaffected by the proposed rule change.\121\ FINRA also does not agree
with arguments made by a commenter that FINRA did not consider less
restrictive alternatives in drafting its proposal and that aspects of
the proposal are vague or overbroad. FINRA notes that, because the
Commission must find that FINRA's proposal imposes substantially
equivalent or more stringent restrictions on its member firms as the
SEC Pay-to-Play Rule imposes on investment advisers for FINRA members
to be ``regulated persons'' under the SEC Pay-to-Play Rule, the
provisions and definitions to which the commenter objects are modeled
on and substantially similar to provisions in the

SEC Pay-to-Play Rule.\122\ FINRA also states that it will work with the
industry and Commission to address interpretive questions and provide
additional guidance, as needed, to the extent that questions arise
regarding the application and scope of the provisions and terms used in
the proposed rule change.\123\
---------------------------------------------------------------------------

    \119\ See, e.g., FINRA Response Letter 2 at 6.
    \120\ See, e.g., id. (quoting Blount, 61 F.3d at 947-48).
    \121\ See, e.g., FINRA Response Letter 2 at 4. See also SEC Pay-
to-Play Rule Adopting Release, 75 FR at 41024 n.71 (explaining that
the SEC Pay-to-Play rule ``imposes no restrictions on activities
such as making independent expenditures to express support for
candidates, volunteering, making speeches, and other conduct'').
    \122\ See, e.g., FINRA Response Letter 2 at 7.
    \123\ See, e.g., id.
---------------------------------------------------------------------------

B. Comments Regarding FINRA's Authority To Propose a Pay-to-Play Rule
and FINRA's Responses

    Several commenters contend that FINRA does not have the authority
to adopt a pay-to-play rule because only Congress or the Federal
Election Commission may regulate contributions for federal elections.
    In response, FINRA states that the proposed rule change is
consistent with the authority Congress granted a registered national
securities association like FINRA under Section 15A(b)(6) of the Act to
adopt rules that are designed, among other things, to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to perfect the mechanism of a free and
open market and a national market system and, in general, to protect
investors and the public interest.\124\ FINRA believes that the
proposed rule change accomplishes the goals of Section 15A(b)(6) by,
for example, allowing member firms to continue to engage in
distribution or solicitation activities for compensation with
governmental entities on behalf of investment advisers, while at the
same time deterring member firms from engaging in pay-to-play
practices.\125\ FINRA also believes that the proposed rule change is
reasonably designed to address the distortion of the investment
advisory market and collective action problems created by pay-to-play
practices.\126\
---------------------------------------------------------------------------

    \124\ See id.
    \125\ See id.
    \126\ See id. at 9. As outlined in the SEC Pay-to-Play Adopting
Release, pay-to-play activities create a ``collective action''
problem in two respects. First, government officials who participate
in such activities may have an incentive to continue to accept
contributions to support their campaigns for fear of being
disadvantaged relative to their opponents. Second, advisers may have
an incentive to participate out of concern that they may be
overlooked if they fail to make a contribution. See SEC Pay-to-Play
Rule Adopting Release, 75 FR at 40122.
---------------------------------------------------------------------------

    Although FINRA acknowledges that the proposed rule's two-year
``time-out'' provision might result in fewer covered members and their
covered associates making certain political contributions to certain
officials, FINRA notes that if it did not adopt a pay-to-play rule, the
SEC Pay-to-Play Rule would prohibit member firms from soliciting
government entities for investment advisory services for compensation
on behalf of investment advisers.\127\ FINRA explains that the SEC Pay-
to-Play Rule provides that the rules of a self-regulatory organization
(``SRO''), like FINRA, must impose ``substantially equivalent or more
stringent restrictions'' on its member firms that wish to act as
``regulated persons'' as the SEC Pay-to-Play Rule imposes on investment
advisers.\128\ Therefore, unless FINRA imposes sufficiently stringent
restrictions, investment advisers and covered associates will be barred
from providing or agreeing to provide, directly or indirectly, payment
to FINRA member firms to solicit a government entity for investment
advisory services on behalf of the investment adviser.\129\ FINRA
believes that the proposed rule change is a more effective response to
the issues addressed in the SEC Pay-to-Play Rule than a complete ban on
solicitation,\130\ and notes throughout its response that the proposal
imposes substantially equivalent restrictions on FINRA member firms as
the SEC Pay-to-Play Rule imposes on investment advisers.\131\
---------------------------------------------------------------------------

    \127\ See FINRA Response Letter 2 at 4-5.
    \128\ See id. at 4.
    \129\ See id. See also Notice, 80 FR at 81659.
    \130\ See FINRA Response Letter 2 at 4.
    \131\ See, e.g., id. at 4, 7.
---------------------------------------------------------------------------

C. Variable Annuity-Related Comments and FINRA's Responses

    Two commenters raise concerns regarding the application of the
proposed rules to variable annuities.\132\ Both of these commenters
request, as a threshold matter, that FINRA confirm that Rule 2030 would
not apply to variable annuities.\133\ One of these commenters requests
that the proposed rule not apply to the sales of variable annuity
contracts supported by a separate account that invests in mutual funds,
arguing that the nature of variable annuities and the way investment
options are selected does not implicate the investment advisory
solicitation activities contemplated by the SEC Pay-to-Play Rule.\134\
This commenter claims that the relationship between a variable annuity
contract holder and the investment adviser to a mutual fund supporting
the variable annuity does not rise to a level such that it should
implicate the proposed pay-to-play rule's restrictions.\135\ The other
commenter claims, in support of its argument that Rule 2030 should not
apply to variable annuities, that compliance with Rule 2030 would be
impractical for broker-dealers selling variable annuities in the
government market.\136\ This commenter also argues, for example, that a
covered member selling a variable annuity, particularly where the
separate account is registered as a unit investment trust, cannot
fairly be seen to be engaging in solicitation activities on behalf of
all of the investment advisers and sub-advisers that manage the covered
investment pools available as investment options under the separate
account and subaccounts.\137\
---------------------------------------------------------------------------

    \132\ See CAI Letter 1 and FSI Letter 1. See also CAI Letter 2
(reflecting CAI's suggested revisions to the certain language in
some of FINRA's proposed rules).
    \133\ See CAI Letter 1 and FSI Letter 1.
    \134\ See FSI Letter 1 (claiming that applying the proposed rule
to variable annuities will significantly increase the compliance
burden and as such may limit the options their members make
available to 403(b) and 457 plans).
    \135\ See FSI Letter 1.
    \136\ See CAI Letter 1 (claiming that the dynamics and structure
of variable annuities, particularly those with separate accounts
registered as a unit investment trust, and the number of advisers
and sub-advisers to the funds underlying sub-accounts, makes
compliance with proposed Rule 2030 impractical).
    \137\ See id.
---------------------------------------------------------------------------

    This commenter also requests that proposed Rule 2030 be modified
to, among other things, clarify that the distribution of a two-tiered
product such as a variable annuity is not solicitation activity for an
investment adviser and sub-advisers managing the funds available as
investment options.\138\ Furthermore, this same commenter states that
if FINRA or the Commission determines that broker-dealers selling
variable annuities constitute solicitation activities for purposes of
Rule 2030, that determination raises a host of interpretive questions
that, in this commenter's view, would require further guidance from
FINRA or the Commission.\139\
---------------------------------------------------------------------------

    \138\ See id.
    \139\ See id. For example, CAI requests guidance on the
following questions: Is the selling broker-dealer deemed to be
soliciting on behalf of the adviser of each of the underlying funds
or only of advisers and sub-advisers of funds underlying investment
options that are selected by contract holders? If an underlying fund
is managed by an adviser that uses multiple sub-advisers, is the
selling firm deemed to be soliciting on behalf of all of the sub-
advisers? How does the rule apply when a contract holder on his or
her own allocates funds in the variable annuity to an option at a
point of time (for example, five years) subsequent to the purchase
of the variable annuity without any involvement of the selling firm?
See id.
---------------------------------------------------------------------------

    In response, FINRA states that its proposed rules must impose
substantially equivalent or more stringent restrictions on member firms
as the SEC Pay-to-Play Rule imposes on

investment advisers.\140\ Therefore, because the Commission did not
exclude specific products from the SEC Pay-to-Play Rule, such as
variable annuities, FINRA does not believe that excluding specific
products from its proposed rule would satisfy the Commission's
stringency requirements.\141\ FINRA notes, however, that to the extent
interpretive questions arise regarding the application and scope of the
provisions and terms used in its proposed rules, FINRA will work with
the industry and Commission to address those interpretive questions and
provide additional guidance as needed.\142\
---------------------------------------------------------------------------

    \140\ See FINRA Response Letter 2 at 16.
    \141\ See id.
    \142\ See id.
---------------------------------------------------------------------------

D. Comments Regarding the Scope of the Proposed Rule and FINRA's
Responses

    Two commenters also express concern that proposed Rule 2030(d)
would, in their view, re-characterize ``ordinary'' or ``customary''
distribution activities for covered investment pools as the
solicitation of clients on behalf of the investment adviser to the
covered investment pools.\143\ One of these commenters requests that
such customary distribution activity by member firms for covered
investment pools sold to government entities not be treated as
solicitation activity for an investment adviser for purposes of Rule
2030 simply because an investment adviser provides advisory services to
a covered investment pool that is available as an investment
option.\144\ As more fully explained in the commenter's letter, the
commenter claims, for example, that proposed Rule 2030(d) would recast
``traditional'' broker-dealer activity (i.e., the offer and sale of
covered investment pool securities pursuant to a selling or placement
agent agreement) into something it is not: The solicitation of
investment advisory services on behalf of an investment adviser.\145\
This commenter also claims that the decision in Goldstein v. SEC, 451
F.3d 873 (D.C. Cir. 2006) and the Commission staff's interpretive
position under Advisers Act Rule 206(4)-3 suggest that proposed Rule
2030(d) would be impractical.\146\ This commenter also notes that Rule
206(4)-3 puts selling firms in a contradictory position under FINRA
rules and Advisers Act rules.\147\ This commenter further states that,
in its view, 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.\148\
---------------------------------------------------------------------------

    \143\ See CAI Letter 1 and FSI Letter 1.
    \144\ See CAI Letter 1.
    \145\ See id.
    \146\ See id. (claiming that ``[i]t would create significant
confusion in the industry and undermine settled practices and
understandings, while creating doubt as to the application of the
Goldstein case and the Commission staff's guidance in the Mayer
Brown no-action letter'').
    \147\ See id.
    \148\ See id.
---------------------------------------------------------------------------

    Similarly, another commenter expresses concern with the apparent
application of proposed Rule 2030(d) to ``traditional'' brokerage sales
of mutual funds and variable annuities to participant-directed
government-sponsored retirement plans.\149\ As more fully explained in
the commenter's letter, this commenter continues to be concerned that
the provisions in proposed Rule 2030(d) go beyond that which is
required under Rule 206(4)-5(a)(2)(i) and Rule 206(4)-5(c) to the
detriment of investors.\150\ This same commenter also claims that
mutual fund sales, as well as variable annuity sales, should be
excluded, claiming that the proposed rules serve to redefine the sale
of mutual funds as solicitation by a broker-dealer on behalf of an
investment adviser and also conflict with the realities of conventional
mutual fund selling agreements.\151\
---------------------------------------------------------------------------

    \149\ See FSI Letter 1. See also FSI Letter 2
    \150\ See FSI Letter 1. See also FSI Letter 2.
    \151\ See FSI Letter 1. See also FSI Letter 2.
---------------------------------------------------------------------------

    In response, FINRA explains that, in proposing FINRA Rule 2030(d),
it did not intend to re-characterize broker-dealers' selling interests
in variable annuities, mutual funds and private funds as soliciting an
investment advisory relationship with investors who invest in those
products.\152\ Rather, FINRA states that the purpose of proposed Rule
2030(d) is to clarify that the prohibition of proposed Rule 2030(a)
would apply when the covered member is engaging in distribution or
solicitation activities with a government entity on behalf of a covered
investment pool.\153\ FINRA further explains that proposed Rule 2030(d)
is modeled on a similar provision in the SEC Pay-to-Play Rule, Rule
206(4)-5(c).\154\ As such, and consistent with SEC Pay-to-Play Rule
206(4)-5(c), proposed Rule 2030(d) is 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.\155\ Finally, FINRA notes that the applicability of proposed
Rule 2030(d) is for purposes of FINRA's pay-to-play rule only and, as
such, would not impact or otherwise affect other FINRA rules or
guidance. Therefore, FINRA has determined not to make the changes
suggested by the commenters.\156\
---------------------------------------------------------------------------

    \152\ See FINRA Response Letter 2 at 14.
    \153\ See id.
    \154\ See id.
    \155\ See id. at 15 (noting that when adopting SEC Pay-to-Play
Rule 206(4)-5(c), the Commission stated that although ``an
investment in a pooled investment vehicle may not involve a direct
advisory relationship with a government sponsored plan [that] does
not change the nature of the fraud or the harm that may be inflicted
as a consequence of the adviser's pay-to-play activity'') (quoting
SEC Pay-to-Play Rule Adopting Release, 75 FR at 41044-45)).
    \156\ See FINRA Response Letter 2 at 15.
---------------------------------------------------------------------------

E. Comments Regarding the Inclusion of Distribution Activity in the
Proposed Rule and FINRA's Responses

    One commenter generally expresses concern that proposed Rule 2030
is unnecessarily ambiguous regarding the term ``distribution''
activities in Rule 2030(a).\157\ This commenter claims that it is
unclear what distribution activities ``with'' a government entity would
be prohibited, what compensation is covered by the proposed rule and
who must pay it, and when a member firm might be deemed to be acting
``on behalf of'' an investment adviser.\158\ This commenter states that
the ambiguity of proposed Rule 2030 may result in its misapplication in
a variety of contexts, such as: Where a selling firm is affiliated with
one, but not all, underlying fund advisers and none of the sub-
adviser(s) to any underlying funds, or none of the underlying fund
advisers, but some of the sub-advisers.\159\
---------------------------------------------------------------------------

    \157\ See CAI Letter 1.
    \158\ See id.
    \159\ See id.
---------------------------------------------------------------------------

    This commenter also claims that, while the SEC Pay-to-Play Rule
requires regulated persons to be subject to rules that prohibit them
from engaging in certain distribution activities if certain political
contributions have been made, SEC Pay-to-Play Rule 206(4)-5 does not
mandate the use of the term ``distribution'' in describing the conduct
prohibited by the proposed rule, and suggested revised rule text
reflecting that assertion.\160\ The commenter believes that its
suggested revisions would eliminate, among other things, the potential
concern that a selling firm might violate proposed Rule 2030
unknowingly due to being deemed to be acting on behalf of investment
advisers

or sub-advisers of underlying funds with which it has no
relationship.\161\
---------------------------------------------------------------------------

    \160\ See CAI Letter 1 and CAI Letter 2 (reflecting CAI's
suggested revisions to certain language in some of FINRA's proposed
rules).
    \161\ See CAI Letter 1 (claiming that the commenter's suggested
revisions would not result in any inappropriate narrowing of the
scope of Rule 2030).
---------------------------------------------------------------------------

    In response, FINRA states that it continues to maintain the
position, outlined in the Notice, that it will not remove references to
the term ``distribution.'' \162\ FINRA explains that the Notice pointed
to language in the SEC Pay-to-Play Rule Adopting Release supporting the
inclusion of distribution activities by broker-dealers in FINRA's
proposed Rule 2030.\163\ Specifically, FINRA pointed to the
Commission's discussion regarding under what circumstances distribution
payments would violate the SEC's Pay-to-Play Rule.\164\ FINRA also
notes that based on the Commission's definition of ``regulated person''
\165\ in the SEC's Pay-to-Play Rule, as well as the Commission's
discussion regarding the treatment of distribution fees paid pursuant
to a 12b-1 plan as compared to legitimate profits, FINRA believes that
its proposed rule must apply to member firms engaging in distribution
activities.\166\ FINRA mentioned previously, to the extent that
interpretive questions arise regarding the application and scope of the
provisions and terms used in the proposed rule change, FINRA will work
with the industry and Commission to address the interpretive questions
and provide additional guidance as needed.\167\
---------------------------------------------------------------------------

    \162\ See FINRA Response Letter 2 at 12.
    \163\ See id. at 11-12 (citing Notice, 80 FR at 81660-61).
    \164\ See FINRA Response Letter 2 at 12 n.52 (citing SEC Pay-to-
Play Rule Adopting Release, 75 FR at 4104 n.298).
    \165\ See FINRA Response Letter 2 at 12 (explaining that 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) (citing 17 CFR 275. 206(4)-
5(f)(9)(ii)(A)) (emphasis in original).
    \166\ See FINRA Response Letter 2 at 12 (citing Notice, 80 FR at
81660-61).
    \167\ See id.
---------------------------------------------------------------------------

F. Comments Regarding Defined Terms Used in the Proposed Rules and
FINRA's Responses

    Two commenters request clarification of certain defined terms used
in the proposed rules.\168\ One commenter urged FINRA, or the
Commission, to clarify the meaning of the term ``instrumentality'' as
it is used in the definition of ``government entity.'' \169\ This
commenter claims that, ``[w]ithout additional guidance, covered members
will continue to struggle with whether a contribution to a given entity
should be treated as a contribution to an `instrumentality' of a state
or state agency, thus triggering the two-year time out. . . .'' \170\
This same commenter also asked for clarification as to whether each and
every ``contribution'' (as defined in proposed Rule 2030(g)(1)) is, by
definition, also a ``payment'' (as defined in proposed Rule
2030(g)(9)).\171\
---------------------------------------------------------------------------

    \168\ See CAI Letter 1 and NAIFA Letter.
    \169\ See CAI Letter 1 (claiming that CAI's members have
struggled to understand the contours of this term in the context of
the SEC Pay-to-Play Rule).
    \170\ See id.
    \171\ See CAI Letter 1 (discussing Notice, 80 FR at 81654 n.41:
``Consistent with the SEC Pay-to-Play Rule, FINRA is including the
broader term `payments,' as opposed to `contributions,' to deter a
cover member from circumventing the proposed rule's prohibitions by
coordinating indirect contributions to government officials by
making payments to political parties'').
---------------------------------------------------------------------------

    Another commenter requests that FINRA clarify the definition of a
``covered associate'' and clarify and delineate the positions that
would qualify someone as a covered ``official.'' \172\ This commenter
claims that, in response to the same definition of ``covered
associate'' as used in the SEC Pay-to-Play Rule, many investment
advisers and broker-dealers have classified all of their
representatives as covered associates regardless of whether they
actually engage in the solicitation activity specified in the
definition.\173\ This commenter believes that additional clarification
on when an associated person of a covered member would (or would not)
qualify as a ``covered associate'' would ease compliance burdens,
curtail overly broad limits on legitimate political activity, and
increase the consistency of procedures amongst member firms who seek to
comply with both the letter and the spirit of the proposed rule.\174\
This same commenter requests additional details or guidance from the
Commission with respect to this definition of ``official'' because,
according to that commenter, that definition has caused, and will
continue to spark confusion over exactly what offices subject the
holder to be classified as an ``official'' given that the term is
defined the same way in the SEC Pay-to-Play Rule.\175\
---------------------------------------------------------------------------

    \172\ See NAIFA Letter.
    \173\ See id.
    \174\ See id.
    \175\ See id.
---------------------------------------------------------------------------

    In response, FINRA states that it recognizes, as did the
commenters, that these terms are defined in the SEC Pay-to-Play Rule
and that FINRA modeled the definitions in its proposal on those in the
SEC Pay-to-Play Rule.\176\ With respect to CAI's request for
clarification as to whether each and every ``contribution'' (as defined
in proposed FINRA Rule 2030(g)(1)) is, by definition, also a
``payment'' (as defined in proposed FINRA Rule 2030(g)(9)), FINRA
states that the definition of ``payment'' is similar to the definition
of ``contribution,'' but is broader because 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).\177\ Finally, FINRA also acknowledges the concerns raised by
the commenters and the requests for clarification and additional
guidance from the Commission and FINRA as to certain terms.\178\ FINRA
again states that to the extent that interpretive questions arise
regarding the application and scope of the provisions and terms used in
the proposed rule change, FINRA will work with the industry and
Commission to address the interpretive questions and provide additional
guidance as needed.\179\
---------------------------------------------------------------------------

    \176\ See FINRA Response Letter 2 at 18.
    \177\ See id. at 17.
    \178\ See id. at 19.
    \179\ See id.
---------------------------------------------------------------------------

G. Comments Regarding PAC Contributions and FINRA's Responses

    One commenter claims that statements made by FINRA in the Notice
regarding the proposed rule's anti-circumvention provision, proposed
Rule 2030(e), combined with statements made in Commission staff
guidance concerning whether contributions through PACs would violate
the SEC Pay-to-Play Rule and Section 208(d) of the Advisers Act, have
the ability to chill contributions to PACs.\180\ This commenter claims,
for example, that prospective contributors who simply want to donate to
a PAC have been hesitant to or restricted from doing so out of fear
that they may be making an indirect contribution in violation of the
SEC Pay-to-Play Rule.\181\ Accordingly, this commenter requests further
guidance from the Commission on the factors by which contributions to
PACs would or would not trigger the anti-circumvention provision of the
proposed rule.\182\
---------------------------------------------------------------------------

    \180\ See NAIFA Letter.
    \181\ See id.
    \182\ See id.
---------------------------------------------------------------------------

    In response, FINRA again acknowledges the concerns raised by the
commenter and the requests for clarification and additional guidance
from the Commission and FINRA.\183\ FINRA states that, to the extent
that interpretive questions arise regarding the application and scope
of the provisions and terms used in the

proposed rule change, FINRA will work with the industry and Commission
to address the interpretive questions and provide additional guidance
as needed.\184\
---------------------------------------------------------------------------

    \183\ See FINRA Response Letter 2 at 19.
    \184\ See id. at 18.
---------------------------------------------------------------------------

    Another commenter claims that it continues to believe that not all
payments to political parties or PACs should have to be maintained
under the books and records requirements of proposed Rule 4580.\185\
Rather, this commenter believes that only payments to political parties
or PACs where the covered member or a covered associate: (i) Directs
the political party or PAC to make a contribution to an official of a
government entity which the covered member is soliciting on behalf of
an investment adviser; or (ii) knows that the political party or PAC is
going to make a contribution to an official of a government entity
which the covered member is soliciting on behalf of an investment
adviser, should have to be maintained.\186\ This commenter states that,
while it appreciates FINRA's rationale for proposed Rule 4580, it
believes the costs and burdens associated with the request far outweigh
the benefits to FINRA in ensuring compliance with the rule and would
lead to periodic ``fishing expeditions'' by FINRA examiners.\187\
---------------------------------------------------------------------------

    \185\ See CAI Letter 1.
    \186\ See id.
    \187\ See id.
---------------------------------------------------------------------------

    In response, FINRA states that it disagrees with these comments and
has determined to retain the recordkeeping requirements as proposed in
FINRA Rule 4580.\188\ FINRA notes that, as discussed in the Notice,
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.\189\ Therefore, FINRA states
that it 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.\190\
---------------------------------------------------------------------------

    \188\ See FINRA Response Letter 2 at 20.
    \189\ See id. As FINRA explains in the Notice, a covered
associate would include a PAC controlled by the covered member or
any of its associates. FINRA states that it 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. See
Notice, 80 FR at 81653, 81660 (noting that this position is
consistent with the position taken by the SEC in connection with the
SEC Pay-to-Play Rule) (citing SEC Pay-to-Play Adopting Release, 75
FR at 41032).
    \190\ See FINRA Response Letter 2 at 20-21. FINRA states in the
Notice that the proposed recordkeeping requirements are intended to
allow FINRA to examine for compliance with its proposed pay-to-play
rule, and 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). See Notice, 80 FR at 81663.
---------------------------------------------------------------------------

H. Comments Regarding the De Minimis Exception Under Proposed Rule
2030(c) and FINRA's Responses

    As discussed above, certain commenters raise concerns regarding the
exception for de minimis contributions under proposed Rule 2030(c)(1)
on First Amendment grounds.\191\ In addition, one commenter requests
that the $350 and $150 amounts ``be raised substantially'' in both the
SEC Pay-to-Play Rule and in proposed Rule 2030(c)(1), and further
requests that the $350 limitation on the proposed exception for
returned contributions under proposed Rule 2030(c)(3) be eliminated in
both the SEC Pay-to-Play Rule and in FINRA's proposed rule.\192\
---------------------------------------------------------------------------

    \191\ For a discussion of these First Amendment comments and
FINRA's responses, see Section III.A, supra.
    \192\ See CAI Letter 1 (claiming that these contribution amounts
fail to take inflation into consideration and are ``unreasonably
low'').
---------------------------------------------------------------------------

    In response, FINRA explains that its proposed rules must impose
substantially equivalent or more stringent restrictions on member firms
as the SEC Pay-to-Play Rule imposes on investment advisers.\193\
Therefore, FINRA has proposed exceptions for de minimis contributions
and returned contributions that are consistent with similar exceptions
in the SEC Pay-to-Play Rule.\194\ FINRA does not believe that raising
the limits for the de minimis exception or eliminating the limit for
returned contributions would impose substantially equivalent or more
stringent restrictions on member firms as the SEC Pay-to-Play Rule
imposes on investment advisers.\195\
---------------------------------------------------------------------------

    \193\ See FINRA Response Letter 2 at 19.
    \194\ See id.
    \195\ See id.
---------------------------------------------------------------------------

I. Comments Regarding the Grandfathering of Existing Accounts and
Contracts and FINRA's Responses

    One commenter requests that FINRA clarify the application of the
proposed rule to existing government entity accounts or contracts.\196\
FSI requests that, in the event that FINRA does not amend the
application of its proposed rule to covered investment pools (as
requested by this same commenter), FINRA apply the proposed rule only
to accounts and variable contracts opened after the effective
date.\197\
---------------------------------------------------------------------------

    \196\ See FSI Letter 1.
    \197\ See id.
---------------------------------------------------------------------------

    In response, FINRA explains that, as discussed above, its proposed
rules must impose substantially equivalent or more stringent
restrictions on member firms as the SEC Pay-to-Play Rule imposes on
investment advisers.\198\ The Commission did not apply its rule only to
contracts or accounts opened after the effective date of the rule.\199\
FINRA also explains in the Notice that, if the Commission approves the
proposed rule change, proposed Rule 2030(a) will not be triggered by
contributions made prior to the rule's effective date, and that the
rule 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.\200\ FINRA states that the transition
period--the time between the Commission approving the proposal and
FINRA announcing the effective date of the rule--will provide member
firms with time to identify their covered associates and government
entity clients and to modify their supervisory systems to address new
obligations under the rules.\201\ Therefore, FINRA does not believe
that limiting the application of its rule in the way suggested by FSI
would impose substantially equivalent or more stringent restrictions on
member firms as the SEC Pay-to-Play Rule imposes on investment
advisers.\202\
---------------------------------------------------------------------------

    \198\ See FINRA Response Letter 2 at 16.
    \199\ See id. See also Notice, 80 FR at 81656.
    \200\ See Notice, 80 FR at 81656.
    \201\ See id. (``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.'').
    \202\ See FINRA Response Letter 2 at 16.
---------------------------------------------------------------------------

J. Comments Regarding Application of the Proposed Rules to the
Independent Business Model and FINRA's Responses

    One commenter claims that its members ``will face difficulties'' in
attempting to comply with the proposed rules, and that these
difficulties stem, primarily, from a requirement for independent firms
to implement a rule that is premised on the notion that solicitation of
clients is performed pursuant to a centralized process controlled by
the management of a registered investment adviser.\203\ This same
commenter claims that the ``lack of clarity'' as to the application of
the SEC Pay-to-Play Rule to its members' independent business model,
and the scope of government officials that trigger the requirements,
has led some

firms to adopt aggressive compliance programs that prohibit political
contributions.\204\
---------------------------------------------------------------------------

    \203\ See FSI Letter 1 (claiming FSI believes that the SEC Pay-
to-Play Rule has inadvertently captured non-corrupting activity and
fears that the proposed rule may do the same).
    \204\ See id. (claiming that, absent clarity concerning the
application of the proposed rule to the brokerage services provided
to 403(b) and 457 plans, FSI's members will be faced with the choice
of either adopting similarly aggressive policies or prohibiting
sales to government-sponsored retirement plans).
---------------------------------------------------------------------------

    In response, FINRA states that, consistent with the SEC Pay-to-Play
Rule, it has determined not to except from its proposed pay-to-play
rule member firms engaged in the independent business model.\205\
FINRA, however, states that, to the extent that interpretive questions
arise regarding the application and scope of the provisions and terms
used in the proposed rule change, FINRA will work with the industry and
Commission to address the interpretive questions and provide additional
guidance as needed.\206\
---------------------------------------------------------------------------

    \205\ See FINRA Response Letter 2 at 18.
    \206\ See id.
---------------------------------------------------------------------------

K. Comments Requesting More Stringent Requirements in the Proposed
Rules and FINRA's Responses

    Two commenters suggested that proposed Rule 2030 include more
stringent requirements in certain respects.\207\ First, both commenters
request that FINRA expand the applicability of its proposed rules to
include state-registered investment advisers.\208\ More specifically,
one of these commenters suggests that FINRA include state-registered
investment advisers in its definition of ``investment adviser'' for the
purposes of its proposed rule.\209\ Although FINRA states in the Notice
that relatively few state-registered investment advisers manage public
pension plans,\210\ one commenter believes that this alone does not
justify permitting FINRA-member firms that do manage public pension
plans, but happen to work with smaller investment advisers, to engage
in pay-to-play activities with no repercussions.\211\ Another commenter
claims that state-registered investment advisers now include larger
firms and, therefore, it is much more likely that state-registered
investment advisers will manage or advise public pension plans or
similar funds.\212\
---------------------------------------------------------------------------

    \207\ See NASAA Letter and PIABA Letter.
    \208\ See NASAA Letter and PIABA Letter.
    \209\ See NASAA Letter.
    \210\ See NASAA Letter and PIABA Letter.
    \211\ See PIABA Letter. Unless the commenter is discussing
dually-registered intermediaries, we do not understand the
commenter's reference to ``FINRA-member firms that do manage public
pension plans'' as those plans are managed by investment advisers,
not broker-dealers.
    \212\ See NASAA Letter.
---------------------------------------------------------------------------

    In response, FINRA states that, as discussed in the Notice,\213\ 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
to include state-registered investment advisers in its definition of
``investment adviser'' for the purposes of its proposed rule.\214\ As
discussed in the Notice, FINRA explains that the Commission also
declined to make a similar change to its proposed rule, stating that it
was the Commission's understanding that few of these smaller firms
manage public pension plans or other similar funds.\215\
---------------------------------------------------------------------------

    \213\ See Notice, 80 FR at 81652 n.26 (explaining 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 id. at 81660 n.98 (citing SEC Pay-to-Play Rule Adopting
Release, 75 FR at 41026).
    \214\ See FINRA Response Letter 2 at 10.
    \215\ See Notice, 80 FR at 81652 n.26. See also id. at 81660
n.98.
---------------------------------------------------------------------------

    Second, these two commenters request that FINRA include a mandatory
disgorgement provision for violations of its proposed rule.\216\ These
commenters state that they are disappointed that FINRA removed the
mandatory disgorgement provisions from the proposal as outlined in
FINRA's Regulatory Notice 14-50.\217\ These commenters believe that a
mandatory disgorgement provision would act as a significant deterrent
to engaging in pay-to-play schemes, and it should remain in FINRA's
final rule.\218\
---------------------------------------------------------------------------

    \216\ See NASAA Letter and PIABA Letter.
    \217\ See NASAA Letter and PIABA Letter.
    \218\ See NASAA Letter and PIABA Letter.
---------------------------------------------------------------------------

    In response, FINRA states that, after considering similar comments
made in response to its Regulatory Notice 14-50, in particular, that
FINRA has authority to require disgorgement of fees in enforcement
actions, FINRA determined not to include a disgorgement requirement in
its proposal.\219\ For those same reasons, which also are discussed in
the Notice,\220\ FINRA also has determined not to revise the proposal
to include a disgorgement requirement.\221\
---------------------------------------------------------------------------

    \219\ See FINRA Response Letter 2 at 19-20.
    \220\ See Notice, 80 FR at 81662 (noting, for example, ICI's
comment made in connection with Regulatory Notice 14-50 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'').
    \221\ See FINRA Response Letter 2 at 20.
---------------------------------------------------------------------------

    Finally, one commenter believes that the cooling-off period in the
proposal should be at least four years.\222\ PIABA believes that the
two-year cooling-off period does not adequately reduce the incentive
for FINRA member firms to make political contributions to obtain pay-
to-play advantages.\223\ PIABA states FINRA should start with the most
comprehensive rule, and that it would welcome the deterrent effect of a
four-year cooling off period.\224\
---------------------------------------------------------------------------

    \222\ See PIABA Letter.
    \223\ See id.
    \224\ See id.
---------------------------------------------------------------------------

    FINRA declines to make PIABA's suggested change.\225\ FINRA
explains that 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 period from the date of a contribution is
sufficient to discourage covered members from engaging in pay-to-play
practices.\226\ As FINRA explains in the Notice, 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 quid pro quo political
contribution on the selection process can be expected to
dissipate.\227\
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    \225\ See FINRA Response Letter 2 at 10.
    \226\ See id.
    \227\ See Notice, 80 FR at 81651. As the Commission explained,
the two-year ``cooling-off period'' is not a penalty but, rather, is
intended to be a period during which any effects of a quid pro quo
are expected to dissipate. See SEC Pay-to-Play Adopting Release, 75
FR at 41026 n.104.
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IV. Discussion and Commission Findings

    After carefully considering the proposed rule change, the comments
submitted, and FINRA's responses thereto, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a registered
national securities association.\228\
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    \228\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. In this regard, the Commission
considered FINRA's extensive discussion of these effects in its
Notice and FINRA's response to comments on that discussion.
Moreover, the Commission observes that, in response to the
Commission's Notice, no commenter suggested that FINRA's analysis
was incorrect or incomplete, or that the proposed rule change would
have a negative effect on efficiency, competition, or capital
formation. See 15 U.S.C. 78c(f).
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    In particular, the Commission finds that the proposed rule change
is consistent with Section 15A(b)(6) of the Act.\229\ Section
15A(b)(6), which governs registered national securities associations
like FINRA, requires, among other things, that the association's rules
be ``designed to prevent fraudulent and manipulative

acts and practices, to promote just and equitable principles of trade,
. . . to remove impediments to and perfect the mechanism of a free and
open market and a national market system and, in general, to protect
investors and the public interest.'' \230\ As discussed in more detail
below, we believe that FINRA's proposal is consistent with Section
15A(b)(6). FINRA's proposed rule will address the regulatory concerns
that underlie, and thus support the objectives of, the SEC Pay-to-Play
Rule, discussed below, by discouraging FINRA member firms and certain
of their covered associates from engaging in quid pro quo corruption
that may create market distortions--when, for example, an investment
adviser is chosen on the basis of a placement agent's political
contributions rather than the adviser's merit. Such conduct impedes a
free and open market, and may harm investors and the public interest if
government entities, including public pension plans, and their
beneficiaries receive inferior services or pay higher fees.\231\
FINRA's proposed rule also promotes a free and open market and the
protection of investors and the public interest by avoiding the
outright ban on distribution and solicitation activity that would
result if FINRA member firms were not ``regulated person[s]'' under the
SEC Pay-to-Play Rule.\232\ The fact that FINRA's proposed rule may have
implications for a small subset of political contributions made by
certain covered associates to certain elected officials does not
somehow eliminate FINRA's ability to adopt rules pursuant to the Act,
or the Commission's authority to approve such rules under Section
19(b)(2) of the Act.\233\
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    \229\ 15 U.S.C. 78o-3(b)(6).
    \230\ Id.
    \231\ See FINRA Response Letter 2 at 8. See also Notice, 80 FR
at 81651, 81656 (discussing the regulatory objectives of and
statutory basis for the proposal).
    \232\ See FINRA Response Letter 2 at 5 (``FINRA believes that
the proposed rule change is a more effective response to the issues
addressed in the SEC Pay-to-Play Rule than a complete ban on
solicitation.''). See also Notice, 80 FR at 81652, 81656 (discussing
the regulatory objectives of and statutory basis for the proposal).
    \233\ While FINRA's proposed rule does not bar member firms and
their covered associates from making contributions, it may affect
the propensity of member firms and certain employees to make the
subset of contributions that would trigger the two-year time-out.
FINRA's rule does not impose a requirement that member firms
publicly disclose political contributions.
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    As support for the need for the proposed rule, FINRA outlined
certain regulatory concerns in the Notice that also were identified by
the Commission in connection with its adoption of the SEC Pay-to-Play
Rule.\234\ These concerns, which also implicate the investor and public
interest protections described in Section 15A(b)(6) of the Act,
recognize the central role intermediaries, such as ``solicitors'' or
``placement agents,'' have played in actions that the Commission and
other authorities have brought involving pay-to-play schemes.\235\
FINRA also acknowledges the Commission's observation of how investment
advisers, in several instances, allegedly made significant payments to
placement agents and other intermediaries to influence the award of
advisory contracts.\236\ Moreover, FINRA points out the difficulties
that investment advisers face in monitoring or controlling the
activities of their third-party solicitors.\237\
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    \234\ See Notice, 80 FR at 81651, nn.12-14 (discussing concerns
the Commission identified in the SEC Pay-to-Play Rule Adopting
Release, 75 FR at 41037).
    \235\ See Notice, 80 FR at 81651. See also id. at nn.10-11
(explaining that ``solicitors'' typically locate investment advisory
clients on behalf of an investment adviser, and that ``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) (citing
Advisers Act Release No. 2910 (Aug. 3, 2009), 74 FR 39840, 39853
n.137 (Aug. 7, 2009) (Political Contributions by Certain Investment
Advisers)).
    \236\ See Notice, 80 FR at 81651. See also e.g., SEC Pay-to-Play
Adopting Release, 75 FR at 41037.
    \237\ See Notice, 80 FR at 81651. See also SEC Pay-to-Play
Adopting Release, 75 FR at 41032 n.182, 40137 n.266 (acknowledging
commenters' concerns regarding the difficulties that advisers may
have when monitoring the activities of their third-party
solicitors).
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    As we explained in adopting the SEC Pay-to-Play Rule, public
pension plans are particularly vulnerable to pay-to-play practices, and
we have been particularly concerned that the engagement of placement
agents who have made political contributions to key officials is viewed
by investment advisers as a necessary step to securing a contract with
a public pension plan.\238\ In connection with the SEC Pay-to-Play
Rule, we initially proposed a complete bar on investment advisers
engaging third parties to solicit government clients on their behalf
because of concerns about investment advisers' use of third-party
solicitors and placement agents to engage in pay-to-play
activities.\239\ However, persuaded by commenters, we revised the
proposed SEC Pay-to-Play Rule to permit advisers to make payments to
certain ``regulated persons'' to solicit government clients on their
behalf, provided that they are themselves subject to prohibitions
against participating in pay-to-play practices, are subject to
Commission oversight and, in the case of broker-dealers, the oversight
of a registered national securities association such as FINRA.\240\
FINRA agreed and informed us that it would prepare rules for our
consideration that would prohibit its members from soliciting advisory
business from a government entity on behalf of an adviser unless they
comply with pay-to-play restrictions.\241\
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    \238\ See SEC Pay-to-Play Adopting Release, 75 FR at 41019-20,
nn.16-25 (collecting examples of SEC litigation releases as well as
state and federal criminal actions with pay-to-play schemes
involving placement agents among other intermediaries). See also id.
at 40137, n.262 (collecting examples of state and local legislative
actions undertaken to prohibit or regulate pay-to-play practices
involving placement agents in response to concerns about pay-to-play
activities in their jurisdictions).
    \239\ See id. at 41037 nn.259-68 (discussing the Commission's
observations in the SEC Pay-to-Play Rule proposing release).
    \240\ See id. at 41041.
    \241\ See Notice, 80 FR at 81651 n.15 (citing a letter from
Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, to
Andrew J. Donohue, Director, Division of Investment Management,
Commission (Mar. 15, 2010) (``Ketchum Letter''), available at http://www.sec.gov/comments/s7-18-09/s71809-260.pdf (stating that FINRA
``believe[s] 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 also notes that in
developing its proposal it intended to draw closely upon all the
substantive and technical elements of the Commission's rule as well
as FINRA's regulatory expertise in examining and enforcing the MSRB
rules, upon which the SEC Pay-to-Play Rule is based. See Ketchum
Letter. See also SEC Pay-to-Play Adopting Release, 75 FR at 41042
n.317 (discussing same).
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    Pay-to-play practices are harmful. They create an impediment to a
free and open market by, for example, distorting the investment adviser
selection process from one that is based on merit, performance and
cost, to one that is influenced by a placement agent's contributions to
the campaigns of government officials who are responsible for, or can
influence the outcome of, selecting an investment adviser.\242\ As a
result of this distortion, government entities, including pension
funds, and their citizen beneficiaries may be harmed by receiving
inferior services or paying higher fees.\243\ Investors and the public
interest ultimately suffer, including taxpayers, residents who rely on
municipal services, and the beneficiaries of public pension funds, such
as firemen, police officers, teachers, and other civil

servants.\244\ Investment advisers also are harmed because their
ability to participate in the market is impeded unless they are willing
to engage in pay-to-play practices by, for example, hiring placement
agents that make certain political contributions.\245\
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    \242\ See, e.g., SEC Pay-to-Play Adopting Release, 75 FR at
41023, 41039.
    \243\ SEC Pay-to-Play Adopting Release, 75 FR at 41019.
    \244\ SEC Pay-to-Play Adopting Release, 75 FR at 41019 (noting
that the management of public pension plans ``most significantly . .
. affects taxpayers and the beneficiaries of these funds, including
the millions of present and future State and municipal retirees who
rely on the funds for their pensions and other benefits'').
    \245\ See, e.g., SEC Pay-to-Play Adopting Release, 75 FR at
41023, 41039 (explaining that ``pay to play practices may hurt
smaller advisers that cannot afford the required contributions.
Curtailing pay to play arrangements enables advisory firms,
particularly smaller advisory firms, to compete on merit, rather
than their ability or willingness to make contributions'').
---------------------------------------------------------------------------

    The Commission also believes that the stealth in which pay-to-play
practices occur and the inability of markets to properly address these
practices argue strongly for rules like the SEC Pay-to-Play Rule and
FINRA's proposal.\246\ Pay-to-play practices create a ``collective
action'' problem in two respects: (1) Government officials who
participate in such activities have an incentive to continue to accept
contributions to support their campaigns for fear of being
disadvantaged relative to their opponents; and (2) investment advisers
have an incentive to participate out of concern that they may be
overlooked if they fail to make a contribution.\247\
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    \246\ See SEC Pay-to-Play Adopting Release, 75 FR at 40122-23.
See also FINRA Response Letter at 6 (noting that, as explained in
Blount, ``no smoking gun is needed;'' however, ``where, as here, the
conflict of interest is apparent, the likelihood of stealth great,
and the [Commission's] purpose prophylactic'').
    \247\ See FINRA Response Letter at 9; SEC Pay-to-Play Adopting
Release, 75 FR at 40122.
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    We believe that application of FINRA's proposed pay-to-play rules
will effectively discourage covered members and their covered
associates who act as placement agents for investment advisers from
participating in pay-to-play practices because their political
contributions or payments will be subject to restrictions similar to
those imposed on investment advisers under the SEC Pay-to-Play
Rule.\248\ The Commission therefore believes that FINRA's proposed rule
change will help address the concerns identified in the SEC Pay-to-Play
Rule Adopting Release regarding the distortion of the investment
advisory market.\249\ As a result, like the SEC Pay-to-Play rule,
FINRA's proposal should help protect investors and the public interest
by, among other things, reducing the costs to plans and their
beneficiaries of inferior asset management services arising from
adviser selection based on a placement agent's political contributions
rather than prudential investment considerations.\250\ Further, in the
Commission's view, FINRA's proposed rule strikes an appropriate balance
in addressing these regulatory concerns by providing for FINRA member
firms to be ``regulated person[s]'' under the SEC Pay-to-Play
Rule.\251\ As a result, investment advisers will be able to continue to
benefit from the use of placement agents in obtaining investment
advisory business with government entities without political
contributions distorting the process by which a government entity, such
as a public pension fund, selects an adviser.\252\ The two-year time-
out period imposed by the proposed rule change is not a penalty but,
rather, is intended to discourage participation in pay-to-play
practices by requiring a ``cooling-off period'' during which the
effects of a quid pro quo political contribution on the selection
process are expected to dissipate.\253\ This time-out will help promote
fair competition in the market and protect public pension funds and
investors by curbing fraudulent conduct resulting from pay-to-play
practices.\254\ In addition, according to FINRA, the proposal can be
expected to help promote competition by allowing more third-party
solicitors to participate in the market for solicitation services,
which in turn may reduce costs to investment advisers and improve
competition for advisory services.\255\ For these reasons and as
discussed throughout, the Commission finds that the proposed rule
change is consistent with Section 15A(b)(6) of the Act.\256\
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    \248\ See Notice, 80 FR at 81651.
    \249\ See FINRA Response Letter at 9 (stating that ``[f]or
example, the proposed rule change is reasonably designed to address
the distortion of the investment advisory market and collective
action problems created by pay-to-play practices''). As the
Commission has explained, by addressing distortions in the process
by which investment advisers are selected regarding public
investments, pay-to-play rules provide important protections to
public pension plans and their beneficiaries, as well as
participants in other important plans or programs sponsored by
government entities. See SEC Pay-to-Play Adopting Release, 75 FR at
41023, 41054.
    \250\ See SEC Pay-to-Play Adopting Release, 75 FR at 41039.
    \251\ See, e.g., FINRA Response Letter at 5 (``FINRA believes
that the proposed rule change is a more effective response to the
issues addressed in the SEC Pay-to-Play Rule than a complete ban on
solicitation.'') See also Notice, 80 FR at 81652, 81656 (discussing
the regulatory objectives of and statutory basis for the proposal).
    \252\ See, e.g., FINRA Response Letter 2 at 8 (``The proposed
rule change accomplishes these goals by allowing member firms to
continue to engage in distribution or solicitation activities for
compensation with governmental entities on behalf of investment
advisers, while at the same time deterring member firms from
engaging in pay-to-play practices.'').
    \253\ See Notice, 80 FR at 81651. See also SEC Pay-to-Play
Adopting Release, 75 FR at 41026 n.104.
    \254\ See Notice, 80 FR at 81657.
    \255\ See id.
    \256\ See 15 U.S.C. 78o-3(b)(6).
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    The Commission notes that most commenters to the Notice \257\ and
some of the commenters responding to the Order Instituting Proceedings
\258\ generally express support for FINRA's proposal. For example, one
commenter states that it is pleased that, like the SEC and the MSRB,
FINRA is adopting rules to govern the activities of its members that
solicit government clients on behalf of an investment adviser and also
is pleased that FINRA's proposal is designed to complement, and be
consistent with, the SEC's pay-to-play rule.\259\ Similarly, another
commenter states that, although it requests certain revisions, it also
supports FINRA's attempt to deter pay-to-play activity among covered
members and supports the regulatory objectives underlying the Proposed
Rules.\260\
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    \257\ See CAI Letter 1; CAI Letter 2; FSI Letter 1; ICI Letter;
NAIFA Letter; NASAA Letter; and PIABA Letter.
    \258\ See FSI Letter 2 (claiming that the proposal creates
``compliance uncertainties'' for FSI's members, but noting that FSI
``support[s] regulatory efforts to combat pay-to-play corruption
activity'').
    \259\ See ICI Letter.
    \260\ See CAI Letter 1 (recognizing ``the challenges in crafting
the Proposed Rules so that they reach all of the activity sought to
be eliminated without also prohibiting activity that is harmless'').
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    The Commission acknowledges the concerns and questions raised by
some commenters, which are outlined in further detail above in Section
III. As discussed below, the Commission believes, however, that FINRA
has responded to the commenters' concerns and questions in light of,
among other things, the regulatory framework established by the SEC
Pay-to-Play Rule, which provides that FINRA's proposed rules must
impose substantially equivalent or more stringent restrictions on its
members than the SEC Pay-to-Play Rule imposes on investment advisers
for FINRA members to be ``regulated persons'' under the SEC Pay-to-Play
Rule.

A. Comments Concerning the First Amendment and Related Concerns

    Several commenters express the view that FINRA's proposed rule
violates the First Amendment.\261\ The Commission is sensitive to the
constitutional concerns raised by the commenters, but after careful
consideration of their arguments, for the reasons discussed

below, concludes that FINRA's rule is consistent with the First
Amendment.
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    \261\ See CCP Letter 1; FSI Letter 1; FSI Letter 2; and State
Parties Letter 1. See also CCP Letter 2; CCP Letter 3; Moran Letter
and State Parties Letter 2.
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    FINRA's rule, which focuses on covered members who serve as
placement agents, tracks the SEC Pay-to-Play Rule for investment
advisers, which, in turn, tracks the MSRB's pay-to-play rule, Rule G-
37, which the D.C. Circuit upheld against First Amendment challenge in
1995.\262\ The Supreme Court has issued several decisions regarding
political speech since Blount was decided,\263\ and none of these
decisions call into question Blount's holding that a tailored pay-to-
play rule, which is nearly identical in purpose and form to FINRA's
proposed rule and which also furthers an important public interest, is
constitutional. Indeed, the en banc D.C. Circuit recently and
unanimously upheld a broader pay-to-play restriction--a bar on all
contributions to federal candidates by federal contractors--in its
decision in Wagner that analyzed the post-Blount Supreme Court
decisions and cited Blount with approval.\264\ Various pay-to-play
restrictions imposed by other jurisdictions also have withstood First
Amendment challenge in recent years.\265\
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    \262\ Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995), cert. denied,
517 U.S. 1119 (1996). One significant difference between the MSRB
rule, on one hand, and the SEC's and FINRA's rules, on the other, is
that the MSRB rule requires the public disclosure of political
contributions whereas the SEC's and FINRA's rules do not.
    \263\ See, e.g., McCutcheon v. FEC, 134 S. Ct. 1434 (2014);
Citizens United v. FEC, 558 U.S. 310 (2010); Davis v. FEC, 554 U.S.
724 (2008); FEC v. Wisc. Right To Life, Inc., 51 U.S. 449 (2007);
Randall v. Sorrell, 548 U.S. 230 (2006); FEC v. Beaumont, 539 U.S.
146 (2003); Nixon v. Shrink Mo. Gov't PAC, 528 U.S. 377 (2000).
    \264\ Wagner v. FEC, 793 F.3d 1 (D.C. Cir. 2015) (en banc),
cert. denied sub nom., Miller v. FEC, 136 S. Ct. 895 (2016).
    \265\ See, e.g., Yamada v. Snipes, 786 F.3d 1182 (9th Cir.),
cert. denied, 136 S. Ct. 569 (2015); Preston v. Leake, 660 F.3d 726,
729-30, 736 (4th Cir. 2011); Ognibene v. Parkes, 671 F.3d 174, 179-
80 (2d Cir. 2011); Green Party of Connecticut v. Garfield, 616 F.3d
189, 200 (2d Cir. 2010).
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    Decisions like Wagner confirm that even an outright limitation on
contributions--as opposed to FINRA's rule, which may indirectly
discourage contributions--is permissible if it is justified by a
sufficiently important government interest and is closely drawn to
avoid unnecessary abridgement of the type of political speech
represented by a political contribution.\266\ We believe that FINRA's
proposed rule serves a vitally important governmental interest:
Discouraging a specific type of quid pro quo corruption in which
political contributions made by placement agents may influence the
award of investment advisory business by government entities. The
Supreme Court has long held that halting quid pro quo corruption is an
important government interest that justifies limitations--or outright
bans--on contributions.\267\