[Federal Register Volume 83, Number 92 (Friday, May 11, 2018)]
[Proposed Rules]
[Pages 21953-21955]
[FR Doc No: 2018-09979]

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DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2018-0394; Product Identifier 2018-NM-036-AD]
RIN 2120-AA64

Airworthiness Directives; Dassault Aviation Airplanes

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice of proposed rulemaking (NPRM).

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SUMMARY: We propose to adopt a new airworthiness directive (AD) for all
Dassault Aviation Model MYSTERE-FALCON 50 airplanes. This proposed AD
was prompted by a determination that more restrictive maintenance
requirements and airworthiness limitations are necessary. This proposed
AD would require revising the maintenance or inspection program, as
applicable, to incorporate new and more restrictive maintenance
requirements and airworthiness limitations. We are proposing this AD to
address the unsafe condition on these products.

DATES: We must receive comments on this proposed AD by June 25, 2018.

ADDRESSES: You may send comments, using the procedures found in 14 CFR
11.43 and 11.45, by any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the instructions for submitting comments.
     Fax:<PHONE_NUMBER>.
     Mail: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue SE, Washington, DC 20590.
     Hand Delivery: Deliver to Mail address above between 9
a.m. and 5 p.m., Monday through Friday, except Federal holidays.
    For service information identified in this NPRM, contact Dassault
Falcon Jet Corporation, Teterboro Airport, P.O. Box 2000, South
Hackensack, NJ 07606; telephone<PHONE_NUMBER>; internet http://www.dassaultfalcon.com. You may view this service information at the
FAA, Transport Standards Branch, 2200 South 216th Street, Des Moines,
WA. For information on the availability of this material at the FAA,
call<PHONE_NUMBER>.

Examining the AD Docket

    You may examine the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-
0394; or in person at the Docket Management Facility between 9 a.m. and
5 p.m., Monday through Friday, except Federal holidays. The AD docket
contains this NPRM, the regulatory evaluation, any comments received,
and other information. The street address for the Docket Operations
office (telephone<PHONE_NUMBER>) is in the ADDRESSES section. Comments
will be available in the AD docket shortly after receipt.

FOR FURTHER INFORMATION CONTACT: Tom Rodriguez, Aerospace Engineer,
International Section, Transport Standards Branch, FAA, 2200 South
216th Street, Des Moines, WA 98198; telephone and fax<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments about this proposal. Send your comments to an address listed
under the ADDRESSES section. Include ``Docket No. FAA-2018-0394;
Product Identifier 2018-NM-036-AD'' at the beginning of your comments.
We specifically invite comments on the overall regulatory, economic,
environmental, and energy aspects of this NPRM. We will consider all
comments received by the closing date and may amend this NPRM based on
those comments.
    We will post all comments we receive, without change, to http://www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact we
receive about this NPRM.

Discussion

    The European Aviation Safety Agency (EASA), which is the Technical
Agent for the Member States of the European Union, has issued EASA
Airworthiness Directive 2018-0026, dated January 30, 2018 (referred to
after this as the Mandatory Continuing Airworthiness Information, or
``the MCAI''), to correct an unsafe condition for all Dassault Aviation
Model MYSTERE-FALCON 50 airplanes. The MCAI states:

    The airworthiness limitations and certification maintenance
instructions for the

Dassault Myst[egrave]re Falcon 50 aeroplanes, which are approved by
EASA, are currently defined and published in the Dassault
Myst[egrave]re Falcon 50 Aircraft Maintenance Manual (AMM) chapter
5-40. These instructions have been identified as mandatory for
continued airworthiness.
    Failure to accomplish these instructions could result in an
unsafe condition [i.e, reduced structural integrity of the
airplane].
    Consequently, EASA issued [EASA] AD 2016-0067 [which corresponds
to FAA AD 2017-09-03 Amendment 39-18865 (82 FR 21467, May 9, 2017)
(``AD 2017-09-03'')] to require accomplishment of the maintenance
tasks, and implementation of the airworthiness limitations, as
specified in Dassault Myst[egrave]re Falcon 50 AMM chapter 5-40
Revision 23.
    Since that [EASA] AD was issued, Dassault issued Revision 24 of
the Dassault Myst[egrave]re Falcon 50 AMM chapter 5-40, which
introduces new and more restrictive maintenance requirements and/or
airworthiness limitations.
    For the reason described above, this [EASA] AD retains the
requirements of EASA AD 2016-0067, which is superseded, and requires
accomplishment of the actions specified in Revision 24 of the
Dassault Myst[egrave]re Falcon 50 AMM chapter 5-40 * * *.

    You may examine the MCAI in the AD docket on the internet at http://www.regulations.gov by searching for and locating Docket No. FAA-2018-
0394.

Relationship Between Proposed AD and Certain Other ADs

    This NPRM would not supersede AD 2017-09-03. Rather, we have
determined that a stand-alone AD would be more appropriate to address
the changes in the MCAI. This NPRM would require revising the
maintenance or inspection program, as applicable, to incorporate the
new maintenance requirements and airworthiness limitations.
Accomplishment of the proposed actions would then terminate all
requirements of AD 2017-09-03. Accomplishment of the proposed actions
would also terminate all requirements of AD 2010-26-05, Amendment 39-
16544 (75 FR 79952, December 21, 2010) (``AD 2010-26-05'') and AD 2012-
02-18, Amendment 39-16941 (77 FR 12175, February 29, 2012) (``AD 2012-
02-18''), for the Dassault Aviation Model MYSTERE-FALCON 50 airplanes
specified in those ADs.

Related Service Information Under 1 CFR Part 51

    Dassault Aviation has issued Chapter 5-40, Airworthiness
Limitations, of the Dassault Falcon 50/50EX Maintenance Manual,
Revision 24, dated July 2017. This service information describes
instructions applicable to airworthiness and safe life limitations.
This service information is reasonably available because the interested
parties have access to it through their normal course of business or by
the means identified in the ADDRESSES section.

FAA's Determination and Requirements of This Proposed AD

    This product has been approved by the aviation authority of another
country, and is approved for operation in the United States. Pursuant
to our bilateral agreement with the State of Design Authority, we have
been notified of the unsafe condition described in the MCAI and service
information referenced above. We are proposing this AD because we
evaluated all pertinent information and determined an unsafe condition
exists and is likely to exist or develop on other products of the same
type designs.
    This proposed AD requires revisions to certain operator maintenance
documents. Compliance with these revisions is required by 14 CFR
91.403(c). For airplanes that have been previously modified, altered,
or repaired in the areas addressed by this proposed AD, the operator
may not be able to accomplish the actions described in the revisions.
In this situation, to comply with 14 CFR 91.403(c), the operator must
request approval for an alternative method of compliance according to
paragraph (j)(1) of this proposed AD. The request should include a
description of changes to the required actions that will ensure the
continued damage tolerance of the affected structure.

Differences Between This Proposed AD and the MCAI or Service
Information

    The MCAI specifies that if there are findings from the
airworthiness limitations section (ALS) inspection tasks, corrective
actions must be accomplished in accordance with Dassault Aviation
maintenance documentation. However, this proposed AD does not include
that requirement. Operators of U.S.-registered airplanes are required
by general airworthiness and operational regulations to perform
maintenance using methods that are acceptable to the FAA. We consider
those methods to be adequate to address any corrective actions
necessitated by the findings of ALS inspections required by this
proposed AD.

Costs of Compliance

    We estimate that this proposed AD affects 250 airplanes of U.S.
registry.
    We estimate the following costs to comply with this proposed AD:
    We have determined that revising the maintenance or inspection
program takes an average of 90 work-hours per operator, although we
recognize that this number may vary from operator to operator. In the
past, we have estimated that this action takes 1 work-hour per
airplane. Since operators incorporate maintenance or inspection program
changes for their affected fleet(s), we have determined that a per-
operator estimate is more accurate than a per-airplane estimate.
Therefore, we estimate the total cost per operator to be $7,650 (90
work-hours x $85 per work-hour).

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. Subtitle VII: Aviation Programs,
describes in more detail the scope of the Agency's authority.
    We are issuing this rulemaking under the authority described in
Subtitle VII, Part A, Subpart III, Section 44701: ``General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.
    This proposed AD is issued in accordance with authority delegated
by the Executive Director, Aircraft Certification Service, as
authorized by FAA Order 8000.51C. In accordance with that order,
issuance of ADs is normally a function of the Compliance and
Airworthiness Division, but during this transition period, the
Executive Director has delegated the authority to issue ADs applicable
to transport category airplanes to the Director of the System Oversight
Division.

Regulatory Findings

    We determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify this proposed
regulation:
    1. Is not a ``significant regulatory action'' under Executive Order
12866;

    2. Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979);
    3. Will not affect intrastate aviation in Alaska; and
    4. Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

The Proposed Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

0
1. The authority citation for part 39 continues to read as follows:

    Authority:  49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13   [Amended]

0
2. The FAA amends Sec.  39.13 by adding the following new airworthiness
directive (AD):

Dassault Aviation: Docket No. FAA-2018-0394; Product Identifier
2018-NM-036-AD.

(a) Comments Due Date

    We must receive comments by June 25, 2018.

(b) Affected ADs

    This AD affects AD 2010-26-05, Amendment 39-16544 (75 FR 79952,
December 21, 2010) (``AD 2010-26-05''); AD 2012-02-18, Amendment 39-
16941 (77 FR 12175, February 29, 2012) (``AD 2012-02-18''); and AD
2017-09-03 Amendment 39-18865 (82 FR 21467, May 9, 2017) (``AD 2017-
09-03'').

(c) Applicability

    This AD applies to Dassault Aviation Model MYSTERE-FALCON 50
airplanes, certificated in any category, all manufacturer serial
numbers.

(d) Subject

    Air Transport Association (ATA) of America Code 05, Time limits/
maintenance checks.

(e) Reason

    This AD was prompted by a determination that more restrictive
maintenance requirements and airworthiness limitations are
necessary. We are issuing this AD to prevent reduced structural
integrity of the airplane.

(f) Compliance

    Comply with this AD within the compliance times specified,
unless already done.

(g) Revision of Maintenance or Inspection Program

    Within 90 days after the effective date of this AD, revise the
maintenance or inspection program, as applicable, to incorporate the
information specified in Chapter 5-40, Airworthiness Limitations, of
the Dassault Falcon 50/50EX Maintenance Manual, Revision 24, dated
July 2017. The initial compliance times for doing the tasks are at
the time specified in Chapter 5-40, Airworthiness Limitations, of
the Dassault Falcon 50/50EX Maintenance Manual, Revision 24, dated
July 2017, or within 90 days after the effective date of this AD,
whichever occurs later.

(h) No Alternative Actions or Intervals

    After the maintenance or inspection program has been revised as
required by paragraph (g) of this AD, no alternative actions (e.g.,
inspections), or intervals, may be used unless the actions, or
intervals, are approved as an alternative method of compliance
(AMOC) in accordance with the procedures specified in paragraph
(j)(1) of this AD.

(i) Terminating Actions for Other ADs

    (1) Accomplishing the actions required by paragraph (g) of this
AD terminates all requirements of AD 2017-09-03.
    (2) Accomplishing the actions required by paragraph (g) of this
AD terminates all requirements of AD 2010-26-05 and AD 2012-02-18
for the Dassault Aviation Model MYSTERE-FALCON 50 airplanes
specified in those ADs.

(j) Other FAA AD Provisions

    The following provisions also apply to this AD:
    (1) Alternative Methods of Compliance (AMOCs): The Manager,
International Section, Transport Standards Branch, FAA, has the
authority to approve AMOCs for this AD, if requested using the
procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19,
send your request to your principal inspector or local Flight
Standards District Office, as appropriate. If sending information
directly to the International Section, send it to the attention of
the person identified in paragraph (k)(2) of this AD. Information
may be emailed to: [email protected]. Before using any
approved AMOC, notify your appropriate principal inspector, or
lacking a principal inspector, the manager of the local flight
standards district office/certificate holding district office.
    (2) Contacting the Manufacturer: For any requirement in this AD
to obtain corrective actions from a manufacturer, the action must be
accomplished using a method approved by the Manager, International
Section, Transport Standards Branch, FAA; or the European Aviation
Safety Agency (EASA); or Dassault Aviation's EASA Design
Organization Approval (DOA). If approved by the DOA, the approval
must include the DOA-authorized signature.

(k) Related Information

    (1) Refer to Mandatory Continuing Airworthiness Information
(MCAI) Airworthiness Directive 2018-0026, dated January 30, 2018,
for related information. This MCAI may be found in the AD docket on
the internet at http://www.regulations.gov by searching for and
locating Docket No. FAA-2018-0394.
    (2) For more information about this AD, contact Tom Rodriguez,
Aerospace Engineer, International Section, Transport Standards
Branch, FAA, 2200 South 216th Street, Des Moines, WA 98198;
telephone and fax<PHONE_NUMBER>.
    (3) For service information identified in this AD, contact
Dassault Falcon Jet Corporation, Teterboro Airport, P.O. Box 2000,
South Hackensack, NJ 07606; telephone<PHONE_NUMBER>; internet http://www.dassaultfalcon.com. You may view this service information at the
FAA, Transport Standards Branch, 2200 South 216th Street, Des
Moines, WA. For information on the availability of this material at
the FAA, call<PHONE_NUMBER>.

    Issued in Des Moines, Washington, on April 27, 2018.
Michael Kaszycki,
Acting Director, System Oversight Division, Aircraft Certification
Service.
[FR Doc. 2018-09979 Filed 5-10-18; 8:45 am]
 BILLING CODE 4910-13-P


[Federal Register Volume 76, Number 153 (Tuesday, August 9, 2011)]
[Notices]
[Pages 48935-48937]
[FR Doc No: 2011-20172]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65031; File No. SR-CBOE-2011-040]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Proposed Rule to Simplify the $1 Strike Price
Interval Program

August 4, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 26, 2011, the Chicago Board Options Exchange, Incorporated
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    CBOE proposes to amend its rules in order to simplify the $1 Strike
Price Interval Program. The text of the rule proposal is available on
the Exchange's Web site (http://www.cboe.org/legal), at the Exchange's
Office of the Secretary, and at the Commission's public reference room.

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

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

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

1. Purpose
    The Exchange proposes to amend Interpretation and Policy .01 to
Rule 5.5 in order to simplify the $1 Strike Price Interval Program
(``Program'').
    In 2003, the Commission issued an order permitting the Exchange to
establish the Program on a pilot basis.\3\ At that time, the underlying
stock had to close at $20 on the previous trading day in order to
qualify for the Program. The range of available $1 strike price
intervals was limited to a range between $3 and $20 and no strike price
was permitted that was greater than $5 from the underlying stock's
closing price on the previous trading day. Series in $1 strike price
intervals were not permitted within $0.50 an existing strike [sic]. In
addition, the Exchange was limited to selecting five (5) classes and
reciprocal listing was permitted. Furthermore, LEAPS in $1 strike price
intervals were not permitted for classes selected to participate in the
Program.
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    \3\ See Securities Exchange Act Release No. 47991 (June 5,
2003), 68 FR 35243 (June 12, 2003) (SR-CBOE-2001-60).
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    The Exchange renewed the pilot program on a yearly basis and in
2007, the Commission granted permanent approval of the Program.\4\ At
that time, the Program was expanded to increase the upper limit of the
permissible strike price range from $20 to $50. In addition, the number
of class selections per exchange was increased from five (5) to ten
(10).
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    \4\ See Securities Exchange Act Release No. 57049 (December 27,
2007), 73 FR 528 (January 3, 2008) (SR-CBOE-2007-125).
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    Since the Program was made permanent, the number of class
selections per exchange has been increased from ten (10) classes to 55
classes \5\ and subsequently increased from 55 classes to 150
classes.\6\
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    \5\ See Securities Exchange Act Release No. 59587 (March 17,
2009), 74 FR 12414 (March 24, 2009) (SR-CBOE-2009-001).
    \6\ See Securities Exchange Act Release No. 62443 (July 2,
2010), 75 FR 39608 (July 9, 2010) (SR-CBOE-2010-064).
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Amendments To Simplify Non-LEAPS Rule Text
    The most recent expansion of the Program was approved by the
Commission in early 2011 and increased the number of $1 strike price
intervals permitted within the $1 to $50 range.\7\ This expansion was a
proposal of another exchange and CBOE submitted its filing for
competitive reasons. This expansion, however, has resulted in very
lengthy rule text that is complicated and difficult to understand. CBOE
believes that the proposed changes to simplify the rule text of the
Program will benefit market participants since the Program will be
easier to understand and will maintain the expansions made to the
Program in early 2011. Through the current proposal, the Exchange also
hopes to make administration of the Program easier, e.g., system
programming efforts. To simply the rules of the Program and, as a
proactive attempt to mitigate any unintentional listing of improper
strikes, CBOE is proposing the following streamlining amendments:
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    \7\ See Securities Exchange Act Release No. 63772 (January 25,
2011), 76 FR 5644 (February 1, 2011) (SR-CBOE-2011-006).
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     When the price of the underlying stock is equal to or less
than $20, permit $1 strike price intervals with an exercise price up to
100% above and 100% below the price of the underlying stock.\8\
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    \8\ See proposed new subparagraph (i) to Rule 5.5.01(a)(2).
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     [cir] However, the above restriction would not prohibit the
listing of at least five (5) strike prices above and below the price of
the underlying stock per expiration month in an option class.\9\
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    \9\ Id.
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     [cir] For example, if the price of the underlying stock is $2, the
Exchange would be permitted to list the following series: $1, $2, $3,
$4, $5, $6 and $7.\10\
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    \10\ Id.
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     When the price of the underlying stock is greater than
$20, permit $1 strike price intervals with an exercise price up to 50%
above and 50% below the price of the underlying security up to $50.\11\
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    \11\ See proposed new subparagraph (ii) to Rule 5.5.01(a)(2).
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     For the purpose of adding strikes under the Program, the
``price of the underlying stock'' shall be measured in the same way as
``the price of the underlying security'' is as set forth in Rule
5.5A(b)(i).\12\
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    \12\ See proposed new subparagraph (iii) to Rule 5.5.01(a)(2).
Rule 5.5A(b)(i) provides, ``[t]he price of a security is measured
by: (1) For intra-day add-on series and next-day series additions,
the daily high and low of all prices reported by all national
securities exchanges; (2) for new expiration months, the daily high
and low of all prices reported by all national securities exchanges
on the day the Exchange determines it preliminary notification of
new series; and (3) for option series to be added as a result of
pre-market trading, the most recent share price reported by all
national securities exchanges between 7:45 a.m. and 8:30 a.m.
(Chicago time).''
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     Prohibit the listing of additional series in $1 strike
price intervals if the underlying stock closes at or above $50 in its
primary market and provide that additional series in $1 strike price
intervals may not be added until the underlying stock closes again
below $50.\13\
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    \13\ See proposed new subparagraph (iv) to Rule 5.5.01(a)(2).
The Exchange believes that it is important to codify this additional
series criterion because there have been conflicting interpretations
among the exchanges that have adopted similar programs. The $50
price criterion for additional series was intended when the Program
was originally established (as a pilot) in 2003. See Securities
Exchange Act Release No. 47991 (June 5, 2003), 68 FR 35243 (June 12,
2003) (SR-CBOE-2001-60) (``CBOE may list an additional expiration
month provide that the underlying stock closes below $20 on its
primary market on expiration Friday. If the underlying stock closes
at or above $20 on expiration Friday, CBOE will not list an
additional month for a $1 strike series until the stock again closes
below $20.'')
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Amendments To Simplify LEAPS Rule Text
    The early 2011 expansion of the Program permitted for some limited
listing of LEAPS in $1 strike price intervals for classes that
participate in the Program. The Exchange is proposing to maintain the
expansion as to LEAPS, but simplify the language and provide examples
of the simplified rule text. These changes are set forth subparagraph
(v) to Rule 5.5.01(b)(2).
    For stocks in the Program, the Exchange may list one $1 strike
price interval between each standard $5 strike interval, with the $1
strike price interval being $2 above the standard strike for each
interval above the price of the underlying stock, and $2 below the
standard strike for each interval below the price of the underlying
stock (``$2 wings''). For example, if the price of the underlying stock
is $24.50, the Exchange may list the following standard strikes in $5
intervals: $15, $20, $25, $30 and $35. Between these standard $5
strikes, the Exchange may list the following $2 wings: $18, $27 and
$32.\14\
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    \14\ The Exchange notes that a $2 wing is not permitted between
the standard $20 and $25 strikes in the above example. This is
because the $2 wings are added based on reference to the price of
the underlying and as being between the standard strikes above and
below the price of the underlying stock. Since the price of the
underlying stock ($24.50) straddles the standard strikes of $20 and
$25, no $2 wing is permitted between these standard strikes.
---------------------------------------------------------------------------

    In addition, the Exchange may list the $1 strike price interval
which is $2 above the standard strike just below the underlying price
at the time of listing. In the above example, since the standard strike
just below the underlying price ($24.50) is $20, the Exchange may list
a $22 strike. The Exchange may add additional long-term options series
strikes as the price of the underlying stock moves, consistent with the
OLPP.

Non-Substantive Amendments to Rule Text
    The early 2011 expansion of the Program prohibited the listing of
$2.50 strike price intervals for classes that participate in the
Program. This prohibition applies to non-LEAP and LEAPS. The Exchange
proposes to maintain this prohibition and codify it in Rule
5.5.01(a)(1) (Program Description).
    For ease of reference, the Exchange is proposing to add the
headings ``Program Description,'' ``Initial and Additional Series'' and
``LEAPS'' to Rule 5.5.01.
    The Exchange is proposing to more accurately reflect the nature of
the Program and is proposing to make stylistic changes throughout Rule
5.5.01 by adding the phrase ``price interval.''
    Lastly, the Exchange is making technical changes to Rule 5.5.01,
e.g., replacing the word ``security'' with the word ``stock.''
    The Exchange represents that it has the necessary systems capacity
to support the increase in new options series that will result from the
proposed streamlining changes to the Program.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with
Section 6(b) \15\ of the Act, in general, and furthers the objectives
of Section 6(b)(5) \16\ in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, and to
remove impediments to and perfect the mechanisms of a free and open
market in a manner consistent with the protection of investors and the
public interest. In particular, the proposed rule change seeks to
reduce investor confusion and to simplify the provisions of the $1
Strike Price Interval Program.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose any
burden on competition not necessary or appropriate in furtherance of
the purposes of the Act.

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

    No written comments were solicited or received with respect to the
proposed rule change.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number SR-CBOE-2011-040 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2011-040. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of CBOE. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make publicly available. All
submissions should refer to File Number SR-CBOE-2011-040 and should be
submitted on or before August 30, 2011.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-20172 Filed 8-8-11; 8:45 am]
BILLING CODE 8011-01-P


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    \266\ Wagner, 793 F.3d at 6-8. We note that FINRA's rule is not
an absolute bar on contributions, but the two-year time-out may have
the effect of discouraging member firms and certain covered
associates who may act as placement agents for investment advisers
from making certain contributions to certain covered officials. To
the extent that the commenters suggest that such an indirect
limitation on contributions would be reviewed by a court under
strict scrutiny, they misstate applicable Supreme Court precedent,
which has maintained that limitations on contributions are reviewed
under a more intermediate form of scrutiny because ``[c]ontribution
limits impose a lesser restraint on political speech'' that permits
```symbolic expression of support evidence by a contribution'' but
do not ```in any way infringe the contributor's freedom to discuss
candidates and issues.' '' McCutcheon, 134 S. Ct. at 1444, quoting
Buckley v. Valeo, 424 U.S. 1, 21 (1976).
    \267\ McCutcheon, 134 S. Ct. at 1452; Buckley, 424 U.S. at 27-28
(1976).
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    We do not understand FINRA to be engaging in broad electoral reform
or trying to clean up the electoral process. Rather, to avoid the
outright ban on placement agent activity resulting from FINRA member
firms not being ``regulated person[s]'' under the SEC Pay-to-Play Rule,
the two-year time-out in FINRA's proposal, like the SEC Pay-to-Play
Rule, discourages quid pro quos that affect government entities,
including public pension funds, served by investment advisers. Quid pro
quos involving placement agents, who make contributions to certain
elected officials and then assist investment advisers in obtaining
business from the government entities those officials serve may be:
Fraudulent, run counter to just and equitable principles of trade,
impede a free and open market, and harm investors and the public
interest.\268\ When pay-to-play is a factor in the selection or
retention of an investment adviser--when the adviser is chosen on the
basis of a placement agent's political contributions rather than its
merit--the most qualified adviser may not be hired, which may lead to
inferior performance and payment of higher fees.\269\ Ultimately,
taxpayers and fund beneficiaries suffer the harm. Moreover, pay-to-play
distorts free and open markets by requiring investment advisers and
their placement agents to ``play the game'' or risk being left
out.\270\ In short, while FINRA's rule resembles other contribution
limitations by serving a government interest in discouraging quid quo
pro corruption, it is a targeted effort that should protect investors
and the public by promoting the integrity of the investment advisory
market.
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    \268\ Blount, 61 F.3d at 944-48. See also 15 U.S.C. 78o-3(b)(6).
    \269\ SEC Pay-to-Play Adopting Release, 75 FR at 41022, 41053-
54.
    \270\ Id. at 41019, 41022, 41053. See also Blount, 61 F.3d at
945-46.
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    FINRA's proposed rule advances this important governmental interest
because the two-year time-out discourages pay-to-play. As explained
above, pay-to-play has been and is a serious problem when placement
agents assist investment advisers in obtaining advisory business from
government entities.\271\ Placement agents ``played a central role in
actions that [the Commission] and other authorities have brought
involving pay-to-play schemes,'' and, in several instances, advisers
used placement agents, who had made campaign contributions to elected
officials, to influence the award of investment advisory
contracts.\272\ Most notably, Alan Hevesi, the Comptroller of New York
State who was responsible for investment of state pension funds,
accepted campaign contributions from a placement agent and steered over
$250 million in pension funds to investment advisers that had retained
the placement agent.\273\
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    \271\ SEC Pay-to-Play Adopting Release, 75 FR at 41019-20. Pay-
to-play that affects State and local pension funds is not limited to
the investment advisory context.
    \272\ SEC Pay-to-Play Adopting Release, 75 FR at 41019-20,
41037.
    \273\ Id. at 41019-20.
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    In response to these incidents, the Commission proposed a ban on
the use of placement agents by investment advisers and ultimately
adopted a final rule that permitted use of placement agents so long as
they were ``regulated persons'' governed by the type of pay-to-play
rule that FINRA has proposed here.\274\ FINRA is not alone in
addressing these issues. For example, several State and local
governments have barred or restricted placement agents from playing a
role in the contracting process.\275\ Although the Supreme Court has
never required a certain amount of past quid pro quo corruption to
sustain a contribution limitation, there is more than sufficient
evidence of pay-to-play practices to support FINRA's rule.\276\
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    \274\ Id. at 41037-42.
    \275\ Id. at 41037 n. 262.
    \276\ McCutcheon, 134 S. Ct. at 1445, 1458; Nixon, 528 U.S. at
390-91; Buckley, 424 U.S. at 29-30.
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    The contours of FINRA's proposed rule reflect how pay-to-play
practices involving placement agents affect the hiring and retention of
investment advisers by State and local pension funds. One scenario
implicated by FINRA's rule (and reflected in the

Hevesi matter) involves an investment adviser that seeks business from
a State pension fund and retains a firm, or an individual at a firm,
that has made contributions to an elected official responsible for
selecting investment advisers.\277\ The elected officials who
participate have no incentive to stop accepting contributions for fear
of being disadvantaged relative to their opponents. Similarly neither
the placement agents that make the contributions nor the investment
advisers that hire the placement agents have an incentive to stop out
of concern that if they abstain, their competitors will continue to
engage in the practice profitably and without adverse
consequences.\278\ FINRA's rule should resolve this collective-action
problem by interposing a time-out that creates a disincentive to engage
in pay-to-play.
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    \277\ SEC Pay-to-Play Adopting Release, 75 FR at 41019-20 &
nn.18-20 (citing examples).
    \278\ Id. at 41022, 41040, 41053. See also Blount, 61 F.3d at
945-46. Even if the public is aware of the quid pro quo
relationship, there is little that can be done because the official
is compromised by the receipt of the contribution, and beneficiaries
of a pension fund cannot easily shift their assets out of the fund,
reverse the hiring decision, or remove the official. Id. at 41027.
See also id. at 41053 n.459.
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    The proposed FINRA rule, like the SEC Pay-to-Play Rule that it is
modeled on, is a tailored solution to a particularly pernicious form of
quid pro quo corruption that affects the beneficiaries of public
pension funds, such as teachers, law enforcement officers,
firefighters, and other public servants, as well as the beneficiaries
of other collective government funds, including participant-directed
plans such as 403(b), 457 and 529 plans. The proposed FINRA rule would
affect a small segment of the electorate: In general, member firms
acting as placement agents for investment advisers seeking to obtain
advisory business from government entities. And the proposed FINRA rule
would affect only a small number of elected officials--those who are
responsible for or have authority to appoint any person who is
responsible for or can influence the outcome of the hiring of an
investment adviser by a government entity--and has no bearing on the
vast majority of elections where the elected office's scope of
authority does not encompass the awarding of investment advisory
contracts. Moreover, the proposed FINRA rule's de minimis exception
permits some campaign contributions to be made in all instances without
triggering the time-out--thus allowing ``the symbolic expression of
support evidenced by a contribution''--and it does not restrict other
forms of political speech, such as independent expenditures.\279\
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    \279\ McCutcheon, 134 S. Ct. at 1444, quoting Buckley, 424 U.S.
at 21 (internal quotation marks omitted).
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B. Comments Regarding the Scope and Coverage of the Proposal

    As discussed in detail above, the commenters raise several concerns
regarding the scope and coverage of the proposed rules, including with
respect to: The inclusion of variable annuities and mutual funds; \280\
the inclusion of distribution activities; \281\ the application to
covered investment pools; \282\ the level of the de minimis
contribution exception and the returned contribution exception; \283\
the inclusion of the independent business model; \284\ and the
application to existing contracts or accounts.\285\ FINRA generally
responded that its proposed rules are designed to be at least as
stringent as the SEC Pay-to-Play Rule so that FINRA's member firms will
meet the definition of ``regulated persons'' such that they are subject
to rules that impose substantially equivalent or more stringent
restrictions on its members than the SEC Pay-to-Play Rule imposes on
investment advisers.\286\
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    \280\ See CAI Letter 1 and FSI Letter 1. See also CAI Letter 2
(reflecting CAI's suggested revisions to certain language in some of
FINRA's proposed rules). In FINRA's view, because the Commission did
not exclude specific products from the SEC Pay-to-Play Rule, such as
variable annuities or mutual funds, excluding specific products from
its proposed rule would not satisfy the Commission's stringency
requirements. See FINRA Response Letter 2 at 16.
    \281\ See CAI Letter 1. See also CAI Letter 2 (reflecting CAI's
suggested revisions to certain language in some of FINRA's proposed
rules). FINRA notes that, among other things, language in the SEC
Pay-to-Play Rule Adopting Release supports the inclusion of
``distribution'' activities by broker-dealers in FINRA's proposed
Rule 2030(a). See Notice, 80 FR at 81660-61 (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'').
FINRA believes that based on the Commission's definition of
``regulated person'' 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, its
proposed rule must apply to member firms engaging in distribution
activities. See FINRA Response Letter 2 at 12 (citing Notice, 80 FR
at 81660-61) and FINRA Response Letter 2 at 12 n.53 (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, and citing SEC Pay-to-Play Rule
206(4)-5(f)(9)(ii)(A)) (emphasis in original).
    \282\ See CAI Letter 1; FSI Letter 1; FSI Letter 2. FINRA
clarifies that it is not intending in this proposal 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. See FINRA Response Letter 2 at 14-15 (noting, for example,
that the applicability of proposed FINRA Rule 2030(d) is for
purposes of FINRA's pay-to-play rule only). FINRA also explains that
FINRA Rule 2030(d) is modeled on a similar provision in the SEC Pay-
to-Play Rule, Rule 206(4)-5(c) and, as such, proposed FINRA 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. See FINRA
Response Letter 2 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). Finally,
FINRA notes that the applicability of proposed FINRA Rule 2030(d) is
for purposes of FINRA's pay-to-play rule only. See FINRA Response
Letter 2 at 15.
    \283\ See CAI Letter 1. In response, FINRA explains that it has
proposed exceptions for de minimis contributions and returned
contributions that are consistent with similar exceptions in the SEC
Pay-to-Play Rule as FINRA's proposed rules must impose substantially
equivalent or more stringent restrictions on member firms as the SEC
Pay-to-Play Rule imposes on investment advisers. FINRA does not
believe that raising the limits for the de minimis exception or
eliminating the limit for returned contributions would satisfy the
Commission's stringency requirements set forth in the SEC Pay-to-
Play Rule.
    \284\ See FSI Letter and FSI Letter 2. FINRA explains that the
Commission did not exempt application of the rule for firms engaged
in the independent business model. See FINRA Response Letter 2 at
16. As a result, in FINRA's view, excluding independent business
model firms from its proposed rule would not satisfy the
Commission's stringency requirements, although FINRA is willing to
work with the industry and Commission to address the interpretive
questions and provide additional guidance as needed.
    \285\ See FSI Letter 1. In response, FINRA explains that the
Commission did not apply its rule only to contracts or accounts
opened after the effective date of the rule; therefore, FINRA does
not believe that limiting the application of its rule in the way
suggested by FSI would satisfy the Commission's stringency
requirements set forth in the SEC Pay-to-Play Rule. However, FINRA
also explains 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. See Notice, 80 FR at 81656.
    \286\ See, e,g., FINRA Response Letter 2 at 4, 16.
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    As noted above, the SEC Pay-to-Play Rule, in part, prohibits any
investment adviser covered under the rule 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 the investment adviser unless
such person is a ``regulated person,'' as defined under the rule.\287\
The definition of ``regulated person''

includes a FINRA member firm, provided that: (a) FINRA rules prohibit
member firms from engaging in distribution or solicitation activities
if political contributions have been made; and (b) the 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.\288\ Thus, any changes
to the proposed rules that would result in FINRA's rules not being
found to impose at least substantially equivalent restrictions on its
member firms and to be otherwise consistent with the objectives of the
SEC Pay-to-Play Rule would result in a ban on such activity.
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    \287\ See Notice, 80 FR at 81650 n.6, 81656. See also 17 CFR
275.206(4)-5(a)(2)(i)(A).
    \288\ See Notice, 80 FR at 81650 n.6. See also SEC Pay-to-Play
Rule 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.
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    The Commission believes that it is appropriate and consistent with
Section 15A(b)(6) of the Act for FINRA to design its proposed rules to
have the same scope and provisions as the SEC Pay-to-Play Rule. If the
Commission were unable to make the required stringency finding, this
would result in FINRA member firms not being a ``regulated person''
under the SEC Pay-to-Play Rule and therefore prohibited from receiving
compensation for engaging in distribution and solicitation activities
with government entities on behalf of investment advisers.\289\
---------------------------------------------------------------------------

    \289\ See Notice, 80 FR at 81650 n.6. See also id. at 81651,
81656 (discussing the regulatory objectives of and statutory basis
for the proposal).
---------------------------------------------------------------------------

    One commenter states that the proposal is ambiguous regarding the
term ``distribution'' activities in Rule 2030(a).\290\ This term in
FINRA's proposed rule is taken directly from the definition of
``regulated person'' in the SEC Pay-to-Play Rule.\291\ Although the
term ``distribution'' is not defined specifically in the SEC Pay-to-
Play Rule, to preserve the identified benefits of the rule, the
Commission interprets the term broadly in the context of the SEC Pay-
to-Play Rule to mean generally engaging in any activity that is
primarily intended to result in the sale of securities.\292\ In view of
the Commission's prior statements regarding the term, including those
contained in the SEC Pay-to-Play Rule Adopting Release,\293\ we believe
the term is not ambiguous and could be applied by FINRA members for
purposes of the proposed rule in a way that is consistent with the
prophylactic nature of the proposal. However, we note that in
connection with adopting the SEC Pay-to-Play Rule, the Commission did
clarify under what circumstances distribution payments would violate
the SEC's Pay-to-Play Rule.\294\ For example, the Commission explained
that mutual fund distribution fees are typically paid by the fund from
fund assets pursuant to a 12b-1 plan and generally would not constitute
payment by the fund's adviser; therefore, such payments would not be
prohibited under Rule 206(4)-5.\295\ The Commission also explained that
where an adviser pays for the fund's distribution out of its
``legitimate profits,'' the rule would generally be implicated.\296\
Based on the foregoing, we believe it is appropriate for FINRA not to
have specifically defined the term ``distribution'' activities for
purposes of its proposal.
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    \290\ See CAI Letter 1.
    \291\ A ``regulated person,'' as defined in the SEC Pay-to-Play
Rule, includes a FINRA member firm, provided that, among other
things, FINRA rules ``prohibit member firms from engaging in
distribution or solicitation activities if certain political
contributions have been made.'' 17 CFR 275.206(4)-5(f)(9)(ii)
(emphasis added).
    \292\ By way of example in other contexts, the Commission has
recognized that, because new distribution activities may
continuously evolve in the future, it would be impracticable to
develop, for example, an all-inclusive definition or list of such
activities and related expenses, and declined to do so when it
adopted the SEC Pay-to-Play Rule. See Bearing of Distribution
Expenses by Mutual Funds, Investment Company Act Release No. 11414
(Oct. 28, 1980), 45 FR 73898, 73903 (Nov. 7, 1980) (``Rule 12b-1
Adopting Release''). See also 17 CFR.12b-1(a)(2) (explaining, in the
context of registered open-end funds, that one will be deemed to be
acting as a distributor of securities if they engage in ``any
activity which is primarily intended to result in the sale of shares
issued by such [fund], including, but not necessary limited to, the
compensation of underwriters, dealers and other sales personnel, the
printing and mailing of prospectuses to other than current
shareholders, and the printing and mailing of sales literature'').
    \293\ See infra notes 294-296 and accompanying text.
    \294\ See SEC Pay-to-Play Rule Adopting Release, 75 FR at 41040
n.298. See also FINRA Response Letter 2 at 12 (citing Notice, 80 FR
at 81660-61).
    \295\ See SEC Pay-to-Play Rule Adopting Release, 75 FR at 41040
n.298 (citing Rule 12b-1 Adopting Release).
    \296\ See SEC Pay-to-Play Rule Adopting Release, 75 FR at 41040
(citing Rule 12b-1 Adopting Release).
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    One commenter claims that, among other things, the ``lack of
clarity as to the application of the SEC Pay-to-Play Rule to [its]
members' business model, and the scope of government officials that
trigger the requirements, has led some firms to adopt aggressive
compliance programs that prohibit political contributions.'' \297\ As
discussed above, 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 that use an independent business model.\298\ We note
that FINRA's rules and the federal securities laws do not distinguish
so-called independent business model firms from other broker-dealer
business models.\299\ Rather, although a broker-dealer may organize its
operations under a variety of business models, and different business
models may present unique compliance challenges, it is up to the
broker-dealer to sufficiently discharge its regulatory obligations in
light of the business model it has elected, and to tailor its
supervisory system appropriately so that it is reasonably designed
\300\ to achieve compliance with applicable federal securities laws and
regulations and FINRA rules.\301\
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    \297\ See FSI Letter 1 (claiming FSI believes that the SEC Pay-
to-Play Rule has inadvertently captured non-corrupting activity and
it fears that the proposed rule may do the same).
    \298\ See FINRA Response Letter 2 at 18.
    \299\ While a firm may accept independent contractor status for
purposes other than the federal securities laws, such treatment does
not alter such person's status as a person associated with a broker
or dealer or the firm's responsibility to supervise under the
federal securities laws. See, e.g., Hollinger v. Titan Capital
Corp., 914 F.2d 1564, 1572-76 (9th Cir. 1990) (en banc) (explaining
that, even if a broker-dealer and registered representative
contractually agree that a representative is an independent
contractor, the broker-dealer is still required to supervise its
representatives).
    \300\ See FINRA Rule 3110(a) (``Each member shall establish and
maintain a system to supervise the activities of each associated
person that is reasonably designed to achieve compliance with
applicable securities laws and regulations and with applicable FINRA
rules.'') and Exchange Act Section 15(b)(4)(E), 15 U.S.C.
78o(b)(4)(E) (authorizing the Commission to sanction a broker-dealer
that ``has failed reasonably to supervise, with a view to preventing
violations of'' the federal securities laws and rules and
regulations thereunder).
    \301\ Giving guidance on its supervision rule, FINRA (then-NASD)
noted that to fulfill its obligations to establish and maintain a
supervisory system, a member firm must determine the types of
business it conducts, how the firm is organized and operated, and
the current regulatory requirements. See NASD Notice to Members 99-
45 (NASD Provides Guidance on Supervisory Responsibilities) (June
1999) (stating that this analysis will enable the member to design a
supervisory system that is current and appropriately tailored to its
specific attributes and structure). See also FINRA Regulatory Notice
14-10 (SEC Approves New Supervision Rules) (Mar. 2014), at 17 n.4
(discussing NASD Notice to Members 99-45).
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    We also note that FINRA has committed to working with the industry
and the Commission to address interpretive questions that may arise
regarding the application and scope of the provisions and terms used in
the proposed rule change and to provide additional guidance as
needed.\302\
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    \302\ See FINRA Response Letter 2 at 18. We note that the
proposed rule does contain a provision--modeled on an analogous
provision in the SEC Pay-to-Play Rule--allowing member firms to
apply to FINRA for an exemption, conditional or unconditional, from
the proposed rule's two-year ``time-out,'' and enumerates factors
for FINRA to consider in deciding whether to grant such an
exemption. See Proposed Rule 2030(f).

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C. Comments Requesting Clarification of Terms and Provisions in the
Proposal

    Commenters asked for clarification of certain defined terms and
provisions in the proposed rule, including clarification with respect
to: The term ``instrumentality'' as it is used in the definition of
``government entity;'' \303\ the definition of ``covered associate''
and the positions that would qualify someone as a covered ``official;''
\304\ whether a ``contribution'' is also a ``payment;'' \305\ and the
factors by which contributions to a PAC would trigger the proposed
anti-circumvention rule.\306\ In response to these comments, FINRA
generally acknowledges, 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.\307\
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    \303\ See CAI Letter 1.
    \304\ See NAIFA Letter.
    \305\ See CAI Letter 1.
    \306\ See NAIFA Letter.
    \307\ See FINRA Response Letter 2 at 17, 18.
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    The Commission believes that FINRA's definition of ``covered
associate'' in proposed Rule 2030(g) is functionally identical to the
definition of the same term in the SEC Pay-to-Play Rule.\308\ The
definition brings within the ambit of the rule--and its two-year
``time-out''--only those contributions made by employees of a member
firm who, by virtue of their position or responsibilities, are best
positioned to engage in pay-to-play activities as placement agents. It
includes ``[a]ny general partner, managing member or executive officer
of a covered member,'' any ``associated person of a covered member who
engages in distribution or solicitation activities with a government
entity for such covered member,'' any associated person who supervises
such an employee, and any ``political action committee controlled by a
covered member or a covered associate.'' FINRA's rule also adopts the
Commission's definition of ``executive officer,'' which was designed to
tailor the trigger for the time-out to those officers whose position is
most likely to incentivize them to engage in solicitation or
distribution activities--and thus most likely to incentivize them to
engage in pay-to-play.\309\
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    \308\ Compare Proposed Rule 2030(g)(2), with 17 CFR 275.206(4)-
5(f)(2).
    \309\ At least one commenter points out that some entities have
precluded all employees from making contributions as a result of the
Commission's pay-to-play rule and that FINRA's rule will have the
same effect. See FSI Letter 2. However, under FINRA's rule (and the
SEC Pay-to-Play Rule), only certain employees' contributions will
trigger the time-out and the rules on their face do not cover
contributions by all employees. See SEC Pay-to-Play Rule Adopting
Release, 75 FR at 40131-32.
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    FINRA's definition of ``official'' also tracks the Commission's
definition of that same term in the SEC Pay-to-Play Rule and,
therefore, limits the rule so that a time-out is triggered only by
contributions to certain officials.\310\ Under FINRA's proposed rule,
the time-out for a placement agent is not triggered by a contribution
to every public official running for office; it is triggered only by
contributions to a person ``who was, at the time of the contribution,
an incumbent, candidate or successful candidate for elective office of
a government entity, if the office . . . [i]s directly or indirectly
responsible for, or can influence the outcome of, the hiring of an
investment adviser by a government entity'' or a person with authority
to appoint someone whose office had the hiring responsibility.\311\
FINRA's definition, like the Commission's, is flexible enough to
accommodate the myriad State and local political structures while still
limiting the reach of the rule to those officials who are responsible
for or have authority to appoint any person who is responsible for or
can influence the outcome of the hiring of an investment adviser by a
government entity.\312\
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    \310\ Compare Proposed Rule 2030(g)(8), with 17 CFR 275.206(4)-
5(f)(6).
    \311\ See supra note 310.
    \312\ If FINRA were to define ``official'' by reference to a
particular title, such as ``Comptroller,'' the definition would be
both over- and under- inclusive. Some officials who have hiring
responsibility for investment advisers do not hold the title of
``Comptroller,'' and some officials with the title of
``Comptroller'' do not have hiring responsibility for investment
advisers. Because we understand FINRA's definition to track the
definition that we adopted in the SEC Pay-to-Play Rule, we note that
it is the scope of authority of the office, not de facto influence,
that determines whether a contribution will trigger the time-out.
See SEC Pay-to-Play Adopting Release, 75 FR at 41029.
---------------------------------------------------------------------------

    Additionally, FINRA's definitions of ``contribution'' and
``payment'' are functionally identical to those same definitions in the
SEC Pay-to-Play Rule.\313\ We note that under FINRA's rule, the time-
out is not triggered by direct contributions to political parties.
Therefore, a member firm will not violate the time-out if it receives
compensation for solicitation and distribution activities in the wake
of contributions that it or its covered associates make to a political
party. Instead, FINRA's proposed rule only precludes a covered member
from soliciting or coordinating payments to a political party of a
State or locality of a government entity with which the covered member
is engaging in distribution or solicitation activities on behalf of an
investment adviser.\314\ FINRA notes in response to a commenter'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)), that the
definition of ``payment'' is similar to the definition of
``contribution,'' but is broader in the sense that it does not include
limitations on the purposes for which such money is given (e.g., it
does not have to be made for the purpose of influencing an
election).\315\
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    \313\ Compare Proposed Rules 2030(g)(8)-(9), with 17 CFR
275.206(4)-5(f)(1), 206(4)-5(f)(7).
    \314\ See Proposed Rule 2030(b). This aspect of the rule serves
an anti-circumvention function, along with proposed Rule 2030(e),
which makes it a violation of the 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.'' As FINRA
notes, Rule 2030(e) precludes only intentional efforts to circumvent
the time-out and a covered member would not violate the rule's
prohibition on the receipt of compensation unless there is a showing
that the covered member intended to evade the time-out. Thus, a
contribution to a PAC--other than a PAC controlled by the covered
member, which would be a ``covered associate'' for purposes of the
time-out--would not trigger the time-out and the receipt of
compensation in the wake of that contribution would not violate the
rule unless it can be shown that the covered member or covered
associate who made the contribution intended to circumvent the time-
out provision. This provision, which is analogous to a provision in
the Commission's Pay-to-Play Rule, precludes a member or its covered
associates from, for example, funneling contributions or payments
through third parties, such as attorneys, family members, or
friends, to complete a pay-to-play arrangement without triggering
the time-out.
    \315\ See FINRA Response Letter 2 at 17.
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    The Commission believes that FINRA's definitions, which mirror or
are functionally equivalent to similar definitions in the SEC's Pay-to-
Play Rule, will help to achieve the objectives of the SEC Pay-to-Play
Rule and, as described above, the requirements governing the rules of a
registered national securities association.\316\ The Commission
believes that it is appropriate and consistent with the Act for FINRA
to encompass in its rule the same definitions and discussion regarding
its pay-to-play rules as the Commission did in adopting the SEC Pay-to-
Play Rule. The Commission emphasizes that FINRA has committed to
working with the industry and the Commission to address interpretive
questions and provide additional guidance as needed.\317\
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    \316\ See SEC Pay-to-Play Rule Adopting Release, 75 FR at 41042-
44.
    \317\ There are several ways for industry members to obtain
guidance from FINRA about the application of its rules. Such
guidance may include FINRA's publication of Notices to Members and
Regulatory Notices, as well as interpretative and exemptive letters.
Although FINRA can address interpretive questions with respect to
its own rules, for its member firms to satisfy the ``regulated
person'' definition in the SEC Pay-to-Play Rule, the Commission must
find that FINRA's pay-to-play rule (i) imposes substantially
equivalent or more stringent restrictions on member firms than the
SEC Pay-to-Play Rule imposes on investment advisers and (ii) that
such rule is consistent with the objectives of the SEC Pay-to-Play
Rule. See supra note 22 (discussing the Commission's notice of
stringency findings dated August 25, 2016). Given the stringency
requirements of the SEC Pay-to-Play Rule, we expect our staff to
work closely with FINRA regarding interpretive questions about the
application and scope of the provisions and terms used in FINRA's
rule to the extent those interpretations do not otherwise require
FINRA to file a proposed rule change with the Commission pursuant to
Section 19(b) of the Act and the rules and regulations thereunder.

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D. Comments Regarding the Books and Records Requirements

    One commenter claims that not all payments to political parties or
PACs should have to be maintained under the books and records
requirements of proposed Rule 4580.\318\ In response, FINRA states that
it has determined to retain the recordkeeping requirements as proposed
in the Notice.\319\ 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.\320\ FINRA states that it
proposed requiring a covered member to maintain a record of all
payments to political parties or PACs because such records would assist
FINRA in identifying situations that might suggest an intent to
circumvent the rule.\321\
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    \318\ See CAI Letter 1.
    \319\ See FINRA Response Letter 2 at 20-21.
    \320\ 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 Commission in connection
with the SEC Pay-to-Play Rule) (citing SEC Pay-to-Play Adopting
Release, 75 FR at 41032).
    \321\ See FINRA Response Letter 2 at 20. 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.
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    The Commission acknowledges the comment, but agrees, as noted by
FINRA, that payments to political parties or PACs can be a means for a
covered member or covered associate to contribute indirectly to a
government official in contravention of the proposed rule. The
Commission also agrees that requiring FINRA members to maintain a
record of all payments to political parties or PACs would assist FINRA
in identifying situations that might suggest an intent to violate
proposed Rules 2030(b) and 2030(e).\322\ The Commission therefore
believes that it is appropriate and consistent with the Act for FINRA
to require its members to keep records of all such payments to assist
FINRA in carrying out its regulatory responsibilities to enforce
compliance with the Act and with FINRA's rules.\323\
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    \322\ We note that proposed Rule 2030(e) would require a showing
of intent to circumvent the rule for such persons to trigger the
two-year ``time-out.'' 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) also
``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.'')).
    \323\ Section 15A(b)(2) of the Act requires, among other things,
that a registered national securities association, such as FINRA,
has the capacity to enforce compliance by its members and persons
associated with its members with the provisions of the Act, the
rules and regulations thereunder, and the rules of the association.
See 15 U.S.C. 78o-3(b)(2).
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E. Additional Comments

    Certain commenters also suggested that FINRA should include more
stringent requirements in its proposed rule.\324\ Both commenters
suggested that FINRA expand the applicability of its proposed rules to
include state-registered investment advisers.\325\ In response, FINRA
explains that 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.\326\
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    \324\ See NASAA Letter and PIABA Letter.
    \325\ See NASAA Letter and PIABA Letter.
    \326\ See FINRA Response Letter 2 at 10.
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    The Commission acknowledges this comment but believes that it is
appropriate for FINRA to determine to provide for the same scope of its
pay-to-play rule as that of the SEC Pay-to-Play Rule. As FINRA notes,
the Commission previously declined to make a similar change to the SEC
Pay-to-Play Rule stating, among other things, that it was the
Commission's understanding that few of these smaller state-registered
firms manage public pension plans or other similar funds.\327\
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    \327\ See Notice, 80 FR at 81652 n.26, 81660 n.98. See also SEC
Pay-to-Play Rule Adopting Release, 75 FR at 41026, 41060. The
Commission also explained in connection with the SEC Pay-to-Play
Rule that we do not have regulatory authority to oversee the
activities of state-registered advisers through examination and our
recordkeeping rules, nor does the Commission have authority over the
states to oversee their enforcement of their rules. See SEC Pay-to-
Play Rule Adopting Release, 75 FR at 41026, 41060.
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    These same commenters suggest that FINRA include a mandatory
disgorgement provision for violations of its proposed rule.\328\ In
response, FINRA explains that it determined not to include a
disgorgement requirement in its proposal because it has existing
authority to require disgorgement of fees in enforcement actions.\329\
The Commission believes that it is appropriate and consistent with the
Act for FINRA not to separately require mandatory disgorgement for
violations of its proposed rules.
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    \328\ See NASAA Letter and PIABA Letter.
    \329\ See FINRA Response Letter 2 at 19-20.
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    Finally, one of these commenters suggests that the current two-year
cooling-off period in the proposal should be at least four years.\330\
In response, FINRA states that it believes a two-year time-out from the
date of a contribution is sufficient 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.\331\ In addition, FINRA explains that the proposed two-year
time-out is consistent with the time-out period in the SEC's Pay-to-
Play Rule. The Commission believes that it is appropriate and
consistent with the Act for FINRA to determine that a two-year time-out
is sufficient to support the objective of the rule to deter pay-to-play
activity among its covered members. The Commission notes that the same
time period applies in the SEC's Pay-to-Play Rule.
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    \330\ See PIABA Letter.
    \331\ See FINRA Response Letter 2 at 10. 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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    The Commission recognizes these commenters suggest that the rule
could have a broader scope. The Commission, however, must evaluate the
proposed rule before it and approve a proposed rule if it finds that
the proposed rule is consistent with the requirements of the Act and
the applicable rules and regulations thereunder. As discussed above,
because the rule is consistent with the Act, the Commission is required
to approve the FINRA rule.

V. Conclusion

    Accordingly, for the reasons discussed above, the Commission finds
that the proposed rule change is consistent with the Act and the rules
and regulations thereunder applicable to such organization.
    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\332\ that the proposed rule change (SR-FINRA-2015-056) be, and
hereby is, approved.
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    \332\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2016-20888 Filed 8-30-16; 8:45 am]
 BILLING CODE 8011-01-P