January 24, 2011

Elizabeth M. Murphy
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-1090

Re: File No. S7-36-10

Dear Ms. Murphy:

The Securities Industry and Financial Markets Association (“SIFMA” or “we”)1

welcomes this opportunity to comment on the proposed amendments to Rule 206(4)-5, the “Pay-
to-Play Rule” applicable to certain investment advisers, which the Securities and Exchange
Commission (“SEC”) issued for comment on November 19, 2010 and published in the Federal
Register on December 10, 2010.2 SIFMA continues to strongly support the SEC’s goal of
eliminating “pay-to-play” practices from the selection of investment advisers by government
entities.3

1
SIFMA brings together the shared interests of hundreds of securities firms, banks, and asset managers. SIFMA’s
mission is to support a strong financial industry, investor opportunity, capital formation, job creation, and economic
growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and
Washington, D.C., is the U.S. regional member of the Global Financial Markets Association. For more information,
visit www.sifma.org.
2
Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No.
IA-3110 (Dec. 10, 2010), 75 Fed. Reg. 77052, 77070-72 (“Proposed Amendment NPRM”). The Pay-to-Play Rule
is codified at 17 C.F.R. § 275.206(4)-5.
3
In this comment, “government entities,” as defined in the Pay-to-Play Rule, refers to any state or political
subdivision of a state, as well as any agency, authority, instrumentality of the state or a political subdivision, a
pension fund or other pool of assets sponsored and established by a state or political subdivision or any agency,
authority, or instrumentality thereof. See Rule 206(4)-5(f)(5).

New York | Washington

120 Broadway, 35th Floor | New York, NY 10271-0080 | P: 212.313.1200 | F: 212.313.1301
www.sifma.org | www.investedinamerica.org
 We write, however, to express our concern about one of the proposed amendments to the
Pay-to-Play Rule, which would require a covered investment adviser to use either its own
employees or a “regulated municipal advisor” in soliciting government entities for investment
advisory services (the “Proposed Amendment”). The Pay-to-Play Rule currently allows
advisers to use their employees or a “regulated person” to solicit government entities. We
believe that adoption of the Proposed Amendment would result in confusion and unintended
distortions of the placement agent market, and would result in duplicative and unnecessary
registration of already-regulated persons.4 We also believe that the Proposed Amendment is
premature, given that the proposed regulatory definition of “municipal advisor,” as well as the
contours of the potentially onerous registration and regulatory regime applicable to such
municipal advisors, has yet to be conclusively determined.5

Accordingly, SIFMA respectfully recommends that the SEC combine the approach of the
current Pay-to-Play Rule with the Proposed Amendment so that investment advisers may
continue using a broad range of regulated entities to solicit government entities. Adding
“regulated municipal advisors” to the existing category of “regulated persons” would accomplish
this result. We believe that this minor change would enable a clearer rule to be promulgated
promptly. If, however, the SEC proceeds with replacing “regulated persons” with “regulated
municipal advisors,” we would recommend that the SEC suspend its rulemaking until the
definition of “municipal advisor,” the contours of the registration and regulatory regime for
municipal advisors, and the related Municipal Securities Rulemaking Board’s (“MSRB”)
proposed G-42 pay-to-play rule6 are finalized. At that point, all solicitors covered by the Pay-to-
Play Rule would be identified and the industry would have an opportunity to meaningfully
comment to the SEC on how the Proposed Amendment would interact with the defined group of
“municipal advisors” and the MSRB’s pay-to-play rule, including whether the scope of solicitors
defined as “municipal advisors” is over- or under-inclusive for the purposes of the Pay-to-Play
Rule.

I. THE PROPOSED AMENDMENT IS NOT AN ADEQUATE AND APPROPRIATE SUBSTITUTE

FOR THE SOLICITATION PROVISION OF THE PAY-TO-PLAY RULE

The current Pay-to-Play Rule covers more relevant market participants than the Proposed
Amendment, leaves more room for legitimate business practices, and provides clearer guidance
to investment advisers as to which solicitors they are permitted to use when seeking investments
or advisory business from municipal entities.

4
We understand that the SEC has proposed in its municipal advisor rulemaking that affiliated solicitors may
“voluntarily” register as “municipal advisors” in order to continue to solicit advisory business under the Pay-to-Play
Rule. Registration of Municipal Advisors, Release No. 34-63576 (Jan. 6, 2011), 76 Fed. Reg. 824, 831-32
(“Municipal Advisors NPRM”). This proposal would result in duplicative and unnecessary registration of already-
regulated persons, and would potentially subject all affiliated solicitors to fiduciary duties under 15 U.S.C. § 78o-
4(c)(1). SIFMA intends to comment separately on this proposed rule to elaborate on these concerns.
5
See Municipal Advisors NPRM, 76 Fed. Reg. at 824. See also notes 20-21 and accompanying text.
6
See Request for Comment on Pay to Play Rule for Municipal Advisors, MSRB Notice 2011-04 (Jan. 14, 2011),
available at http://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices/2011/2011-04.aspx?n=1. SIFMA
intends to comment separately on this proposed rule.

 The Proposed Amendment replaces the existing solicitation provision of the Pay-to-Play
Rule, which permits a covered investment adviser to compensate any “regulated person”
(defined as a registered investment adviser or broker-dealer subject to the SEC’s pay-to-play
rules or a substantially equivalent regime) to solicit a government entity for investment advisory
services or fund investments, with a new solicitation provision that only permits covered advisers
to compensate a “regulated municipal advisor” for solicitation services.7 We presume this
change is intended to harmonize the Pay-to-Play Rule8 with Section 975 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd-Frank Act”),9 which created a new
category of “municipal advisors” subject to the jurisdiction of the MSRB. But nothing in the
Dodd-Frank Act requires such harmonization and the effect of the Proposed Amendment will be
to narrow significantly the scope of individuals that covered advisers may use under the current
Pay-to-Play Rule to solicit government entities.

The initial proposal for Rule 206(4)-5 expressly prohibited covered advisers from using
third-party placement agents to solicit government entities for advisory business.10 In its
comment letter on that rule proposal, SIFMA recommended among other things that the SEC
reconsider its ban on third-party placement agents and instead permit advisers to use any broker-
dealer placement agent—affiliated or non-affiliated—provided the placement agent was both
appropriately registered and subject to a pay-to-play regime to be promulgated by the Financial
Industry Regulatory Authority (“FINRA”).11 This approach was consistent with the existing
securities law structure for registered broker-dealers and ensured that solicitors for advisers were
appropriately registered and subject to an adequate pay-to-play regime. The SEC agreed with
this general approach and adopted its final rule permitting an investment adviser to retain
“regulated persons”—defined to include investment advisers and broker-dealers registered with
the SEC and subject to a pay-to-play regime promulgated by the SEC or FINRA—for the
solicitation of investment advisory services.12

The Proposed Amendment undermines this approach, which the SEC adopted after
extensive notice-and-comment and deliberation, by replacing “regulated persons” with
“regulated municipal advisors.” This change limits the scope of available solicitors for advisers
because the statutory definition of “municipal advisor” expressly excludes affiliated parties and
potentially other solicitors currently defined as “regulated persons.”13 The Proposed Amendment
would pose significant problems for covered advisers and for investors, particularly for those
advisers who use affiliated broker-dealers to place the interests in their funds. It would also
7
Proposed Amendment NPRM, 75 Fed. Reg. at 77071. Both versions of the solicitation provision permit a covered
adviser to use its own employees to solicit government entities.
8
Id. at 77070 (stating “[w]e are proposing three amendments to the rule that we believe are needed as a result of the
enactment of the Dodd-Frank Act”).
9
Pub. L. No. 111-203, 124 Stat. 1376 (2010).
10
See Proposed Rule: Political Contributions by Certain Investment Advisers, Release No. IA-2910, 74 Fed. Reg.
39840, 39851-54 (Aug. 7, 2009) (“Proposed Pay-to-Play Rule”).
11
See Ltr. from SIFMA to Elizabeth Murphy, Sec’y, SEC (Oct. 5, 2009), available at http://sec.gov/comments/s7-
18-09/s71809-166.pdf.
12
See Rule 206(4)-5(a)(2), (f)(9).
13
See infra note 16.

increase costs for such advisers as they will be forced to alter their current solicitation
arrangements. Moreover, it will result in the unnecessary and duplicative registration of
otherwise already-regulated affiliates. Finally, it will undoubtedly require covered advisers to
alter compliance structures created in reliance on the recently promulgated Pay-to-Play Rule.

This change cannot be justified by either the anti-corruption rationale underlying the Pay-
to-Play Rule or congressional intent as expressed in the Dodd-Frank Act,14 and would require
advisers which employ affiliated placement agents and potentially other regulated persons under
the Pay-to-Play Rule to engage in a significant and needless restructuring of their business lines
and operations. Ultimately, the Proposed Amendment may be even more problematic—the
definition of “municipal advisor” is still subject to a pending rulemaking; the registration,
regulatory, and recordkeeping regime for municipal advisors has yet to be determined; and it is
possible that the final definition of “municipal advisor” will exclude additional categories of
placement agents.15

The following charts illustrate that the terms “regulated persons” and “regulated
municipal advisors” appear to cover different groups of market participants.16 As set out below,
the Proposed Amendment would result in a potentially significant number of “regulated persons”
—who covered advisers may retain under the current Pay-to-Play Rule—being required to
voluntarily register as municipal advisors if they wish to continue soliciting government entities.
This will be the case regardless of the outcome of the SEC’s proposal on the definition of
“municipal advisor.”

The current Pay-to-Play Rule (and the FINRA rulemaking it contemplates) allow
investment advisers to retain affiliated and non-affiliated “regulated persons” to solicit advisory
business and place fund interests:

14
See S. REP. NO. 111-176, at 147 (2010) (committee report on Dodd-Frank states that Section 975 “broadens
current municipal securities market protections to cover previously unregulated market participants”) (emphasis
added).
15
See Municipal Advisors NPRM, 76 Fed. Reg. at 824. The comment period does not end until February 22, 2011.
16
Section 975 of the Dodd-Frank Act defines “municipal advisor” in relevant part as a “person” that either “(i)
provides advice to or on behalf of a municipal entity . . . with respect to municipal financial products or the issuance
of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters
concerning such financial products or issues . . . or (ii) undertakes a solicitation of a municipal entity.” 15 U.S.C.
§ 78o-4(e)(4). “[S]olicitation” is defined in relevant part as:
a direct or indirect communication with a municipal entity . . . made by a person, for direct or indirect
compensation, on behalf of a broker, dealer, municipal securities dealer, municipal advisor, or investment
adviser . . . that does not control, is not controlled by, or is not under common control with the person
undertaking such solicitation for the purpose of obtaining or retaining an engagement by a municipal entity
. . . 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.
Id. § 78o-4(e)(9) (emphases added). Although SIFMA will be commenting on the SEC’s proposed definitions and
interpretations of “municipal advisor” and related terms, the plain text of the statute does not cover affiliated
placement agents soliciting fund investments or affiliated placement agents soliciting advisory services, or third-
party placement agents placing fund interests with municipal entities. See id. (defining “solicitation” to exclude
solicitation by affiliated persons and include only solicitation on behalf of certain enumerated entities).

Regulated Persons Placing Fund Interests Soliciting Advisory Business

Affiliated Person Yes Yes
Non-Affiliated Person Yes Yes

By contrast, the category of parties that will be required to register as municipal advisors
under Dodd-Frank—and therefore the only parties who would qualify as permissible solicitors
under the Proposed Amendment absent voluntary registration17—is substantially more
circumscribed:

Regulated Municipal Placing Fund Interests Soliciting Advisory Business

Advisors
Affiliated Person No No
Non-Affiliated Person Maybe18 Yes

In sum, the statutory category of “municipal advisor” potentially excludes three of the
four above-described types of solicitors when compared to the category of “regulated persons” in
the current Pay-to-Play Rule. Thus, many “regulated persons” who are already subject to federal
registration and oversight will be compelled to additionally register as municipal advisors,
thereby becoming subject to further and duplicative regulatory and recordkeeping requirements,
if they wish to continue to solicit government entities.
Given that the original proposal for the Pay-to-Play Rule permitted advisers to only
compensate affiliated solicitors (and employees),19 we do not believe this exclusion of affiliated
solicitors was the intended result of the Proposed Amendment and therefore we urge the SEC to
retain “regulated persons” in the Pay-to-Play Rule while adding “registered municipal advisors.”
If the SEC nonetheless decides to replace the category of “regulated persons” with “regulated
municipal advisors,” then we recommend timing consideration of the Proposed Amendment until
after promulgation of a final rule defining “municipal advisor,” the registration and regulation
obligations therein, and a final Rule G-42 by the MSRB.

17
In each scenario where registration is not required by statute, the SEC’s proposed approach would require a
potential solicitor to register “voluntarily” as a municipal advisor to be able to solicit government entities. The
consequences of registering are potentially onerous (though the full significance and cost are presently unknown)
and such consequences are not justified where a less burdensome and more tailored approach exists, as discussed
infra. Moreover, the SEC should not expect (nor does it have the authority to require) registration by entities that
the Dodd-Frank Act does not require to register. See, e.g., Michigan v. EPA, 268 F.3d 1075, 1081 (D.C. Cir. 2001)
(“if there is no statute conferring authority, a federal agency has none”).
18
Non-affiliated persons placing fund interests are not included under the plain text of the statute, see supra note 16,
but the SEC’s Municipal Advisors NPRM (if adopted as a final rule) could capture such persons.
19
See 74 Fed. Reg. at 39853 & n.140, 39870.

II. THE SEC SHOULD PERMIT INVESTMENT ADVISERS TO CONTINUE TO USE AFFILIATED
AND OTHER SOLICITORS

A. Proposed Solution To Permit The Use Of Affiliated And Other Solicitors

SIFMA believes the Proposed Amendment should be modified to restore the ability of
investment advisers to compensate affiliated and other potentially excluded solicitors who are
regulated and covered by a pay-to-play regime. Therefore, we believe that the SEC should
include both the “regulated person” category of the current Pay-to-Play Rule and the Proposed
Amendment’s provision allowing the use of “regulated municipal advisors” to solicit municipal
business. The SEC could do this by simply expanding the definition of “regulated person” in the
current rule20 to include the category of “regulated municipal advisor” as defined in the Proposed
Amendment. (See Appendix A.)

Under the current Pay-to-Play Rule, investment advisers may retain placement agents so
long as (i) they are registered as an investment adviser or broker-dealer with the SEC and (ii)
subject to the SEC’s pay-to-play scheme or one as stringent as the SEC’s. Adding the category
of “regulated municipal advisor” to this scheme would be consistent with the existing rule.
While we express no preference as to the appropriate regulator, we do not want to create an
additional layer of unnecessary MSRB registration and regulation for solicitors who are already
subject to other federal registration requirements and pay-to-play rules. Because there are pay-
to-play regimes proposed or in place for municipal advisors and registered investment advisers,
respectively, it is therefore only necessary to create a pay-to-play regime for registered broker-
dealers. These broker-dealers are already subject to FINRA’s regulatory purview and FINRA
could adopt a mirror rule to proposed Rule G-42 for those broker-dealers who solicit municipal
entities on behalf of investment advisers. FINRA and the MSRB have a history of successfully
administering a comparable regulatory scheme (i.e., MSRB Rule G-37 and the broader rule
harmonization process that has occurred over the last few years) and this approach would draw
on that experience and enable investment advisers to continue utilizing a wide range of solicitors
who would be subject to a consistent pay-to-play regime. Such an approach is appropriately
tailored to address the problem of pay-to-play in the marketplace and would avoid duplication
and potential conflicting regulatory regimes.

B. The Proposed Amendment Should At A Minimum Be Coordinated With The

Municipal Advisor Rulemaking And Proposed MSRB Rule G-42

We recommend the above solutions in the first instance. But if the SEC determines to
replace “regulated persons” with “regulated municipal advisors,” we recommend the SEC
suspend consideration of the Proposed Amendment so that it may coordinate the Proposed
Amendment with the rulemaking to define “municipal advisor,” the registration and regulation
regime for such persons, and proposed MSRB Rule G-42. Such coordination also would allow
the SEC to address at one time how the use of the “municipal advisor” category in the Pay-to-
Play Rule may necessitate additional and conforming changes. For instance, upon completing
the municipal advisor rulemaking the SEC may need to consider whether to amend the Pay-to-
Play Rule to expand the scope of appropriately regulated solicitors permitted to be retained by

20
See Rule 206(4)-5(a)(2)(i), (f)(9).

investment advisers. This could include solicitors that are employees of affiliated entities but
who are not covered municipal advisors under the municipal advisor rule. (See, e.g., Appendix
B.) Such a change would be consistent with the purposes of the Pay-to-Play Rule, while
providing covered investment advisers with a broad range of solicitors who are subject to
comparable levels of regulation and pay-to-play regimes.21

Until the SEC finalizes the definition of “municipal advisor” in its rulemaking, and the
MSRB finalizes its pay-to-play rule for municipal advisors, those who will be affected by the
proposed changes do not know what the potential contours of the regulatory regime will be for
municipal advisors.22 As noted above, the outcome of the proposed regulatory definition of
“municipal advisor” is particularly unclear at present—the SEC’s proposed definition is
inconsistent with “municipal advisor” as defined under the Dodd-Frank Act, and therefore the
ultimate scope of the category is highly uncertain. This is particularly significant for those
entities that may need to voluntarily register as municipal advisors, since the registration,
regulatory, and recordkeeping requirements are as yet unknown and are potentially onerous and
conflicting. When an agency’s notice of proposed rulemaking necessarily leaves potentially
affected parties guessing at the basic structure of the regulation, there is no meaningful
opportunity for comment and the participatory nature of the rule adoption process is weakened.
Therefore, a decision to replace the category of “regulated person” with that of “municipal
advisor” in the absence of a finalized definition of “municipal advisor”—much less a final set of
registration and recordkeeping requirements—cannot be squared with the SEC’s obligation to
afford affected parties an opportunity to comment.23 This is particularly true given that the SEC
has proposed a definition of “municipal advisor” that is broader in certain respects than the terms
of the statutory text.24

Accordingly, SIFMA respectfully recommends that if the SEC decides to proceed in

replacing the category of “regulated person” with that of “municipal advisor,” it suspend
consideration of the Proposed Amendment until the notice-and-comment process on its proposed
rule for municipal advisor registration and regulation and on the MSRB’s proposed pay-to-play
regime for municipal advisors are complete. This would provide the industry with a meaningful
opportunity to comment on how the Proposed Amendment would affect covered advisers’

21
Indeed, the use of any affiliated solicitor subject to an adequate pay-to-play regime—whether a broker-dealer
subject to a FINRA pay-to-play regime as a “regulated person,” a municipal advisor subject to an MSRB pay-to-
play regime, or any other entity (such as a bank) subject to another pay-to-play regime—would be sound policy.
The SEC recognized as much in the Proposed Pay-to-Play Rule, which would have allowed affiliates to solicit
government entities as “related persons” of advisers. See 74 Fed. Reg. at 39853 & n.140, 39870. Thus, a general
rule permitting the use of solicitors registered with a federal regulator subject to a pay-to-play regime comparable to
the SEC’s regime would adequately address the risk of political corruption without unduly restricting the investment
advisers or affiliated entities themselves.
22
See Municipal Advisors NPRM, 76 Fed. Reg. at 824.
23
See, e.g., Am. Water Works Ass’n v. EPA, 40 F.3d 1266, 1274-1275 (D.C. Cir. 1994) (agencies must “provide
sufficient factual detail and rationale for the rule to permit interested parties to comment meaningfully” (internal
quotation marks omitted)); Shell Oil Co. v. EPA, 950 F.2d 741, 751 (D.C. Cir. 1991) (affected parties cannot be
“expected to divine the [agency’s] unspoken thoughts”).
24
Homemakers North Shore, Inc. v. Bowen, 832 F.2d 408, 413 (7th Cir. 1987) (whether interpretation is
“newfangled” affects judicial review).

solicitation activities.

* * *

SIFMA appreciates this opportunity to comment upon the Proposed Amendment. Please
do not hesitate to contact me with any questions at (202) 962-7373 or Marin Gibson, SIFMA
Managing Director and Counsel, at (212) 313-1317; or Barbara Stettner and Charles Borden, of
O’Melveny & Myers LLP, at (202) 383-5283 and (202) 383-5269, respectively.

Sincerely,

Ira D. Hammerman

Senior Managing Director

and General Counsel

cc: The Hon. Mary L. Schapiro, Chairman

The Hon. Kathleen L. Casey
The Hon. Luis A. Aguilar
The Hon. Troy A. Paredes
The Hon. Elisse B. Walter
David M. Becker, General Counsel

 Appendix A

§ 275.206(4)-5 Political contributions by certain investment advisers.

(f) Definitions. For purposes of this section:

(9) Regulated person means:

(i) An investment adviser registered with the Commission that has not, and whose covered
associates have not, within two years of soliciting a government entity:

(A) Made a contribution to an official of that government entity, other than as described in
paragraph (b)(1) of this section; and

(B) Coordinated or solicited any person or political action committee to make any contribution or
payment described in paragraphs (a)(2)(ii)(A) and (B) of this section; or

(ii) A “broker,” as defined in section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(4)) or a “dealer,” as defined in section 3(a)(5) of that Act (15 U.S.C. 78c(a)(5)) or a
“municipal advisor,” as defined in Section 15B of that Act (15 U.S.C. 78o-4), that is
registered with the Commission, and is a member of a national securities associationself-
regulatory organization as defined in Section 3(a)(26) of that Act (15 U.S.C. 78c(a)(26)),
provided that:

(A) The rules of the association organization prohibit members from engaging in distribution or
solicitation activities if certain political contributions have been made; and

(B) The Commission, by order, finds that such rules impose substantially equivalent or more
stringent restrictions on broker-dealersits members than this section imposes on investment
advisers and that such rules are consistent with the objectives of this section.
 Appendix B

§ 275.206(4)-5 Political contributions by certain investment advisers.

(a) Prohibitions. As a means reasonably designed to prevent fraudulent, deceptive or

manipulative acts, practices, or courses of business within the meaning of section 206(4) of the
Act (15 U.S.C. 80b–6(4)), it shall be unlawful:

(2) For 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
(15 U.S.C. 80b–3(b)(3)) or any of the investment adviser's covered associates:

(i) To provide or agree to provide, directly or indirectly, payment to any person to solicit a
governmental entity for investment advisory services on behalf of such investment adviser unless
such person is a regulated person, or is an executive officer, general partner, managing member,
(or, in each case, a person with a similar status or function), or employee of the investment
adviser, or a covered associate of such investment adviser, and

(f) Definitions. For purposes of this section:

(2) Covered associate of an investment adviser means:

(i) Any general partner, managing member or executive officer, or other individual with a similar
status or function;

(ii) Any employee of the investment adviser who solicits a government entity for the
investment adviser and any person who supervises, directly or indirectly, such employee; and

(iii) Any employee of any person who controls, is controlled by, or is under common control
with the investment adviser who solicits a government entity on behalf of such adviser and
who is supervised directly by such adviser, or an employee thereof, for the purposes of such
solicitation; and

(iii) (iv) Any political action committee controlled by the investment adviser or by
any person described in paragraphs (f)(2)(i)and , (f)(2)(ii), or (f)(2)(iii) of this section.