[Federal Register Volume 59, Number 174 (Friday, September 9, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22253]


[[Page Unknown]]

[Federal Register: September 9, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34630; File No. SR-MSRB-94-14]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Rule G-
37 on Political Contributions and Prohibitions on Municipal Securities 
Business, and Rule G-8 on Recordkeeping

September 1, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on August 
18, 1994, the Municipal Securities Rulemaking Board (``Board'' or 
``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Board. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.

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

    The Board is proposing to amend rule G-37 on political 
contributions and prohibitions on municipal securities business, and 
rule G-8 concerning recordkeeping.\1\
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    \1\The Board plans to publish the text of the proposed rule 
change in the August 1994 MSRB Reports (Vol. 14, No. 4, pp.--). The 
text of the proposed rule change also is available for inspection 
and copying at the Commission's public reference room and at the 
Board.
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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 Board included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

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

    On April 7, 1994, the Commission approved Board rule G-37, 
concerning political contributions and prohibitions on municipal 
securities business.\2\ In response to numerous inquiries received by 
the Board concerning the application of the rule, on May 24, 1994, the 
Board filed with the Commission a Question and Answer (``Q&A'') 
interpretation of the rule.\3\ On June 3, 1994, the Commission approved 
amendments to the rule which (i) provide a procedure whereby dealers 
may seek relief from the rule's prohibition on business, in limited 
circumstances, and (ii) clarify certain definitions in the rule.\4\ 
Notwithstanding these efforts, the Board is aware of continued industry 
concern over certain aspects of rule G-37. Thus, in an effort to 
ameliorate such concern, the Board has proposed to amend the proposed 
rule change, as described below. In addition, the Board has published a 
second Q&A notice.\5\
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    \2\Securities Exchange Act Release No. 33868 (April 7, 1994), 59 
FR 17621 (April 13, 1994) (``Approval order''). The rule applies to 
contributions made on and after April 25, 1994.
    \3\See Securities Exchange Act Release No. 34161 (June 6, 1994), 
59 FR 30379 (June 13, 1994). The interpretations were published in 
the June 1994, MSRB Reports.
    \4\Securities Exchange Act Release No. 34160 (June 3, 1994); 59 
FR 30376 (June 13, 1994).
    \5\File No. SR-MSRB-94-15 (filed August 18, 1994). Securities 
Exchange Act Release No. 34603 (August 25, 1994). The Board plans to 
publish the interpretations in the August 1994 MSRB Reports (Vol. 
14, No. 4, pp. 27-32). The interpretations also are available for 
inspection and copying at the Commission's public reference room and 
at the Board.
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Primarily Engaged in Municipal Securities Representative Activities
    Rule G-37(g)(iv) provides that the term municipal finance 
professional means:

    (A) Any associated person primarily engaged in municipal 
securities representative activities, as defined in rule G-3(a)(i);
    (B) Any associated person who solicits municipal securities 
business, as defined in paragraph (vii);
    (C) Any associated person who is a direct supervisor of such 
persons up through and including, in the case of a broker, dealer or 
municipal securities dealer other than a bank dealer, the Chief 
Executive Officer or similarly situated official and, in the case of 
a bank dealer, the officer or officers designated by the board of 
directors of the bank as responsible for the day-to-day conduct of 
the bank's municipal securities dealer activities, as required 
pursuant to rule G-1(a); or
    (D) Any associated person who is a member of the broker, dealer 
or municipal securities dealer (or, in the case of a bank dealer, 
the separately identifiable department or division of the bank, as 
defined in rule G-1) executive or management committee or similarly 
situated officials, if any.
    Each person listed by the broker, dealer or municipal securities 
dealer as a municipal finance professional pursuant to rule G-
8(a)(xvi) is deemed to be a municipal finance professional.

    A number of dealers have expressed confusion over which retail 
sales persons fall within the definition of ``municipal finance 
professional'' based upon the municipal securities representative 
activities of such persons.\6\ Many of these dealers believe that such 
confusion arises from the fact that a retail sales person's product mix 
can vary significantly, depending on the economy and customers' 
investment objectives. For example, a retail sales person's production 
over a particular quarter may include a preponderance of municipal 
securities transactions, whereas, in the next quarter, that same sales 
person's production may involve a preponderance of equity transactions. 
Such fluctuations in patterns of sales activity make it difficult for 
dealers to determine which retail sales persons are ``primarily engaged 
in municipal securities representative activities.''
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    \6\See Letter from Heather L. Ruth, President, Public Securities 
Association to Diane G. Klinke, General Counsel, MSRB (July 25, 
1994) (``PSA Letter''); Letter from Gordon Reis III, Seasongood & 
Mayer, to Christopher A. Taylor, Executive Director, MSRB (July 25, 
1994) (``Seasongood & Mayer Letter'').
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    In addition, rule G-37 requires a record to be made of all 
contributions by municipal finance professionals for the past two 
years.\7\ Prohibitions on municipal securities business may result from 
such contributions. Thus, there is industry concern that a dealer 
employing hundreds or thousands of individuals who might become 
municipal finance professionals based on a percentage of sales of 
municipal securities during a certain period could find itself 
prospectively prohibited from engaging in certain municipal securities 
business, for up to two years, based on contributions from persons who 
were not municipal finance professionals when the contributions were 
made and who have little or no connection to the dealer's municipal 
securities business activities.
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    \7\Pursuant to rule G-8(a)(xvi)(I), these recordkeeping 
requirements apply to contributions made on or after April 25, 1994.
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    The Board noted in its initial filing of rule G-37 that the 
definition of municipal finance professional includes those individuals 
who have an economic interest in seeing that the dealer is awarded 
municipal securities business and thus may be in a position to make 
political contributions for the purpose of influencing the awarding of 
such business by issuer officials. Such persons would include those in 
the public finance department, as well as underwriters, traders and 
institutional and retail sales persons primarily engaged in municipal 
securities representative activities. The Board continues to believe 
that there may be limited instances in which retail sales persons make 
contributions for the purpose of influencing the awarding of municipal 
securities business. However, the Board is persuaded that, at this 
time, the rule currently imposes a compliance burden on dealers that is 
not outweighed by the benefit to be achieved by determining municipal 
finance professional status based upon the municipal securities 
representative activities of retail sales persons. Accordingly, the 
Board proposes to amend the definition of municipal finance 
professional in rule G-37(g)(iv)(A) by providing that sales activities 
with accounts, other than institutional accounts, shall not be 
considered to be municipal securities representative activities.\8\ The 
proposed amendment to the definition of municipal finance professional 
still includes those persons in the public finance department, as well 
as underwriters, traders and institutional sales persons primarily 
engaged in municipal securities representative activities, but does not 
include retail sales persons. If, in the future, the Board learns of 
problems in connection with retail sales persons making contributions 
to influence the awarding of municipal securities business, then it 
will reconsider the propriety of exempting such persons from the 
definition of municipal finance professional.
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    \8\The term ``institutional account'' is defined in rule G-
8(a)(xi) to mean the account of: (i) A bank, savings and loan 
association, insurance company, or registered investment company; 
(ii) an investment adviser registered under Section 203 of the 
Investment Advisers Act of 1940; or (iii) any other entity (whether 
a natural person, corporation, partnership, trust, or otherwise) 
with total assets of at least $50 million.
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    The proposed amendment would continue to permit a retail sales 
person or any associated person to be designated a municipal finance 
professional under rule G-37(g)(iv)(B) if he or she solicits any 
municipal securities business. The Board notes that a dealer has an 
obligation to determine whether any of its associated person (including 
retail sales persons) have solicited municipal securities business and, 
if so, to designate those persons as municipal finance professionals 
subject to rule G-37.
Supervisors of Municipal Finance Professionals
    As noted previously, the definition of municipal professional 
includes any direct supervisor of a municipal finance professional up 
through and including, in the case of a broker, dealer or municipal 
securities dealer other than a bank dealer, the Chief Executive Officer 
or similarly situated official and, in the case of a bank dealer, the 
officer or officers designated by the board of directors of the bank as 
responsible for the day-to-day conduct of the bank's municipal 
securities dealer activities, as required pursuant to rule G-1(a). Some 
dealers have expressed concern that this part of the definition extends 
unnecessarily beyond the typical municipal department supervisors. For 
example, if a person from the corporate department assists the 
municipal department by soliciting work from a municipal issuer, such a 
person will become a municipal finance professional because of these 
activities. Under the current rule, all direct corporate department 
supervisors of that individual also would be defined as municipal 
finance professionals, even though the person's municipal securities 
activities are subject to the supervision of a principal in the 
municipal securities department.
    In an effort to facilitate compliance with rule G-37, the Board 
proposes to further amend the definition of municipal finance 
professional by designating as a municipal finance professional any 
associated person who is both (i) A municipal securities principal or a 
municipal securities sales principal and (ii) a supervisor of any 
person primarily engaged in municipal securities representative 
activities or who solicits municipal securities business. Thus, in the 
example given above, the corporate department supervisors would not be 
included in the definition of municipal finance professional. The Board 
notes, however, that if a retail sales person solicits municipal 
business and thus becomes a municipal finance professional, then the 
municipal securities principal responsible for supervising that 
person's municipal securities activities (including any solicitation 
activities) would be designated a municipal finance professional. In 
most cases, this would include the sales person's branch manager (a 
municipal securities sales principal). The Board has determined to 
continue to include such supervisory personnel within the definition of 
municipal finance professional because it is concerned about situations 
in which retail sales persons are soliciting municipal securities 
business at the request of, or at least with the knowledge of, their 
supervisors. Thus, the Board wishes to ensure that, if retail sales 
persons are soliciting municipal securities business, the supervisors 
of such persons also are included within the definition of municipal 
finance professional.
    Finally, the Board also proposes to revise the definition of 
municipal finance professional to clarify that the supervisors of the 
municipal securities principals and municipal securities sales 
principals included within the definition also are considered municipal 
finance professionals.
Designation as a Municipal Finance Professional Extends for Two Years
    The Board has been asked whether a dealer can establish its own 
standards under which someone who solicits municipal securities 
business could relinquish municipal finance professional status upon 
completing the solicitation activity.\9\ The Board proposes to further 
amend rule G-37(g)(iv) to provide that each person designated by a 
dealer as a municipal finance professional shall retain this 
designation for two years after the last activity or position which 
gave rise to the designation. For instance, if an associated person is 
designated a municipal finance professional as a result of solicitation 
activities, then that designation shall extend for two years from the 
date of the particular solicitation. Moreover, if this person continues 
to solicit municipal business, then each such solicitation triggers a 
new two-year period. Thus, if a municipal finance professional wants to 
divest himself of this designation, he must forego all soliciting of 
municipal business for two years (as well as avoid the other 
situations, set forth in rule G-37(g)(iv), giving rise to the 
designation of municipal finance professional). So too, if an 
institutional sales person primarily engaged in municipal securities 
representative activities is transferred to the corporate department, 
such person's contributions to officials of issuers and payments to 
political parties must be recorded for two years after such transfer. 
The Board believes that this designation period extension will help to 
ensure that contributions and payments by municipal finance 
professionals are not being made to influence the awarding of municipal 
securities business. It also will allow dealers, after this two-year 
period, to remove these persons from their list of municipal finance 
professionals.
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    \9\See PSA Letter, supra n. 6.
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Contributions and Other Payments Made to Political Parties
    Pursuant to rule G-37, contributions to political parties do not 
trigger the rule's prohibition on business. Such contributions, 
however, are subject to the rule's recordkeeping and reporting 
provisions, as set forth in rule G-8(a)(xvi). These disclosure 
requirements were adopted to help ensure that dealers are not 
circumventing the prohibition on business in the rule by indirect 
contributions to issuer officials through contributions to state or 
local political parties. For example, if a contribution to a political 
party is earmarked or known to be provided to an official or officials 
of a particular issuer, then the dealer would violate the rule's 
proscription against indirect violations, thereby triggering the two-
year prohibition on business with that issuer.
    In its rule G-37 filing with the Commission, the Board stated that 
it:

    Has adopted . . . [rule G-37] as a first step toward eliminating 
the problems associated with political contributions in connection 
with the awarding of municipal securities business. It believes the 
rule is targeted to the reported major problem areas and should be 
an effective deterrent to activities which have called into question 
the integrity of the market. Once the proposed rule is put into 
place, the Board will closely monitor its effectiveness. If it 
determines that compliance problems exist, or if dealers seek to 
circumvent the proposed rule's requirements, the Board will not 
hesitate to amend the . . . rule to make its prohibitions applicable 
to a broader range of entities and individuals or to include other 
prohibitions or disclosure requirements.\10\
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    \10\File No. SR-MSRB-94-2 at 17.

    The Board has been notified by dealers and other industry 
participants that certain political parties currently are engaging in 
fundraising practices which, according to these political parties, do 
not invoke application of rule G-37. For example, some of these 
entities currently are urging dealers to make payments to political 
parties earmarked for expenses other than political contributions (such 
as administrative expenses or voter registration drives). Since these 
payments would not constitute ``contributions'' under the rule, the 
recordkeeping and reporting provisions would not apply.
    The purpose of those disclosure requirements in rule G-37 
pertaining to political parties is to ensure that funds contributed to 
political parties by dealers, Political Action Committees (``PACs''), 
municipal finance professionals and executive officers do not represent 
attempts to make indirect contributions to issuer officials, in 
contravention of the letter and the spirit of the rule. The Board 
continues to believe that disclosure is an adequate means of addressing 
this matter. However, the Board is concerned, based upon information 
provided by dealers and others, that the same pay-to-play pressures 
that motivated the Board to adopt rule G-37 may be emerging in 
connection with the fundraising practices of certain political parties, 
as described above. Accordingly, the Board proposes to amend the 
recordkeeping and reporting provisions of rule G-37 (as set forth in 
rule G-8(a)(xvi)) to require dealers to record and disclose all 
payments made to political parties. The term ``payment'' is proposed to 
be defined as any gift, subscription, loan, advance or deposit of money 
or anything of value. This definition is derived from the definition of 
``contribution'' in rule G-37(g)(i), but does not include the limits on 
the purposes for which such money is given, as currently set forth in 
the definition of contribution.
    Thus, the proposed amendment would require dealers to record and 
report any payments (including contributions) to political parties by 
dealers. PACs, municipal finance professionals and executive officers. 
The Board believes that these disclosure requirements will help to 
sever any connection between the giving of payments (including 
contributions) to political parties and the awarding of municipal 
securities business.
    Finally, the Board does not seek, through its proposed definition 
of payment, to restrict the personal volunteer work of municipal 
finance professionals for political parties.
Definition of Issuer
    Under rule G-37, the term ``issuer'' is defined as any governmental 
issuer specified in Section 3(a)(29) of the Act (i.e., a state or any 
political subdivision thereof, or any agency or instrumentality of a 
state or any political subdivision thereof, or any municipal corporate 
instrumentality of one or more states) and the issuer of any separate 
security, including a separate security as defined in Rule 3b-5 under 
the Act. This definition was taken from the SEC's definition of issuer 
in Rule 15c2-12. The Board has received a number of questions regarding 
the second portion of the definition--the issuer of a separate 
security. This portion of the definition was intended to include, for 
example, a municipality that signs a take-or-pay contact used as a 
guarantee of the underlying bonds. However, in most instances, the 
issuers of separate securities are corporate obligors of industrial 
revenue bonds and bank issuers of letters of credit.
    Dealers have complained to the Board that the inclusion in the 
definition of the issuer of any separate security requires them to go 
through a ``separate security'' analysis to determine if a certain 
corporate obligor fits within this definition of issuer and then to 
determine if any personnel dealing with such issuers would be deemed 
municipal finance professionals. These determinations, however, do not 
result in any connection between the corporate issuers of separate 
securities and political contributions. In its May 1994 Q & A, the 
Board noted that, when filing Form G-37, dealers do not have to include 
corporate issuers in industrial development bond issues, since no 
contributions (as defined in rule G-37) would be made to such 
corporations.\11\ As a result of these concerns, the Board proposes to 
amend the rule G-37 definition of issuer by omitting issuers of 
separate securities from the definition of issuer.
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    \11\Pursuant to rule G-37, a contribution is defined as ``any 
gift, subscription, loan advance, or deposit of money or anything of 
value made: (A) For the purpose of influencing any election for 
federal, state or local office; (B) for payment of debt incurred in 
connection with any such election; or (C) for transition or 
inaugural expenses incurred by the successful candidate for state or 
local office.'' Thus, by definition, any funds given to corporate 
issuers would not constitute a ``contribution'' since such 
corporations are not the issuers or issuer officials contemplated by 
the rule.
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    The Board believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act, which provides that the Board's rules 
shall be 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 regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities, and, in general, to protect investors and the 
public interest.

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

    As discussed below, the Board received two comment letters. 
Seasongood & Mayer argues that, by not including all dealer employees 
within the definition of municipal finance professional, rule G-37 
places regional firms at a disadvantage compared to the larger firms by 
allowing these firms to continue using political contributions to 
influence the awarding of municipal securities business. In its order 
approving rule G-37, the Commission addressed the impact of the rule on 
regional firms, and concluded that the rule ``will not have a 
disproportionate effect on * * * small and regional firms.''\12\ The 
Board continues to believe, as stated in its initial rule G-37 filing, 
that the rule:

    \12\Approval Order, Supra n. 2.
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    Will ensure that ``pay-to-pay'' practices in the municipal 
market will be halted without impacting every employee of the dealer 
* * *. [The rule will] promote just and equitable principles of 
trade by ensuring that dealers compete for the awarding of municipal 
securities business on merit rather than political contributions. 
Such healthy competition * * * [will] remove artificial barriers to 
those dealers not willing or able to make such payments, thereby * * 
* fostering competition.\13\

    \13\File No. SR-MSRB-94-2 at 18 and 51.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Board did not publish or solicit comment on the proposed rule 
change. However, the Board has received two letters addressing some of 
the issues contained in the proposed rule change.\14\ The PSA Letter 
expressed concerns about the inclusion of retail sales persons in the 
definition of municipal finance professional. This issue was addressed 
in Section II.A. supra. The Seasongood & Mayer Letter stated that a 
public official's decisions are influenced when that official receives 
funds from sales personnel affiliated with any firm, and therefore 
recommended that the Board expand the definition of municipal finance 
professional to include ``any individual directly or indirectly 
affiliated with an organization that engages in the negotiated 
underwriting of tax-exempt municipal bonds.'' The Board continues to 
believe that it is not necessary or appropriate to include all such 
persons within the definition of municipal finance professional.
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    \14\See supra n. 6.
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    The PSA Letter also expressed concern about the ``direct 
supervisors'' category of municipal finance professional and asked that 
the Board clarify that this category of municipal finance professional 
does not include supervisors outside of the municipal securities 
department. As previously discussed, the proposed definition focuses on 
the municipal securities supervisors of those primarily engaged in 
municipal securities representative activities and solicitors of 
municipal securities business.

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

    Within 35 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 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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 inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the Board's principal office. 
All submissions should refer to File No. SR-MSRB-94-14 and should be 
submitted by September 30, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-22253 Filed 9-8-94; 8:45 am]
BILLING CODE 8010-01-M