Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Municipal Securities Rulemaking Board; Relating to Recordkeeping and Record Retention Requirements Concerning Gifts and Gratuities

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34162; File No. SR-MSRB-94-7]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Municipal Securities Rulemaking Board; Relating to

Recordkeeping and Record Retention Requirements Concerning Gifts and

Gratuities

June 6, 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 May 26,

1994, the Municipal Securities Rulemaking Board (``Board'' or ``MSRB'')

filed with the Securities and Exchange Commission (``Commission'') a

proposed rule change as described in Items I, II, and III below, which

Items have been prepared by the self-regulatory organization. The

purpose of the proposed rule change is to require municipal securities

dealers to keep records of gifts and gratuities given to others,

including issuer officials and employees, in relation to municipal

securities activities. 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 filing amendments to rule G-8 and G-9, on

recordkeeping and record retention, that relate to rule G-20, on gifts

and gratuities concerning suitability of recommendations. The proposed

rule change requires dealers to keep records of gifts and gratuities

given to others, including issuer officials and employees, in relation

to municipal securities activities. The Board is requesting that the

rule change become effective 30 days after approval by the Commission.

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 self-regulatory organization 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

Rule G-20 is intended to prevent commercial bribery. The rule has

three basic parts. First, rule G-20(a) prohibits dealers from, directly

or indirectly, giving or permitting to be given any thing or service of

value in excess of $100 per year to any person, other than to an

employee or partner of the dealer, in relation to municipal securities

activities of the person's employer.\1\ All gifts given by a dealer and

its associated persons are used to compute the $100 limitation. The

$100 limitation applies to gifts and gratuities to customers,

individuals associated with issuers, and employees of other dealers. In

addition, based on the rule's ``directly or indirectly'' language, if a

third party (e.g., a consultant hired by a dealer) gives a gift to any

such person at the request of the dealer, the value of the gift would

be included in the $100 limitation.

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\1\``Person'' has been interpreted by the Board in the context

of rule G-20 to apply only to natural persons because the intent of

the rule is to discourage dealers from inducing individual employees

to act in a manner inconsistent with their obligations to, or

contrary to the interests of, their employers. MSRB Interpretation

of March 19, 1980. MSRB Manual (CCH) 3571.24.

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Second, rule G-20(b) exempts certain payments from the $100 annual

limit set forth in paragraph (a). These payments are termed ``normal

business dealings'' and are defined as occasional gifts of meals or

tickets to theatrical, sporting, and other entertainments, as well as

the sponsoring of legitimate business functions that are recognized by

the IRS as deductible business expenses, and gifts or reminder

advertising. However, the rule also provides that such gifts cannot be

so frequent or so expensive as to raise a suggestion of unethical

conduct.

Finally, rule G-20(c) provides that contracts of employment with or

compensation for services rendered are not considered gifts or

gratuities subject to the $100 limitation. Such arrangements, however,

must be in writing and must include the nature of the proposed

services, the amount of the proposed compensation, and the written

consent of such person's employer.

In 1993, the municipal securities market came under increased

scrutiny because of concerns that municipal securities dealers were

influencing municipal securities issuers to hire such dealers for

municipal securities business through the payment of political

contributions and other monies to persons with influence over the

dealer selection process. While the Board addressed the issue of

political contributions through rule G-37, the Board was concerned that

other activities, such as excessive gifts, also might be viewed as

influencing the dealer selection process.

The proposed rule change requires dealers to keep and retain

specific records of all gifts and gratuities subject to paragraph (a)

of the rule.2 The proposed rule change also requires dealers to

keep and retain records of all contracts of employment or agreements

for compensation for services and all compensation paid as a result of

those agreements. These amendments are consistent with the rules of

other self-regulatory organizations. The Board believes that the

amendments to the recordkeeping and record retention requirements

related to gifts and gratuities will facilitate dealer compliance with

rule G-20, and assist enforcement agencies in monitoring for compliance

with the rule.

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\2\The proposed rule change also clarifies that dealers

complying with Rule 17a-3 of the Act are required to maintain this

information.

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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

The Board does not believe that the proposed rule change imposes

any burden on competition that is 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

In January 1994, the Board published for comment the proposed rule

change.3 The Board received one comment letter that supported the

proposed amendments to rules G-8 and G-9 to strengthen the Board's

recordkeeping and record retention requirements.4

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\3\MSRB Reports, Vol. 14, No. 1 (January 1994) at 11-12. The

request for comment also requested information and comment on a

number of specific questions regarding dealings with issuer

officials.

\4\In addition, the commenter acknowledged that business

entertainment practices present opportunities for abuse, but

believed that existing law and regulation, properly enforced,

provides sufficient protection against abuse in the area of business

entertainment and gift-giving in the municipal securities industry.

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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 principal office of the

above-mentioned self-regulatory organization. All submissions should

refer to the file number in the caption above and should be submitted

by July 1, 1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Jonathan G. Katz,

Secretary.

[FR Doc. 94-14127 Filed 6-9-94; 8:45 am]

BILLING CODE 8010-01-M