# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-22253 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** September 9, 1994 ## Text 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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.'' --------------------------------------------------------------------------- \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''). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \7\Pursuant to rule G-8(a)(xvi)(I), these recordkeeping requirements apply to contributions made on or after April 25, 1994. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\See PSA Letter, supra n. 6. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \14\See supra n. 6. --------------------------------------------------------------------------- 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-22253. Public record. Not legal advice.