[Federal Register Volume 59, Number 111 (Friday, June 10, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14127]


[[Page Unknown]]

[Federal Register: June 10, 1994]


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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