[Federal Register Volume 59, Number 112 (Monday, June 13, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14226]


[[Page Unknown]]

[Federal Register: June 13, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34160; File No. SR-MSRB-94-5]

 

Self-Regulatory Organizations; Filing and Order Granting 
Accelerated Approval 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

June 3, 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 24, 
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 and II below, which Items 
have been prepared by the self-regulatory organization. The purpose of 
the proposed rule change is to provide procedures for dealers to seek 
exemptive relief from rule G-37, in limited circumstances, and to 
clarify certain definitions in rules G-37 and G-8. The Board has 
requested accelerated approval of the proposed rule change to 
facilitate compliance with rule G-37. The Commission is publishing this 
notice to solicit comments on the propose rule change from interested 
persons. As discussed below, the Commission finds good cause for 
granting accelerated approval of the proposed rule change.

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

    The Board is filing the proposed rule change to amend rule G-37 
concerning political contributions and prohibitions on municipal 
securities business, and rule G-8 concerning recordkeeping. The 
proposed rule change: (i) Provides procedures for dealers to seek 
exemptive relief from rule G-37's prohibition on business, in limited 
circumstances; and (ii) clarifies certain definitions in rules G-37 and 
G-8. The Board has requested accelerated approval of the proposed rule 
change to facilitate compliance with the rule.

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

    In response to the Board's initial proposal on political 
contributions and prohibitions on municipal securities business and its 
rule G-37 filing with the Commission,\1\ the Board received a number of 
comments recommending that the Board consider providing, in limited 
instances, a ``good faith exemption'' to the rule's prohibition on 
municipal securities business.\2\ In light of these comments, the Board 
has determined to submit the proposed rule change.
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    \1\The Commission approved rule G-37 in Securities Exchange Act 
Release No. 33868 (April 7, 1994), 59 FR 17621. Rule G-37 became 
effective on April 25, 1994.
    \2\The Board previously considered and rejected the inclusion of 
a good-faith exception to the rule. See Securities Exchange Act 
Release No. 33482 (January 14, 1994), 59 FR 3389.

    A registered securities association or appropriate regulatory 
agency may exempt a dealer who is prohibited from engaging in 
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municipal securities business with an issuer from such prohibition.

    A number of commenters on rule G-37 have expressed concern that 
imposing a prohibition on municipal securities business may be unfair 
in certain limited situations when political contributions have been 
made.\3\ For example, a disgruntled municipal finance professional may 
make a contribution purposely to injure the dealer, its management or 
employees. Also, a municipal finance professional eligible to vote for 
an issuer official may make a number of small contributions during an 
election cycle (e.g., over four years) which, when consolidated, amount 
to slightly over the $250 de minimis exemption (e.g., $255). In both 
examples, the contributions would trigger the prohibition on business 
under rule G-37(b), thereby prohibiting the dealer from engaging in 
municipal securities business with the issuer for two years.
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    \3\See rule G-37 approval order, supra note 1.
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    The Board recognizes that in certain circumstances, such as those 
discussed above, the rule's prohibition on business may be too harsh a 
consequence for truly inadvertent contributions or the contributions of 
disgruntled employees. Thus, the Board has determined to add new 
paragraph (i) to rule G-37 to establish a procedure whereby the 
National Association of Securities Dealers (``NASD'') and the federal 
bank regulatory agencies (i.e., the Office of Comptroller of the 
Currency, Federal Reserve Board, and Federal Deposit Insurance 
Corporation), upon application by a dealer subject to such 
association's or agency's inspection and enforcement authority, may 
exempt, conditionally or unconditionally, a dealer who is prohibited 
from engaging in municipal securities business from such 
prohibition.\4\ In determining whether to grant such an exemption, the 
proposed rule change would require that the NASD and bank regulatory 
agencies consider, among other factors, whether:
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    \4\The NASD and the bank regulatory agencies are statutorily 
authorized to inspect for compliance with, and to enforce Board 
rules. See Sections 15A(b)(7), 15B(c)(5), and 15B(c)(7) of the Act; 
[15 U.S.C. Secs. 78o-3(b)(7), 78o-4(c)(5), 78o-4(c)(7)].

    (i) such exemption is consistent with the public interest, the 
protection of investors and the purposes of this rule; and
    (ii) such dealer (A) prior to the time the contribution(s) which 
resulted in such prohibition was made, had developed and instituted 
procedures reasonably designed to ensure compliance with this rule; 
(B) prior to or at the time the contribution(s) which resulted in 
such prohibition was made, had no actual knowledge of the 
contribution(s); (C) has taken all available steps to cause the 
person or persons involved in making the contribution(s) which 
resulted in such prohibition to obtain a return of the 
contribution(s); and (D) has taken such other remedial or preventive 
measures, as may be appropriate under the circumstances.

    The Board believes that a dealer that is subject to the prohibition 
on business should have to make a substantial effort to be exempted 
from that prohibition. The proposed rule change would require the 
dealer to petition the NASD or appropriate bank regulatory agency to 
seek such an exemption and to provide sufficient evidence to justify an 
exemption. In making a determination concerning an exemption, the NASD 
or appropriate bank regulatory agency would then review the facts and 
circumstances presented by the dealer, as well as the factors set forth 
in the proposed rule change. The Board would expect that this 
prohibition exemption not be routinely requested by dealers and that 
exemptions would be granted by the NASD and the bank regulatory 
agencies only in limited circumstances. The Board believes that the 
proposed rule change will offer relief from the prohibition on business 
in appropriate circumstances without sacrificing the rule's purpose and 
intent, i.e., to ensure that the high standards and integrity of the 
municipal securities industry are maintained, to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to perfect a free and open market, and to protect 
investors and the public interest. The Board will seek information from 
the NASD and bank regulatory agencies regarding the granting of any 
exemptions in order to monitor the implementation of this provision, 
and to determine if any changes are necessary.
Definition of ``Official of an Issuer''
    An ``official of an issuer'' is defined in rule G-37(g)(vi) as any 
incumbent, candidate or successful candidate for elective office of the 
issuer, which office is directly or indirectly responsible for, or can 
influence the outcome of, the hiring of a dealer for municipal 
securities business. The definition is intended to include any state or 
local official or candidate (or successful candidate) who has influence 
over the awarding of municipal securities business, including certain 
state-wide executive or legislative officials.
    The Board, however, was concerned that because the definition 
focuses on ``an elective office of the issuer,'' it did not clearly 
include certain other officials. For example, a state may have certain 
issuing authorities whose boards of directors are appointed by the 
governor. Although the governor is an official with influence over the 
awarding of municipal securities business, the governor, in this 
illustration, is not an incumbent or candidate for ``elective office of 
the issuer'' (i.e., the state authority). Thus, a contribution to the 
governor would not prohibit a dealer from engaging in business with the 
state authority. The Board intended to include the governor as an 
official of the issuer in such circumstances and, therefore, has 
determined to amend the definition to clarify its intent.
    The amended definition of official of an issuer includes any 
incumbent or candidate ``for any elective office of a state or of any 
political subdivision, which office has authority to appoint any 
official(s) of an issuer, as defined in [paragraph (g)(vii)(A) of rule 
G-37].''

    Definition of ``municipal securities business'' does not include 
competitive financial advisory activities.

    The definition of ``municipal securities business'' in rule G-
37(g)(vii) includes certain dealer activities, such as acting as 
negotiated underwriters, financial advisors and consultants, placement 
agents, and negotiated remarketing agents. In its rule G-37 filing with 
the Commission, the Board noted that the rule would not prohibit 
dealers from acting as competitive underwriters or competitive 
remarketing agents.\5\ The Board is amending this definition to clarify 
that the rule also would not prohibit dealers from engaging in 
competitive advisory activities.
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    \5\See supra note 2.

    Only associated persons come under definition of ``municipal 
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finance professional.''

    The Board determined to amend the definition of ``municipal finance 
professional,'' as set forth in rule G-37(g)(iv), to clarify that only 
associated persons would fall within the rule's four categories of 
municipal finance professionals.\6\
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    \6\``Associated persons'' is defined in Sections 3(a)(18) and 
3(a)(32) of the Act; [15 U.S.C. 78c(a)(18), (32)].

    Dealers shall send G-37 Reports to the Board by certified or 
registered mail or by some other means that provides a record of 
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sending.

    Rule G-37(e)(i) currently requires dealers to submit quarterly 
reports to the Board on Form G-37 concerning political contributions 
and municipal securities business. The Board is concerned, however, 
that some confusion could arise over whether particular reports were 
actually sent and/or lost in the mail. To obviate any such problem, the 
Board is amending this paragraph to require that dealers send such 
reports to the Board ``by certified or registered mail, or some other 
equally prompt means that provides a record of sending.'' This will 
ensure that dealers have a record of all reports submitted to the 
Board.
    The Board also is amending this paragraph to correct an erroneous 
cross-reference to rule G-8, which requires dealers to submit to the 
Board reports on contributions that are required to be recorded 
pursuant to rule G-8(a)(xvi).

    The rule requires, among other things, that dealers disclose the 
name, company, role and compensation arrangement of any person, 
other than a municipal finance professional, employed by the dealer 
to obtain or retain business.

    Paragraph (e)(ii) of rule G-37 requires that the reports referred 
to in paragraph (e)(i) include, among other things, a list of issuers 
with which the dealer has engaged in municipal securities business, 
along with the type of municipal securities business and the name, 
company, role, and compensation arrangement of any person employed by 
the dealer to obtain or retain municipal securities business with such 
issuers. The Board intended that this provision apply to persons such 
as outside consultants that are not municipal finance professionals 
associated with the dealer. Thus, the amendment clarifies that this 
requirement does not require the dealer to disclose the name of such 
municipal finance professionals.

    Dealers complying with Commission Rule 17a-3 must maintain the 
information and records required by Board rule G-37.

    Board rule G-8(f) allows dealers, other than bank dealers, who are 
in compliance with Commission Rule 17a-3, on recordkeeping, to be 
deemed in compliance with Board rule G-8, on recordkeeping. However, 
the rule provides that specific information required by rule G-8 must 
be maintained, even though such information is not required by Rule 
17a-3. The Board is amending rule G-8(f) to clarify that dealers 
complying with Rule 17a-3 are still required to maintain the 
information and records required by Board rule G-37.\7\
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    \7\In addition, the board is amending rule G-8(f) to include 
appropriate cross-references to rules G-27 on supervision, and G-36 
on delivery to the Board of officials statements and advance 
refunding documents. This amendment, like the proposed rule change, 
clarifies that dealers complying with Rule 17a-3 must still maintain 
the information and records required by rules G-27 and G-36. These 
cross-references were inadvertently omitted when the Board 
previously amended these rules.
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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 will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, since it will apply equally to 
brokers, dealers, and municipal securities dealers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    The Board has requested that the Commission find good cause, 
pursuant to Section 19(b)(2) of the Act, for approving the proposed 
rule change prior to the thirtieth day after publication of the notice 
of filing in the Federal Register. The Board believes that accelerated 
approval of the proposed rule change is necessary to facilitate dealer 
compliance with rules G-37 and G-8.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the Board, and, in particular, with Sections 
15B(b)(2) (C) and (G) of the Act.\8\ Section 15B(b)(2)(C) authorizes 
the MSRB to adopt rules 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 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. Section 15B(b)(2)(G) authorizes the MSRB to adopt rules that 
prescribe the records to be made and kept by municipal securities 
dealers and the periods for which such records shall be preserved.
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    \8\Sections 15B(b)(2)(C), (G); [15 U.S.C. 78o-4(b)(2)(C), (G)].
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    The Commission received several comments to rule G-37 recommending 
that the rule provide an exemption process, based on the dealer's 
compliance procedures and supervision, for certain inadvertent 
violations.\9\ The Commission approved the rule and recommended the 
MSRB separately address these concerns by filing a proposed rule change 
that provides an exemption process for inadvertent violations. The 
MSRB's proposal adequately addresses these concerns.\10\ The proposal 
provides procedures for dealers to obtain exemptive relief from rule G-
37's prohibition on business where, for example, covered persons 
inadvertently make contributions that slightly exceed the de minimis 
exemption provided by the rule. The proposal's exemptive relief is 
based on the dealers' supervision of covered persons, compliance 
procedures concerning rule G-37, and corrective and remedial action 
concerning inadvertent violations. The Commission expects that dealers 
will apply for exemptive relief only in certain, limited situations. 
Thus, the proposal provides an exemptive process to rule G-37 without 
providing dealers a ``loop-hole'' that would frustrate the rule's 
purpose to, among other things, ensure that high standards and 
integrity of the municipal securities industry are maintained.
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    \9\See Supra note 1.
    \10\Because an exemption to rule G-37 is appropriate in very 
limited circumstances,
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    The proposal also clarifies provisions of rules G-37 and G-8. 
Amendments to rule G-37's definitions of ``official of an issuer,'' 
``municipal securities business,'' and ``municipal finance 
professional,'' as well as amendments to rules G-37 and G-8 disclosure 
and recordkeeping requirements will facilitate compliance with the 
rules.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing in the Federal Register. Accelerated approval is 
necessary and appropriate to facilitate compliance with rules G-37 and 
G-8.

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 
Board. All submissions should refer to File No. SR-MSRB-94-5 and should 
be submitted by July 5, 1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change be, and hereby is, approved.

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    \11\15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority, 17 U.S.C. 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 94-14226 Filed 6-10-94; 8:45 am]
BILLING CODE 8010-01-M