[Federal Register Volume 60, Number 48 (Monday, March 13, 1995)]
[Notices]
[Pages 13496-13499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6029]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35446; File No. SR-MSRB-94-14]
Self-Regulatory Organizations; Order Approving 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
March 6, 1995.
On August 18, 1994, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission''\1\ a proposed rule change
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed rule change
amends rule G-37 on political contributions and prohibitions on
municipal securities business, and rule G-8 concerning
recordkeeping.\4\
\1\On November 9, 1994, the MSRB filed Amendment No. 1 with the
Commission. Amendment No. 1 withdraws from the filing the proposed
amendment to rule G-37(g)(iv)(A). The MSRB had proposed to amend the
definition of ``municipal finance professional'' contained in rule
G-37(g)(iv)(A) to exempt retail sales persons from being deemed
``municipal finance professionals.''
\2\15 U.S.C. Sec. 78s(b)(1).
\3\17 CFR 240.19b-4.
\4\The Board published the text of the proposed rule change in
the August 1994 MSRB Reports, Vol. 14, No. 4, at 27-32.
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by issuance of a Commission release
(Securities Exchange Act Release No. 34630, September 1, 1994) and by
publication in the Federal Register (59 FR 46682, September 9, 1994).
Eleven comment letters were received.\5\ This order approves the
proposed rule change.
\5\Letter from Mark D. Schwartz, Esq. (``Schwartz'') to Arthur
Levitt, Chairman, Commission, dated September 18, 1994 (``Schwartz
Letter''); Letter from Heather L. Ruth, President, Public Securities
Association (``PSA'') to Jonathan G. Katz, Secretary, Commission,
dated September 18, 1994 (``PSA Letter''); Letter from Patrick J.
Manning, President, Chemical Securities Inc. (``Chemical'') to
Jonathan G. Katz, Secretary, Commission, dated September 30, 1994
(``Chemical Letter''); Letter from Rhonda G. Kirschner, Senior
Attorney and Corporate Vice President, Paine Webber Inc. (``Paine
Webber'') to Jonathan G. Katz, Secretary, Commission, dated
September 30, 1994 (``Paine Webber Letter''); Letter from Robin L.
Wiessmann, Principal, Artemis Capital Group, Inc. (``Artemis'') to
Jonathan G. Katz, Secretary, Commission, dated September 29, 1994
(``Artemis Letter''); Letter from W. Robb Hough, Jr., President,
William R. Hough & Co. (``Hough'') to Jonathan G. Katz, Secretary,
Commission, dated September 29, 1994 (``Hough Letter''); Letter from
Robert K. Dalton, Vice Chairman and William H. Coughlin, President,
George K. Baum & Co. (``Baum'') to Jonathan G. Katz, Secretary,
Commission, dated September 28, 1994 (``Baum Letter''); Letter from
Brian C. Underwood, Vice President--Director of Compliance, A.G.
Edwards & Sons, Inc. (``Edwards'') to Jonathan G. Katz, Secretary,
Commission, dated September 29, 1994 (``Edwards Letter''); Letter
from Samuel J. Winer, Esq., Arter & Hadden to Jonathan G. Katz,
Secretary, Commission, dated October 20, 1994 (``Arter & Hadden
Letter''); Letter from A. George Saks, Executive Vice President,
Secretary and General Counsel, Smith Barney Inc. (``Smith Barney'')
to Jonathan G. Katz, Secretary, Commission, dated September 29, 1994
(``Smith Barney Letter''); Letter from Steven D. Vander Clay, Vice
President, NBD Bank, N.A. (``NBD'') to Jill C. Finder, Assistant
General Counsel, MSRB, dated October 20, 1994 (``NBD Letter'').
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I. Introduction
On April 7, 1994, the Commission approved Board rule G-37,
concerning political contributions and prohibitions on municipal
securities business.\6\ 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.\7\ 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.\8\ The
Board has filed with the Commission subsequent Q&A interpretations of
the rule.\9\ The rule change approved herein also is intended to
address concern over certain aspects of rule G-37.
\6\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.
\7\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.
\8\Securities Exchange Act Release No. 34160 (June 3, 1994); 59
FR 30376 (June 13, 1994).
\9\See Securities Exchange Act Release No. 35128 (December 20,
1994), 59 FR 66989 (December 28, 1994); Securities Exchange Act
Release No. 34603 (August 25, 1994), 59 FR 45049 (August 31, 1994).
See also MSRB Reports, Vol. 14, No. 5, at 8 (December 1994); Vol.
14, No. 4, at 27-32 (August 1994). The interpretations also are
available for inspection and copying at the Commission's public
reference room and at the Board.
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II. Amendments to Rule G-37 and Rule G-8
The rule change approved today amends rule G-37 and rule G-8 by:
(i) amending the definition of municipal finance professional by
designating as a municipal finance professional any associated person
who is both (a) a municipal securities principal or a municipal
securities sales principal and (b) a supervisor of any person primarily
engaged in municipal securities representative activities or who
solicits municipal securities business; (ii) amending the definition of
municipal finance professional so that any person designated as a
municipal finance [[Page 13497]] professional will keep that
designation for two years after the last activity which would trigger
that designation; (iii) requiring brokers, dealers and municipal
securities dealers to disclose all payments made to political parties,
even if the payments do not constitute contributions as defined in the
rule; and (iv) amending the definition of ``issuer'' to exclude all
issuers of separate securities, as defined in Rule 3b-5 under the Act.
A. Supervisors of Municipal Finance Professionals
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 municipal finance professional is defined to include any direct
supervisor of a municipal finance professional up through 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).
For example, a person from the corporate department will be deemed
a municipal finance professional if that person assist the municipal
department in soliciting municipal securities business and all direct
corporate department supervisors of that person also will be deemed
municipal finance professionals under rule G-37, regardless of whether
that person's municipal securities activities are subject to the
supervision of a principal in the municipal securities department.
Concern has been expressed that this part of the definition
unnecessarily covers persons whose duties and activities do not provide
them with an opportunity or incentive to make political contributions
for the purpose of influencing the awarding of municipal securities
business by issuer officials.
The MSRB noted in its initial filing of rule G-37 that the
definition of municipal finance professional includes those individuals
who have a pecuniary interest in soliciting municipal securities
business on behalf of a dealer. It is those persons who may be in a
position to make political contributions for the purpose of influencing
the awarding of such business by issuer officials. Such persons could
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.
However, a corporate department supervisor typically does not have a
pecuniary interest in soliciting municipal securities business, and
typically does not acquire such an interest solely because a person
supervised by that supervisor assists the municipal department by
soliciting work from a municipal issuer.
The MSRB believes that amending the definition of municipal finance
professional to designate as a municipal finance professional only a
supervisor of any person primarily engaged in municipal securities
representative activities or who solicits municipal securities business
who also is a municipal securities principal or a municipal securities
sales principal will facilitate compliance with rule G-37. Thus, in the
example given above, the corporate department supervisors would not be
included in the definition of municipal finance professional.
The MSRB continues to believe that if a retail sales person becomes
a municipal finance professional by virtue of soliciting municipal
securities business, then the municipal securities principal
responsible for supervising that person's municipal securities
activities should be designated a municipal finance professional. In
most cases, this would include the sales person's branch manager (a
municipal securities sales principal). Such supervisory personnel
continue to be included within the definition of municipal finance
professional because the MSRB is concerned that retail sales persons
may solicit municipal securities business at the request of, or at
least with the knowledge of, their supervisors. Thus, the amendment is
intended to ensure that, if retail sales persons are soliciting
municipal securities business, the supervisors of such persons also are
deemed to be municipal finance professionals.
Finally, the definition of municipal finance professional has been
amended to clarify that the supervisors of the municipal securities
principals and municipal securities sales principals included within
the definition also are deemed to be municipal finance professionals.
B. Designation as a Municipal Finance Professional
The MSRB 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.\10\ The rule change approved
today amends 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 due to that person's
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.\11\ The amendment is intended to ensure that contributions
and payments by municipal finance professionals are not being made to
influence the awarding of municipal [[Page 13498]] securities business.
The amendment also will allow dealers, after this two-year period, to
remove these persons from their list of municipal finance
professionals.
\10\See Letter from Heather L. Ruth, President, PSA to Diane G.
Klinke, General Counsel, MSRB (July 25, 1994) (``July PSA Letter''),
supra n. 6.
\11\However, rule G-37 does not require a firm to monitor and
record the activities of a municipal finance professional that it no
longer employs.
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C. Contributions and Other Payments Made to Political Parties
Contributions to political parties do not trigger rule G-37'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 are intended to help ensure
that dealers do not circumvent 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.
Certain dealers and other industry participants have notified the
MSRB 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 MSRB is
concerned, based upon this information, 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 described above.
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 rule G-37. The rule change approved today amends 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 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 amendment will require dealers to record and report any
payments to political parties by dealers, PACs, municipal finance
professionals and executive officers, regardless of whether those
payments constitute contributions. These disclosure requirements are
intended to assist in severing any connection between payments to
political parties and the awarding of municipal securities business.
The amendment is not intended to restrict the personal volunteer work
of municipal finance professionals for political parties.
D. 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. In most instances, the issuers of separate securities are
corporate obligors of industrial revenue bonds and bank issuers of
letters of credit.
As noted above, rule G-37 was adopted in order to cleanse the
municipal securities market of pay-to-play pressures. However, pay-to-
play pressures do not exist when the issuer of a separate security is a
corporate obligor of industrial revenue bonds or a bank issuer of a
letter of credit. The Board itself recognized this when it noted in its
May 1994 Q & A that, when filing Form G-37, dealers do not have to
include corporate issuers in industrial development bond issues because
no contributions (as defined in rule G-37) would be made to such
corporations.\12\ Therefore, the rule change amends the rule G-37
definition of issuer by omitting issuers of separate securities from
the definition of issuer.
III. Comment Letters
A. Supervisors of Municipal Finance Professionals
Chemical and Artemis express unqualified support for designating as
municipal finance professionals only those supervisors of municipal
finance professionals who are also municipal securities principals or
municipal securities sales principals. The PSA Letter also expresses
general support for this amendment. The Edwards Letter expresses
support for the views expressed in the PSA Letter; therefore, Edwards
generally supports this amendment.
Schwartz opposes this amendment. The Schwartz Letter asserts that
the amendment would ``open a loophole further'' because political
fundraising has been happening across departments. The Commission notes
that the amendment does not purport to exclude all supervisors of
municipal finance professionals. Furthermore, the MSRB stated that the
amendment was designed to cover situations in which retail sales
persons are soliciting municipal securities business at the request of,
or at least with the knowledge of, their supervisors.
The Arter & Hadden Letter also expresses opposition to this
amendment. The Arter & Hadden Letter reasons that the supervisor of a
retail sales person involved in municipal securities solicitation
activity may not be involved in supervising that person's solicitation
activity. The Arter & Hadden Letter argues that the MSRB was correct to
amend rule G-37 so that a supervisor of persons primarily engaged in
municipal securities representative activities or who solicit municipal
securities business is deemed a municipal securities professional only
if that supervisor is also a municipal securities principal or a
municipal securities sales principal. However, the Arter & Hadden
Letter criticizes the proposed amendment because, it asserts, the MSRB
states that it would deem a branch manager and a branch manager's
supervisor to be municipal finance professionals if a retail sales
person in that branch office was soliciting municipal securities
business. Arter & Hadden asserts that a branch manager does not have
the background or expertise to supervise the solicitation activities of
a retail sales representative; therefore, a branch manager should not
be restricted in the same manner as a person who does have the
background and expertise to supervise the solicitation activities of a
retail sales representative.\12\
\12\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.
[[Page 13499]]
Smith Barney also opposes this amendment. The Smith Barney Letter
objects to the MSRB deeming a branch manager and a branch manager's
supervisor to be municipal finance professionals if a retail sales
person in that branch office was soliciting municipal securities
business. It notes that the MSRB 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;
Smith Barney does not consider those reasons sufficient to justify the
apparent breadth of the amendment. Smith Barney states that a simpler
approach would be to interpret solicitation as asking others to
solicit, and that the MSRB should not be concerned about supervisors
who simply know that their sales persons are soliciting municipal
securities business. The Commission believes that, while Smith Barney
may be correct in theory, as a practical matter, Smith Barney's
solution will make enforcement of the rule much more difficult. It
believes that the practical difficulties of enforcing the rule if it
were amended as Smith Barney suggests outweigh any compliance burdens
imposed by the amendment. The Commission thus believes that the need
for a prophylactic provision also outweighs the concerns expressed by
Arter & Hadden concerning the burden imposed upon branch managers.\13\
\13\The Commission notes that the amendment does not add any
compliance burden that is not imposed under the current version of
rule G-37.
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B. Designation as a Municipal Finance Professional
Chemical and Artemis also express support for requiring each person
designated by a dealer as a municipal finance professional to retain
this designation for two years after the last activity or position
which gave rise to the designation. The Chemical Letter states that the
two year designation period matches the two year disqualification
length contained in rule G-37(b) and provides clarity.
NBD opposes this amendment. NBD states that this amendment will
create an undue reporting burden and would be unworkable from a
supervisory standpoint. The NBD Letter reasons that if the designated
municipal finance professional left the firm at which the professional
engaged in the activity that gave rise to the designation, then that
firm no longer would maintain any supervisory control over that
individual, and therefore, any political activities of the individual
would no longer benefit that firm and would be impossible to monitor.
The NBD Letter also argues that if an employee is transferred to
another department, then supervisory authority is severed. NBD regards
it as ``unlikely'' that an employee would be transferred to another
department in order to circumvent rule G-37.
With respect to the issue of monitoring municipal finance
professionals who have left a firm, the Commission notes that rule G-37
does not require a firm to monitor the activities of a municipal
finance professional that it no longer employs. With respect to the
issue of whether a firm receives any continuing benefits from a
municipal finance professional no longer employed by that firm, the
Commission believes that whether or not a firm benefits from the
political activities of an individual that occur after the individual
leaves the firm, or is transferred, a firm may continue to enjoy the
benefits that flow from that employee's activities even after that
employee left the firm or was transferred. Rule G-37 reflects a
reasoned judgment that certain activities may corrupt the awarding of
municipal securities business, not only at the time of the activity,
but for a certain period of time thereafter.
C. Miscellaneous Comments
Chemical and Artemis expressed support for the remainder of the
rule change.
The PSA believes that the MSRB should further amend rule G-37 to:
establish a threshold percentage of commissions below
which a registered representative would not be considered a municipal
finance professional;
establish guidelines concerning how frequently they must
review their records to identify registered representatives as
municipal finance professionals;
clarify that the MSRB will not retroactively apply the
municipal finance professional designation to persons who were not
initially identified by the broker, dealer or municipal securities
dealer as a registered representative, but subsequently engage in
activities that would trigger application.
codify procedures for brokers, dealers and municipal
securities dealers to follow to ensure that municipal finance
professionals are being identified.
The Commission believes that the MSRB may address these comments in
the context of a separate proposed rule change filed with the
Commission. It does not believe that these comments must be addressed
in the context of this rule change.
IV. Discussion and Findings
The Commission finds that the rule change is consistent with the
provisions of Section 15B(b)(2)(C)\14\ 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. The Commission believes that
the rule change is in the public interest and removes impediments to
and perfects the mechanism of a free and open market in municipal
securities in that the amendments: (i) tailor the application of rule
G-37 to those persons who may be in a position to make political
contributions for the purpose of influencing the awarding of municipal
securities business by issuer officials; (ii) require disclosure of
certain payments which may have the effect of influencing the awarding
of municipal securities business; and (iii) eliminate the restrictions
imposed by rule G-37 with respect to certain transactions and practices
which are not likely to influence the awarding of municipal securities
business by issuer officials.
\14\15 U.S.C. Sec. 78o-4.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that File No. SR-MSRB-94-14 be, and hereby is, approved.
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. 95-6029 Filed 3-10-95; 8:45 am]
BILLING CODE 8010-01-M