[Federal Register Volume 61, Number 37 (Friday, February 23, 1996)]
[Notices]
[Pages 7034-7037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4123]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36857; File No. SR-MSRB-96-1]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Municipal 
Securities Rulemaking Board Relating to Interpretation of Rule G-37 on 
Political Contributions and Prohibitions on Municipal Securities 
Business

February 16, 1996.
    On January 16, 1996,\1\ the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change, pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''), 
15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder. The proposed rule 
change is 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.

    \1\ On February 14, 1996, the MSRB filed Amendment No. 1 with 
the Commission. Amendment No. 1 withdraws question-and-answer number 
3, as well as certain language in the filing pertaining thereto. See 
Letter from Jill C. Finder, Assistant General Counsel, MSRB, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation, SEC (February 14, 1996) (``February 14 Letter'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Board is filing herewith a notice of interpretation concerning 
rule G-37 \2\ on political contributions and prohibitions on municipal 
securities business (hereafter referred to as ``the proposed rule 
change'').\3\ The Board has requested accelerated approval of the 
proposed rule change because the clarifications provided in the 
proposed rule change are needed to eliminate uncertainty over the 
specific application of rule G-37 to certain situations.

    \2\ MSRB Manual. General Rules, rule G-37 (CCH) para.3681.
    \3\ The Board published the interpretation as originally 
submitted in the January 1996 MSRB Reports (Vol. 16, no. 1, pp. 31-
34). The interpretation is also available for inspection and copying 
at the Commission's public reference room and at the Board.

[[Page 7035]]

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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 
texts of these statements may be examined at the places specified in 
Item III 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 rule G-37, concerning 
political contributions and prohibitions on municipal securities 
business.\4\ Since that time, the Board has received inquiries 
concerning the application of the rule. In order to assist the 
municipal securities industry and, in particular, brokers, dealers and 
municipal securities dealers in understanding and complying with the 
provisions of the rule, the Board has published five prior notices of 
interpretation which set forth, in question-and-answer (``Q&A'') 
format, general guidance on rule G-37.\5\

    \4\ See Securities Exchange Act Release No. 33868 (April 7, 
1994); 59 FR 17621 (April 13, 1994). The rule applies to 
contributions made on and after April 25, 1994.
    \5\ See MSRB Reports, Vol. 14, No. 3 (June 1994) at 11-16; Vol. 
14, No. 4 (August 1994) at 27-31; Vol. 14, No. 5 (December 1994) at 
8; Vol. 15, No. 1 (April 1995) at 21; and Vol. 15, No. 2 (July 1995) 
at 3-4. See also MSRB Manual, supra n.2, at para.3681.
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    In July 1995, the Board published a Q&A notice in MSRB Reports 
which addressed the issue of when a municipal finance professional 
would be ``entitled to vote'' for an issuer official candidate, and, 
thus be able to make a de minimis contribution without causing a two-
year ban on municipal securities business with that issuer.\6\ The 
Board stated that a municipal finance professional is entitled to vote 
for an official of an issuer if the issuer official is on the ballot in 
the locality in which the municipal finance professional may vote. 
Since publication of this ``entitled to vote'' interpretation, the 
Board has received comments from dealers concerning the burden this 
interpretation has placed on their compliance departments. Upon further 
review, the Board has decided to withdraw this interpretation and to 
issue a new interpretation. Accordingly, a municipal finance 
professional is ``entitled to vote'' for an issuer official if the 
municipal finance professional's principal residence is in the locality 
in which the issuer official seeks election. In such instances, a 
municipal finance professional is able to make a de minimis 
contribution without resulting in a ban on municipal securities 
business. For example, if an issuer official is a governor running for 
re-election, then anyone residing in that state may make a de minimis 
contribution to the official without causing a ban on municipal 
securities business with that issuer. In the example of an issuer 
official running for President, anyone in the country may contribute 
the de minimis amount to the official's Presidential campaign. By 
focusing on the municipal finance professional's principal residence 
for determining permissible de minimis contributions, this 
interpretation should allow any interested municipal finance 
professional to participate in the political process where he or she 
lives without resulting in a ban on municipal securities business.

    \6\ MSRB Reports, Vol. 15, No. 2 (July 1995) at 3-4.
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    In prior filings with the Commission, the Board stated that it will 
continue to monitor the application of rule G-37, and, from time to 
time, will publish additional notices of interpretations, as 
necessary.\7\ Recently, the Board has received several inquiries 
concerning the applicability of rule G-37 when a person makes a 
contribution to an issuer official on behalf of others. This situation 
includes, but is not limited to, the following examples:

    \7\ See, e.g., Securities Exchange Act Release No. 35879 (June 
21, 1995), 60 FR 33447 (June 28, 1995) (Notice of Filing and 
Immediate Effectiveness of SR-MSRB-95-11).
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    1. A municipal finance professional signs a check drawn on a joint 
account and sends it as a contribution to an issuer official, along 
with a writing which states that the contribution is being made, in 
whole or in part, on behalf of the other holder of the joint account 
(who is not a municipal finance professional).
    2. Both holders of a joint account, one of whom is a municipal 
finance professional, sign a check and send it as a contribution to an 
issuer official.
    The Board is of the view that, in these and similar situations, if 
a municipal finance professional has his or her name associated with a 
contribution, then this creates, at the very least, the appearance that 
the contribution is being given by the municipal finance professional. 
Accordingly, the Board believes that, for purposes of rule G-37, it is 
appropriate to attribute such a contribution to the municipal finance 
professional. If the contribution exceeds, or does not qualify for, the 
$250 de minimis exception set forth in rule G-37(b), then the two-year 
ban on municipal securities business will be triggered.
    In addition to questions concerning making contributions to issuer 
officials on behalf of other persons, the Board has received other 
questions and comments concerning (i) making contributions to a 
candidate who later loses the election; (ii) reporting requirements for 
holding companies; and (iii) making payments to a national political 
party for its non-federal account. In light of these questions, the 
Board has determined that it is necessary to provide further guidance 
to the municipal industry. Accordingly, the Board is publishing a sixth 
set of questions and answers.\8\

    \8\ See February 14 Letter.
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    The Board believes the proposed rule change is consistent with 
section 15B(b)(2)(C) of the Securities Exchange Act of 1934 (``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 would apply equally to 
all 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

    The Board did not publish or solicit comments on the proposed rule 
change. However, the Board has received five letters addressing some of 
the issues contained in the proposed rule change. Letters were received 
from the following:

Chemical Securities Inc. (``Chemical'')
J.C. Bradford & Co. (``JC Bradford'')
Morgan Keegan & Company, Inc. (``Morgan Keegan'')
Raymond James & Associates, Inc. (``Raymond James'')

[[Page 7036]]

Wolf, Robert R. (``Mr. Wolf'')

    As noted previously, in the Q&A notice published in July 1995, the 
Board provided clarification of its de minimis exception with regard to 
determining when a municipal finance professional is ``entitled to 
vote'' for an issuer official. In general, the Board stated that a 
municipal finance professional is entitled to vote for an issuer 
official (incumbent or candidate) after determining that the issuer 
official's name has been placed ``on the ballot'' for the primary or 
general election of the locality in which the municipal finance 
professional may vote. If the incumbent or candidate is not ``on the 
ballot,'' then any contribution given to that issuer official by a 
municipal finance professional would trigger the rule's two-year ban on 
municipal securities business.
    All of the commentators expressed concern over this ``entitled to 
vote'' interpretation. In general, the commentators believe that it 
creates confusion and will make compliance with the rule more 
burdensome. Chemical notes that ``the process of running for office 
begins well in advance of a person actually having their name placed 
`on the ballot' and that, under the Board's current interpretation, 
municipal finance professionals would be precluded from contributing 
`early money' to campaign efforts.'' Chemical further notes that in 
some jurisdictions ``a candidate's name is not placed `on the ballot' 
until very late in the election process--sometimes days before the 
election.'' Chemical argues that because the procedures for placing a 
candidate on the ballot vary from jurisdiction to jurisdiction, 
compliance with the ``on the ballot'' standard will not be uniform. 
Therefore, Chemical suggests that the appropriate standard should be 
``whether the official is a candidate for an office for which the MFP 
is eligible to vote.''
    JC Bradford also is concerned about the Board's ``entitled to 
vote'' interpretation, particularly as it applies to an issuer 
official's campaign for the U.S. Presidency. JC Bradford states that 
the interpretation ``has the practical effect of prohibiting any 
contribution from a municipal finance professional until such time as . 
. . [the issuer official] has qualified for the Presidential primary 
ballot in the state of residence of the municipal finance professional. 
At the moment . . . [the issuer official] qualifies for the ballot, a 
de minimis contribution, impermissible to that point, suddenly becomes 
permissible. . . . [This] is both arbitrary and capricious.''
    Morgan Keegan and Raymond James both state that the interpretation 
has made their compliance efforts significantly more difficult. Mr. 
Wolf, a registered representative with Morgan Keegan, notes that 
because of the peculiarities of certain state laws vis-a-vis the 
Board's interpretation, he is effectively prohibited from making a de 
minimis contribution until after an election. Mr. Wolf argues that 
``this cannot be the way the rule is intended to operate. . . .''
Board's Response
    In light of the concerns expressed by these and other commentators, 
and upon further review, the Board has decided to withdraw its previous 
``entitled to vote'' interpretation and to issue a new interpretation. 
Accordingly, a municipal finance professional is ``entitled to vote'' 
for an issuer official if the municipal finance professional's 
principal residence is in the locality in which the issuer official 
seeks election. In such instances, a municipal finance professional may 
make a de minimis contribution without triggering the ban on municipal 
securities business. For example, if an issuer official is a governor 
running for re-election, then anyone residing in that state may make a 
de minimis contribution to the official without causing a ban on 
municipal securities business with that issuer. In the example of an 
issuer official running for President, anyone in the country may 
contribute the de minimis amount to the official's Presidential 
campaign. The focus on the principal residence of municipal finance 
professionals for de minimus contributions should allow interested 
municipal finance professionals to participate in the political process 
where they live.
    If the Board discovers that dealers or municipal finance 
professionals are soliciting municipal finance professionals to make de 
minimis contributions for Presidential elections, in contravention of 
rule G-37(c), then the Board may consider additional rulemaking in this 
area.

III. 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, N.W., Washington, D.C. 20549. 
Copies of the submissions, 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. Sec. 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 
offices. All submissions should refer to File No. SR-MSRB-96-1 and 
should be submitted by March 15, 1996.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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 30th day after publication in the Federal 
Register. The Commission has reviewed the MSRB's proposed rule change 
and believes, for the reasons set forth below, that the proposal is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Board. Specifically, the 
Commission believes the proposal is consistent with Section 
15B(b)(2)(C) of the Act,\9\ which provides in pertinent part that, the 
rules of the Board shall be designed to remove impediments to and 
perfect the mechanism of a free and open market in municipal 
securities; and not be designed to permit unfair discrimination between 
customers, issuers, municipal securities brokers or municipal 
securities dealers.

    \9\ 15 U.S.C. 78o-4.
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act, for approving the proposed rule change prior to the 30th day 
after publication in the Federal Register. The clarifications provided 
by the proposed rule change are needed to eliminate uncertainty over 
the specific application of rule G-37, particularly with respect to the 
previous interpretation of ``entitled to vote.'' These clarifications 
are intended to reduce compliance burdens and costs relating to the 
previous interpretation. The Commission believes that accelerated 
approval of the proposed rule change will help to clarify applicable 
guidelines for those who wish to participate in the political process 
through financial means. The issues addressed in the questions and 
answers will assist dealers in understanding the requirements of rule 
G-37, and will thereby facilitate compliance with the rule.

[[Page 7037]]

    Based on the foregoing, the Commission deems it appropriate to 
approve the proposed rule change on an accelerated basis, pursuant to 
Section 15B of the Act and the rules and regulations thereunder.\10\

    \10\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change SR-MSRB-96-01 be, and hereby is, 
approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    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. 96-4123 Filed 2-22-96; 8:45 am]
BILLING CODE 8010-01-M