[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Notices]
[Pages 49368-49371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23975]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37675; File No. SR-MSRB-96-7]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Political Contributions and Prohibitions on Municipal Securities 
Business

September 12, 1996.
    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 
6, 1996,\1\ the Municipal Securities Rulemaking Board (``Board'' or 
``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'')

[[Page 49369]]

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.
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    \1\ On September 9, 1996, the MSRB filed Amendment No. 1 with 
the Commission. Amendment No. 1 amends proposed language to rule G-
37(g) (vii). See Letter from Ronald W. Smith, Legal Associate, MSRB, 
to Katherine England, Assistant Director, Division of Market 
Regulation, SEC (September 9, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Board proposes a rule change to amend rule G-37, on political 
contributions and prohibitions on municipal securities business, and 
rule G-8, on books and records.
    The text of the proposed rule change is available at the offices of 
the MSRB.

II. Self-Regulatory Organization's Statement of the Terms of Substance 
of 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 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

    The Board is filing the proposed rule change to: (i) Amend the 
definition of ``municipal finance professional;'' (ii) amend the 
definition of ``executive officer;'' (iii) clarify the definition of 
``official of an issuer;'' (iv) clarify the definition of ``municipal 
securities business;'' and (v) require the retention of Forms G-37/G-38 
and of records itemizing mailing of the same.
Definition of ``Municipal Finance Professional''
    Rule G-37(g)(iv) defines the term ``municipal finance 
professional'' as:
    (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 both (i) a municipal securities 
principal or a municipal securities sales principal and (ii) a 
supervisor of any person described in subparagraphs (A) or (B);
    (D) any associated person who is a supervisor of any person 
described in subparagraph (C) 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
    (E) 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.
    The activities described in subparagraphs (A) and (B) which would 
cause someone to become a municipal finance professional are directly 
the result of the individual's actions (e.g., primarily engaged in 
underwriting, trading or sales of municipal securities, or soliciting 
municipal securities business). The activities described in 
subparagraph (C) relate to the supervision of anyone described in 
subparagraphs (A) and (B), and the activities described in subparagraph 
(D) relate to the supervision of anyone described in subparagraph (C). 
Thus, for someone to meet the definition of municipal finance 
professional pursuant to subparagraphs (A) through (D), individuals 
would have to be directly involved in municipal securities activities 
or supervisors of such persons.
    Subparagraph (E) states that an associated person who is a member 
of the dealer executive or management committee or similarly situated 
official is a municipal finance professional. This provision is the 
only part of the definition of municipal finance professional that is 
not dependent upon the municipal securities activities of the person or 
the supervision of persons engaging in municipal securities activities. 
This provision was added to the rule because of the belief that issuer 
officials may seek out dealers' senior executives for contributions if 
municipal finance professionals ceased making contributions. The 
Statement of Initiative by Dealers regarding Political Contributions 
also included executive or management committee members within its 
voluntary prohibition on political contributions.\2\
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    \2\ In October 1993, at the urging of SEC Chairman Levitt, a 
number of dealers agreed to a Statement of Initiative to support the 
principle that political contributions which are intended to 
influence the awarding of municipal securities business should be 
prohibited.
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    The Board understands that there are certain dealers that 
occasionally engage in municipal securities sales transactions but do 
not engage in municipal securities business as defined in rule G-
37(g)(vii). As a result, the only individuals who meet the definition 
of municipal finance professional are executive or management committee 
members. Because such dealers do not engage in municipal securities 
business, the ban on business based on political contributions is 
irrelevant to them. However, such dealers also are required to record 
and report the contributions and payments of these municipal finance 
professionals. The Board believes that there is no useful purpose 
served in requiring dealers to record and report the political 
contributions of executive or management committee members if they are 
the only individuals in a firm meeting the definition of municipal 
finance professional. The proposed rule change amends the definition of 
municipal finance professional in rule G-37(g)(iv)(E) to exempt 
executive or management committee members from the definition of 
municipal finance professional (and thus the applicable recording and 
reporting requirements) if these are the only individuals within a firm 
who would meet the definition as described in subparagraphs (A) through 
(E).\3\
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    \3\ Rule G-37(g)(iv) states that each person designated by the 
dealer as a municipal finance professional is deemed to be a 
municipal finance professional and that each person so designated 
will retain this designation for two years after the last activity 
or position which gave rise to the designation. Upon approval of the 
proposed rule change by the SEC, dealers may remove individuals 
subject to the new rule language from their lists of designated 
municipal finance professionals and do not have to record and report 
their contributions.
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Definition of ``Executive Officer''
    Rule G-37(g)(v) defines ``executive officer'' as: An associated 
person in charge of a principal business unit, division or function or 
any other person who performs similar policy making functions for 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), but does not include any municipal 
finance professional, as defined in paragraph (iv) of this section (g).
    Contributions and payments by executive officers are subject to the 
recordkeeping and reporting provisions of rule G-37. Contributions by 
executive officers do not result in a ban on business; however, 
paragraph (d) of rule G-37 prohibits dealers from using executive 
officers (as well as any other person or entity) as conduits for making 
contributions to officials of issuers. The Board determined to apply 
the recordkeeping and reporting

[[Page 49370]]

requirements to contributions by executive officers to ensure that 
these individuals are not being used to circumvent the rule.
    As in the situation described above involving executive or 
management committee members, rule G-37 currently requires a dealer to 
record and report the contributions of executive officers even if that 
dealer has no one meeting the definition of municipal finance 
professional. The Board believes that this serves no useful purpose 
because the dealer currently is not engaging in municipal securities 
business. The proposed rule change would amend the definition of 
executive officer in rule G-37(g)(v) to provide that, if no associated 
person of the dealer meets the definition of municipal finance 
professional, the dealer shall be deemed to have no executive officers 
(and thus the recording and reporting requirements for executive 
officers are not applicable).\4\
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    \4\ Upon approval of the proposed rule change by the SEC, 
dealers may remove individuals subject to the new rule language from 
their lists of executive officers and do not have to record and 
report their contributions.
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    In both situations involving municipal finance professionals and 
executive officers described above, if the dealer later engages in 
municipal securities business, then the dealer will have to record the 
contributions and payments made by any municipal finance professionals, 
as well as executive officers, for the previous two calendar years to 
determine whether it is banned from any municipal securities 
business.\5\
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    \5\ Of course, any dealer who has municipal finance 
professionals, even if the dealer currently is not engaging in 
municipal securities business, must record and report the 
contributions and payments of municipal finance professionals and 
executive officers.
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Definition of ``Official of an Issuer''
    When the Board adopted rule G-37, the term ``official of such 
issuer'' or ``official of an issuer'' was initially defined 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 was 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.
    After adoption of the rule, the Board became concerned that, 
because the definition focused 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, determined to amend the definition to clarify its intent.\6\
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    \6\ See Securities Exchange Act Release No. 34160 (June 3, 
1994), 59 FR 30376 (June 13, 1994).
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    Accordingly, rule G-37(g)(vi) currently defines the term ``official 
of such issuer'' or ``official of an issuer'' as:

any person (including any election committee for such person) who 
was, at the time of the contribution, an incumbent, candidate or 
successful candidate: (A) For elective office of the issuer which 
office is directly or indirectly responsible for, or can influence 
the outcome of, the hiring of a broker, dealer or municipal 
securities dealer for municipal securities business by the issuer; 
or (B) 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 subparagraph (A), above. [emphasis 
added]

    Recently, it came to the Board's attention that the revised 
definition does not clearly address situations in which an elected 
official may appoint someone to an issuer position. Subparagraph (B) in 
rule G-37(g)(vi) refers to the definition of official of an issuer as 
defined in subparagraph (A), but, subparagraph (A) refers only to an 
elective office and not an appointed office. The proposed rule change 
amends the definition of ``official of such issuer'' and ``official of 
an issuer'' to clarify that the definition includes ``any elective 
office of a state or of any political subdivision, which office has 
authority to appoint any person who is directly or indirectly 
responsible for, or can influence the outcome of, the hiring of a 
broker, dealer or municipal securities dealer for municipal securities 
business by an issuer.'' Such amendment removes the incorrect reference 
to an elective office for those who are appointed by an elected 
official.
Definition of ``Municipal Securities Business''
    Rule G-37(g)(vii) defines the term ``municipal securities 
business'' as:
    (A) The purchase of a primary offering (as defined in rule A-13(d)) 
of municipal securities from the issuer on other than a competitive bid 
basis (i.e., negotiated underwriting); or
    (B) The offer or sale of a primary offering of municipal securities 
on behalf of any issuer (i.e., private placement); or
    (C) The provision of financial advisory or consultant services to 
or on behalf of an issuer with respect to a primary offering of 
municipal securities on other than a competitive bid basis; or
    (D) The provision of remarketing agent services to or on behalf of 
an issuer with respect to a primary offering of municipal securities on 
other than a competitive bid basis.
    Under rule G-37, dealers could be subject to a ban on business with 
an issuer if certain contributions are made to officials of that 
issuer. The ban on business provision applies to municipal securities 
business awarded on a negotiated basis; the rule does not prohibit 
dealers from engaging in business awarded on a competitive basis.
    Some dealers have noted that it is not clear in subparagraph (C) of 
rule G-37(g)(vii) whether, for financial advisory services, the rule is 
referring to the selection of a financial advisor on other than a 
competitive bid basis or whether the rule is referring to financial 
advisory services provided only on negotiated deals. The proposed rule 
change amends rule G-37(g)(vii)(C) to make clear that the definition of 
``municipal securities business'' includes financial advisory services 
when the dealer is chosen as financial advisor on a negotiated basis. 
It is irrelevant whether the financial advisory services provided by 
the dealer are with respect to a negotiated or competitive issue. A 
similar change has been made to rule G-37(g)(vii)(D) to clarify that 
the definition of ``municipal securities business'' includes 
remarketing agent services when the dealer is chosen as remarketing 
agent on a negotiated basis.

Recordkeeping

    Rule G-37(e) requires dealers to submit Forms G-37/G-38 to the 
Board by certified or registered mail or some other equally prompt 
means that provides a record of dispatch. While rule G-8(a)(xvi), on 
books and records, requires dealers to keep records of all of the 
information reported on Form G-37/G-38, it also requires dealers to 
keep records of additional information (e.g., a listing of the names, 
titles, city/county and state of residence of all municipal finance 
professionals). The Board believes it would be helpful to the

[[Page 49371]]

enforcement agencies for rule G-8(a)(xvi) to require dealers to keep 
copies of the Forms G-37/G-38 submitted to the Board so that these 
forms can be easily retrieved for review. In reviewing the timely 
submission of the forms, the Board also believes it would be helpful to 
the enforcement agencies to require dealers to keep the certified or 
registered mail record or other records indicating dispatch.\7\
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    \7\ Rule G-9, on preservation of records, requires dealers to 
retain the G-8(a)(xvi) records concerning political contributions 
and prohibitions on municipal securities pursuant to rule G-37 for a 
six year period.
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    The Board believes 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.

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

    Within 35 days of the 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 the 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 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. 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-96-7 and should be 
submitted by October 10, 1996.

    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. 96-23975 Filed 9-18-96; 8:45 am]
BILLING CODE 8010-01-M