[Federal Register Volume 63, Number 132 (Friday, July 10, 1998)]
[Notices]
[Pages 37434-37435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18297]
[[Page 37434]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40167; File No. SR-MSRB-98-10]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness 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
July 2, 1998.
On June 30, 1998, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change (File No.
SR-MSRB-98-10) pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed
rule change is described in Items, I, II, and III below, which Items
have been prepared by the Board. The Board has designated this proposed
rule change as constituting a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule of the Board under Section 19(b)(3)(A)
\3\ of the Act, which renders the proposed rule change effective upon
receipt of this filing by the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
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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 proposed rule change consisting of a
notice of interpretation, in question-and-answer format, concerning
Rule G-37, on political contributions and prohibitions on municipal
securities business. The proposed rule change is as follows:
Rule G-37, on Political Contributions and Prohibitions on Municipal
Securities Business
Since May 1994, the Board has provided interpretive guidance on
Rule G-37 through the publication of eight Question & Answer (``Q&A'')
notices.\4\ The Board recently has received a number of questions
concerning mergers in the municipal securities industry and the
operation of the exemptive provision set forth in section (i) of the
rule from market participants and the agencies charged with enforcing
the rule. As a result, the Board has determined that it is necessary to
provide further guidance to the industry and the applicable enforcement
agencies by confirming and elaborating upon guidance provided in prior
Q&A notices and in prior communications with the applicable enforcement
agencies. Accordingly, the Board is publishing this ninth set of
questions and answers.
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\4\ See Securities Exchange Act Rel. No. 34161 (June 6, 1994),
59 FR 30379 (June 14, 1994); Securities Exchange Act Rel. No. 34603
(Aug. 25, 1994), 59 FR 45049 (Aug. 31, 1994); Securities Exchange
Act Rel. No. 35128 (Dec. 20, 1994), 59 FR 66989 (Dec. 28, 1994);
Securities Exchange Act Rel. No. 35544 (March 28, 1995), 60 FR 16896
(April 3, 1995); Securities Exchange Act Rel. No. 35879 (June 21,
1995), 60 FR 33447 (June 28, 1995); Securities Exchange Act Rel. No.
36857 (Feb. 16, 1996), 61 FR 7034 (Feb. 23, 1996); Securities
Exchange Act Rel. No. 37675 (Sept. 12, 1996), 61 FR 49368 (Sept. 19,
1996); Securities Exchange Act Rel. No. 39084 (Sept. 16, 1997), 62
FR 49717 (Sept. 23, 1997).
See MSRB Reports, Vol. 14, No. 3 (June 1994) at 11-16; Vol. 14,
No. 4 (Aug. 1994) at 27-31; Vol. 14, No. 5 (Dec. 1994) at 8; Vol.
15, No. 1 (April 1995) at 21; Vol. 15, No. 2 (July 1995) at 3-4;
Vol. 16, No. 1 (Jan. 1996) at 31; Vol. 16, No. 3 (Sept. 1996) at 35-
36; and Vol. 17, No. 3 (Oct. 1997) at 11-12. See also CCH Manual
para. 3681.
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Questions and Answers Regarding Rule G-37(i)
1. Q: A person is associated with a dealer in a non-municipal
finance professional capacity and makes a political contribution to an
official of an issuer for whom such person is not entitled to vote.
Less than two years after such person made the contribution, the dealer
merges with another dealer and, solely as a result of the merger, that
person becomes a municipal finance professional of the surviving
dealer. Would the surviving dealer be prohibited from engaging in
municipal securities business with that issuer?
A: Yes. Rule G-37 would prohibit the surviving dealer from engaging
in municipal securities business with the issuer for two years from the
date the contribution was made. Of course, the surviving dealer's
prohibition on business would only begin when the person who made the
contribution becomes a municipal finance professional of the surviving
dealer.
The Board notes, however, that Rule G-37 was not intended to
prevent mergers in the municipal securities industry or, once a merger
is consummated, to seriously hinder the surviving dealer's municipal
securities business if the merger was not an attempt to circumvent the
letter or spirit of Rule G-37. Thus, the Board believes that it would
be appropriate for the NASD or the appropriate regulatory agency (i.e.,
federal bank regulatory authorities) to grant conditional or
unconditional exemptions from bans on municipal securities business
arising from such mergers if the NASD or the appropriate regulatory
agency determines that, pursuant to Rule G-37(i), the exemption is
consistent with the public interest, the protection of investors and
the purposes of the rule, as well as any other factors set forth in the
rule or any other factors deemed relevant by the NASD or the
appropriate regulatory agency.
2. Q: The Board has previously provided two examples in which
exemptions from a ban on municipal securities business may be
appropriate under Rule G-37(i). Are these the only situations in which
the NASD or the appropriate regulatory agency may provide an exemption
under Rule G-37(i)?
A: No. The two examples noted in Q&A number 4 (June 15, 1995), MSRB
Reports, Vol. 15, No. 2 (July 1995) at 3-4, MSRB Manual (CCH) para.
3681, were not meant to be the only instances in which exemptions might
appropriately be given. Because of the varying factual situations that
arise with each exemptive request, the Board believes that the NASD and
the appropriate regulatory agencies should review such other factual
situations presented by dealers in exemptive requests pursuant to the
requirements in Rule G-37(i) and, based on the facts, either approve or
reject the request. Rule G-37(i) allows the NASD and the appropriate
regulatory agencies to grant exemptions from the ban on business
``conditionally or unconditionally'' and, if the NASD or the
appropriate regulatory agency believes it would be appropriate to
shorten the ban on business or limit its scope, it is authorized to do
so as long as the requirements of Rule G-37(i) are met.
3. Q: The Board has previously described three situations which it
believes are not sufficient to justify the granting of an exemption
from a ban on municipal securities business under Rule G-37(i). Does
this mean that the NASD or the appropriate regulatory agency may never
provide an exemption under Rule G-37(i) if any of these situations
exist?
A: No. The Board's intent in describing these three scenarios in
Q&A number 4 (June 15, 1995), MSRB Reports, Vol. 15, No. 2 (July 1995)
at 3-4, MSRB Manual (CCH) para. 3681, was to note that none of these
situations was sufficient, in and of itself, to justify the granting of
an exemption from a ban on municipal securities business. However, any
such scenario in combination with other facts and circumstances deemed
[[Page 37435]]
relevant by the NASD or the appropriate regulatory agency (including,
but not limited to, the factors set forth in Rule G-37(i)) could, in
the judgment of the NASD or the appropriate regulatory agency, be
sufficient to justify a conditional or unconditional exemption from the
ban.
The Board also notes that none of the three situations previously
cited as insufficient to justify an exemption involved a contribution
made prior to an individual becoming a municipal finance professional.
Thus, for example, where a non-de minimis contribution was made by a
person who later becomes a municipal finance professional (whether by
reason of a merger, as a newly hired associated person, as an existing
associated person becoming involved in municipal securities activities,
or otherwise), neither the NASD nor any appropriate regulatory agency
is constrained from granting a conditional or unconditional exemption
if, in its judgment, such exemption is consistent with Rule G-37(i).
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 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
On April 7, 1994, the Commission approved Board Rule G-37, on
political contributions and prohibitions on municipal securities
business.\5\ Since that time, the Board has received numerous 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 published eight prior notices of
interpretation which set forth, in Q&A format, general guidance on Rule
G-37.\6\ In prior filings with the Commission, the Board stated that it
will continue to monitor the application of Rule G-37 and, from to
time, will publish additional notices of interpretations, as
necessary.\7\ The Board recently has received a number of questions
concerning mergers in the municipal securities industry and the
operation of the exemption provision set forth in section (i) of the
rule from market participants and the agencies charged with enforcing
the rule. As a result, the Board has determined that it is necessary to
provide further guidance to the industry and the applicable enforcement
agencies by confirming and elaborating upon guidance provided in prior
Q&A notices and in prior communications with the applicable enforcement
agencies. Accordingly, the Board is publishing this ninth set of Q&As.
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\5\ 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.
\6\ See supra note 3.
\7\ See Securities and Exchange Act Release No. 34161 (June 6,
1994), 59 FR 30379 (June 13, 1994) (SR-MSRB-94-06) and Securities
and Exchange Act Release No. 34603 (August 25, 1994), 59 FR 45049
(August 31, 1994) (SR-MSRB-94-15).
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The Board believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act.\8\
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\8\Section 15(b)(2)(C) states in pertinent part that the rules
of the Board ``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.''
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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, because 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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The Board has designated this proposed rule change as constituting
a stated policy, practice, or interpretation with respect to the
meaning, administration, or enforcement of an existing Board rule under
Section 19(b)(3)(A) of the Act and Rule 19b-4(1) thereunder,\9\ which
renders the proposed rule change effective upon receipt of this filing
by the Commission
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\9\ 17 CFR 240.19b-4(e)(1).
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At any time within sixty days of the filling of this proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 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 Board's principal offices.
All submissions should refer to File No. SR-MSRB-98-10 and should be
submitted by July 31, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18297 Filed 7-9-98; 8:45 am]
BILLING CODE 8010-01-M