[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