[Federal Register Volume 64, Number 2 (Tuesday, January 5, 1999)]
[Notices]
[Pages 539-544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22]


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SECURITIES AND EXCHANGE COMMISSION

[Release NO. 34-408545; File No. SR-MSRB-97-12]


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

December 28, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 hereunder,\2\ notice is hereby given that 
on December 18, 1997, 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-97-12) as described in Items I, II, and III below, which Items 
have been prepared by the Board. On December 3, 1998, the Board file 
Amendment No. 1 which supersedes the initial proposal.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change as contained in Amendment No. 1 from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 18, 1997, the MSRB submitted its initial 
proposal which would not require Rule G-37 disclosures by dealers 
who have not engaged in municipal securities transactions for 2 
years. Also the proposal would not have required dealers subject to 
reporting requirements to make any filing in the event they have 
nothing to disclose. After discussions between the Commission and 
the MSRB, the MSRB filed Amendment No. 1 on December 3, 1998. While 
the revised proposal maintains the exemptions of the disclosure 
requirements, it includes a dealer certification as a precondition 
to the effectiveness of the exemptions created in the original 
proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed rule change

    The Board has filed with the Commission a proposed rule change 
consisting of amendments to Rule G-37, on political contributions and 
prohibitions on municipal securities business, Rule G-8, on 
recordkeeping, Rule G-9, on preservation of records, and Rule G-38, on 
consultants. In addition, the MSRB submitted proposed Form G-37x as 
part of Amendment No. 1. Below is the text of the proposed rule change. 
Additions are italicized; deletions are bracketed.
Rule G-37. Political Contributions and Prohibitions on Municipal 
Securities Business
    (a)-(d) No change.
    (e)(i) Except as otherwise provided in paragraph (e)(ii), each 
[Each] broker, dealer or municipal securities dealer shall, by the 
last day of the month following the end of each calendar quarter 
(these dates correspond to January 31, April 30, July 31 and October 
31), send to the Board by certified or registered mail, or some 
other equally prompt means that provides a record of sending, [and 
the Board shall make public, reports on contributions to officials 
of issuers and on payments to political parties of states and 
political subdivisions that are required to be recorded pursuant to 
rule G-8(a)(xvi). Such reports shall include information concerning 
the amount of,] two copies of Form G-37/G-38 setting forth, in the 
prescribed format, the following information:
    (A) for contributions to officials of issuers (other than a 
contribution made by a municipal finance professional or a non-MFP 
executive officer to an official of an issuer for whom such person 
is entitled to vote if all contributions by such person to such 
official of an issuer, in total, do not exceed $250 per election) 
and payments to political parties of states and political 
subdivisions (other than a payment made by a municipal finance 
professional or a non-MFP executive officer to a political party of 
a state or political subdivision in which such person is entitled to 
vote if all payments by such person to such political party, in 
total, do not exceed $250 per year): [and an indication of the 
contributor category of each contribution or payment] made by the 
persons and entities described in subclause (2) of this clause (A):
    [(A) the broker, dealer or municipal securities dealer;]
    [(B) all municipal finance professionals;]
    [(C) all non-MFP executive officers; and]
    [(D) all political action committees controlled by the broker, 
dealer or municipal securities dealer or by any municipal finance 
professional.]
    [Such reports also shall include information on municipal 
securities business engaged in and certain other information 
specified in this section (e), as well as other identifying 
information as may be determined by the Board from time to time.]
    [(ii) Two copies of the reports referred to in paragraph (i) of 
this section (e) must be sent to the Board on Form G-37/G-38 by the 
last day of the month following the end of each calendar quarter 
(these dates correspond to January 31, April 30, July 31 and October 
31), and must include, in the prescribed format, by state, the 
following information on contributions to each official of an issuer 
and payments to each political party of a state or political 
subdivision made and municipal securities business engaged in during 
the reporting period:]
    [(A)] (1) the name and title (including and city/county/state or 
political subdivision) of each official of an issuer and political 
party receiving contributions or payments during such calendar 
quarter, listed by state;
    [(B)] (2) the contribution or payment amount made and the 
contributor category of each of the following persons and entities 
[described in paragraph (i) of this section (e); and (C) such other 
identifying information required by Form G-37/G-38. Such reports 
also must include] making such contributions or payments during such 
calendar quarter:
    (a) the broker, dealer or municipal securities dealer;
    (b) each municipal finance professional;
    (c) each non-MFP executive officer; and
    (d) each political action committee controlled by the broker, 
dealer or municipal securities dealer or by any municipal finance 
professional;
    (B) a list of issuers with which the broker, dealer or municipal 
securities dealer has engaged in municipal securities business 
during such calendar quarter, listed by state, along with the type 
of municipal securities business;
    (C) any information required to be included on Form G-37/G-38 
for such calendar quarter pursuant to paragraph (e)(iii);
    (D) any information required to be disclosed pursuant to section 
(d) of rule G-38; and
    (E) such other identifying information required by Form G-37/G-
38.
    The Board shall make public a copy of each Form G-37/G-38 
received from any broker, dealer or municipal securities dealer.
    (ii)(A) No broker, dealer or municipal securities dealer shall 
be required to send Form G-37/G-38 to the Board for any calendar 
quarter in which either:
    (1) such broker, dealer or municipal securities dealer has no 
information that is required to be reported pursuant to clauses (A) 
through (D) of paragraph (e)(i) for such calendar quarter; or
    (2) subject to clause (B) of this paragraph (e)(ii), such 
broker, dealer or municipal securities dealer has not engaged in 
municipal securities business, but only if such broker, dealer or 
municipal securities dealer:
    (a) had not engaged in municipal securities business during the 
seven consecutive calendar quarters immediately preceding such 
calendar quarter; and
    (b) has sent to the Board, by certified or registered mail or 
some other equally prompt means that provides a record of sending, 
two copies of a completed Form G-37x setting forth, in the 
prescribed format, (i) a certification to the effect that such 
broker, dealer or municipal securities dealer did not engage in 
municipal securities business during the eight consecutive calendar 
quarters immediately preceding the date of such certification, (ii) 
certain acknowledgments as are set forth in said Form G-37x 
regarding the obligations of such broker, dealer or municipal 
securities dealer

[[Page 540]]

in connection with Forms G-37/G-38 and G-37x under this paragraph 
(e)(ii) and rule G-8(a)(xvi), and (iii) such other identifying 
information required by Form G-37x; provided that, if a broker, 
dealer or municipal securities dealer has engaged in municipal 
securities business subsequent to the submission of Form G-37x to 
the Board, such broker, dealer or municipal securities dealer shall 
be required to submit a new Form G-37x to the Board in order to 
again qualify for an exemption under this subclause (A)(2). The 
Board shall make public a copy of each Form G-37x received from any 
broker, dealer or municipal securities dealer.
    (B) If for any calendar quarter a broker, dealer or municipal 
securities dealer has met the requirements of clause (A)(2) of this 
paragraph (e)(ii) but has information that is required to be 
reported pursuant to clause (D) of paragraph (e)(i), then such 
broker, dealer or municipal securities dealer shall be required to 
send Form G-37/G-38 to the Board for such quarter setting forth only 
such information as is required to be reported pursuant to clauses 
(D) and (E) of paragraph (e)(i).
    (iii) If a broker, dealer or municipal securities dealer engages 
in municipal securities business during any calendar quarter after 
not having reported on Form G-37/G-38 the information described in 
clause (A) of paragraph (e)(i) for one or more contributions or 
payments made during the two-year period preceding such calendar 
quarter solely as a result of clause (A)(2) of paragraph (e)(ii), 
such broker, dealer or municipal securities dealer shall include on 
Form G-37/G-38 for such calendar quarter all such information 
(including year and calendar quarter of such contributions or 
payments) not so reported during such two-year period.
    (f)-(i) No change.

Rule G-8. Books and Records To Be Made by Brokers, Dealers and 
Municipal Securities Dealers

    (a) Description of Books and Records Required to be Made. Except 
as otherwise specifically indicated in this rule, every broker, 
dealer and municipal securities dealer shall make and keep current 
the following books and records, to the extent applicable to the 
business of such broker, dealer or municipal securities dealer:
    (i)-(xv) No change.
    (xvi) (A)-(G) No change.
    (H) Dealers shall maintain copies of the Forms G-37/G-38 and G-
37x submitted to the Board along with the certified or registered 
mail receipt or other record of sending such forms to the Board.
    (I)-(J) No change.
    (K) No broker, dealer or municipal securities dealer shall be 
subject to the requirements of this paragraph (a)(xvi) during any 
period that such broker, dealer or municipal securities dealer has 
qualified for and invoked the exemption set forth in clause (A)(2) 
of paragraph (e)(ii) of rule G-37; provided, however, that such 
broker, dealer or municipal securities dealer shall remain obligated 
to comply with clause (H) of this paragraph (a)(xvi) during such 
period of exemption. At such time as a broker, dealer or municipal 
securities dealer that has been exempted by this clause (K) from the 
requirements of this paragraph (a)(xvi) engages in any municipal 
securities business, all requirements of this paragraph (a)(xvi) 
covering the periods of time set forth herein (beginning with the 
then current calendar year and the two preceding calendar years) 
shall become applicable to such broker, dealer or municipal 
securities dealer.
    (xvii)-(xix) No change.
    (b)-(f) No change.

Rule G-9. Preservation of Records

    (a) Records to be Preserved for Six Years. Every broker, dealer 
and municipal securities dealer shall preserve the following records 
for a period of not less than six years:
    (i)-(vii) No change.
    (viii) the records to be maintained pursuant to rule G-
8(a)(xvi); provided, however, that copies of Forms G-37x shall be 
preserved for the period during which such Forms G-37x are effective 
and for at least six years following the end of such effectiveness.

Rule G-38. Consultants

    (a)-(c) No change.
    (d) Disclosure to Board. Each broker, dealer or [and] municipal 
securities dealer shall send to the Board, in the manner and at the 
times prescribed in paragraph (e)(i) of rule G-37, [by certified or 
registered mail, or some other equally prompt means that provides a 
record of sending,] and the Board shall make public, reports on Form 
G-37/G-38 of all consultants used by the broker, dealer or municipal 
securities dealer during each calendar quarter. [Two copies of the 
reports must be sent to the Board on Form G-37/G38 by the last day 
of the month following the end of each calendar quarter (these dates 
correspond to January 31, April 30, July 31, and October 31).] Such 
reports shall include, for each consultant, in the prescribed 
format, the consultant's name, company, role and compensation 
arrangement. In addition, such reports shall indicate the dollar 
amount of payments made to each consultant during such calendar 
quarter [the report period] and, if any such payments are related to 
the consultant's efforts on behalf of the broker, dealer or 
municipal securities dealer which resulted in particular municipal 
securities business, then that business and the related dollar 
amount of the payment must be separately identified.
* * * * *

Proposed Form G-37x

Form G-37x--MSRB
Name of Dealer:--------------------------------------------------------
    The undersigned, on behalf of the dealer identified above, does 
hereby certify that such dealer did not engage in ``municipal 
securities business'' (as defined in rule G-37) during the eight 
full consecutive calendar quarters ending immediately on or prior to 
the date of this Form G-37x.
    The undersigned, on behalf of such dealer, does hereby 
acknowledge that, notwithstanding, the submission of this Form G-37x 
to the MSRB, such dealer will be required to:
    (1) submit Form G-37/G-38 for each calendar quarter unless it 
has met all of the requirements for an exemption set forth in rule 
G-37(e)(ii) for such calendar quarter;
    (2) submit Form G-37/G-38 for each calendar quarter in which it 
has information relating to consultants that is required to be 
reported pursuant to rule G-37(e)(ii)(B), regardless of whether the 
dealer has qualified for the exemption set forth in rule G-
37(e)(ii)(A)(2);
    (3) undertake the recordkeeping obligations set forth in rule G-
8(a)(xvi) at such time as it no longer qualifies for the exemption 
set forth in rule G-8(a)(xvi)(K);
    (4) undertake the disclosure obligations set forth in rule G-
37(e), including in particular the disclosure obligations under 
paragraph (e)(iii) thereof, at such time as it no longer qualifies 
for the exemption set forth in rule G-37(e)(ii)(A)(2); and
    (5) submit a new Form G-37 in order to again meet the 
requirements for the exemption set forth in rule G-37(e)(ii)(A)(2) 
in the event that the dealer has engaged in municipal securities 
business subsequent to the date of this Form G-37x and thereafter 
wishes to qualify for said exemption.
Signature:-------------------------------------------------------------
Date:------------------------------------------------------------------
            (must be officer of dealer)
Name:------------------------------------------------------------------
Phone:-----------------------------------------------------------------
Address:---------------------------------------------------------------
    Submit to: Municipal Securities Rulemaking Board, 1640 King 
Street, Suite 300, Alexandria, Virginia 22314.
* * * * *

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

1. Purpose
    Rule G-37 prohibits a broker, dealer or municipal securities dealer 
(a ``dealer'') that effects transactions in municipal securities from 
engaging in municipal securities business \4\ with an

[[Page 541]]

issuer within two years after certain contributions to an official of 
such issuer made by the dealer, any municipal finance professional 
(``MFP'') associated with such dealer (other than certain de minimis 
contributions) or any political action committee (``PAC'') controlled 
by the dealer or any MFP. In addition, Rules G-37 and G-38 require 
dealers to make disclosures of certain contributions to issuer 
officials, payments to state and local political parties, consultant 
arrangements and municipal securities business on Form G-37/G-38. Rule 
G-8 requires dealers to create records of such contributions, payments, 
consultants and issuers with which the dealer has engaged in municipal 
securities business and rule G-9 requires dealers to preserve these 
records for a period of at least six years.
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    \4\ Municipal securities business is defined in Rule G-37 to 
encompass certain activities of dealers in connection with primary 
offerings of municipal securities, such as acting as underwriter in 
a negotiated sale, as placement agent, or as financial advisor, 
consultant or remarketing agent to an issuer in which the dealer was 
chosen on a negotiated basis.
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    Although the Board continues to be vigilant for any evidence that 
political contributions may affect the awarding of municipal securities 
business, the Board believes that the direct connection between 
political contributions to issuer officials and the awarding of 
municipal securities business has been substantially reduced during the 
last four years by Rule G-37. The Board is sensitive, however, to the 
burden imposed on dealers by the requirements of Rules G-37 and G-8 and 
is committed to reducing this burden whenever possible as long as the 
effectiveness of the rules is not impaired.
    Every dealer currently is obligated to comply with the reporting 
requirements of Rule G-37 by submitting Form G-37/G-38 to the Board on 
a quarterly basis and to undertake the related recordkeeping 
obligations under Rule G-8, even if a dealer does not engage in 
municipal securities business.\5\ Upon reviewing the first four years 
of operation of Rule G-37, the Board believes that requiring dealers 
that do not engage in municipal securities business to comply with 
these disclosure and recordkeeping obligations does not substantially 
further Rule G-37's stated purpose of exposing to public scrutiny 
contributions and payments that may be linked to the awarding of 
municipal securities business.
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    \5\ The range of activities encompassed by the term municipal 
securities business is significantly narrower than the types of 
activities that can cause a dealer to be subject to the obligation 
to comply with Board rules. For example, a dealer that effects 
municipal securities transactions that are limited to secondary 
market trades for its customers or underwritings of new issues 
solely through competitive sales is not, by effecting such 
transactions, engaging in municipal securities business within the 
meaning of Rule G-37. However, such dealer is still required to 
undertake the disclosure and recordkeeping obligations under current 
Rules G-37 and G-8 with respect to contributions and payments.
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    Thus, the Board is proposing certain amendments to Rules G-37 and 
G-8 designed to sharpen the focus of the reporting and recordkeeping 
obligations by exempting dealers that do not engage in municipal 
securities business from these obligations.\6\ Dealers invoking this 
new exemption (hereinafter referred to as the ``No Business 
Exemption'') will be required to meet two preconditions and will be 
subject to a third requirement if they after begin engaging in 
municipal securities business. As more fully described below, in order 
to invoke this No Business Exemption, a dealer must (1) not have 
engaged in municipal securities business for a period of at least two 
years; and (2) submit to the Board new Form G-37x. If such a dealer 
thereafter begins to engage in municipal securities business, it would 
also become subject to a disclosure and recordkeeping look back 
requirement (hereinafter referred to as the ``Look Back Requirement'') 
that will obligate the dealer to create records of, and to disclose on 
Form G-37/G-38, certain contributions to issuer officials and payments 
to state and local political parties made during the preceding two-year 
period.
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    \6\ This exemption would not extend to the reporting 
requirements under Rule G-38. Therefore, as amended, Board rules 
would continue to require the submission of information on Form G-
37/G-38 concerning the use of consultants pursuant to Rule G-38.
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    In addition, the Board is proposing amendments to Rule G-37 to 
codify a previously recognized exemption to the Form G-37/G-38 
submission requirement for any quarter in which a dealer has no 
information to report (hereinafter referred as the ``No Information 
Exemption''). The Board also is requiring certain technical amendments 
to consolidate the provisions currently appearing separately in Rules 
G-37 and G-38 relating to submission of Form G-37/G-38, to clarify Rule 
G-37 by eliminating certain cross-referencing to Rule G-8 and to 
provide for the maintenance and preservation under Rules G-8 and G-9 of 
any Forms G-37x submitted to the Board.
a. No Business Exemption for Dealers Not Engaged in Municipal 
Securities Business
    A dealer that qualifies for the No Business Exemption under amended 
Rule G-37(e)(ii)(A)(2) would not be required to report information to 
the Board on Form G-37/G-38 regarding contributions to issuer officials 
and payments to state and local political parties and would not be 
required to create records of such contributions and payments pursuant 
to new clause (K) of Rule G-8(a)(xvi).\7\ If a dealer that has invoked 
the No Business Exemption later engages in municipal securities 
business, such dealer would become subject to the Look Back Requirement 
under new paragraph (iii) of Rule G-37(e).
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    \7\ However, dealers still would be required to maintain copies 
of any Forms G-37/G-38 submitted to the Board during the period of 
exemption (e.g., in connection with information relating to use of 
consultants) and of any Forms G-37x submitted to the Board to invoke 
the No Business Exemption. In addition, the recordkeeping exemption 
would not entitle a dealer to discontinue preservation of any 
records previously created under Rule G-8(a)(xvi) unless the period 
for preserving such records under Rule G-9(a)(viii) has lapsed.
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i. No Municipal Securities Business for at Least Two Years
    The first condition for invoking the No Business Exemption in any 
calendar quarter, as set forth in amended Rule G-37(e)(ii)(A)(2)(a), is 
that the dealer must not have engaged in municipal securities business 
during such calendar quarter and during the seven consecutive calendar 
quarters immediately preceding such calendar quarter. Any dealer that 
has previously engaged in municipal securities business may qualify for 
the No Business Exemption if it has ceased such business for the 
requisite period of time. In addition, any dealer that has never 
engaged in municipal securities business may also qualify for the No 
Business Exemption, regardless of how long such dealer has been in 
existence.\8\
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    \8\ For this purpose, the Board would deem that a dealer that 
has been subjects to the rules of the Board for a period of less 
than two years (for example, because it came into existence during 
such period or because it previously affected only non-municipal 
securities transactions) and has not engaged in any municipal 
securities business since becoming subject to Board rules would 
automatically satisfy this two-year requirement of the No Business 
Exemption.
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ii. Submission for Form G-37x
    The second condition for invoking the No Business Exemption, as set 
forth in amended Rule G-37(e)(ii)(A)(2)(b), is that the dealer must 
have sent, by certified or registered mail or some other equally prompt 
means that provides a record of sending, two copies of new Form G-37x 
to the Board. Form G-37x would include a certification that such dealer 
did not engage in municipal securities business during the eight 
consecutive calendar quarters immediately preceding the date of such 
certificate. A Form G-37x submitted to the Board would remain in effect 
for so long as the dealer continues to refrain from engaging in 
municipal securities

[[Page 542]]

business.\9\ Notwithstanding the submission of Form G-37x, a dealer 
would remain responsible for determining whether it continues to 
qualify for an exemption from the Form G-37/G-38 submission requirement 
for each calendar quarter.\10\ Form G-37x would contain an 
acknowledgment of the dealer to this effect and a further 
acknowledgment that it will be required to undertake the recordkeeping 
and disclosure obligations under the Look Back Requirement at such time 
as it again engages in municipal securities business.
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    \9\ Thus, if after submitting Form G-37x the dealer undertakes 
any municipal securities business (thereby subjecting itself to the 
Look Back Requirement) and thereafter again seeks to invoke the No 
Business Exemption after a new period of two years without engaging 
in any further municipal securities business, such dealer would be 
required to submit a new Form G-37x. However, dealers would 
carefully consider the advisability of alternating between periods 
of undertaking municipal securities business and periods of invoking 
the No Business Exemption, particularly in view of the strict 
requirements of the Look Back Requirement described below and the 
potential difficulties in complying with such strict requirement.
    \10\ Thus, the dealer must determine whether it has met all of 
the requirements for the No Business Exemption or the No Information 
Exemption for such quarter. In addition, the dealer would be 
required to submit Form G-37/G-38 for any calendar quarter in which 
it has information to report regarding consultants under Rule G-38, 
as discussed below, even if the dealer continues to qualify for the 
No Business Exemption.
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    Forms G-37x submitted to the Board will be made available to the 
public on the same basis as are Forms G-37/G-38. Thus, Forms G-37x will 
be available for review and photocopying at the Board's Public Access 
Facility in Alexandria, Virginia. In addition, copies will be posted on 
the Board's Internet Web site (http://www.msrb.org), where members of 
the public may download such forms to their computers for review and 
printing free of charge. Such forms also will be made available to the 
public, along with Forms G-37/G-38, in computer CD-ROM format on a 
quarterly basis.\11\
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    \11\ CD-ROMs are currently priced at $10.00 (plus delivery or 
postage charges and any applicable sales tax) for each CD-ROM 
containing copies of Form G-37/G-38 and at $11.50 (plus delivery or 
postage charges and any applicable sales tax) for each such CD-ROM 
that is bundled with a CD-ROM containing the software necessary to 
access and read the forms on a computer. See Securities Exchange Act 
Release No. 39488 (December 23, 1997), 63 FR 280 (January 5, 1998). 
The Board anticipates that Forms G-37x would be included in these 
CD-ROMs at no additional cost.
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iii. Look Back Requirement Upon Engaging in Municipal Securities 
Business
    A dealer that has invoked the No Business Exemption but that later 
begins engaging in municipal securities business would become subject 
to the two-pronged Look Back Requirement under new paragraph (iii) of 
Rule G-37(e). With respect to recordkeeping, the Look Back Requirement 
provides that a dealer that engages in municipal securities business 
after having invoked the No Business Exemption must create records of 
political contributions and payments to state and local political 
parties under G-8(a)(xvi) for the then current calendar year and the 
two preceding calendar years and must continue to create such records 
thereafter unless the dealer again qualifies for, and invokes, the No 
Business Exemption.\12\ Before engaging in municipal securities 
business with an issuer, such dealer would need to review the newly 
created records to ensure that it has not been banned from business 
with the issuer as a result of a contribution to an official of the 
issuer during the period that the dealer had invoked the No Business 
Exemption.
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    \12\ A dealer that is creating records under the Look Back 
Requirement must re-create the records that would have been made 
during the then current calendar year and the two preceding calendar 
years but for the No Business Exemption. This includes the political 
contributions and payments to state and local political parties made 
by any individual who was an MFP or a non-MFP executive officer 
during this look back period. The dealer must also create records of 
the contributions and payments of individuals who became MFPs or 
non-MFP executive officers during the look back period made prior to 
becoming an MFP or a non-MFP executive officer of such dealer. A 
dealer would not be required to create records of contributions or 
payments made prior to such look back period.
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    In addition, a dealer that engages in municipal securities business 
after having invoked the No Business Exemption must disclose on Form G-
37/G-38 for the calendar quarter in which it first engages in municipal 
securities business all reportable contributions to issuer officials 
and payments to state and local political parties made during the 
preceding two years by the dealer, any MFP, and non-MFP executive 
officer or any dealer-controlled or MFP-controlled PAC, to the extent 
not previously reported as a result of the No Business Exemption.\13\ 
Such dealer also would be required to send Form G-37G-38 to the Board 
for each calendar quarter thereafter unless the dealer qualifies for 
the No Information Exemption described below or again qualifies for, 
and invokes, the No Business Exemption.
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    \13\ In reporting prior contributions and payments on such 
calendar quarter's Form G-37/G-38, a dealer would be required to 
include the year and calendar quarter in which each such prior 
contribution or payment was made. A dealer, however, would not be 
required to include in such report contributions or payments made 
more than two years prior to such quarter, even if not previously 
reported.
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    The Look Back Requirement is intended to prevent circumvention of 
the rule and to promote public scrutiny of all contributions to issuer 
officials and payments to state and local political parties (other than 
qualifying de minimis contributions and payments) that may affect the 
awarding of municipal securities business to any dealer that is newly 
engaging in, or is again becoming engaged in, municipal securities 
business.
    The Board strongly believes that the No Business Exemption is best 
suited to dealers that do not intend on engaging in municipal 
securities business for the foreseeable future. Thus, a dealer that 
qualifies for the No Business Exemption in any particular calendar 
quarter but intends to engage in municipal securities business in 
subsequent quarters should consider carefully whether the burden of 
having to comply with the Look Back Requirement--in particular, the 
burden of recreating at least two full years of records under Rule G-
8(a)(xvi)--and the risk of unknowingly becoming banned from municipal 
securities business as a result of a contribution made to an issuer 
official during such exemption period outweigh the short-term benefit 
of not having to create and maintain such records and not having to 
submit Form G-37/G-38 on a current basis. The Board advises any dealer 
that engages in municipal securities business after having invoked the 
No Business Exemption that it should be prepared to evidence to the 
appropriate regulatory agency charged with enforcing Board rules that 
it has fully complied with its strict obligations to create the 
required records and to disclose on a timely basis the required 
information under the Look Back Requirement.
iv. No Effect on Disclosure and Recordkeeping Obligations Relating to 
Consultants
    If, in any quarter during which a dealer qualifies for the No 
Business Exemption, that dealer uses a consultant to attempt to obtain 
municipal securities business, it would be required under amended Rule 
G-37(e)(ii)(B) to submit Form G-37/G-38 to the Board but would only be 
required to report information relating to such use of consultants as 
required under Rule G-38. Such a required submission of Form G-37/G-38 
in any quarter would not cause the No Business Exemption or the related 
Form G-37x submission to lapse unless the dealer in fact engages in 
municipal securities business. Of course, a dealer that has engaged a 
consultant in an attempt to obtain municipal securities business from 
an

[[Page 543]]

issuer should consider carefully the advisability of invoking (or 
continuing to invoke) the No Business Exemption since, if the dealer is 
successful in obtaining such business, it would need to comply with the 
strict requirements of the Look Back Requirement and, in particular, 
would need to confirm that it has been banned from undertaking 
municipal securities business with such issuer prior to undertaking 
that business.
v. No Effect on Two-Year Ban on Municipal Securities Business or 
Prohibition of Certain Solicitations and Coordination of Contributions 
Under Rule G-37 (b) and (c)
    The No Business Exemption would not provide an exemption from the 
operation of sections (b) and (c) of Rule G-37.\14\ thus, under certain 
circumstances, a political contribution (other than an MFP's de minimis 
contribution) to an official of an issuer that was not disclosed on 
Form G-37/G-38 and not recorded under Rule G-8(a)(xvi) by virtue of the 
No Business Exemption could trigger the ban on municipal securities 
business with such issuer under section (b). In addition, solicitation 
or coordination of contributions to an official of an issuer with which 
the dealer is seeking to engage in municipal securities business would 
continue to be prohibited under section (c) even if the No Business 
Exemption is then in effect. Dealers that qualify for the No Business 
Exemption but that are considering future engagements in municipal 
securities business should be cognizant of the continuing applicability 
of sections (b) and (c) of the rule.
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    \14\ Section (b) provides that no dealer shall engage in 
municipal securities business with an issuer within two years after 
any contribution to an official of such issuer made by the dealer, 
an MFP or PAC controlled by the dealer or an MFP. Section (c) 
provides that no dealer or MFP shall solicit any person or PAC to 
make any contribution, or shall coordinate any contributions, to an 
official of an issuer with which the dealer is engaging or seeking 
to engage in municipal securities business.
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b. No Information Exemption for Dealers With No Information to Report 
in a Quarter
    Amended Rule G-37(e)(ii)(A)(1) would codify the previously 
recognized No Information Exemption to the quarterly Form G-37/G-38 
submission requirement.\15\ The proposed amendment provides that a 
dealer would not be required to send Form G-37/G-38 to the board for 
any calendar quarter in which all of the following conditions apply: 
(1) the dealer has not engaged in municipal securities business, (2) 
the dealer has no reportable political contributions to issuer 
officials or payments to state and local political parties, and (3) the 
dealer has no reportable use of consultants. The No Information 
Exemption would continue to obviate the need for a dealer to submit a 
Form G-37/G-38 that reflects no reportable activity under all category 
headings. A dealer, however, would be required to send Form G-37/G-38 
to the Board in any subsequent calendar quarter in which it does not 
qualify for the No Information Exemption, unless the dealer qualifies 
for, and invokes, the No Business Exemption.
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    \15\ See Securities Exchange Act Release No. 34161 (June 6, 
1994), 59 FR 30379 (June 14, 1994), Question and Answer No. 34. See 
also MSRB Reports, Vol. 14, No. 3 (June 1994) at 15-16, and 
``Instructions for Completing and Filing Form G-37/G-38,'' reprinted 
in MSRB Reports, Vol. 16, No. 1 (January 1996) at 11.
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c. Technical Amendments
    Amended Rule G-37(e)(i) would consolidate the Form G-37/G-38 
submission procedures that are currently set forth separately in 
paragraphs (i) and (ii) of Rule G-37(e) and in Rule G-38(d). Amended 
Rule G-38(d) would include certain related amendments.
    In addition, the existing exemption from the reporting requirements 
under Rule G-37 for de minimis contributions made by MFPs and non-MFP 
executive officers to officials of issuers \16\ and to state and local 
political parties \17\ is effected by a cross-reference to the 
recordkeeping requirements of Rule G-8(a)(xvi). To clarify the nature 
of such de minimis exemption, amended Rule G-37(e)(i)(A) incorporates 
into the language of Rule G-37, but does not change, the specific 
requirements of the de minimis exemption.
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    \16\ A de minimis contribution to an official of an issuer not 
requiring disclosure consists of a contribution made by an MFP or a 
non-MFP executive officer to an official of an issuer for whom such 
person is entitled to vote if all contributions by such person to 
such official of an issuer, in total, do not exceed $250 per 
election.
    \17\ A de minimis payment to a political party of a state or 
political subdivision not requiring disclosure consists of a payment 
made by an MFP or a non-MFP executive officer to a political party 
of a state or political subdivision in which such person is entitled 
to vote if all payments by such person to such political party, in 
total, do not exceed $250 per year.
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d. Amendments Relating to Records of Form G-37x
    Section H of Rule G-8(a)(xvi) would be amended to require that 
dealers maintain copies of any Forms G-37x submitted to the Board and 
the corresponding records of sending. Amended Rule G-9(a)(viii) would 
require that copies of Forms G-37x be preserved for the period during 
which they are effective and for at least six years following the end 
of such effectiveness.
2. Statutory Basis
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act.\18\ The Board believes that the 
proposed rule change will provide relief to certain dealers that do not 
engage in municipal securities business from the burden of compliance 
with the reporting requirements of Rule G-37 and the recordkeeping 
requirements of Rule G-8(a)(xvi) under circumstances where the 
effectiveness of the rules would not be impaired. The proposed rule 
change will also assist the enforcement agencies in maintaining 
accurate records of dealers that are qualified to invoke the No 
Business Exemption and of dealers that are required to create records 
and make disclosures pursuant to the Look Back Requirement.
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    \18\ Section 15B(b)(2)(c) states 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

    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

[[Page 544]]

    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, 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, NW., Washington, DC 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-97-12 and should be 
submitted by January 26, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22 Filed 1-4-99; 8:45 am]
BILLING CODE 8010-01-M