[Federal Register Volume 64, Number 239 (Tuesday, December 14, 1999)]
[Notices]
[Pages 69808-69811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32271]



[[Page 69808]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42205; File No. SR-MSRB-98-08]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval to Proposed Rule Change Relating to Rule 
G-38, on Consultants, Rule G-37, Political Contributions and 
Prohibitions on Municipal Securities Business, Rule G-8, on Books and 
Records, and Revisions to the Attachment Page to Form G-37/G-38

December 7, 1999.

I. Introduction

    On June 16, 1998, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') submitted to the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change that requires brokers, dealers, 
or municipal securities dealers (``dealers'') to obtain from their 
consultants information on the consultants' political contributions and 
payment to state and local political parties and to report such 
information to the Board on Form G-37/G-38. On August 26, 1999, the 
Board filed Amendment No. 1 which replaced and superseded the proposed 
rule change.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter to Katherine A. England, Assistant Director, 
Division of Market Regulation, SEC, from Ronald W. Smith, Senior 
Legal Associate, MSRB, dated August 26, 1999.
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    The proposed rule change was published for comment in the Federal 
Register on October 12, 1999.\4\ The Commission received one comment 
letter regarding the proposed rule change.
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    \4\ Securities Exchange Act Release No. 41975 (October 4, 1999), 
64 FR 55326.
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II. Description of the Proposed Rule Change

    The proposed rule change would require a dealer to receive and 
report certain contribution and payment information from: the 
consultant; any partner, director, officer or employee of the 
consultant who communicates with an issuer to obtain municipal 
securities business on behalf of the dealer; and, any PAC controlled by 
the consultant or any partner, director, officer or employee of the 
consultant who communicates with issuers to obtain municipal securities 
business on behalf of the of the dealer.\5\ A dealer would be required 
to include within its Consultant Agreement a statement that the 
consultant agrees to provide the dealer each calendar quarter with a 
listing of reportable political contributions to an official(s) of an 
issuer and reportable contributions to political parties of states and 
political subdivisions during such quarter, or a report that no 
reportable political contributions or reportable political party 
contributions were made, as appropriate.\6\
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    \5\ A ``consultant'' in Rule G-38 can refer to an individual or 
a company (e.g., a bank affiliated with a bank dealer). For example, 
if an individual is a consultant, this individual would report to 
the dealer only his or her contributions and payments and the 
contributions of any PAC controlled by such individual. If the 
consultant is a company, the company would report its contributions 
and payments to the dealer, as well as those made by any partner, 
director, officer or employee of the consultant who communicates 
with issuers to obtain municipal securities business on behalf of 
the dealer, and any PAC controlled by the consultant or any partner, 
director, officer or employee of the consultant who communicates 
with issuers to obtain municipal securities business on behalf of 
the dealer.
    \6\ The de minimis exception for contributions to official(s) of 
an issuer provides that a consultant need not provide to a dealer 
information about contributions made by any partner, director, 
officer or employee of the consultant who communicates with issuers 
to obtain municipal securities business on behalf of the dealer to 
any official of an issuer for whom such individual is entitled to 
vote if such individual's contributions, in total, are not in excess 
of $250 to each official of such issuer, per election. Similarly, 
the de minimis exception for payments provides that a consultant 
need not provide to a dealer information about payments to political 
parties of a state or political subdivision made by any partner, 
director, officer or employee of the consultant who communicates 
with issuers to obtain municipal securities business on behalf of 
the dealer who is entitled to vote in such state or political 
subdivision if the payments by the individual, in total, are not in 
excess of $250 per political party, per year.
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    The proposed rule change would require a dealer to obtain 
information from its consultants about the contributions made to issuer 
officials only if the consultant has had direct or indirect 
communication with such issuer to obtain municipal securities business 
on behalf of the dealer.\7\ The political party payments required to be 
reported are limited to those made to political parties of states and 
political subdivisions that operate within the geographic area of the 
issuer with whom the consultant communicates on behalf of the dealer 
(e.g., city, county and state parties). The date that establishes the 
obligation for the collection of contribution information is the date 
of the consultant's communication with the issuer to obtain municipal 
securities business on behalf of the dealer.
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    \7\ A dealer must disclose contributions with respect to those 
issuers from which a consultant is seeking municipal securities 
business on behalf of the dealer, regardless of whether 
contributions are going to and communications are occurring with the 
same or different personnel within that particular issuer.
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    With respect to the collection of contribution and payment 
information, the proposed rule change contains a six-month ``look-
back'' provision, as well as a six-month ``look-forward'' provision 
from the date of communication with an issuer. Thus, a consultant must 
disclose to the dealer the contributions and payments made by the 
consultant during the six months prior to the date of the consultant's 
communication with the issuer.\8\ So too, if the consultant's 
communication with an issuer continues, any reportable contributions 
and payments would be required to be disclosed. Once communication 
ceases, the consultant still must disclose to the dealer contribution 
and payment information for six months.\9\ The proposed rule change 
would require dealers to keep records under Rule G-8 of all reportable 
political contributions and all reportable political party payments.
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    \8\ Such contributions and payments become reportable in the 
calendar quarter in which the consultant first communicates with the 
issuer.
    \9\ Contributions and payments made simultaneously with or after 
the consultant's first communication with the issuer are reportable 
in the calendar quarter in which they are made.
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    A dealer's requirement to collect contribution and payment 
information from its consultants ends when a Consultant Agreement has 
been terminated.\10\ Of course, dealers should not attempt to avoid the 
requirements of Rule G-38 by terminating a consultant relationship 
after directing or soliciting the consultant to make a political 
contribution to an issuer official after termination. Rule G-37(d) 
prohibits a dealer from doing any act indirectly which would result in 
a violation of Rule G-37 if done directly by the dealer. Thus, a dealer 
may violate Rule G-37 by engaging in municipal securities business with 
an issuer after directing or soliciting any person to make a 
contribution to an official of the issuer.
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    \10\ A dealer that terminates a Consultant Agreement would of 
course be obligated to obtain information regarding contributions 
and payments made up to the date of termination.
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    The proposed rule change would require that the information 
obtained by dealers concerning their consultants' contributions and 
payments be submitted by dealers to the Board on Form G-37/G-28.\11\ 
The proposed rule change would require dealers to disclose on the 
attachment sheet for each consultant used by the dealer the

[[Page 69809]]

contributions and payments covered by the rule or that no such 
contributions or payments were made for the quarter. Furthermore, a 
dealer must disclose if a consultant has failed to provide it with a 
report concerning its contributions and payments. When completing the 
form, a dealer must disclose, in addition to the other required 
information, the calendar quarter and year of any reportable political 
contributions and reportable political party payments that were made 
prior to the calendar quarter of the form being completed (e.g., 
contributions and payments made in a prior quarter that are reportable 
as a result of the six-month look-back). Reportable ``look-back'' 
contributions and payments also must be disclosed on the Form G-37/G-38 
for the quarters in which the consultant has communicated with an 
issuer to obtain municipal securities business on behalf of a dealer. 
Once a contribution or payment has been disclosed on a report, a dealer 
should not continue to disclose that particular contribution or payment 
on subsequent reports. The attachment page to Form G-37/G/38 also has 
been revised to require dealers to separately identify all of the 
municipal securities business obtained or retained by the consultant 
for the dealer.\12\
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    \11\ The proposed rule change also requires dealers to report 
the consultant's business address on Form G-37/G-38.
    \12\ The existing version of the form requires dealers to list 
only the municipal securities business obtained or retained by the 
consultant in which the consultant was paid a specific dollar amount 
for the particular municipal securities business.
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    The proposed rule change includes a ``reasonable efforts'' 
provision that allows dealers to rely in good faith on information 
received from their consultants regarding contributions and payments. 
The reasonable efforts provision states that a dealer will not violate 
Rule G-38 if the dealer fails to receive from its consultant all 
required contribution and payment information and thus fails to report 
the information to the Board if the dealer can demonstrate that it used 
reasonable efforts in attempting to obtain the necessary information. 
However, to avail itself of the reasonable efforts provision, a dealer 
must:
    (1) State in its Consultant Agreement that Board rules require 
disclosure of consultant contributions and payment;
    (2) Send quarterly reminders to consultants of the deadline for 
their submissions to the dealer of contribution information;
    (3) Include language in the Consultant Agreement to the effect 
that: (a) the Consultant Agreement will be terminated if, for any 
calendar quarter, the consultant fails to provide the dealer with 
information about its reportable contributions or payments, or a report 
noting that the consultant made no reportable contributions or 
payments, and the failure continues up to the date to be determined by 
the dealer but no later than the date by which the dealer is required 
to send Form G-37/G-38 to the Board with respect to the next succeeding 
calendar quarter, such termination to be effective upon the date the 
dealer must send its Form G-37/G-38 to the Board, and (b) the dealer 
may not make any further payments to the consultant, including payments 
owed for services performed prior to the date of termination, as of the 
date of such termination; and
    (4) Enforce the Consultant Agreement provisions described above in 
a full and timely manner and indicate the reason for and date of the 
termination on its Form G-37/G-38 for the applicable quarter.
    The failure by a dealer to include the termination and non-payment 
provisions in a Consultant Agreement or to enforce any such provisions 
that may be contained in the Consultant Agreement, would not, in and of 
itself, constitute a violation of Rule G-38 but would instead preclude 
the dealer from invoking the reasonable efforts provision as a defense 
against a possible violation for failing to disclose consultant 
contribution information, which the consultant may have withheld from 
the dealer.
    Finally, the proposed rule change contains a clarifying amendment 
to Rule G-38(b)(i)(B), and a technical amendment to Rule G-37(e)(I)(D) 
to conform to the amendments to Rule G-38.

III. Summary of Comments

    The Commission received one comment letter from the Bond Market 
Association (``TBMA''),\13\ generally opposing the proposed rule change 
but supporting the ``reasonable efforts'' provision. In its letter, 
TBMA questioned the need for an additional layer of regulatory 
bureaucracy under the proposed changes to Rule G-38, arguing that Rule 
G-37 already prohibits the use of consultants, as a conduit, to make 
contributions that are inappropriate payments to secure municipal 
business. For the same reason, TBMA also stated that the proposed rule 
change unduly interferes with commercial contractual arrangements and 
is an example of excessive regulatory micromanagement. If the proposed 
rule change is adopted, TBMA stated that the ``reasonable efforts'' 
provision must be included in its broadest form, and further suggested 
that the provision should be modified into a non-exclusive safe harbor, 
thereby allowing dealers to present facts and circumstances evidence of 
``reasonable efforts'' even though the specific requirements presented 
in the proposed rule change have not been satisfied.
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    \13\ See letter from Paul Saltzman, Executive Vice President and 
General Counsel, TBMA, to Jonathan Katz, Secretary, SEC, dated 
November 5, 1999.
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    The Commission disagrees with TBMA's suggested modification of the 
``reasonable efforts'' provision. The Commission believes an 
interpretation of this provision which focuses primarily on facts and 
circumstances evidence could lead to irregular compliance and 
inconsistent enforcement of the rules. The Commission recognizes that, 
ultimately, the responsibility for disclosure reporting lies with the 
dealers. The Commission notes, however, that these dealers benefit from 
their relationships with and the activities of their consultants. Thus, 
the burden should be on the dealers to ensure that their consultants 
provide the requisite information in the time specified by the rules. 
Therefore, the Commission supports the proposed rule change, as 
amended, because it removes the possibility of collusion between 
dealers and consultants and requires dealers to act affirmatively to 
ensure that the required information is disclosed.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder.\14\ In particular, the Commission believes the 
proposed rule change in consistent with the requirements of Section 
15B(b)(2)(C) of the Act \15\ because the proposed rule change is 
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. The Commission believes the proposed rule change is 
consistent with the Act because the public will be able to monitor 
whether there is a connection

[[Page 69810]]

between contributions given to an issuer by consultants and the 
business they obtained for the dealers that hired them.
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    \14\ In reviewing this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78f(b)(7).
    \15\ 15 U.S.C. 78o-4(b)(2)(C).
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    the Commission notes that Rule G-38 requires that dealers record 
and report certain information about their consultants every quarter; 
the amendments merely add items of information that must be recorded 
and reported. While the additional information may be a burden on 
dealers, the Commission believes it is important that dealers obtain 
and report the information so that consultants' political contributions 
can be reviewed to determine whether these contributions influenced the 
awarding of municipal securities business. Accordingly, to establish a 
complete record of information, the Commission finds it reasonable that 
the proposed rule change requires dealers to receive quarterly reports 
from their consultants listing all reportable contributions, stating 
that the consultants made no reportable contributions, or disclosing 
that the consultants failed to provide a report to their dealer.
    The proposed rule change also mandates that dealers include a 
statement in their Consultant Agreements describing this quarterly 
reporting requirement so the consultant is informed of his reporting 
responsibilities. The Commission believes that if it should be 
determined later that a consultant did in fact make a reportable 
contribution after reporting that no reportable contributions were 
made, the dealer will have a record to demonstrate that the consultant 
hid the contribution information from the dealer.
    Additionally, the Commission believes that the proposed rule change 
is a measured response to the Act's requirement to prevent fraudulent 
and manipulative acts and practices. The proposed rule change does not 
require a dealer to obtain information about all political 
contributions made by its consultants. A dealer must obtain information 
from its consultants about the contributions made to issuer officials 
only if the consultant has communicated directly or indirectly with the 
issuer to obtain municipal securities business on behalf of the dealer. 
The political party payments required to be reported are limited to 
those made to political parties of states and political subdivisions 
that operate within the geographic area of the issuer with whom the 
consultant communicates on behalf of the dealer. Furthermore, the 
proposed rule change only requires dealers to record and report 
information about certain political contributions and payments to state 
and local political parties made by their consultants.\16\
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    \16\ The Commission notes that the proposed rule change does not 
prohibit political contributions or payments to political parties. 
Contributions and payments are allowed within the de minimis 
exemption. the Commission also notes that the proposed rule change 
does not prevent dealers or their employees from demonstrating 
support for local and state officials in other ways, such as 
volunteer political campaign activity. See Securities Exchange Act 
Release No. 33868 (April 7, 1994), 59 FR 17621 (April 13, 1994).
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    The date that establishes the obligation for the collection of 
contribution information is the date of the consultant's communication 
with the issuer to obtain municipal securities business on behalf of 
the dealer. The proposed rule change provides for a six-month look-back 
and a six-month look-forward reporting provision from this date of 
communication with an issuer.\17\ The Commission finds these provisions 
are necessary to ensure that this information is provided for a minimum 
period of one-year, absent termination of a Consultant Agreement, about 
any consultant contributions to officials of an issuer with whom the 
consultant communicated on behalf of a dealer to obtain municipal 
securities business. This requirement also should help to identify any 
situations in which contributions could have influenced the awarding of 
municipal securities business.
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    \17\ The dealer's reporting requirement ends when a Consultant 
Agreement is terminated.
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    The Commission also finds that the ``reasonable efforts'' provision 
is consistent with the Act. The provision allows a dealer to rely in 
good faith on information received from its consultants regarding 
contributions and payments if the dealer: (1) Demonstrates that it used 
reasonable efforts in attempting to obtain the necessary information; 
(2) follows certain disclosure requirements regarding the Consultant 
Agreement; and (3) terminates the Consultant Agreement if the 
information is not provided by the second calendar quarter. These 
requirements should help ensure that all required information on 
contributions is obtained from the consultants. The Commission believes 
that these requirements emphasize the Board's stated intention that a 
dealer should vigorously enforce its contract with a consultant if the 
dealer becomes aware that the consultant is not providing it with 
materially complete or accurate information concerning contributions on 
a timely basis. Moreover, the Commission finds the proposed time period 
for reporting a consultant's contribution and payment information, or 
lack thereof, is appropriate and reasonable. Under the proposed rule 
change, a dealer has in excess of two calendar quarters (i.e., no later 
than the date by which the dealer is required to send Form G-37/G-38 to 
the Board with respect to the next succeeding calendar quarter) to 
report this information. If a dealer fails to report this information 
by the end of this extended period, then the dealer must terminate the 
Consultant Agreement.
    The Commission carefully considered the concerns expressed by TBMA 
in its letter opposing the amendment. The Commission was not persuaded 
by TBMA's contention that Rule G-37 already addresses the concerns for 
which the proposed rule change is designed. As previously discussed, 
the Commission believes that the reporting requirements outlined in the 
proposed rule change, which make it possible to review consultants' 
political contributions, are an important mechanism for preventing 
fraudulent and manipulative acts and practices. Moreover, the 
Commission believes that the proposed limitations on the ``reasonable 
efforts'' defense are necessary to ensure that dealers exercise 
diligence in monitoring the disclosure and receipt of reportable 
information.
    Moreover, the Commission believes two calendar quarters constitute 
an appropriate and reasonable time period for a dealer to comply with 
the reporting requirements. Two calendar quarters should provide a 
diligent dealer with enough time to gather and report the information 
currently required by the Board's rules as well as the information 
required by the proposed rule change. Accordingly, the Commission 
believes that a facts and circumstance review, as suggested by TBMA, is 
unnecessary because of the extended reporting period provided by the 
proposed rule change. Furthermore, the Commission believes such a 
review is antithetical to the purpose of the proposed rule change which 
is to encourage accurate and timely reporting by dealers. Indeed, the 
Commission believes that a facts and circumstance review in combination 
with the ``reasonable efforts'' provision would permit dealers to 
circumvent the rule, rather than encourage timely and thorough 
reporting by them.
    The proposed rule change provides that the reporting information is 
sent to the Board which then posts the Forms G-37/G-38 on its web site. 
This requirement includes those instances in which a Consultant 
Agreement has been terminated because the consultant did not provide 
the required information concerning contributions made. The Commission 
finds that this procedure is consistent with the Act because it

[[Page 69811]]

allows the public to access and monitor the information disclosed by 
consultants thereby removing impediments to and perfecting the 
mechanism of a free and open market in municipal securities.

Date of Effectiveness

    As requested by the Board, the proposed rule change will become 
effective on April 1, 2000, beginning with the reports for the second 
quarter of 2000 (i.e., reports required to be sent to the Board by July 
31, 2000). Dealers will be required to disclose their consultants' 
reportable political contributions and reportable political party 
payments for the second quarter of 2000 and include, pursuant to the 
six-month look-back, reportable political contributions and reportable 
political party payments since October 1, 1999, where appropriate.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-MSRB-98-08), as amended, is 
approved.

    \18\ 15 U.S.C. 78s(b)(2).
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    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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Jonathan G. Katz,
Secretary.
[FR Doc. 99-32271 Filed 12-13-99; 8:45 am]
BILLING CODE 8010-01-M