[Federal Register Volume 68, Number 67 (Tuesday, April 8, 2003)]
[Notices]
[Pages 17122-17134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8447]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47609; File No. SR-MSRB-2002-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Amendments to Rules G-37, on Political Contributions and Prohibitions 
on Municipal Securities Business, G-8, on Books and Records, Revisions 
to Form G-37/G-38 and the Withdrawal of Certain Rule G-37 Questions and 
Answers

April 1, 2003.
    On September 26, 2002, 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-2002-12), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act''), and rule 19b-4 thereunder.\1\ 
The proposed rule change is described in items I, II, and III below, 
which Items have been prepared by the Board. On March 26, 2003, the 
MSRB filed Amendment No. 1 to the proposed rule change. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change and Amendment No. 1 from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.
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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 amendments to rules G-37, on political 
contributions and prohibitions on municipal securities business, G-8, 
on books and records, revisions to Form G-37/G-38 and the withdrawal of 
certain Rule G-37 Questions and Answers . The cumulative amendments 
made to rules G-37 and G-8, the revisions to Form G-37/G-38 and the 
withdrawal of certain Rule G-37 Questions and Answers as set forth in 
the original filing and by Amendment No. 1 are collectively referred to 
herein as the ``Proposed Rule

[[Page 17123]]

Change.'' The Proposed Rule Change revises the exemption process and 
the definition of municipal finance professional. Amendment No. 1 
alters the text of the amendments to the rule language as it appears in 
the original filing. 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) No change.
    (b)(i) No broker, dealer or municipal securities dealer shall 
engage in municipal securities business with an issuer within two years 
after any contribution to an official of such issuer made by: (A) The 
broker, dealer or municipal securities dealer; (B) any municipal 
finance professional associated with such broker, dealer or municipal 
securities dealer; or (C) any political action committee controlled by 
the broker, dealer or municipal securities dealer or by any municipal 
finance professional; provided, however, that this section shall not 
prohibit the broker, dealer or municipal securities dealer from 
engaging in municipal securities business with an issuer if the only 
contributions made by the persons and entities noted above to officials 
of such issuer within the previous two years were made by municipal 
finance professionals to officials of such issuer for whom the 
municipal finance professionals were entitled to vote and which 
contributions, in total, were not in excess of $250 by any municipal 
finance professional to each official of such issuer, per election.
    (ii) For an individual designated as a municipal finance 
professional solely pursuant to subparagraph (B) of paragraph (g)(iv) 
of this rule, the provisions of paragraph (b)(i) shall apply to 
contributions made by such individual to officials of an issuer prior 
to becoming a municipal finance professional only if such individual 
solicits municipal securities business from such issuer.
    (iii) For an individual designated as a municipal finance 
professional solely pursuant to subparagraphs (C), (D) or (E) of 
paragraph (g)(iv) of this rule, the provisions of paragraph (b)(i) 
shall apply only to contributions made during the six months prior to 
the individual becoming a municipal finance professional.
    (c) through (d) No change.
    (e)(i) Except as otherwise provided in paragraph (e)(ii), 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, two copies of Form G-37/G-38 
setting forth, in the prescribed format, the following information:
    (A)-(C) No change.
    (D) any information required to be disclosed pursuant to section 
(e) of rule G-38; [and]
    (E) such other identifying information required by Form G-37/G-
38[.] ; and
    (F) whether any contribution listed in this paragraph (e)(i) is the 
subject of an automatic exemption pursuant to section (j) of this rule, 
and the date of such automatic exemption.
    The Board shall make public a copy of each Form G-37/G-38 received 
from any broker, dealer or municipal securities dealer.
    (ii) through (iii) No change.
    (f) No change.
    (g) Definitions. (i) through (iii) No change.
    (iv) The term ``municipal finance professional'' means: (A) Any 
associated person primarily engaged in municipal securities 
representative activities, as defined in rule G-3(a)(i), provided, 
however, that sales activities with natural persons shall not be 
considered to be municipal securities representative activities for 
purposes of this subparagraph (A); (B) any associated person who 
solicits municipal securities business, as defined in paragraph (vii); 
(C) any associated person who is both (i) a municipal securities 
principal or a municipal securities sales principal and (ii) a 
supervisor of any persons described in subparagraphs (A) or (B); (D) 
any associated person who is a supervisor of any person described in 
subparagraph (C) up through and including, in the case of a broker, 
dealer or municipal securities dealer other than a bank dealer, the 
Chief Executive Officer or similarly situated official and, in the case 
of a bank dealer, the officer or officers designated by the board of 
directors of the bank as responsible for the day-to-day conduct of the 
bank's municipal securities dealer activities, as required pursuant to 
rule G-1(a); or (E) any associated person who is a member of the 
broker, dealer or municipal securities dealer (or, in the case of a 
bank dealer, the separately identifiable department or division of the 
bank, as defined in rule G-1) executive or management committee or 
similarly situated officials, if any; provided, however, that, if the 
only associated persons meeting the definition of municipal finance 
professional are those described in this subparagraph (E), the broker, 
dealer or municipal securities dealer shall be deemed to have no 
municipal finance professionals.
    Each person designated by the broker, dealer or municipal 
securities dealer as a municipal finance professional pursuant to rule 
G-8(a)(xvi) is deemed to be a municipal finance professional. Each 
person designated a municipal finance professional shall retain this 
designation for [two] one year[s] after the last activity or position 
which gave rise to the designation.
    (v) through (viii) No change.
    (h) No change.
    (i) A registered securities association with respect to a broker, 
dealer or municipal securities dealer who is a member of such 
association, or the appropriate regulatory agency as defined in section 
3(a)(34) of the Act with respect to any other broker, dealer or 
municipal securities dealer, upon application, may exempt, 
conditionally or unconditionally, a broker, dealer or municipal 
securities dealer who is prohibited from engaging in municipal 
securities business with an issuer pursuant to section (b) of this rule 
from such prohibition. In determining whether to grant such exemption, 
the registered securities association or appropriate regulatory agency 
shall consider, among other factors [whether]:
    (i) whether such exemption is consistent with the public interest, 
the protection of investors and the purposes of this rule; [and]
    (ii) whether such broker, dealer or municipal securities dealer
    (A) prior to the time the contribution(s) which resulted in such 
prohibition was made, had developed and instituted procedures 
reasonably designed to ensure compliance with this rule;
    (B) prior to or at the time the contribution(s) which resulted in 
such prohibition was made, had no actual knowledge of the 
contribution(s);
    (C) has taken all available steps to cause the [person or persons] 
contributor involved in making the contribution(s) which resulted in 
such prohibition to obtain a return of the contribution(s); and
    (D) has taken such other remedial or preventive measures, as may be 
appropriate under the circumstances[.], and the nature of such other 
remedial or preventive measures directed specifically toward the 
contributor who made the relevant contribution and all employees of the 
broker, dealer or municipal securities dealer;
    (iii) whether, at the time of the contribution, the contributor was 
a municipal finance professional or

[[Page 17124]]

otherwise an employee of the broker, dealer or municipal securities 
dealer, or was seeking such employment;
    (iv) the timing and amount of the contribution which resulted in 
the prohibition;
    (v) the nature of the election (e.g., federal, state or local); and
    (vi) the contributor's apparent intent or motive in making the 
contribution which resulted in the prohibition, as evidenced by the 
facts and circumstances surrounding such contribution.
    (j) Automatic Exemptions.
    (i) A broker, dealer or municipal securities dealer that is 
prohibited from engaging in municipal securities business with an 
issuer pursuant to section (b) of this rule as a result of a 
contribution made by a municipal finance professional may exempt itself 
from such prohibition, subject to subparagraphs (ii) and (iii) of this 
section, upon satisfaction of the following requirements: (1) The 
broker, dealer or municipal securities dealer must have discovered the 
contribution which resulted in the prohibition on business within four 
months of the date of such contribution; (2) such contribution must not 
have exceeded $250; and (3) the contributor must obtain a return of the 
contribution within 60 calendar days of the date of discovery of such 
contribution by the broker, dealer or municipal securities dealer.
    (ii) A broker, dealer or municipal securities dealer is entitled to 
no more than two automatic exemptions per 12-month period.
    (iii) A broker, dealer or municipal securities dealer may not 
execute more than one automatic exemption relating to contributions by 
the same municipal finance professional regardless of the time period.
* * * * *

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) Records Concerning Political Contributions and Prohibitions 
on Municipal Securities Business Pursuant to Rule G-37.
    Records reflecting:
    (A)-(D) No change.
    (E) the contributions, direct or indirect, to officials of an 
issuer and payments, direct or indirect, made to political parties of 
states and political subdivisions, by the broker, dealer or municipal 
securities dealer and each political action committee controlled by the 
broker, dealer or municipal securities dealer [(or controlled by any 
municipal finance professional of such broker, dealer or municipal 
securities dealer)] for the current year and separate listings for each 
of the previous two calendar years, which records shall include: (i) 
The identity of the contributors, (ii) the names and titles (including 
any city/county/state or other political subdivision) of the recipients 
of such contributions and payments, and (iii) the amounts and dates of 
such contributions and payments;
    (F) the contributions, direct or indirect, to officials of an 
issuer made by each municipal finance professional, any political 
action committee controlled by a municipal finance professional, and 
non-MFP executive officer for the current year [and separate listings 
for each of the previous two calendar years], which records shall 
include: (i) The names, titles, city/county and state of residence of 
contributors, (ii) the names and titles (including any city/county/
state or other political subdivision) of the recipients of such 
contributions, [and] (iii) the amounts and dates of such contributions, 
and (iv) whether any such contribution was the subject of an automatic 
exemption, pursuant to Rule G-37(j), including the amount of the 
contribution, the date the broker, dealer or municipal securities 
dealer discovered the contribution, the name of the contributor, and 
the date the contributor obtained a return of the contribution; 
provided, however, that such records need not reflect any contributions 
made by a municipal finance professional or non-MFP executive officer 
to officials of an issuer for whom such person is entitled to vote if 
the contributions made by such person, in total, are not in excess of 
$250 to any official of an issuer, per election[; and]. In addition, 
brokers, dealers and municipal securities dealers shall maintain 
separate listings for each of the previous two calendar years 
containing the information required pursuant to this subparagraph (F) 
for those individuals meeting the definition of municipal finance 
professional pursuant to subparagraphs (A) and (B) of rule G-37(g)(iv) 
and for any political action committee controlled by such individuals, 
and separate listings for the previous six months containing the 
information required pursuant to this subparagraph (F) for those 
individuals meeting the definition of municipal finance professional 
pursuant to subparagraphs (C), (D) and (E) of rule G-37(g)(iv) and for 
any political action committee controlled by such individuals and for 
any non-MFP executive officers; and
    (G) the payments, direct or indirect, to political parties of 
states and political subdivisions made by all municipal finance 
professionals, any political action committee controlled by a municipal 
finance professional, and non-MFP executive officers for the current 
year [and separate listings for each of the previous two calendar 
years], which records shall include: (i) The names, titles, city/county 
and state of residence of contributors, (ii) the names and titles 
(including any city/county/state or other political subdivision) of the 
recipients of such payments, and (iii) the amounts and dates of such 
payments; provided, however, that such records need not reflect those 
payments made by any municipal finance professional or non-MFP 
executive officer to a political party of a state or political 
subdivision in which such persons are entitled to vote if the payments 
made by such person, in total, are not in excess of $250 per political 
party, per year. In addition, brokers, dealers and municipal securities 
dealers shall maintain separate listings for each of the previous two 
calendar years containing the information required pursuant to this 
subparagraph (G) for those individuals meeting the definition of 
municipal finance professional pursuant to subparagraphs (A) and (B) of 
rule G-37(g)(iv) and for any political action committee controlled by 
such individuals, and separate listings for the previous six months 
containing the information required pursuant to this subparagraph (G) 
for those individuals meeting the definition of municipal finance 
professional pursuant to subparagraphs (C), (D) and (E) of rule G-
37(g)(iv) and for any political action committee controlled by such 
individuals and for any non-MFP executive officers.
    (H)-(K) No change.
* * * * *

Form G-37/G-38

 Name of dealer:-------------------------------------------------------
 Report period:

[[Page 17125]]

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                I. Contributions Made to Issuer Officials
                             [List by state]
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------------------------------------------------------------------------
State....................  Complete name,       Contributions by each
                            title (including)    contributor category
                            any city/county/     (i.e., dealer, dealer
                            state or other       controlled PAC,
                            political            municipal finance
                            subdivision) of      professional controlled
                            issuer official.     PAC, municipal finance
                                                 professionals and
                                                 executive officers).
                                                 For each contribution,
                                                 list contribution
                                                 amount and contributor
                                                 category (for example,
                                                 ($500 contribution by
                                                 non-MFP executive
                                                 officer).
                                                If any contribution is
                                                 the subject of an
                                                 automatic exemption
                                                 pursuant to Rule G-37
                                                 (j), list amount of
                                                 contribution and date
                                                 of such automatic
                                                 exemption.
------------------------------------------------------------------------

II. Payments Made to Political Parties of States or Political 
Subdivisions (List by State)

    No change.

III. Issuers With Which Dealer Has Engaged in Municipal Securities 
Business (List by State)

    No change.

IV. Consultants

    No change.
* * * * *

Rule G-37 Questions & Answers To Be Withdrawn

May 24, 1994 (Q&A 12)

    [Q: A dealer may discover that a ``disgruntled'' municipal finance 
professional made a contribution to an issuer official deliberately to 
prohibit the dealer from engaging in municipal securities business with 
the issuer. Is there a procedure in place whereby the dealer can seek 
an exemption from the prohibition on municipal securities business in 
such circumstances?]
    [A: The Board recognizes that there may be limited circumstances in 
which a dealer should be able to request an exemption from the 
prohibition on business. Thus, the Board has filed with the SEC an 
amendment to rule G-37 that allows bank regulatory authorities (the 
Office of the Comptroller of the Currency, Federal Reserve Board and 
Federal Deposit Insurance Corporation), upon application by a dealer, 
to grant such exemption, conditionally or unconditionally, in certain 
circumstances. See the rule filing, SR-MSRB-94-5, for more information 
about this procedure.]

June 15, 1995 (Q&A 4)

    [Q: Rule G-37(i) provides a procedure whereby dealers may request 
that the NASD or the appropriate regulatory agency (i.e., federal bank 
regulatory authorities) grant an exemption from the rule's two-year ban 
on municipal securities business with an issuer which resulted from 
political contributions made to officials of that issuer by the dealer, 
a PAC controlled by the dealer, or a municipal finance professional. If 
a municipal finance professional made a contribution to an issuer 
official which triggered the ban, what factors would be relevant to the 
dealer's decision to request an exemption from that ban, and to the 
NASD or appropriate regulatory agency in determining whether the 
exemption should be granted?]
    [A: In determining whether to grant such an exemption, rule G-37(i) 
requires the NASD or the appropriate regulatory agency to consider, 
among other factors, whether (i) such exemption is consistent with the 
public interest, the protection of investors and the purposes of rule 
G-37; and (ii) such dealer (A) prior to the time the contribution(s) 
which resulted in such prohibition was made, had developed and 
instituted procedures reasonably designed to ensure compliance with the 
rule; (B) prior to or at the time the contribution(s) which resulted in 
such prohibition was made, had no actual knowledge of the 
contribution(s); (C) has taken all available steps to cause the person 
or persons involved in making the contribution(s) which resulted in 
such prohibition to obtain a return of the contribution(s); and (D) has 
taken such other remedial or preventive measures as may be appropriate 
under the circumstances.
    In reviewing the facts and circumstances presented by the dealer, 
as well as the factors set forth above, the NASD or the appropriate 
regulatory agency will consider whether, prior to the time the 
contribution was made, the dealer had developed and instituted 
procedures reasonably designed to ensure compliance with the rule. Such 
procedures are required by rule G-27 on supervision. Effective 
compliance procedures are essential because rule G-37 requires the 
dealer to have information regarding each contribution made by the 
dealer, dealer-controlled PACs and municipal finance professionals so 
that the dealer can determine where and with whom it may or may not 
engage in municipal securities business. In addition, for disclosure 
purposes, the dealer must maintain information on executive officers' 
contributions and payments to political parties, as well as consultant 
hiring practices. Moreover, because of the ``directly and indirectly'' 
provision in rule G-37(d), as well as the no solicitation and no 
bundling provisions in section (c) of the rule, the dealer must ensure 
that those persons and entities subject to the rule are not causing the 
dealer to be in violation thereof. In this regard, the Board wishes to 
remind dealers that they are responsible for determining which of their 
employees, supervisors (e.g., branch managers), and management 
personnel (e.g., members of the dealer's executive or management 
committee or similarly situated officials) are ``municipal finance 
professionals.'' In addition to those persons and entities covered by 
the rule, the dealer must ensure that other persons and entities hired 
to assist in municipal securities activities (e.g., consultants) are 
not being directed to make contributions, or otherwise being used as 
conduits, in violation of the rule. In reviewing a request for 
exemption, the NASD or the appropriate regulatory agency also will 
consider whether the dealer has taken all available steps to obtain a 
return of the contribution. The return of the contribution, while 
important, is only one of the factors to be considered, and is not 
dispositive of whether an exemption should be granted.
    Finally, the NASD or appropriate regulatory agency will consider 
whether the dealer has taken remedial or preventive measures as may be 
appropriate under the circumstances. Thus, dealers should provide 
information on any changes to compliance procedures and/or personnel 
action taken to address the particular situation which resulted in the 
prohibition so that such problems do not recur. For additional guidance 
on the exemption provision, please refer to Q&A number 2 in the August 
1994 issue of MSRB Reports (Vol. 14, No. 4).
    The Board previously provided two examples in which exemptions may 
be appropriate. The first example described a situation in which a 
disgruntled municipal finance professional made a contribution 
purposely to injure the

[[Page 17126]]

dealer, its management or employees. The second example involved a 
municipal finance professional who was eligible to vote for a 
particular issuer official and who made a number of small contributions 
during an election cycle (e.g., over four years) which, when 
consolidated, amounted to slightly over the $250 de minimis exemption 
(e.g., $255).
    The Board believes that the following situations are not sufficient 
to justify the granting of an exemption from a ban on business: (1) A 
contribution was made by a municipal finance professional which 
subjected the dealer to the two-year ban on business, but the municipal 
finance professional was not aware of rule G-37 or any of its 
particular provisions; (2) the dealer or a municipal finance 
professional did not know that the recipient of a particular 
contribution was an ``official of an issuer''; and (3) at the time the 
contribution was made, an associated person did not know that he was a 
``municipal finance professional'' by virtue of his supervisory 
capacity, by being primarily engaged in municipal securities 
representative activities, or by virtue of any of the other activities 
listed in the rule's definition of municipal finance professional.
    The Board is strongly of the view that exemptions should be granted 
only in limited circumstances. If a significant number of exemptions 
are granted by the regulatory agencies, then the Board may reexamine 
the propriety of the exemption provision.]

June 29, 1998 (Q&A 1 (partial withdrawal), 2 and 3)

    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) & 
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) & 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 
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 MSRB 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 
text of these statements may be examined at the places specified in 
item IV below. The MSRB 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, on political contributions and prohibitions on municipal 
securities business, became effective on April 25, 1994. During the 
past eight years, the MSRB believes that the rule has been successful 
in halting pay-to-play practices in the municipal securities market. As 
part of the MSRB's

[[Page 17127]]

Long-Range Plan, the MSRB determined to conduct a review of the rule's 
requirements and seek comments on whether there are compliance concerns 
to address. Although the MSRB is sensitive to the burden imposed on 
brokers, dealers and municipal securities dealers (``dealers'') by the 
requirements of rule G-37 and is committed to reducing this burden 
whenever possible, the MSRB believes that the rule has provided 
substantial benefits to the industry and the investing public by 
reducing the direct connection between political contributions to 
issuer officials and the awarding of municipal securities business.

Background

    Rule G-37 prohibits a dealer from engaging in municipal securities 
business \2\ with an 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) \3\ or any political 
action committee (``PAC'') controlled by the dealer or any MFP. In 
addition, the rule requires dealers to disclose on Form G-37/G-38 
certain contributions to issuer officials and payments to political 
parties of states and political subdivisions made by MFPs and certain 
other categories of contributors. Rule G-8, on books and records, 
requires dealers to create records of such contributions and payments. 
Finally, rule G-37(i) provides a procedure whereby dealers may request 
that NASD or the appropriate regulatory agency (i.e., federal bank 
regulatory authorities) grant an exemption from rule G-37's two-year 
ban on municipal securities business with an issuer that resulted from 
political contributions made to officials of that issuer.
---------------------------------------------------------------------------

    \2\ 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 remarking agent to an issuer in which the dealer was 
chosen on a negotiated basis.
    \3\ Contributions made by an issuer for whom the MFP is entitled 
to vote will not cause the MFP's dealer to be prohibited from 
engaging in municipal securities business with issuer if the 
contributions, in total, are not in excess of $250 by such MFP to 
each official of such issuer, per election.
---------------------------------------------------------------------------

Review of Proposed Rule Change

Exemption Process and Withdrawal of Certain Rule G-37 Questions and 
Answers

    As noted above, under rule G-37(i), a dealer that has triggered the 
rule's two-year ban on municipal securities business may seek an 
exemption from that ban from the appropriate regulatory agency.\4\ The 
rule provides that the appropriate regulatory agency may exempt, 
``conditionally or unconditionally,'' a dealer that is banned from 
engaging in municipal securities business with an issuer from such ban. 
The MSRB specifically intended that the regulatory agencies have 
flexibility in dealing with the various factual situations that may 
arise pursuant to exemption requests. For example, a regulatory agency 
could reduce the ban on business from two years to a lesser period of 
time. In determining whether to grant an exemption request, the 
appropriate regulatory agency is required to consider, among other 
factors, whether an exemption would be consistent with the public 
interest, the protection of investors and the purposes of rule G-37. 
The regulatory agency also is required to examine whether the dealer 
had appropriate procedures in place to ensure compliance with the rule, 
had no actual knowledge that the contribution was being made, has taken 
all steps to obtain a return of the contribution, and has taken any 
other appropriate remedial or preventive measures.
---------------------------------------------------------------------------

    \4\ The appropriate regulatory agencies include NASD for 
securities firms and the federal bank regulators for bank dealers.
---------------------------------------------------------------------------

    The Proposed Rule Change includes the addition of the following 
relevant factors to be considered by the appropriate regulatory agency 
in determining whether to grant an exemption (conditional or 
unconditional) from the two-year ban on business:
    [sbull] The nature of remedial or preventive measures directed 
specifically toward the contributor and all employees of the dealer.
    [sbull] Whether, at the time of the contribution, the contributor 
was an MFP or otherwise an employee of the dealer, or was seeking such 
employment.
    [sbull] The timing and amount of the contribution.
    [sbull] The nature of the election (e.g., federal, state or local).
    [sbull] The contributor's apparent intent or motive in making the 
contribution, as evidenced by the facts and circumstances surrounding 
such contribution.
    The additional factors will help to clarify facts and circumstances 
relevant to exemptive requests and will facilitate the review of such 
requests by the appropriate regulatory agency. To further clarify and 
facilitate this process, the MSRB also is withdrawing certain rule G-37 
Questions and Answers (``Qs and As'') previously published concerning 
when an exemption may or may not be appropriate. This action is 
necessary in order to clarify that the regulatory agencies have 
discretion in administering the exemption process. The Proposed Rule 
Change will assist the regulatory agencies in exercising their 
discretion in a manner that will fulfill the purposes of rule G-37.

Adoption of an Automatic Exemption Provision

    The Proposed Rule Change provides for an automatic exemption from a 
dealer's ban on business in certain limited instances. This provision 
sets out procedures that would permit dealers to execute two such 
exemptions per 12-month period for contributions made by an MFP of $250 
or less if the dealer discovers the contribution within four months of 
the date of such contribution and the contributor obtains a return of 
the contribution within 60 calendar days of the date of discovery of 
such contribution by the dealer. A dealer would not be permitted to 
execute more than one automatic exemption relating to contributions by 
the same MFP. The automatic exemption would not be available for 
contributions made by a dealer, a dealer-controlled PAC or MFP-
controlled PAC. Finally, dealers would be required to report the 
exemption on Form G-37/G-38 and to maintain records of such exemptions 
pursuant to rule G-8, on books and records. A dealer would be banned 
from municipal securities business until the contribution was returned.
    The MSRB believes that a limited automatic exemption provision will 
provide a measure of relief to the industry without compromising the 
purposes of rule G-37. In addition, it will relieve some of the 
regulatory agencies' burden of administering the exemption process by 
removing from this process certain routine cases involving small 
contributions. The MSRB notes that the time periods proposed are 
reasonable and will encourage dealers to discover contributions that 
could give rise to a ban on business in a timely manner (e.g., in 
preparation for the filing of quarterly forms G-37/G-38) and to seek 
quick refunds of these contributions. The automatic exemption will, for 
example, allow dealers who wish to hire as an MFP someone who 
previously gave a small contribution to an issuer official to lift the 
ban on business with that issuer after meeting the requirements of the 
new provision.

[[Page 17128]]

Also, a dealer could lift the ban on business if an MFP contributes to 
an issuer official for whom he or she is not entitled to vote without 
knowing that his or her firm does business with that issuer. The MSRB 
determined to limit the number of exemptions, as well as the dollar 
amount involved, to ensure that the automatic exemption provision could 
only be used in limited circumstances and not as an avenue for 
circumvention of the rule.

Definition of Municipal Finance Professional

MFPs Primarily Engaged in Municipal Securities Representative 
Activities

    The Proposed Rule Change amends the definition of MFP so that 
associated persons ``primarily engaged'' in municipal securities 
representative activities based on their retail sales of municipal 
securities are excluded from the definition. While there may be limited 
instances in which retail sales persons make contributions to obtain 
municipal securities business for dealers, the MSRB believes that these 
instances do not outweigh the compliance burden of determining which of 
these persons are included in the rule. In addition, any retail sales 
representative who solicits municipal securities business would remain 
covered under the rule as an MFP.

Look Back and Look Forward Provisions

    Since rule G-37 prohibits a dealer from engaging in municipal 
securities business within two years of certain contributions made by 
MFPs, a dealer must perform a two-year ``look back'' of its MFPs'' 
contributions in order to make a determination on whether it is subject 
to any prohibitions on municipal securities business. Dealers have 
informed the MSRB that this look back has precluded them from hiring 
individuals who had made contributions, even though the contributions 
(which may have been relatively small) were made at a time when the 
individuals had no reason to be familiar with rule G-37. In addition, 
some dealers have noted how the look back has affected individuals with 
regard to in-firm transfers and promotions.
    Once an individual is designated as an MFP by a dealer, he or she 
retains this designation for two years after the last activity or 
position which gave rise to the designation. This ``look forward'' 
provision has created compliance problems for some dealers in trying to 
track the contributions of individuals who have left their MFP 
positions and transferred to other areas in the firms.
    The Proposed Rule Change produces the following results:
    [sbull] MFPs primarily engaged in municipal securities 
representative activities: The two-year look back is retained, and the 
look forward is reduced to one year.
    [sbull] Solicitor MFPs: The two-year look back is retained, but 
limited only to contributions to officials of the issuer solicited, and 
the look forward is reduced to one year.
    [sbull] Supervisor and management-level MFPs: The look back is 
reduced to six months and the look forward is reduced to one year.
    Thus, the two-year look back is retained for those MFPs who are 
primarily engaged in municipal securities representative activities and 
for those who solicit municipal securities business while the two year 
look forward is reduced to one year for these individuals. For 
supervisory and management-level MFPs, the look back is reduced to six 
months and the look forward is reduced to one year.\5\ The MSRB 
believes that supervisors and management-level MFPs should remain 
subject to the rule while they hold their supervisory positions; 
however, the potential link between obtaining municipal securities 
business and contributions made by an individual prior to becoming an 
MFP solely by reason of taking on a new supervisory or management 
position is tenuous and therefore the shorter timeframes are 
appropriate. The MSRB notes that most supervisors in the municipal 
securities department will still be covered by the two-year look back 
because such individuals are ``primarily engaged'' in municipal 
securities representative activities.
---------------------------------------------------------------------------

    \5\ The Proposed Rule Change also amends rule G-8(a)(xvi) to 
reduce the look back to six months for contributions made by non-MFP 
executive officers.
---------------------------------------------------------------------------

    In addition, many dealers over the years have raised concerns about 
bringing non-MFPs to meetings with issuers to solicit municipal 
securities business (e.g., an individual with expertise in asset-backed 
securities may be asked to attend a meeting with an issuer that is 
considering a securitization of tobacco settlement revenue or 
delinquent tax receipts) because the prior contributions of these 
individuals could result in a ban on business, even if made to issuers 
other than those solicited. Dealers believe that such a result is 
unreasonable given that the contribution by the solicitor MFP to 
another issuer's official would have no impact on the underwriter 
selection process of the issuer that he or she is soliciting. 
Accordingly, the Proposed Rule Change limits the look back for 
solicitor MFPs (i.e., persons not primarily engaged in municipal 
securities representative activities) only to contributions to 
officials of the issuer solicited. Once these solicitors become MFPs, 
all of their subsequent contributions to any issuer official still will 
be covered by the rule.
2. Statutory Basis
    The MSRB believes the Proposed Rule Change is consistent with 
section 15B(b)(2)(C) of the Securities Exchange Act of 1934 (``Act''), 
which provides that the Board's rules shall:

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade * * * 
to 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 MSRB believes that the Proposed Rule Change is consistent with 
the Act in that it will facilitate dealer compliance with rule G-37, 
thereby further protecting investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the Proposed Rule Change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, since 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

    On April 2, 2002, the MSRB proposed for comment draft amendments 
relating to the exemption provision and the definition of municipal 
finance professional as contained in Rule G-37 (the ``Notice''). The 
MSRB received nine comment letters from the following:

John M. Hartenstein (``Mr. Hartenstein''),
Investment Company Institute (``ICI'')
MassMutual Financial Group (``MassMutual'')
Morgan Stanley & Co. Incorporated (``Morgan Stanley'')
National Association of State Treasurers (``NAST'')
Seasongood & Mayer, LLC (``Seasongood'')
T. Rowe Price Group, Inc. (``T. Rowe Price'')
The Bond Market Association (``TBMA'')
Wilmer, Cutler & Pickering (``Wilmer'') (commenting on behalf of the

[[Page 17129]]

Democratic National Committee (``DNC'') and the Republican National 
Committee (``RNC'')).

    Many commentators expressed their support for one or more of the 
proposals and provided suggestions for additional changes.

The Exemption Provision

Additional Relevant Factors To Be Added; Certain Qs & As To Be 
Withdrawn

    The MSRB proposed the addition of the following relevant factors to 
be considered by the appropriate regulatory agency in determining 
whether to grant an exemption (conditional or unconditional) from the 
two-year ban on business:
    [sbull] The nature of remedial or preventive measures directed 
specifically toward the contributor and all employees of the dealer.
    [sbull] Whether, at the time of the contribution, the contributor 
was an MFP or otherwise an employee of the dealer, or was seeking such 
employment.
    [sbull] The timing and amount of the contribution.
    [sbull] The nature of the election (e.g., federal, state or local).
    [sbull] The contributor's apparent intent or motive in making the 
contribution, as evidenced by the facts and circumstances surrounding 
such contribution.
    The MSRB also proposed withdrawing certain Qs and As previously 
published concerning when an exemption may or may not be appropriate, 
noting that this action is necessary to clarify that the regulatory 
agencies have discretion in administering the exemption process.
    Morgan Stanley and T. Rowe Price expressed support for the 
additional relevant factors and the withdrawal of certain Qs and As. 
Morgan Stanley believes that the MSRB ``must go further to facilitate 
the NASD's equitable administration of the exemption process by adding 
an additional factor that expressly requires the NASD to consider the 
proportionality of the penalty to the violation.'' They argue that the 
MSRB ``must emphasize to the NASD that it has at its disposal and must 
utilize the option of granting conditional exemptions to fashion 
remedies that are more proportional to the egregiousness of the 
violation.''
    Seasongood believes that the opportunity for exemptive relief 
should be available only to those dealers who discover problematic 
contributions prior to a third party discovering them. Seasongood 
argues that this approach ``will encourage firms to be forthright in 
dealing with violations and will more effectively punish firms who 
either are not vigilant in monitoring G-37 compliance or who willfully 
violate the rule.''
    MSRB Response. The two-year ban arose from the MSRB's view of the 
necessity of avoiding even the appearance of a conflict of interest by 
an issuer in awarding negotiated municipal securities business to a 
dealer that made contributions (or an MFP who made non-de minimis 
contributions) to issuer officials. In reviewing exemptive requests, 
the appropriate regulatory agencies examine the facts and circumstances 
surrounding each such request and, in addition to the relevant factors 
set forth in the rule, may examine any other factor they wish, 
including the size of the contribution and the potential business lost. 
The draft amendments add to the list of factors the timing and amount 
of the contribution, as well as the contributor's apparent intent or 
motive in making the contribution. The MSRB does not believe it is 
appropriate to add to the list of relevant factors the amount of 
business lost because then it could be argued that a contribution of 
any size should not result in a ban on business in a large issuing 
state. The MSRB believes such a result would go against the purposes of 
rule G-37.
    In addition, rule G-37(i) states that the regulatory agencies may 
exempt, ``conditionally or unconditionally,'' a dealer that is banned 
from engaging in municipal securities business with an issuer from such 
ban. The regulatory agencies may, if they deem it appropriate, reduce a 
ban on business to less than two years, and, in fact, have done so on 
certain occasions. Thus, the rule, as amended, already provides the 
regulatory agencies the ability to limit the extent of the ban on 
business in situations where, based on the specific facts and 
circumstances, a reduced penalty would be appropriate. Because the MSRB 
has no inspection or enforcement authority, it must defer to the 
regulatory agencies' judgment on these matters. Thus, the MSRB does not 
believe it is appropriate for it to mandate that the regulatory 
agencies grant conditional exemptions in appropriate cases, as 
suggested by Morgan Stanley.
    The MSRB disagrees with Seasongood's suggestion that exemptions 
should only be available to those dealers who discover problematic 
contributions prior to someone else discovering them and reporting them 
to the authorities or the media. The MSRB believes that most dealers 
discover their own problematic contributions and then apply to the NASD 
for exemptive relief in appropriate cases. While self-discovery of 
problematic contributions is a factor, it should not be a conclusive 
one against the dealer. A failure to self-discover does not mean that a 
dealer has willfully violated the rule.

Adoption of an Automatic Exemption Provision

    The Notice requested comments on incorporating an automatic 
exemption provision into Rule G-37. The draft amendments provided for 
an automatic exemption from a dealer's ban on business in certain 
limited instances. The provision sets out procedures that would permit 
dealers to execute two such exemptions per 12-month period for 
contributions made by an MFP of $250 or less if: (1) The dealer 
discovers the contribution within four months of the date of such 
contribution; (2) the contributor makes a written request for a return 
of the contribution within 30 calendar days of the dealer's discovery; 
and (3) the contributor obtains a refund within 30 calendar days of the 
written request. A dealer would not be permitted to execute more than 
one automatic exemption relating to contributions by the same MFP. The 
automatic exemption would not be available for contributions made by a 
dealer, a dealer-controlled PAC or an MFP-controlled PAC. Finally, 
dealers would be required to report the exemption on Form G-37/G-38 and 
to maintain records of such exemptions pursuant to rule G-8, on books 
and records. A dealer would be banned from municipal securities 
business until the contribution was returned.
    TBMA supports the concept of an automatic exemption but believes 
``that a somewhat broader exemptive provision is warranted.'' They 
recommend increasing the allowable dollar amount to $1,000, arguing 
that ``contributions that are promptly identified and refunded in full 
would not reasonably influence the underwriter selection process'' 
regardless of the amount. Morgan Stanley also recommends that the 
amount be increased to $1,000, arguing that ``the fact that a refund 
must be obtained in a prompt manner eliminates any perceived risk of 
pay-to-play.''
    The draft amendments required a dealer to make a written request 
for a refund within 30 days of discovering the contribution, and obtain 
the refund within 30 days of such request. TBMA recommends adding a 
measure of flexibility to the automatic exemption provision by 
combining these two time periods so that dealers would be

[[Page 17130]]

required to obtain a refund within 60 days of discovering the 
contribution.
    In its Notice, the MSRB noted that, in addition to the automatic 
exemption, dealers may continue to seek exemptions from the appropriate 
regulatory agency through the regular exemption process. TBMA argues 
that ``it is likely that waivers will continue to be granted 
infrequently, and the process will continue to be time-consuming. 
Further, the mere existence of an automatic exemption may lessen the 
likelihood of obtaining a discretionary waiver in circumstances in 
which contributions are quickly discovered and refunded but do not meet 
all the requirements of the automatic exemption.''
    T. Rowe Price and Wilmer support the draft amendments in this area, 
but believe it is unfair to base the availability of the automatic 
exemption on a requirement that is outside the contributor's control, 
i.e., obtaining a refund. T. Rowe Price recommends eliminating this 
requirement. ICI suggests that the requirement be changed to require 
that the contributor make a ``good faith effort'' within 30 calendar 
days of the dealer's discovery to obtain a return of the contribution, 
including making a written request for such return. T. Rowe Price also 
recommends that the Board eliminate the requirement that a dealer 
discover the contribution in a timely manner (i.e., within four 
months).
    Seasongood believes that an automatic exemption should be available 
only if the dealer itself discovers the rule violation (as opposed to 
another dealer discovering it and reporting it to the authorities or 
the media). They also argue that the automatic exemption should not be 
available if the contribution is returned after the election for which 
it was given, otherwise the candidate would derive the benefit of using 
the funds when they were needed most.
    MSRB Response. The MSRB determined to adhere to the $250 
contribution limit for automatic exemptions since the provision is 
intended to apply to routine cases involving small contributions. With 
regard to the requirements that contributors make a written refund 
request within 30 days of discovery of the contribution and obtain a 
refund within 30 days thereafter, the MSRB adopted TBMA's suggestion 
that these two time periods be combined. Thus, the Proposed Rule Change 
requires the contributor to obtain a return of the contribution within 
60 calendar days of the date of discovery of such contribution by the 
dealer.
    The MSRB did not adopt the recommendations of T. Rowe Price and 
Wilmer regarding the elimination of the requirement to actually obtain 
a refund or ICI's suggestion to make a ``good faith effort'' to obtain 
a refund. While it is true that the return of the contribution is not 
within the dealer's control, the automatic exemption provision should 
be limited to those circumstances where there is no appearance of a 
conflict of interest. In those circumstances where the contribution is 
not returned within the appropriate time frame, the MSRB believes that 
NASD or bank regulator review is needed through the regular exemption 
process. Therefore, a refund must be obtained in order to execute an 
automatic exemption.
    Additionally, the MSRB believes that requiring dealers to discover 
offending contributions within four months of such contributions 
represents a reasonable time period that will encourage dealers to 
develop and institute good compliance procedures. The MSRB disagrees 
with T. Rowe Price's suggestion that this requirement be eliminated. 
The time periods proposed are fair and reasonable; so long as a dealer 
discovers, and obtains a refund of, the offending contribution within 
those time periods (and otherwise complies with the provision's 
requirements) the dealer should be permitted to avail itself of an 
automatic exemption.
    Finally, the MSRB disagrees with Seasongood's suggestions that the 
automatic exemption should only be available to those dealers who 
discover the problematic contributions before someone else does and 
reports the information to the authorities or the media, and only if 
the contribution is returned before the election for which it was 
intended. As noted above, the MSRB believes that most dealers discover 
and report their own bans on business and then apply to NASD or bank 
regulator for exemptive relief. Moreover, the requirement that dealers 
discover the offending contributions within four months acts as a 
significant incentive for dealers to discover their own potential bans 
on business. The MSRB also did not adopt Seasongood's suggestion that 
dealers be required to obtain a refund prior to the election for which 
it was intended. Given the relatively small dollar amounts involved, 
the Board was not persuaded that this issue represented a significant 
problem or otherwise merited regulatory action.

Definition of Municipal Finance Professional

MFPs Primarily Engaged in Municipal Securities Representative 
Activities
    The draft amendments provide for amending the definition of MFP to 
exempt retail sales representatives. While there may be limited 
instances in which retail sales persons make contributions to obtain 
municipal securities business for dealers, the MSRB proposed the draft 
amendments because of its belief that these instances do not outweigh 
the compliance burden of determining which of these persons are 
included in the rule. In addition, any retail sales person who solicits 
municipal securities business would be covered under the rule as an 
MFP.
    T. Rowe Price states that it strongly supports the proposal. It 
notes that it is in agreement ``with the Board's belief that if the 
retail salesperson is not soliciting municipal securities business, the 
connection between the retail salesperson's contributions and any 
awarding of municipal securities business is very tenuous.'' T. Rowe 
Price notes that, for its firm, ``where the registered representatives 
who deal with investors and potential investors in Section 529 Plan 
securities do not receive commission-based compensation and do not have 
their own client base * * * there is no connection between any 
contributions they may make and the awarding of a long-term contract by 
a state for the program management of its Section 529 Plan.'' It states 
that the ``proposal brings much needed clarity to the area without 
diluting the effectiveness of Rule G-37.''
    Seasongood is opposed to the proposal. It states that firms are 
``seeking municipal underwriting business by touting the size and 
effectiveness of their retail sales force. As evidenced by the 
significant increase in issuers having a separate `retail order period' 
prior to the regular order period, firms utilize their sales forces to 
generate underwriting fees from tax-exempt financings. Specifically, 
the takedown component, which is usually the largest part of an 
underwriter's fee, is being earned by the firm and the salesperson.'' 
Seasongood believes that the proposal will make it more difficult for a 
firm's competitor to uncover violations in helping to enforce 
compliance with the rule.
    MSRB Response. The MSRB determined to exempt retail sales 
representatives from the definition of MFP. If a retail sales person is 
not soliciting municipal securities business, the appearance of a 
conflict of interest is negligible because there is little

[[Page 17131]]

reason to believe that the contribution was intended to be, or taken to 
be, an attempt to gain influence in the awarding of municipal 
securities business. A retail sales person who solicits municipal 
securities business will still be covered under the rule as an MFP. The 
Commission staff asked that the MSRB make a technical language revision 
to the definition of MFP concerning retail sales persons to clarify 
that the exemption from the definition applies to sales activities with 
individual (not institutional) investors. The MSRB has done so.

Look Back and Look Forward Provisions

    In the Notice, the MSRB requested comments on draft amendments 
concerning the look back and look forward provisions that would produce 
the following results:
    [sbull] MFPs primarily engaged in municipal securities 
representative activities: Retain the two-year look back. Reduce the 
look forward to one year.
    [sbull] Solicitor MFPs: Retain the two-year look back, but limit it 
only to contributions to officials of the issuer solicited. Reduce the 
look forward to one year.
    [sbull] Supervisor and management-level MFPs: Eliminate the look 
back and look forward.
    T. Rowe Price supports the proposals concerning both the look back 
and look forward provisions.
    TBMA supports only the proposals for eliminating the look back and 
look forward provisions for supervisor and management-level MFPs. TBMA 
questions ``whether the look back and overhang requirements, as applied 
to other persons, are justified.'' With respect to the look forward 
provision, TBMA states that ``the MSRB has not identified any 
circumstances in which it is likely that a contribution by a former MFP 
for up to one year after losing that status is being made for the 
purpose of attracting municipal business.'' If the MSRB continues to 
apply look forward and look back provisions for MFPs primarily engaged 
in municipal securities representative activities and solicitor MFPs, 
TBMA states that a six-month period ``is more than sufficient to remedy 
possible abuses.'' TBMA notes that ``a six-month period is more 
consistent with the requirements of Rule G-38,'' on consultants, and 
that dealers ``have designed their compliance systems to track such 
contributions over these time periods.''
    Seasongood states that the look forward provision should remain at 
two years and it should continue to apply to supervisor and management-
level MFPs. With respect to the proposal to limit the two-year look 
back for solicitor MFPs to contributions to officials of the issuer 
solicited, Seasongood notes that it ``could not disagree more 
strongly.'' Seasongood states that the proposal ``would eviscerate the 
definition of solicitation by allowing anyone to participate in a 
presentation calculated to appeal to issuer officials for municipal 
securities business without repercussions. This definition has been the 
lynchpin in preventing the ``pay to play'' games G-37 was designed to 
stop. If a firm soliciting municipal business can bring individuals to 
the presentation who are allowed to contribute to campaigns without 
being banned from their business, the MSRB will be opening a huge hole 
in the overall effectiveness of G-37 and the ability of competitors to 
discern when a violation has occurred.''
    MSRB Response. The MSRB determined to adopt the draft amendments to 
revise the look back and look forward provisions for MFPs primarily 
engaged in municipal securities representative activities and for 
solicitor MFPs. The MSRB believes it is important to retain the longer 
time frames for those MFPs more directly involved in obtaining 
municipal securities business. Once an associated person of a dealer 
solicits municipal securities business, the new look back requirement 
would be limited to officials of the issuer solicited. All 
contributions by this solicitor MFP to any issuer official would be 
covered going forward.
    The SEC staff asked that the MSRB revise the proposal for 
supervisor and management-level MFPs as contained in the draft 
amendments. The SEC staff asked that the look back be revised to six 
months (instead of eliminated) and the look forward be reduced to one 
year (instead of eliminated). The MSRB has revised the requirements per 
the SEC staff's suggestions.

De Minimis Contributions

Maintain the ``Entitled to Vote'' Requirement
    Contributions made by an MFP to officials of an issuer for whom the 
MFP is entitled to vote will not cause the MFP's dealer to be 
prohibited from engaging in municipal securities business with the 
issuer if the contributions, in total, are not in excess of $250 by 
such MFP to each official of such issuer, per election. Wilmer believes 
that the de minimis exception should be available to any MFP, not just 
those entitled to vote for the particular candidate, arguing that 
``[t]here are compelling reasons that a contributor who lives in one 
jurisdiction might want to support a candidate in a different 
jurisdiction. When a voter lives in a different jurisdiction from where 
the voter works, the voter might feel effected as much or more by the 
election of county or city officials in the work jurisdiction than at 
home.'' Similarly, NAST believes that the Board should eliminate the 
``entitled to vote'' requirement, noting that ``the determination of 
whether a contribution is so small as to be de minimis should not 
depend on where the contributor lives.''
    MSRB Response. The MSRB determined to maintain this requirement. 
Eliminating the requirement would allow national firms with numerous 
MFPs to make many contributions to an issuer official. This would 
create at least the appearance of a conflict of interest since the MFPs 
would have no direct interest in the issuer's jurisdiction.
Maintain the $250 De Minimis Amount
    NAST ``strongly believes'' that the de minimis amount should be 
raised to $1,000 to correspond to current federal limits, arguing that:

First, Congress determined that $1,000 per election is a sufficiently 
low amount that it does not raise conflict of interest or favoritism 
concerns. Inflation and the increasing amount of contributions required 
to compete in local, state, and national elections in many 
jurisdictions have diminished even further the potential impact of an 
individual appropriate to prevent corruption or the perception of 
corruption in connection with contributions in the amount of $1,000 or 
less.* * * Second, increasing the de minimis contribution exemption to 
correspond with the federal contribution limit would significantly 
reduce the likelihood that a contributor might inadvertently trigger a 
two-year ban on business under rule G-37.* * * Finally, raising the de 
minimis exemption to the current FECA level would eliminate the 
disproportionate impact of rule G-37 on contributions to issuer 
officials who are candidates for federal office.

    MSRB Response. First, the MSRB determined that $250 continues to be 
an appropriate limit. Second, the inclusion of ``the nature of the 
election'' in the list of relevant factors should assist NASD and bank 
regulators in deciding whether to grant an exemptive request 
(conditionally or unconditionally) in view of the contribution amount 
and the federal contribution limits. Finally, the SEC's 1994 rule G-37 
Approval Order rejected the argument of a

[[Page 17132]]

disproportionate impact on issuer officials who are candidates for 
federal office.

Other Issues

Eliminate the Two-Year Ban on Business
    Morgan Stanley is concerned that NASD, in administering exemptive 
requests, does not take into account ``the proportionality of the 
penalty to the perceived violation. * * *'' They note that ``the two-
year ban applies regardless of the nature of, or intent in making, the 
contribution. Thus, a $1 million contribution triggers the same ban as 
a $5 contribution * * * [and the] so-called `death penalty' applies 
equally to minor infractions and blatant attempts to engage in `pay-to-
play'.'' Morgan Stanley also states that the protracted nature of the 
current exemption process ``is particularly problematic when a broker-
dealer has committed significant resources in connection with a 
municipal securities deal and is suddenly subject to a ban because it 
discovers an inadvertent contribution by an MFP with no relationship to 
that particular deal.'' While they agree with the Board's proposal to 
amend the exemption process, Morgan Stanley believes that ``simply 
changing the exemption standards does not go far enough to remedy the 
problem.* * * It is imperative that the Rule incorporate a mechanism 
designed to avoid disproportionate and clearly inequitable results.'' 
Therefore, Morgan Stanley urges the Board to consider eliminating the 
two-year ban on business and replacing it ``with a fair and equitable 
enforcement process in which the NASD has the mandate to consider 
issues of proportionality and impose sanctions that are consistent with 
the facts and circumstances of each case.'' They state that, under this 
approach, offending contributions would not automatically trigger the 
two-year ban but instead would require the NASD ``to craft a penalty 
that is proportional to the egregiousness of the violation.''
    MSRB Response. The MSRB determined not to eliminate the two-year 
ban on business that results when a dealer or MFP (or their controlled 
PACs) makes a contribution to an issuer official. In formulating rule 
G-37, the MSRB initially proposed a rule that would focus on the intent 
of the giver and be enforced like other MSRB rules through the normal 
inspection and review process of the enforcement agencies. Many 
commentators noted that such a rule would not halt pay-to-play 
practices because determining the intent of the giver would be 
impossible. Thus, the MSRB determined to make the ban on business an 
automatic result of certain contributions to issuer officials. In this 
way, the MSRB believed that pay-to-play practices would be halted, but 
MFPs still could contribute to those they were entitled to vote for, 
and could continue to volunteer their services to those elections. The 
ban is a way to ensure fair competition by avoiding conflicts of 
interest or the appearance of such a conflict.
    Morgan Stanley complains that the two-year ban should be eliminated 
because it does not take into account the proportionality of the 
contribution to the business lost. Morgan Stanley also gives examples 
of MFPs making small contributions that resulted in bans on business 
but were not granted exemptions by NASD. As noted in rule G-37(i), the 
regulatory agencies have the ability to review a number of factors in 
making its decision on exemption requests and has the ability to make 
conditional or unconditional exemptions. Certain of the conditions 
noted include what procedures the firm had in place at the time of the 
contribution and the actions of the MFP. After reviewing these and 
other facts, in a number of cases exemptions were not given. In other 
cases, the ban was lifted, either in whole or in part. A review of the 
totality of the factors apparently led NASD to these results. If one of 
the factors had been the proportionality of the contribution to the 
business lost, one could argue that a contribution of any size should 
not result in a ban on business in a large issuing state. The MSRB 
believes that the addition of such a factor would push the process to 
be too lenient in contravention of the purposes of rule G-37.
Contributions by Bank PACs and Bank Holding Company PACs
    The MSRB's Web site contains links to information provided to the 
Federal Election Commission (``FEC''), the Internal Revenue Service 
(``IRS'') and state election offices.
    Wilmer supports the Board's decision to continue excluding from 
rule G-37 contributions by bank PACs and BHC PACs. On the other hand, 
Morgan Stanley states that ``bank affiliated dealers have the ability 
to circumvent the spirit of the Rule through contributions made by 
their bank affiliate or its PAC * * *. [T]his unintended loophole 
undermines the effectiveness of the Rule and places traditional broker-
dealer firms at a competitive disadvantage.'' Morgan Stanley therefore 
recommends that the Board require disclosure on Form G-37 of 
contributions to issuer officials by dealer affiliated banks, bank PACs 
and BHC PACs. They believe that this ``would bring much needed 
transparency to this area * * * [which] would serve to discourage 
attempts to circumvent the spirit of the Rule through the use of bank 
affiliates.
    Seasongood believes that sufficient disclosure of bank PAC 
contributions does not currently exist under federal law. They state 
that certain Web sites (e.g., http://www.fec.gov/finance_reports) 
``are not user-friendly * * * which prevents someone from gleaning the 
information necessary to determine what PAC gave money to who.'' 
Moreover, the ``information available is old and difficult to 
analyze.'' Seasongood believes that the MSRB should be the single 
repository for information relating to political contributions and 
municipal securities business.
    MSRB Response. The MSRB determined not to require disclosure on 
Form G-37/G-38 of contributions to issuer officials from dealer-
affiliated banks, bank PACs and BHC PACs. As noted above, the MSRB has 
published links on its website to information provided by the FEC, IRS 
and state election offices. Banks and their PACs contribute to state 
and local officials for many reasons that have nothing to do with 
acquiring municipal securities business. Requiring affiliated dealers 
to report these contributions to the MSRB would raise a potentially 
unfair implication that the contribution was intended to influence the 
official to exercise his or her discretion in favor of granting an 
affiliate municipal securities business, when in fact the contribution 
may have been made to further the bank's legitimate political activity 
and there may be no connection between the contribution and the 
affiliated dealer's business.
    Moreover, to the extent that dealer-affiliated bank PACs are 
controlled by the dealer, or by an MFP of the dealer (even if the MFP 
is an employee of the bank), rule G-37 already obligates the dealer to 
report contributions made by the bank PAC. In a recent administrative 
proceeding, the SEC, in only its second rule G-37 enforcement action, 
held that contributions by a bank PAC, controlled by bank-employed 
MFPs, resulted in bans on business by the affiliated dealer.\6\ When 
the dealer engaged in banned business, it violated rule G-37.
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    \6\ See In the Matter of Fifth Third Securities, Inc., Exchange 
Act Release No. 46087, June 18, 2002.
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    Finally, there already is substantial public reporting of PAC 
contributions. The FEC requires all corporate affiliated

[[Page 17133]]

PACs that are not established exclusively for state and local (i.e., 
nonfederal) activity to register and report receipts and expenditures 
to the FEC. These reports are available for free and online from the 
FEC's Web site. The FEC's Web site provides the ability to view actual 
financial reports filed by PACs from 1993 to the present. These reports 
usually reflect contributions to federal campaigns. In addition, some 
reports reflect state and local campaign activity. The FEC website also 
provides researchers with the ability to electronically search the 
records for contributions to PACs by individuals, contributions made or 
received by a specific committee using various criteria, and 
contributions received by a specific campaign using a candidate's name, 
state, or party affiliation. While the information on the FEC website 
may be of limited use to persons searching for state and local 
contributions, the FEC website also links to state records offices that 
receive campaign finance reports and make them publicly available. 
These state records offices provide a wealth of information about 
contributions to state and local officials by corporations and their 
affiliated PACs. In addition, section 527 of the Internal Revenue Code, 
which provides tax-exempt status for political organizations, including 
PACs and federal, state and local committees, requires that political 
organizations that receive $25,000 or more in gross receipts and wish 
to be tax exempt under section 527 to file certain informational forms. 
Currently, it is possible to find additional information about bank 
PACs on the IRS Web site.

Constitutional Issues

    NAST reiterates constitutional issues that the organization raised 
in 1993 when rule G-37 was first proposed. Specifically, NAST questions 
whether the rule violates the First Amendment because it is 
underinclusive or overinclusive, and ``whether the rule is justified by 
a compelling governmental interest and whether it is narrowly tailored 
to achieve the goal.'' \7\ NAST also raises again issues of federalism 
stating that, ``[w]hile the scope and subject matter of the rule is the 
regulation of municipal securities dealers (and related professionals), 
it is also clear that the rule has a direct impact on state and local 
political speech and the conducting of state and local elections.'' 
NAST goes on to say that ``extending the proposed rule to federal 
officials would remove the present inequity of having a federal rule 
which limits the fundraising ability of state and local officials 
running for national office, while leaving incumbent federal officials 
free to take political contributions and gifts from the securities 
industry.''
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    \7\ NAST continues, ``[a]s an example of a potential First 
Amendment problem, NAST submits that the rule remains vulnerable to 
attack as being underinclusive in that it does not reach all the 
municipal securities professionals who participate in municipal 
securities transactions and who have a comparable incentive and 
opportunity to engage in unethical and anti-competitive behavior.''
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    MSRB Response. All of the constitutional issues raised by the NAST 
comment letter were addressed and rejected in both the SEC's 1994 rule 
G-37 Approval Order and the United States District Court of Appeals for 
the District of Columbia Circuit decision in Blount v. Securities and 
Exchange Commission.\8\ In Blount, a unanimous panel of the District of 
Columbia Circuit found that rule G-37 was constitutional under a strict 
scrutiny analysis by finding that the rule was narrowly tailored to 
serve a compelling governmental interest.\9\ The court found the 
purposes of the rule of protecting investors from fraud and protecting 
underwriters from unfair, corrupt practices to be substantial and 
compelling. The court also held that rule G-37 self-evidently advanced 
that interest, noting that,

    \8\ In 1994, William Blount, the then Chairman of the Alabama 
Democratic Party and a municipal securities dealer, brought an 
action against the SEC alleging that rule G-37 was unconstitutional. 
Blount v. SEC, 61 F. 3d 938 (D.C. Cir, 1995), cert. denied, 116 S. 
Ct. 1351 (1996).
    \9\ In 1996, the Supreme Court denied Blount's petition for a 
writ of certiorari to review the Court of Appeal's decision.
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    Underwriter's campaign contributions self-evidently create a 
conflict of interest in state and local officials who have power 
over municipal securities contracts and a risk that they will award 
the contracts on the basis of benefit to their campaign chests 
rather than to the government entity. (Emphasis added)

    The court further concluded that ``the link between eliminating 
pay-to play practices'' and the goals of ``perfecting the mechanism of 
a free and open market'' were also ``self-evident.''
    Finally, the court held that the rule was ``narrowly tailored'' to 
serve these compelling governmental interests.\10\ Accordingly, the 
court concluded that the rule met the strict scrutiny test, noting that 
the rule is closely drawn and thus avoids unnecessary abridgement of 
First Amendment rights.\11\
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    \10\ The court observed that the dealer is barred from engaging 
in business with the particular issuer for only two years after 
making the contribution, and from soliciting contributions only 
during the time it is engaged in or seeking business with the issuer 
associated with the donee. It noted further that municipal finance 
professionals are still able to contribute up to $250 per election 
to each official for whom they are entitled to vote, without 
triggering the business bar. Finally it observed that, as 
interpreted by the SEC, ``the municipal finance professionals are 
not in any way restricted from engaging in the vast majority of 
political activities, including making direct expenditures for the 
expression of their views, giving speeches, soliciting votes, 
writing books, or appearing at fundraising events.''
    \11\ The court also specifically rejected Blount's claims that 
rule G-37 is fatally underinclusive, noting that ``a rule is struck 
for underinclusiveness only if it cannot `fairly be said to advance 
any genuinely substantial governmental interest.' ''
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    NAST's federalism concerns were also addressed and rejected in the 
SEC's 1994 rule G-37 Approval Order. Specifically, the Commission 
stated that ``the proposed rule change is a necessary and appropriate 
measure to prevent fraudulent and manipulative acts and practices and 
the appearance of fraud and manipulation in the municipal securities 
market by eliminating `pay-to-play'' arranged underwritings.' The 
Commission also noted that:

    The Commission believes that it is not necessary to extend the 
proposal to include contributions to candidates for federal office. 
The proposal addresses abusive political contributions to officials 
of issuers who may influence the selection of municipal securities 
underwriters. Because federal office holders do not influence the 
underwriter selection process, the Commission believes it would not 
be appropriate to include federal candidates under the rule's 
requirements. By the same token, the Commission also believes that 
any resulting hardship to candidates for federal office who are 
currently local officials is not a reason for eliminating these 
requirements.\12\

    \12\ The United States District Court of Appeals for the 
District of Columbia Circuit in Blount also summarily rejected as 
meritless petitioner's claim that rule G-37 had an effect on states' 
own election processes and, as such, usurps the states' power to 
control their own elections.
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Ballot Referenda
    One commentator, Mr. Hartenstein, raised the issue of contributions 
to ballot measure campaigns. He states that contributions to ballot 
measure campaigns are an inappropriate influence ``in the selection of 
investment banks and other municipal market participants for the 
consulting work that is generated by successful local bond measures.'' 
He notes that, ``[t]his influence is not unlike the pernicious effects 
that the rule is intended to curb.'' Mr. Hartenstein states that, ``in 
the ballot measure context, investment banking firms may freely make 
money contributions in order to directly influence the appointed and 
elected public officials who decide which firms to hire for the public 
agency's bond business, without

[[Page 17134]]

any fear of sanctions under the rule. This clear flouting of the spirit 
of the rule should be stopped, and it can be stopped if the rule is 
amended to extend to ballot and bond measure elections.''
    Mr. Hartenstein states that contributions to bond measure campaigns 
``can result in higher bond interest and bond issuance costs, and 
higher taxes, than if municipal finance professionals were selected 
without regard to the amount they will contribute to campaigns.'' He 
notes that it is ``in the public interest to limit or prohibit 
contributions to local school bond election campaigns by interested 
private companies and individuals. This is an important corollary to 
the fundamental problem that rule G-37 is designed to address.''
    MSRB Response. The MSRB is reviewing this issue to determine 
whether any further action in this area is advisable.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of 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 such Proposed Rule Change, or
    (B) Institute proceedings to determine whether the Proposed Rule 
Change should be disapproved.

IV. Solicitation of Comments

    Interested people are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
is consistent with the Exchange Act. People making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0608. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the Proposed Rule Change that are filed with 
the Commission, and all written communications relating to the Proposed 
Rule Change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the Board's principal offices. 
All submissions should refer to File No. SR-MSRB-2002-12 and should be 
submitted by April 29, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8447 Filed 4-7-03; 8:45 am]
BILLING CODE 8010-01-P