[Federal Register Volume 70, Number 157 (Tuesday, August 16, 2005)]
[Notices]
[Pages 48214-48219]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4425]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52235; File No. SR-MSRB-2005-12]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Concerning Solicitation 
and Coordination of Payments to Political Parties and Question and 
Answer Guidance on Supervisory Procedures Related to Rule G-37(d) on 
Indirect Violations

August 10, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 27, 2005, the Municipal Securities Rulemaking Board (``MSRB'' 
or ``Board'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the MSRB. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 2 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 MSRB has filed with the SEC a proposed rule change consisting 
of an amendment to Rule G-37(c), concerning solicitation and 
coordination of payments to political parties, and Q&A guidance on 
supervisory procedures related to Rule G-37(d), on indirect violations. 
The text of the proposed rule change is available on the MSRB's Web 
site (http://www.msrb.org), at the MSRB's principal office, and at the 
Commission's Public Reference Room.

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.

[[Page 48215]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Rule G-37(c) prohibits a dealer and its municipal finance 
professionals (``MFPs'') from soliciting any person or political action 
committee (``PAC'') to make or coordinate contributions to an official 
of an issuer with which the dealer is engaging or is seeking to engage 
in municipal securities business. The proposed amendments would also 
prohibit the dealer and certain MFPs\3\ from soliciting any person or 
PAC to make or coordinate a payment to a political party of a state or 
locality where the dealer is engaging or is seeking to engage in 
municipal securities business.\4\ The proposed rule amendments would 
specifically define any ``person''\5\ to include any affiliated entity 
of the dealer. This clarification is intended to alert dealers and MFPs 
that influencing the disbursement decisions of affiliated entities or 
PACs may constitute a direct violation of Rule G-37(c), as amended, if 
the dealer or MFP solicits the affiliated entity or PAC to make or 
coordinate contributions to an official of an issuer or a political 
party of a state or locality where the dealer is engaging or is seeking 
to engage in municipal securities business. Accordingly, in order to 
ensure compliance with Rule G-37(c), dealers should consider the 
adequacy of their information barriers with affiliated entities, or 
PACs controlled by affiliated entities, to ensure that the affiliated 
entities' contributions, payments, or PAC disbursement decisions are 
neither influenced by the dealer or its MFPs, nor communicated to its 
MFPs.
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    \3\ The proposed amendment limits MFPs who would be prohibited 
from soliciting or coordinating political party payments to those 
persons who are directly involved in the dealer's municipal 
securities business. The proposed language provides that only MFPs 
who are primarily engaged in municipal representative activities, 
solicitors of municipal securities business, or direct supervisors 
of MFPs that are ``solicitors'' or ``primarily engaged'' are 
prohibited from soliciting political party payments. The MSRB 
limited those MFPs covered by the proposed amendments to those 
directly involved in the municipal securities business of the 
dealer; recognizing that other MFPs more distant from the day-to-day 
operations of the dealer's municipal securities business may have 
other reasons to solicit or coordinate payments to political parties 
(i.e., reasons related to other business activities of the dealer).
    \4\ The MSRB notes that, depending upon the facts and 
circumstances, an MFP's solicitation of a contribution to an issuer 
with which the dealer is engaging or is seeking to engage in 
municipal securities business or the solicitation of a political 
party payment to a political party of a state or locality where the 
dealer is engaging or is seeking to engage in municipal securities 
business, may also constitute a violation of Rule G-37(d) on 
indirect violations.
    \5\ ``Person'' is defined in Sec.  3(a)(9) of the Act, to mean 
``a natural person, company, government, or political subdivision, 
agency, or instrumentality of a government.'' Unless the context 
otherwise specifically requires, the terms used in MSRB rules have 
the meanings set forth in the Act. See MSRB Rule D-1.
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    The proposed Q&A guidance provides that, in order to ensure 
compliance with Rule G-27(c) as it relates to payments to political 
parties or PACs and Rule G-37(d), each dealer must adopt, maintain and 
enforce written supervisory procedures reasonably designed to ensure 
that neither the dealer nor its MFPs are using payments to political 
parties and non-dealer controlled PACs to contribute indirectly to an 
official of an issuer.\6\ The draft Q&A guidance also explicitly states 
that contributing to ``housekeeping'', ``conference'' or ``overhead'' 
type accounts is not a safe harbor and does not alleviate the dealer's 
supervisory obligation to conduct this due diligence.
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    \6\ In addition, pursuant to MSRB Rule G-8(a)(xx), on records 
concerning compliance with Rule G-27, each dealer must maintain and 
keep current the records required under Rules G-27(c) and G-27(d).
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    The Qs&As seek to provide dealers with more guidance as they 
develop procedures to ensure compliance with both the language and the 
spirit of Rule G-37. The Qs&As emphasize the necessity for adequate 
supervisory procedures to ensure compliance with Rule G-37(d) not only 
with respect to payments to political parties, but also with respect to 
contributions to and disbursements by dealer-affiliated (but not 
controlled) PACs. The Board reminds dealers that a failure to implement 
satisfactory written procedures to ensure compliance with Rule G-37(d) 
could subject the dealer to enforcement actions by the appropriate 
regulatory authorities.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act,\7\ which provides that the MSRB's 
rules shall:
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    \7\ 15 U.S.C. 78o-4(b)(2)(C).

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market 
in municipal securities, and, in general, to protect investors and 
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the public interest.

    The MSRB believes that the proposed rule change is consistent with 
the Act because it will help inhibit practices that create the 
appearance of attempting to influence the awarding of municipal 
securities business through an indirect violation of Rule G-37. The 
MSRB also believes that the Q&A guidance will facilitate dealer 
compliance with Rule G-27, on supervision, and Rule G-37(d)'s 
prohibitions on indirect rule violations.

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

    The MSRB does not believe that the proposed rule change will result 
in any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act since it would apply equally to 
all dealers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    On February 15, 2005 the MSRB published for industry comment draft 
amendments to Rule G-37(c), concerning solicitation and coordination of 
payments to political parties, and draft Q&A guidance on supervisory 
procedures related to Rule G-37(d), on indirect violations (the 
``Notice'').\8\ The MSRB received seven comments on the Notice.\9\
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    \8\ See MSRB Notice 2005-11 (February 15, 2005).
    \9\ The Board received comment letters from the following: Sarah 
A. Miller, General Counsel, ABASA Securities Association (``ABASA'') 
to Carolyn Walsh, Senior Associate General Counsel, MSRB, dated 
April 11, 2005; J. Cooper Petagna, Jr., President, American 
Municipal Securities, Inc. (``American Municipal'') to Ms. Walsh, 
dated March 10, 2005; Robert E. Foran, Senior Managing Director, 
Bear Stearns & Co., Inc. (``Bear Stearns'') to Ms. Walsh, dated 
March 31, 2005; Leslie M. Norwood, Vice-President and Assistant 
General Counsel, Bond Market Association (``BMA'') to Ms. Walsh, 
dated April 1, 2005; Robert J. Stracks, Counsel, Griffin, Kubik, 
Stephens & Thompson, Inc. (``Griffin, Kubik'') to Ms. Walsh, dated 
March 30, 2005; Marc E. Lackritz, President, Securities Industry 
Association (``SIA'') to Ms. Walsh, dated April 5, 2005; and Terry 
L. Atkinson, Managing Director, UBS Financial Services Inc. 
(``UBS'') to Ms. Walsh, dated April 1, 2005.
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    Of the seven commentators, one commentator, American Municipal, 
supports the adoption of the amendments to Rule G-37 and the proposed 
Qs&As because they will strengthen the effectiveness of the rule in 
preventing improper political contributions.\10\ One commentator, 
Griffin, Kubik, believes that the existing structure of Rule G-37 is 
unconstitutional and complains about the existing operation of Rule G-
37.\11\

[[Page 48216]]

Griffin, Kubik also suggests that requiring full and immediate 
disclosure of dealer contributions by the recipient issuer official 
would be more effective in policing this arena.
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    \10\ American Municipal also suggests that consideration be 
given to having the rule applied to all registered personnel and not 
just MFPs.
    \11\ This commentator complains that if an associated person of 
a dealer introduces or solicits municipal securities business for 
the dealer while at the same time making political contributions to 
an official of a completely different local political body, the 
broker-dealer could face a G-37 compliance problem. In fact, 
assuming this was the first time the associated person solicited 
municipal securities business for the dealer, the contribution to an 
issuer official who is not the issuer official solicited would not 
result in a ban on doing business with the introduced issuer. It 
would, however, result in the associated person becoming a municipal 
finance professional of the dealer and being subject to Rule G-37 
from the date of the solicitation activity forward.
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    The remaining five commentators express support for the MSRB's 
efforts to eliminate any vestiges of pay-to-play in the municipal 
securities industry, whether they are in the form of a direct or 
indirect contribution to an issuer official. However, ABASA, BMA \12\, 
SIA and UBS assert that the Qs&As are vague thus making it impossible 
for broker-dealers to know exactly what standard to apply. ABASA, BMA, 
SIA and UBS request that the MSRB clarify the proposed Qs&As as they 
relate to contributions to party committees and PACs so that they 
establish clear standards upon which the industry may rely. BMA, SIA 
and UBS request that the MSRB expressly state that contributions made 
to national party committees and certain federal leadership PACs 
(controlled by members of Congress) are permitted. BMA and UBS also 
request that the MSRB: (1) Acknowledge that the proposed Qs&As reflect 
a new approach to Rule G-37's prohibition on indirect contributions and 
not just a restatement of the existing standard; (2) modify the 
prohibition on soliciting contributions to state or local parties so 
that broker-dealers and MFPs would be permitted to solicit 
contributions to the same extent they are able to make a contribution 
to them; and (3) clarify what is meant by ``affiliated PAC'' for 
purposes of erecting an informational barrier.\13\ ABASA also states 
that the MSRB's suggested information barrier concerning past and 
current municipal securities business is unrealistic because much of 
the information is public. These specific comments are discussed in 
detail below.
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    \12\ Because the Bear Stearns comment letter simply states that 
it supports the BMA letter, for the purposes of this discussion Bear 
Stearns' positions will not be separately identified. Rather, it 
should be understood that positions attributed to BMA are also 
supported by Bear Stearns.
    \13\ Griffin, Kubik also seeks this clarification.
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The Draft Amendments to Rule G-37(c)(ii): The Prohibition on Soliciting 
Contributions to State and Local Party Committees Should Be Symmetrical 
to the Contributions Ban

    Comments Received. BMA and UBS assert that the Rule G-37(c) 
amendment should be symmetrical to the contributions ban because they 
do not believe it makes sense to impose a greater, absolute prohibition 
on soliciting contributions than on making contributions. BMA 
recommends that dealers and MFPs be permitted to solicit contributions 
to the same extent they are allowed to make contributions.
    MSRB Response. The proposed rule amendment is more limited than 
what the comment letters portray. The comment letters state that the 
amendment would completely prohibit MFPs from soliciting contributions 
to any state and local party committees when, in fact, it only 
prohibits solicitations by the dealer or certain MFPs for contributions 
to a political party of a state or locality where the dealer is 
engaging or is seeking to engage in municipal securities business. 
Thus, the proposed amendment is narrowly tailored to regulate only a 
dealer's or certain MFP's solicitation of other persons' payments to 
political parties when there can be a perception that MFPs and dealers 
are soliciting others to make payments to parties or PACs as an end-run 
around the rule and the rule's disclosure requirements.
    Current Rule G-37(c) operates as an absolute prohibition on 
soliciting contributions for an official of an issuer with which the 
dealer is engaging or seeking to engage in municipal securities 
business and is not symmetrical with Rule G-37(b) because there is no 
de minimis exception in Rule G-37(c). Moreover, because dealers' and 
MFPs' payments to political parties do not trigger the automatic ban on 
business (unless there is an indirect violation) there is no mechanism 
to correlate the party payment disclosure scheme in Rule G-37 with the 
proposed prohibition on the solicitation and coordination of payments 
to political parties of states or localities where the dealer is 
engaging or seeking to engage in municipal securities business.
    The MSRB determined that allowing dealers or certain MFPs to 
solicit other persons to make political party or PAC payments in states 
and localities where they are engaging or seeking to engage in 
municipal securities business creates at least the appearance of 
attempting to influence the awarding of municipal securities business 
through such payments. Moreover, without the proposed prohibition, it 
would be very difficult for enforcement agencies to detect such 
potential indirect violations because the parties solicited do not have 
to disclose the payments. Additionally, the arguably stricter 
prohibition can be justified because a violation of Rule G-37(c) does 
not result in an automatic ban on business.

Vagueness of the Proposed Q&A Guidance Concerning Rule G-27, on 
Supervision, and Rule G-37(d), on Indirect Violations

    Comments Received. ABASA, BMA, SIA, and UBS request that the Qs&As 
be clarified because they do not present a clear objective standard as 
to when party and PAC contributions should be treated as indirect 
contributions to issuer candidates. BMA, SIA and UBS also complain that 
the Qs&As represent an expansion of Rule G-37. BMA suggests that if the 
MSRB's intent is to absolutely eliminate state and local party 
committee and PAC contributions, it should come out with a clear 
prohibition.
    MSRB Response. The MSRB's intent was not to eliminate all state and 
local party committee and PAC contributions or to specify which ones 
would not be indirect contributions to issuer officials. The MSRB 
recognizes that some payments to political parties are made for reasons 
that have no connection with influencing the awarding of municipal 
securities business. The MSRB's decision to issue the proposed Q&A 
guidance was prompted by concern that dealers are not implementing 
adequate supervisory procedures reasonably designed to prevent indirect 
rule violations. The MSRB also voiced its concern about the emergence 
of recent media and other reports that issuer agents have informed 
dealers and MFPs that, if they are prohibited from contributing 
directly to an issuer official's campaign, they should contribute to 
the affiliated party's ``housekeeping'' account.
    By voicing a concern that dealers who make such payments to parties 
or PACs may be doing so in an effort to avoid the political 
contribution limitations embodied in Rule G-37, the MSRB was not 
expanding the reach of Rule G-37. The MSRB was, however, alerting 
dealers to modern day political realities and practices that may 
prove--with hindsight--to be problematic. The MSRB was also suggesting, 
though not requiring, general supervisory procedures designed to help 
ensure that the party or PAC payments do not result in a violation of 
Rule G-37(d). Dealers are required to implement adequate supervisory 
procedures, but the MSRB's

[[Page 48217]]

suggestions about general approaches to conducting adequate due 
diligence are not meant to be either required procedures or a safe 
harbor. Ideally, an adequate supervisory procedure will prevent a Rule 
G-37(d) violation, but the existence of adequate supervisory procedures 
may only protect the firm from a resulting Rule G-27 violation should a 
problem later occur. A payment permitted by the dealer's supervisory 
procedures may still result in a violation of Rule G-37(d) if it is 
later proven that the MFP in question contributed with the intent to 
circumvent the rule. Such instance, of course, could put the dealer in 
a good position to seek a waiver of the resulting ban on business from 
the NASD.
    Moreover, the proposed Qs&As do not broaden the sphere of activity 
that is prohibited by Rule G-37. A violation of Rule G-37(d) still will 
only occur when the payment is made to other entities ``as a means to 
circumvent the rule.'' Rule G-37(d), which prohibits anyone from 
``directly or indirectly, through or by any other person or means'' 
doing what sections (b) and (c) prohibit has previously been challenged 
on the grounds that it is unconstitutionally vague. The United States 
Court of Appeals in Blount v. SEC \14\ rejected this challenge 10 years 
ago. In Blount, the Court stated,
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    \14\ Blount v. SEC, 61 F.3d 938, (D.C. Cir. 1995), rehearing and 
suggestion for rehearing en banc denied (1995), certiorari denied by 
517 U.S. 1119, 116 S.Ct. 1351, 134 L.Ed.2d 520 (1996).

Although the language of section (d) itself is very broad, the SEC has 
interpreted it as requiring a showing of culpable intent, that is, a 
demonstration that the conduct was undertaken ``as a means to 
circumvent'' the requirements of (b) and (c). * * * The SEC states its 
``means to circumvent'' qualification in general terms. The 
qualification appears, therefore, to apply not only to such items as 
contributions made by the broker's or dealer's family members or 
employees, but also gifts by a broker to a state or national party 
committee, made with the knowledge that some part of the gift is likely 
to be transmitted to an official excluded by Rule G-37. In short, 
according to the SEC, the rule restricts such gifts and contributions 
only when they are intended as end-runs around the direct contribution 
limitations.\15\
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    \15\ Id. at 948.
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The Standards in the ``Reasons Test'' and ``Activity Test'' Need To Be 
Clarified

    Comments Received. ABASA, BMA, SIA and UBS assert that the proposed 
Q&A guidance should be clarified with bright-line tests to identify the 
parties or PACs to which dealers and MFPs can make payments without 
violating Rule G-37(d), on indirect violations. In particular, the 
commentators object to the guidance that suggests that the dealer 
identify the reason for making the payment to the party or PAC (the 
``reasons test'') without defining the motivation(s) that should result 
in a contribution being classified as an indirect contribution to an 
issuer official. BMA suggests that the reasons test be clarified to 
only cover contributions to party committees and PACs that are 
controlled by, or where the contribution is solicited by, an issuer 
official.
    The commentators also object to the suggestion that dealers make 
inquiries to essentially ``follow the money'' to reasonably ensure that 
the party or PAC is not supporting one or a limited number of issuer 
officials (the ``activity test'') on the grounds that it is unclear. 
BMA asserts that the language is unclear because it could mean one of 
two things: (1) If the party or PAC that receives the contribution 
supports even one issuer official, then an indirect ban is triggered; 
or (2) the dealer must determine that the party's or PAC's expenditures 
on issuer officials constitute a large enough portion of its total 
expenditures such that an indirect ban is triggered. BMA and UBS ask 
the MSRB to revise its guidance to suggest a test based on objective 
criteria. UBS suggests that this objective criteria include a 
``dilution standard'' that would need to include at least the following 
elements: (1) A threshold--50%, 60% or 70%--of a party's or PAC's 
expenditures used for non-issuer purposes that would be sufficient to 
overcome a presumption that the committee supported one or a limited 
number of issuer officials, and (2) a time period over which the party 
committee or PAC would be required to examine when calculating the 
threshold percentage.
    MSRB Response. As discussed above, the proposed Q&A guidance does 
not change the existing legal framework concerning the motivation that 
would result in a contribution being classified as an indirect 
contribution to an issuer official. An MFP or dealer could be found 
(after the fact) to have violated Rule G-37(d) if payments to a party 
or PAC are intended as end-runs around the direct contribution 
limitations. The MSRB does not believe it is appropriate to attempt to 
delineate specific reasons that are permissible, and those that are 
not. What is important is that dealers institute adequate procedures to 
identify potential violations. If the dealer's procedures include 
making an inquiry about the reason for making the payment \16\ the 
dealer must then exercise its judgment as to whether the facts and 
circumstances surrounding the payment indicate that the reason for 
making the contribution was to circumvent Rule G-37.
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    \16\ To the extent that dealers are concerned that the act of 
inquiring about persons' reasons for making payments to PACs and 
political partiers may chill political speech, the procedure could 
require persons to give negative assurances that the party or PAC 
payment is not being made as a means to circumvent the requirements 
of Rule G-37.
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    With regard to the ``activity test'' comments, the MSRB's existing 
Q&A guidance on this issue already states that dealers that make 
contributions to organizations such as political parties or PACs (as 
well as dealers that allow MFPs to make such payments) have a duty to 
make inquiries of such organizations in order to ascertain how the 
contributed funds will be used.\17\ Following this guidance, dealers 
should be able to develop adequate written supervisory procedures 
reasonably designed to ensure that payments to political parties or 
PACs are not being used to circumvent the requirements of Rule G-37. 
The MSRB does not believe it is useful to provide ``safe harbors'' 
concerning parties or PACs such that a dealer or MFP could make 
payments to certain parties or PACs without investigating whether the 
payment is actually being made as a means to circumvent the 
requirements of Rule G-37. Such ``safe harbors'' create the potential 
for loopholes in Rule G-37's regulatory scheme as parties and PACs 
tailor their solicitations for contributions to MSRB suggested 
parameters.
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    \17\ See Rule G-37 Questions and Answers No. III. 5, reprinted 
in MSRB Rule Book. See also Rule G-37 Questions and Answers Nos. 
III.3 and III.4, reprinted in MSRB Rule Book.
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    However, the MSRB has determined to revise the guidance and remove 
some of the specific due diligence suggestions to focus on reminding 
dealers that each dealer is required under Rule G-27, on supervision, 
to evaluate its own circumstances and develop written supervisory 
procedures reasonably designed to ensure that the conduct of the 
municipal securities activities of the dealer and its associated 
persons are in compliance with Rule G-37(d), on indirect violations. 
After evaluating its own circumstances, a dealer could determine that 
adequate supervisory procedures would include some of the commentators' 
suggested due diligence procedures.

[[Page 48218]]

National Party Committees and Federal Leadership PACs Should Be 
Expressly Permitted

    Comments Received. BMA, SIA and UBS request that, while they 
believe contributions to national party committees and federal 
leadership PACs appear to be permitted under the due diligence 
standards established by the proposed Qs&As, the MSRB should expressly 
state that contributions made to a national party committee or federal 
leadership PAC are permitted under the proposed Qs&As as long as (1) 
the contribution was not solicited by an issuer official, and (2) the 
party committee or leadership PAC is not controlled by an issuer 
official.
    MSRB Response. Essentially, the commentators are asking the MSRB to 
create a safe harbor for certain national party committees and federal 
leadership PACs. The creation of such a safe harbor would be a 
departure from the intended reach of Rule G-37(d). As noted above, the 
Court of Appeals in Blount expressly recognized that Rule G-37(d) was 
originally intended to prevent payments to both national and state 
parties used as a ``means to circumvent'' Rule G-37. Moreover, although 
BMA, SIA and UBS essentially assert that when a contribution is not 
solicited by an issuer official and the party leadership PAC is not 
controlled by an issuer official the national party committees and 
federal leadership PACs can not be used as a means to circumvent Rule 
G-37, such a position is inconsistent with public perception.\18\ 
Additionally, the Supreme Court's recent decision in McConnell v. 
Federal Election Commission,\19\ emphasized the potential for payments 
to a political party to have undue influence on the actions of the 
elected officeholders belonging to the same party. McConnell upheld new 
federal statutory restrictions on soft money donations that were 
neither solicited by candidates nor used by the party to aid specific 
candidates. Given public perception and the Supreme Court's 
pronouncements, the MSRB believes it is reasonable to require dealers 
to be responsible for having adequate supervisory procedures that 
obligate the dealer to exercise its judgment concerning whether 
contributions to any party or PAC are being made as a means to 
circumvent the provisions of Rule G-37.
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    \18\ See e.g., Spina, Naples favors one underwriter GOP backer 
gets 80% of county bond business, even at $500,000 higher cost, The 
Buffalo News, April 6, 2005 at p. A1 (suggesting that an MFP's 
contributions to a PAC run by House Majority Leader Tom Delay were 
transferred to the congressional campaign of a sitting issuer 
official that awarded 14 of 24 bond deals to firms that the MFP was 
associated with).
    \19\ McConnell v. Federal Election Commission, 540 U.S. 93, 124 
S.Ct. 619 (Dec. 10, 2003).
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The Existence of a ``Safe-Harbor'' for Payments to ``Housekeeping'' or 
``Conference'' Accounts

    Comments Received. The BMA and UBS assert that the MSRB's 
statements in the Notice are a departure from prior statements because 
previously the MSRB recognized a ``safe-harbor'' that expressly 
permitted contributions to ``conference accounts'' of state and local 
party committees. ABASA also states that the MSRB has with the draft 
Qs&As, in effect, outlawed contributions to housekeeping and similar 
accounts.
    MSRB Response. The MSRB's statements in the Notice about the status 
of ``housekeeping'' or ``conference'' type accounts were made to 
correct a misconception about these types of accounts. Although the 
MSRB never recognized such accounts as a safe-harbor, the MSRB learned 
that some dealers might have believed that payments to a 
``housekeeping'' type account could not result in an indirect violation 
of Rule G-37. The SEC's approval order of certain early amendments to 
Rule G-37 demonstrates that the MSRB never intended for dealers to 
treat payments to administrative accounts as a safe harbor.\20\
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    \20\ See Securities Exchange Act Release No. 35446 (SEC Order 
Approving Proposed Rule Change by the Municipal Securities 
Rulemaking Board Relating to Rule G-37 on Political Contributions 
and Prohibitions on Municipal Securities Business, and Rule G-8, on 
Recordkeeping) (March 6, 1995), 60 FR 13496 (March 13, 1995) (``1995 
SEC Approval Order'').
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    In 1995, the MSRB filed and the SEC approved amendments to Rule G-
37's disclosure requirements to require dealers to record and report 
all payments to parties by dealers, PACs, MFPs and executive officers 
regardless of whether those payments constitute contributions. In the 
1995 SEC Approval Order, the SEC reiterated that the party payment 
disclosure requirements are intended to help ensure that dealers do not 
circumvent the prohibition on business in the rule by indirect 
contributions to issuer officials through payments to political 
parties. The SEC explained that the need for the language amendment was 
motivated by attempts by dealers and/or political parties to assert 
that contributions to administrative type accounts did not fall within 
the rule's regulatory ambit. In the 1995 SEC Approval Order, the SEC 
states:

Certain dealers and other industry participants have notified the 
MSRB that certain political parties currently are engaging in 
fundraising practices which, according to these political parties, 
do not invoke the application of rule G-37. For example, some of 
these entities currently are urging dealers to make payments to 
political parties earmarked for expenses other than political 
contributions (such as administrative expenses or voter registration 
drives). Since these payments would not constitute ``contributions'' 
under the rule, the recordkeeping and reporting provisions would not 
apply. The MSRB is concerned, based upon this information, that the 
same pay-to-play pressures that motivated the MSRB to adopt rule G-
37 may be emerging in connection with the fundraising practices of 
certain political parties described above.\21\
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    \21\ Id. at 13498.

    In addition, in August 2003, when the MSRB published a notice on 
indirect rule violations of Rule G-37, the MSRB referenced the 1995 SEC 
Approval Order and specifically stated that, ``The party payment 
disclosure requirements were intended to assist in severing any 
connection between payments to political parties (even if earmarked for 
expenses other than political contributions) and the awarding of 
municipal securities business.'' \22\
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    \22\ MSRB Notice 2003-32 (August 6, 2003) at pp. 1-2 (emphasis 
added).
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The Term Affiliated PAC Should Be Clarified

    The BMA states that, while the proposed Qs&As suggest that a 
broker-dealer establish an informational barrier between it and its 
affiliated PAC, the MSRB does not clarify what it means by the term 
``affiliated PAC.'' The BMA also states that the MSRB should clarify 
``affiliated PAC'' to mean a PAC that is controlled by a wholly owned 
affiliate of the broker-dealer.
    MSRB Response. The MSRB has accepted the suggestion that the term 
``affiliated PAC'' should be defined in the guidance and has revised 
the guidance to provide that for the purposes of this guidance the term 
``affiliated PAC'' means a PAC controlled by an affiliated entity of a 
dealer. An ``affiliated entity'' is an entity that controls, is 
controlled by or is under common control with the dealer. This use of 
the term ``affiliated'' is consistent with the use of the term in the 
MSRB's proposed amendments to Rule G-38(b)(ii), on consultants.\23\
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    \23\ See Securities Exchange Act Release No. 51561 (April 15, 
2005), 70 FR 20782 (April 21, 2005) (File No. SR-MSRB-2005-04).
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Recommendations Concerning Information Barriers

    Comments Received. ABASA states that the MSRB's suggestion that 
dealers establish an information barrier

[[Page 48219]]

prohibiting sharing information about prior negotiated municipal 
securities business as well as current and planned solicitations 
between the dealer, its MFPs and any affiliated PAC is unrealistic 
because much of the information is public.
    MSRB Response. The MSRB has revised the language relating to the 
municipal securities business information barrier to suggest that 
dealers prohibit the dealer and its MFPs from directly providing or 
coordinating information about prior negotiated municipal securities 
business as well as current and planned solicitations to any affiliated 
PAC.

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 persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

 Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
 Send an e-mail to [email protected]. Please include File 
Number SR-MSRB-2005-12 on the subject line.

Paper Comments

 Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-MSRB-2005-12. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the MSRB's 
offices. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
MSRB-2005-12 and should be submitted on or before September 6, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4425 Filed 8-15-05; 8:45 am]
BILLING CODE 8010-01-P