[Federal Register Volume 70, Number 162 (Tuesday, August 23, 2005)]
[Notices]
[Pages 49342-49344]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4587]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52278, File No. SR-MSRB-2005-04]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval to Amendment No. 1 to the Proposed 
Rule Change Relating to Solicitation of Municipal Securities Business 
under MSRB Rule G-38

August 17, 2005.

I. Introduction

    On March 22, 2005, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change deleting existing Rule G-38, on 
consultants, and replacing it with new Rule G-38, on solicitation of 
municipal securities business. In addition, the proposed rule change 
would make related amendments to Rule G-37, on political contributions 
and prohibitions on municipal securities business, Rule G-8, on 
recordkeeping, Form G-37/G-38 and Form G-37x, as well as add new Form 
G-38t. The proposed rule change was published for comment in the 
Federal Register on April 21, 2005.\3\ The Commission received four 
comment letters regarding the proposal.\4\ On August 9, 2005, the MSRB 
filed Amendment No. 1 to the proposed rule change and a response to the 
four comment letters.\5\ This order approves the proposed rule change, 
accelerates approval of Amendment No. 1, and solicits comments from 
interested persons on Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51561 (April 15, 
2005), 70 FR 20782 (April 21, 2005).
    \4\ See letter from Rick Santorum, Senator, United States 
Senate, to William H. Donaldson, Chairman, Commission, dated March 
31, 2005 (``Senator Santorum's Letter''); letter from Chris Charles, 
President, Wulff, Hansen & Co. (``Wulff, Hansen''), to Jonathan G. 
Katz, Secretary, Commission, dated May 6, 2005 (``Wulff, Hansen's 
Letter''); letter from Lynnette Kelly Hotchkiss, Senior Vice 
President and Associate General Counsel, The Bond Market Association 
(the ``BMA''), to Jonathan G. Katz, Secretary, Commission, dated May 
5, 2005 (``BMA's Letter''); and letter from Jonathan Stein, Director 
of Regulatory Affairs--Fixed Income, Raymond James & Associates, 
Inc. (``Raymond James''), to Jonathan G. Katz, Secretary, 
Commission, dated May 24, 2005 (``Raymond James'' Letter).
    \5\ Amendment No. 1 is described in Section II, infra.
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II. Description of the Proposal

    The proposal would delete existing Rule G-38, on consultants, and 
replace it with new Rule G-38, on solicitation of municipal securities 
business. The MSRB believes that it would be appropriate to apply the 
basic standards of fair practice and professionalism embodied in MSRB 
rules to all persons who solicit municipal securities business on 
behalf of dealers. A full description of the proposal is contained in 
the Commission's Notice.\6\
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    \6\ See supra note 3.
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    In Amendment No. 1, the MSRB provides that the proposed rule change 
would become effective on the first business Monday at least five 
business days after Commission approval. Amendment No. 1 also deletes 
the requirement in proposed Rule G-38(c) relating to transitional 
payments that

[[Page 49343]]

the broker, dealer or municipal securities dealer (``dealer'') must be 
selected by the issuer for municipal securities business on or prior to 
the effective date of the proposed rule change while adding a 
requirement that dealers include on their initial and all subsequent 
Form G-38t submissions each item of municipal securities business for 
which a transitional payment remains pending and the amount of such 
pending payment for each item of business. Amendment No. 1 also 
modifies Form G-38t to reflect the required reporting of pending 
payments. Finally, Amendment No. 1 modifies the definition of 
``affiliated person'' and adds a definition of ``registered person'' so 
that affiliated persons would include independent brokers who are duly 
qualified registered persons of a dealer under MSRB or NASD 
professional qualification requirements. The text of Amendment No. 1 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.

III. Discussion

    As previously noted, the Commission received four comment letters 
on the proposed rule change.\7\ Senator Santorum's Letter opposed 
changing Rule G-38. Senator Santorum stated that he had been informed 
that consultants serve a legitimate and important role in the industry 
by permitting broker-dealers that do not have the resources to maintain 
an office in a particular jurisdiction to bid for municipal securities 
business in that jurisdiction. The MSRB stated in its proposal,\8\ and 
the Commission agrees, that the benefits to the municipal securities 
market resulting from the proposed rule change outweigh the benefits 
that would accrue to permitting consultants to continue soliciting 
municipal securities business on behalf of dealers.
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    \7\ See supra, note 4.
    \8\ See supra, note 3, at 20785.
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    Wulff Hansen's Letter supported the proposed rule change, stating 
that ``we believe that the social and economic costs of the present 
system (in the form of overt pay-to-play, more subtle forms of 
influence peddling, or similar undesirable practices) have come to 
outweigh the benefits.'' \9\
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    \9\ See supra, note 4, at 1.
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    The BMA's Letter requested modification of the requirements for 
making transition payments to consultants and clarification of the 
definitions of ``solicitation'' and ``affiliated employees.'' The 
proposed rule change provided that a dealer could pay an outside 
consultant after the effective date of the amendment (the date that the 
Commission approved the amendment) only if, among other requirements, 
such payment was made with respect solely to solicitation activities 
undertaken on or prior to the effective date pursuant to a Consultant 
Agreement under former Rule G-38 and the dealer had been selected by 
the issuer to engage in such municipal securities business on or prior 
to the effective date. The BMA's Letter stated that as a practical 
matter, dealers will have no meaningful notice as to when the 
Commission will approve the amendment and thus will not have an 
opportunity to effectively close out their relationship with 
consultants. For example, the BMA's Letter stated that a dealer would 
be prohibited from paying consultants compensation, which they had 
legitimately earned, and be forced to renege on its contractual 
obligations simply because the dealer had not yet been selected for the 
deal. In addition, the BMA's Letter stated that other problems arise in 
those instances where a broker-dealer is part of a pool of selected 
underwriters and rotated to a senior manager position periodically or 
in instances where consultants are paid on a retainer basis (as opposed 
to a success fee arrangement) where they earn their compensation 
regardless of whether the broker-dealer is selected and moneys may 
still be contractually due for time worked but not paid as of the 
effective date.
    The MSRB believes, and the Commission agrees, that Amendment No. 1, 
including the new effective date and modified transitional payment 
provisions, as well as the modification to Form G-38t, addresses the 
BMA's concerns about transition payments and will facilitate dealer 
compliance with revised Rule G-38 in an orderly and timely manner while 
reducing the opportunity for circumvention of the purposes of the 
proposed rule change. The MSRB further believes, and the Commission 
agrees, that as modified, the transitional payment provision should 
avoid the potential for exposing dealers to legal liability under their 
contracts with consultants for failure to pay for services rendered.
    The BMA's Letter also stated that the definition of 
``solicitation'' should be clarified. The MSRB has filed with the 
Commission a proposed interpretation providing such further 
clarification.\10\
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    \10\ File No. SR-MSRB-2005-11.
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    The BMA's Letter also requested clarification of the definition of 
affiliated employees, stating that the amendment prohibited a broker-
dealer from paying anyone other than an ``employee'' of the broker-
dealer or an affiliate for soliciting municipal securities business. 
The BMA's Letter stated that there are registered representatives who 
work for a dealer or an affiliate but do so as independent contractors, 
not as employees. The BMA's letter noted that as NASD licensed 
representatives of the dealer these independent contractors are also 
subject to the full array of MSRB rules. The BMA's Letter requested 
that the proposal be modified to permit a dealer to pay any licensed 
representative of that dealer or an affiliate to solicit municipal 
securities business.
    Raymond, James' Letter stated that Raymond James participated in 
BMA's Letter and fully supported that letter. Raymond, James' Letter 
also expressed concern that the proposed rule change did not recognize 
the important role that independent contractor financial advisors play 
in the market today, and stated that the definition of ``affiliated 
person'' should be expanded to include independent contractor 
registered representatives, by including NASD licensed representatives 
within the definition.
    The MSRB believes, and the Commission agrees, that the modified 
definition of ``affiliated person'' in Amendment No. 1 will address 
this concern and will further minimize the potential burden on 
competition of the proposed rule change in that it would treat dealer 
business models using independent brokers equally with dealer business 
models using directly employed brokers without reducing the 
effectiveness of the proposed rule change.
    After careful consideration, the Commission finds that the proposed 
rule change, as amended by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the MSRB \11\ and, in particular, the requirements of 
Section 15B(b)(2)(C) of the Act and the rules and regulations 
thereunder.\12\ Section 15B(b)(2)(C) of the Act requires, among other 
things, that the MSRB's rules 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

[[Page 49344]]

information with respect to, and facilitating transactions in municipal 
securities, to remove impediments to and perfect the mechanism of a 
free and open market in municipal securities, and, in general, to 
protect investors and the public interest.\13\ In particular, the 
Commission finds that the proposed rule change will further investor 
protection and the public interest by ensuring that solicitations of 
municipal securities business are undertaken in a manner consistent 
with standards of fair practice and professionalism, thereby helping to 
maintain public trust and confidence in the integrity of the municipal 
securities market.
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    \11\ In approving this rule the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78o-4(b)(2)(C).
    \13\ Id.
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IV. Accelerated Approval of Amendment No. 1

    The MSRB requested in Amendment No. 1 that the Commission find good 
cause, pursuant to Section 19(b)(2) of the Act, for approving Amendment 
No. 1 (simultaneously with the proposed rule change) prior to the 
thirtieth day after publication of the notice of filing of Amendment 
No. 1 in the Federal Register. The Commission finds good cause to 
approve Amendment No. 1 to the proposal prior to the thirtieth day 
after the date of publication of notice of filing thereof in the 
Federal Register. The MSRB believes, and the Commission agrees, that 
(i) the new effective date and modified transitional payment 
provisions, as well as the modification to Form G-38t, will facilitate 
dealer compliance with revised Rule G-38 in an orderly and timely 
manner while reducing the opportunity for circumvention of the purposes 
of the proposed rule change, and (ii) the modified definition of 
``affiliated person'' would further minimize the potential burden on 
competition of the proposed rule change in that it would treat dealer 
business models using independent brokers equally with dealer business 
models using directly employed brokers without reducing the 
effectiveness of the proposed rule change.
    For these reasons, the Commission finds good cause, consistent with 
Sections 15B(b)(2)(C) and 19(b)(2) of the Act, to accelerate approval 
of Amendment No. 1 to the proposed rule change.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether Amendment No. 1 
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-2005-04 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-2005-04. 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 editpersonal 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-2005-04 and should be submitted on or before September 13, 2005.

VI. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-MSRB-2005-04) be, and hereby 
is, approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4587 Filed 8-22-05; 8:45 am]
BILLING CODE 8010-01-P