[Federal Register Volume 70, Number 163 (Wednesday, August 24, 2005)]
[Notices]
[Pages 49696-49699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4621]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52290; File No. SR-MSRB-2005-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Relating to Amendments 
to MSRB Rule G-20, on Gifts and Gratuities, and MSRB Rule G-8, on 
Recordkeeping

August 18, 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 January 13, 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the Commission a proposed rule change 
consisting of amendments to Rule G-20, on gifts and gratuities, and the 
related recordkeeping requirements of Rule G-8.\3\ 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.
---------------------------------------------------------------------------

    \3\ The New York Stock Exchange, Inc. (``NYSE'') has a pending 
rule filing with the Commission on gifts and gratuities that is 
currently being reviewed. The MSRB has agreed to consider filing 
further amendments to Rule G-20 or other rules, as necessary, to 
make its rules on gifts and gratuities consistent with future rule 
changes made by other self-regulatory organizations (SROs) overseen 
by the Commission.
---------------------------------------------------------------------------

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
    MSRB Rule G-20 prohibits dealers from directly or indirectly giving 
or permitting to be given any thing or service of value in excess of 
$100 per year to any person other than an employee or partner of the 
dealer in relation to the municipal securities activities of the 
recipient's employer. The rule provides certain exemptions from the 
$100 annual limit for ``normal business dealings,'' including (i) 
occasional gifts of meals or tickets to theatrical, sporting and other 
entertainment; (ii) sponsoring legitimate business functions that are 
recognized by the IRS as deductible business expenses; and (iii) gifts 
of reminder advertising. However, such gifts must not be so frequent or 
excessive as to raise a suggestion of unethical conduct.
    MSRB Rule G-20 currently does not mandate specific requirements 
with respect to non-cash sales incentives, although the general fair 
practice

[[Page 49697]]

principles of Rule G-17 apply.\4\ The MSRB has interpreted Rule G-17 in 
the context of municipal fund securities to provide that a dealer may 
violate the rule by engaging in marketing activities that result in a 
customer being treated unfairly, or by engaging in any deceptive, 
dishonest or unfair practice in connection with such marketing 
activities.\5\ Further, depending on the particular facts and 
circumstances, a dealer may violate Rule G-17 if it acts in a manner 
that is reasonably likely to induce another dealer to violate the 
principles of Rule G-17 or other MSRB customer protection rules.\6\ In 
contrast, NASD Rules 2710(i), 2820(g)(4) and 2830(l)(5) establish 
specific requirements with respect to the payment of non-cash 
compensation in connection with offerings of corporate securities, 
variable contracts and mutual funds.
---------------------------------------------------------------------------

    \4\ Rule G-17 provides that ``In the conduct of its municipal 
securities activities, each broker, dealer and municipal securities 
dealer shall deal fairly with all persons and shall not engage in 
any deceptive, dishonest, or unfair practice.''
    \5\ MSRB Notice on ``Application of Fair Practice and 
Advertising Rules to Municipal Fund Securities,'' May 14, 2002, 
reprinted in the MSRB Rule Book (July 1, 2004) at page 151.
    Municipal fund securities are municipal securities issued by an 
issuer that, but for the application of Section 2(b) of the 
Investment Company Act of 1940, as amended, would constitute an 
investment company within the meaning of that Act. The most common 
forms of municipal fund securities sold by dealers consist of 
interests in trusts established by states as qualified tuition 
programs under Section 529 of the Internal Revenue Code (``529 
college savings plans''), and interests in local government 
investment pools.
    \6\ Id.
---------------------------------------------------------------------------

    The MSRB has determined that similar treatment across the 
securities markets is appropriate and would facilitate dealer 
understanding of, and compliance with, requirements relating to sales 
incentives and non-cash compensation. Thus, the proposed amendments are 
intended to more fully conform Rule G-20 to NASD requirements relating 
to gifts and gratuities, and to add new provisions governing non-cash 
compensation and sales incentives in connection with municipal fund 
securities and other primary offerings of municipal securities, based 
on NASD requirements for non-cash compensation and sales incentives. 
The proposed amendments would result in the following changes to Rule 
G-20:
     Modify the existing provision in Rule G-20 that permits 
occasional gifts of meals or sports and entertainment tickets, and 
sponsorship of business functions outside of the $100 per year 
limitation by requiring that dealer personnel host (accompany) such 
meals, entertainment and business functions in conformity with NASD 
gift rule limitations, and further modify the language of the 
requirement to incorporate NASD language to the effect that such 
occasional gifts must not call into question the dealer's ethical 
standards.\7\
---------------------------------------------------------------------------

    \7\ The NASD language with respect to this exception from the 
$100 annual gift limitation appears in an interpretive letter 
relating to NASD Rule 3060. See interpretive letter, dated June 10, 
1999, from R. Clark Hooper, Executive Vice President, NASD, to Henry 
H. Hopkins, Director, and Sarah McCafferty, Vice President, T. Rowe 
Price Investment Services, Inc.
     The existing Rule G-20 language relating to ``gifts of 
reminder advertising'' is retained in the proposed amendments 
without change even though such language does not exist under NASD 
rules.
---------------------------------------------------------------------------

     Clarify that NASD interpretations apply to comparable MSRB 
provisions, unless the MSRB specifically provides otherwise.
     Incorporate definitions of ``non-cash compensation,'' 
``cash compensation'' and ``offeror'' based on language in NASD Rules 
2710, 2820 and 2830, and expand the definition of offeror to include, 
with respect to securities held as assets underlying municipal fund 
securities, any person considered an offeror under relevant NASD rules.
     Treat non-cash sales incentives relating to municipal fund 
securities and other primary offerings of municipal securities (i.e., 
bonds and notes) in a manner similar to NASD's treatment of non-cash 
sales incentives relating to mutual funds, variable contracts, and 
corporate debt and equity offerings, including, among other things, 
permitting gifts that do not exceed $100 per individual per year and 
are not preconditioned on achievement of a sales target; and permitting 
the giving and receipt of occasional gifts of meals or tickets to 
theatrical, sporting and other entertainment, but only if such 
occasional gifts are not preconditioned on achievement of a sales 
target.
     Limit the circumstances under which dealers or offerors 
may pay or reimburse costs of training or education, based on NASD 
rules, including ensuring that attendance at, and payment for, such 
meetings is not preconditioned on achievement of a sales target; 
reimbursement is not applied to expenses of associated persons' guests; 
and that such meetings are held at appropriate locations.\8\
---------------------------------------------------------------------------

    \8\ The proposed language in Rule G-20 that refers to ``a 
location at which a significant asset, if any, being financed or 
refinanced in the primary offering is located'' is based on language 
included in draft amendments to NASD Rule 2710 proposed for comment 
by NASD in Notice to Members 04-07 (February 3, 2004) (the ``NASD 
Corporate Financing Proposal'').
---------------------------------------------------------------------------

     Require that non-cash compensation arrangements include 
the total production and equal weighting requirements under NASD rules, 
which are designed to ensure that the arrangement does not favor sales 
of one municipal security over another.\9\
---------------------------------------------------------------------------

    \9\ These total production and equal weighting requirements 
currently are included in NASD Rules 2820 and 2830, and are included 
in draft amendments to Rule 2710 proposed for comment in the NASD 
Corporate Financing Proposal.
---------------------------------------------------------------------------

     Amend the recordkeeping requirements in Rule G-8 to 
require that dealers maintain a record of non-cash compensation 
received in connection with a primary offering from the issuer or its 
advisers, the underwriter, or any of their affiliates, as well as 
records regarding any internal sales incentive program for municipal 
fund securities.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
section 15B(b)(2)(C) of the Act, \10\ which requires that the rules of 
the MSRB shall ``be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market in 
municipal securities, and, in general, to protect investors and the 
public interest * * *.'' \11\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78o-4(b)(2)(C).
    \11\ Id.
---------------------------------------------------------------------------

    The MSRB believes that the proposed rule change is consistent with 
these provisions in that it would provide for consistent treatment 
across the securities markets regarding gifts, gratuities, non-cash 
compensation and sales incentives, thereby facilitating dealer 
understanding of, and compliance with, these requirements.

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.

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

    In June 2004, the MSRB requested comment on draft amendments to 
Rule G-20, and the related recordkeeping provisions of Rule G-8, that 
would:

[[Page 49698]]

     Treat non-cash sales incentives relating to municipal fund 
securities and other primary offerings of municipal securities (i.e., 
bonds and notes) in a manner similar to NASD's treatment of non-cash 
sales incentives relating to mutual funds and corporate debt and equity 
offerings.
     Modify the existing provision in MSRB Rule G-20 that 
permits occasional gifts of meals or sports and entertainment tickets, 
and sponsorship of business functions outside of the $100 per year 
limitation by requiring that dealer personnel host (accompany) such 
meals, entertainment and business functions.
     Amend the recordkeeping requirements in Rule G-8 to 
require that dealers maintain a record of non-cash compensation 
received in connection with a primary offering from the issuer or its 
advisers, the underwriter, or any of their affiliates, as well as 
records regarding any internal sales incentive program for municipal 
fund securities.\12\
---------------------------------------------------------------------------

    \12\ See ``Request for Comments on Draft Amendments to Rules G-
20 and G-8 Relating to Gifts, Gratuities and Non-Cash Compensation 
in Municipal Debt Offerings and Sales of Municipal Fund 
Securities,'' MSRB Notice 2004-17 (June 15, 2004), at http://www.msrb.org.
---------------------------------------------------------------------------

    In response to the draft amendments, the MSRB received comment 
letters from NASD, The Investment Company Institute (``ICI''), Morgan 
Keegan, and Bernardi Securities. Three of the commentators (NASD, ICI 
and Morgan Keegan) expressed general support for the draft amendments, 
and one commentator (Bernardi Securities) opposed one aspect of the 
draft amendments. Two of the commentators (NASD and ICI) suggested that 
the MSRB make certain revisions, discussed below.
    The MSRB believes that a number of the commentators' concerns and 
suggestions have merit and, accordingly, revised the amendments to (1) 
incorporate NASD rule language where possible; (2) clarify that NASD 
interpretations would apply to comparable MSRB provisions, unless the 
MSRB specifically provides otherwise; and (3) expand the definition of 
offeror to include, with respect to securities held as assets 
underlying municipal fund securities, any person considered an offeror 
under relevant NASD rules.
    Consistency between NASD and MSRB Rules. NASD and ICI supported the 
MSRB's proposal to make Rule G-20 consistent with NASD's rules. ICI 
stated that a ``uniform system of regulation between the MSRB and the 
NASD reduces the potential that persons subject to both regimes will 
face conflicting regulatory requirements and facilitates compliance 
efforts. Moreover, inasmuch as the NASD is charged with inspecting 
securities firms for compliance with the rules of the MSRB, providing 
uniformity between MSRB's rules and those of the NASD * * * should 
facilitate the NASD's ability to conduct such inspections.'' NASD 
suggested that the MSRB, ``whenever possible, use precisely the same 
language as Rule 2830, and clarify that * * * [NASD's] interpretation 
of that rule would similarly apply to the interpretation of the Rule G-
20 amendments.''
    The MSRB agrees that, whenever possible, incorporating identical 
language between comparable provisions of MSRB and NASD rules would 
facilitate dealer understanding of and compliance with such provisions, 
as well as facilitate the inspection and enforcement thereof. The MSRB 
has, therefore, incorporated NASD language in the proposed amendments 
to Rule G-20, including those provisions relating to the requirement 
that dealers host meals, tickets to events and the like; technical 
language on gifts that call into question the dealer's ethical 
standards; non-cash compensation arrangements, including payment or 
reimbursement for education and training meetings; and the definitions 
of ``non-cash compensation,'' ``cash compensation,'' and ``offeror.''
    NASD interpretations. NASD asked the MSRB to clarify whether NASD's 
interpretation of the exception for training and education meetings, as 
set forth in its Summer 2000 Regulatory and Compliance Alert, would 
apply to the training and education meeting exception in the draft 
amendments.\13\ The MSRB agrees that this interpretation should apply 
to the similar provisions of amended Rule G-20.
---------------------------------------------------------------------------

    \13\ See NASD ``Regulatory & Compliance Alert'' (Summer 2000) at 
13.
---------------------------------------------------------------------------

    Moreover, the MSRB intends generally that the provisions of Rule G-
20 be read consistently with the analogous NASD provisions, unless the 
MSRB specifically indicates otherwise. Thus, relevant NASD 
interpretations would be presumed to apply to the comparable MSRB 
provision, subject to the MSRB's right to make distinctions when 
necessary and appropriate in the context of municipal fund securities 
and other primary offerings of municipal securities.
    Definition of ``offeror.'' NASD suggested that the draft definition 
of ``offeror,'' which includes the issuer's service providers in 
connection with the marketing and maintenance of its municipal fund 
securities, also should include the investment adviser to the 
underlying funds. Similarly, ICI recommended expanding the draft 
definition of ``offeror'' to include the issuer of any investment 
product into which the assets of a municipal fund security are 
invested, as well as any investment adviser, fund administrator, 
underwriter, or affiliated person of such entities with respect to such 
underlying investments. The MSRB agrees, and revised the proposed rule 
language to reflect this change, with minor adjustments to more fully 
conform to municipal fund securities and other primary offerings of 
municipal securities.
    Applicability of basic gift limitation to municipal fund 
securities. ICI suggested that the MSRB limit the provisions that would 
be applicable to municipal fund securities to those set forth in draft 
subsection (d) of Rule G-20. ICI noted that the draft amendments would 
result in there being two provisions governing ``de minimis'' gifts, 
and two provisions governing gifts of meals or tickets. ICI stated that 
this is unnecessary and will create confusion. It recommended that 
subsections (a) and (b) be revised to exclude the offer and sale of 
municipal fund securities, and that such offers and sales be subject 
solely to subsection (d). The MSRB does not agree with this suggestion; 
the two provisions are intended to apply in different contexts. Rule G-
20(a) applies to gifts and gratuities in relation to the municipal 
securities activities of the employer of the recipient. Rule G-20(d) 
applies to non-cash compensation in connection with the sale and 
distribution of a primary offering of municipal securities. The MSRB 
believes that both provisions are important and both should apply to 
municipal fund securities as well as to other primary offerings of 
municipal securities. The MSRB observes that dealers selling mutual 
fund shares also are currently subject to both NASD Rule 3060 and NASD 
Rule 2830(l)(5).
    Records of de minimis gifts. ICI recommended that the MSRB revise 
the draft recordkeeping requirement in Rule G-8 regarding non-cash 
compensation to conform to NASD Rule 2830, on investment company 
securities. ICI stated that the NASD rule does not require dealers to 
keep records of de minimis gifts (i.e., those under $100 per year) or 
occasional meals or tickets to theatrical and sporting events. ICI 
suggested that the MSRB similarly exclude these items from the 
recordkeeping requirements of Rule G-8 ``based on the conclusion that 
these de minimis items do not raise regulatory

[[Page 49699]]

concerns and, therefore, the burden of making and keeping such records 
would exceed any benefits of requiring them.'' ICI further noted that 
this revision would provide uniformity between MSRB and NASD 
recordkeeping requirements. The MSRB does not agree with this 
recommendation. The provisions in NASD Rule 3060, on influencing or 
rewarding employees of others, require firms to keep a separate record 
of all payments or gratuities in any amount. The MSRB believes that a 
recordkeeping requirement for de minimis gifts is necessary for both 
the dealer and the appropriate regulatory agency to determine whether a 
rule violation has occurred.

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-2005-02 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-2005-02. 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 
principal office of the MSRB. 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-2005-02 and should be submitted on or before 
September 14, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4621 Filed 8-23-05; 8:45 am]
BILLING CODE 8010-01-P