[Federal Register Volume 60, Number 48 (Monday, March 13, 1995)]
[Notices]
[Pages 13496-13499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6029]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35446; File No. SR-MSRB-94-14]


Self-Regulatory Organizations; 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.
    On August 18, 1994, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''\1\ a proposed rule change 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed rule change 
amends rule G-37 on political contributions and prohibitions on 
municipal securities business, and rule G-8 concerning 
recordkeeping.\4\

    \1\On November 9, 1994, the MSRB filed Amendment No. 1 with the 
Commission. Amendment No. 1 withdraws from the filing the proposed 
amendment to rule G-37(g)(iv)(A). The MSRB had proposed to amend the 
definition of ``municipal finance professional'' contained in rule 
G-37(g)(iv)(A) to exempt retail sales persons from being deemed 
``municipal finance professionals.''
    \2\15 U.S.C. Sec. 78s(b)(1).
    \3\17 CFR 240.19b-4.
    \4\The Board published the text of the proposed rule change in 
the August 1994 MSRB Reports, Vol. 14, No. 4, at 27-32.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was provided by issuance of a Commission release 
(Securities Exchange Act Release No. 34630, September 1, 1994) and by 
publication in the Federal Register (59 FR 46682, September 9, 1994). 
Eleven comment letters were received.\5\ This order approves the 
proposed rule change.

    \5\Letter from Mark D. Schwartz, Esq. (``Schwartz'') to Arthur 
Levitt, Chairman, Commission, dated September 18, 1994 (``Schwartz 
Letter''); Letter from Heather L. Ruth, President, Public Securities 
Association (``PSA'') to Jonathan G. Katz, Secretary, Commission, 
dated September 18, 1994 (``PSA Letter''); Letter from Patrick J. 
Manning, President, Chemical Securities Inc. (``Chemical'') to 
Jonathan G. Katz, Secretary, Commission, dated September 30, 1994 
(``Chemical Letter''); Letter from Rhonda G. Kirschner, Senior 
Attorney and Corporate Vice President, Paine Webber Inc. (``Paine 
Webber'') to Jonathan G. Katz, Secretary, Commission, dated 
September 30, 1994 (``Paine Webber Letter''); Letter from Robin L. 
Wiessmann, Principal, Artemis Capital Group, Inc. (``Artemis'') to 
Jonathan G. Katz, Secretary, Commission, dated September 29, 1994 
(``Artemis Letter''); Letter from W. Robb Hough, Jr., President, 
William R. Hough & Co. (``Hough'') to Jonathan G. Katz, Secretary, 
Commission, dated September 29, 1994 (``Hough Letter''); Letter from 
Robert K. Dalton, Vice Chairman and William H. Coughlin, President, 
George K. Baum & Co. (``Baum'') to Jonathan G. Katz, Secretary, 
Commission, dated September 28, 1994 (``Baum Letter''); Letter from 
Brian C. Underwood, Vice President--Director of Compliance, A.G. 
Edwards & Sons, Inc. (``Edwards'') to Jonathan G. Katz, Secretary, 
Commission, dated September 29, 1994 (``Edwards Letter''); Letter 
from Samuel J. Winer, Esq., Arter & Hadden to Jonathan G. Katz, 
Secretary, Commission, dated October 20, 1994 (``Arter & Hadden 
Letter''); Letter from A. George Saks, Executive Vice President, 
Secretary and General Counsel, Smith Barney Inc. (``Smith Barney'') 
to Jonathan G. Katz, Secretary, Commission, dated September 29, 1994 
(``Smith Barney Letter''); Letter from Steven D. Vander Clay, Vice 
President, NBD Bank, N.A. (``NBD'') to Jill C. Finder, Assistant 
General Counsel, MSRB, dated October 20, 1994 (``NBD Letter'').
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I. Introduction

    On April 7, 1994, the Commission approved Board rule G-37, 
concerning political contributions and prohibitions on municipal 
securities business.\6\ In response to numerous inquiries received by 
the Board concerning the application of the rule, on May 24, 1994, the 
Board filed with the Commission a Question and Answer (``Q&A'') 
interpretation of the rule.\7\ On June 3, 1994, the Commission approved 
amendments to the rule which (i) provide a procedure whereby dealers 
may seek relief from the rule's prohibition on business, in limited 
circumstances, and (ii) clarify certain definitions in the rule.\8\ The 
Board has filed with the Commission subsequent Q&A interpretations of 
the rule.\9\ The rule change approved herein also is intended to 
address concern over certain aspects of rule G-37.

    \6\Securities Exchange Act Release No. 33868 (April 7, 1994), 59 
FR 17621 (April 13, 1994) (``Approval Order''). The rule applies to 
contributions made on and after April 25, 1994.
    \7\See Securities Exchange Act Release No. 34161 (June 6, 1994), 
59 FR 30379 (June 13, 1994). The interpretations were published in 
the June 1994 MSRB Reports.
    \8\Securities Exchange Act Release No. 34160 (June 3, 1994); 59 
FR 30376 (June 13, 1994).
    \9\See Securities Exchange Act Release No. 35128 (December 20, 
1994), 59 FR 66989 (December 28, 1994); Securities Exchange Act 
Release No. 34603 (August 25, 1994), 59 FR 45049 (August 31, 1994). 
See also MSRB Reports, Vol. 14, No. 5, at 8 (December 1994); Vol. 
14, No. 4, at 27-32 (August 1994). The interpretations also are 
available for inspection and copying at the Commission's public 
reference room and at the Board.
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II. Amendments to Rule G-37 and Rule G-8

    The rule change approved today amends rule G-37 and rule G-8 by: 
(i) amending the definition of municipal finance professional by 
designating as a municipal finance professional any associated person 
who is both (a) a municipal securities principal or a municipal 
securities sales principal and (b) a supervisor of any person primarily 
engaged in municipal securities representative activities or who 
solicits municipal securities business; (ii) amending the definition of 
municipal finance professional so that any person designated as a 
municipal finance [[Page 13497]] professional will keep that 
designation for two years after the last activity which would trigger 
that designation; (iii) requiring brokers, dealers and municipal 
securities dealers to disclose all payments made to political parties, 
even if the payments do not constitute contributions as defined in the 
rule; and (iv) amending the definition of ``issuer'' to exclude all 
issuers of separate securities, as defined in Rule 3b-5 under the Act.

A. Supervisors of Municipal Finance Professionals

    Rule G-37(g)(iv) provides that 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);
    (B) any associated person who solicits municipal securities 
business, as defined in paragraph (vii);
    (C) any associated person who is a direct supervisor of such 
persons 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
    (D) 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.
    Each person listed 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.

    A municipal finance professional is defined to include any direct 
supervisor of a municipal finance professional up through 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).
    For example, a person from the corporate department will be deemed 
a municipal finance professional if that person assist the municipal 
department in soliciting municipal securities business and all direct 
corporate department supervisors of that person also will be deemed 
municipal finance professionals under rule G-37, regardless of whether 
that person's municipal securities activities are subject to the 
supervision of a principal in the municipal securities department. 
Concern has been expressed that this part of the definition 
unnecessarily covers persons whose duties and activities do not provide 
them with an opportunity or incentive to make political contributions 
for the purpose of influencing the awarding of municipal securities 
business by issuer officials.
    The MSRB noted in its initial filing of rule G-37 that the 
definition of municipal finance professional includes those individuals 
who have a pecuniary interest in soliciting municipal securities 
business on behalf of a dealer. It is those persons who may be in a 
position to make political contributions for the purpose of influencing 
the awarding of such business by issuer officials. Such persons could 
include those in the public finance department, as well as 
underwriters, traders and institutional and retail sales persons 
primarily engaged in municipal securities representative activities. 
However, a corporate department supervisor typically does not have a 
pecuniary interest in soliciting municipal securities business, and 
typically does not acquire such an interest solely because a person 
supervised by that supervisor assists the municipal department by 
soliciting work from a municipal issuer.
    The MSRB believes that amending the definition of municipal finance 
professional to designate as a municipal finance professional only a 
supervisor of any person primarily engaged in municipal securities 
representative activities or who solicits municipal securities business 
who also is a municipal securities principal or a municipal securities 
sales principal will facilitate compliance with rule G-37. Thus, in the 
example given above, the corporate department supervisors would not be 
included in the definition of municipal finance professional.
    The MSRB continues to believe that if a retail sales person becomes 
a municipal finance professional by virtue of soliciting municipal 
securities business, then the municipal securities principal 
responsible for supervising that person's municipal securities 
activities should be designated a municipal finance professional. In 
most cases, this would include the sales person's branch manager (a 
municipal securities sales principal). Such supervisory personnel 
continue to be included within the definition of municipal finance 
professional because the MSRB is concerned that retail sales persons 
may solicit municipal securities business at the request of, or at 
least with the knowledge of, their supervisors. Thus, the amendment is 
intended to ensure that, if retail sales persons are soliciting 
municipal securities business, the supervisors of such persons also are 
deemed to be municipal finance professionals.
    Finally, the definition of municipal finance professional has been 
amended to clarify that the supervisors of the municipal securities 
principals and municipal securities sales principals included within 
the definition also are deemed to be municipal finance professionals.

B. Designation as a Municipal Finance Professional

    The MSRB has been asked whether a dealer can establish its own 
standards under which someone who solicits municipal securities 
business could relinquish municipal finance professional status upon 
completing the solicitation activity.\10\ The rule change approved 
today amends rule G-37(g)(iv) to provide that each person designated by 
a dealer as a municipal finance professional shall retain this 
designation for two years after the last activity or position which 
gave rise to the designation. For instance, if an associated person is 
designated a municipal finance professional due to that person's 
solicitation activities, then that designation shall extend for two 
years from the date of the particular solicitation. Moreover, if this 
person continues to solicit municipal business, then each such 
solicitation triggers a new two-year period. Thus, if a municipal 
finance professional wants to divest himself of this designation, he 
must forego all soliciting of municipal business for two years (as well 
as avoid the other situations, set forth in rule G-37(g)(iv), giving 
rise to the designation of municipal finance professional). So too, if 
an institutional sales person primarily engaged in municipal securities 
representative activities is transferred to the corporate department, 
such person's contributions to officials of issuers and payments to 
political parties must be recorded for two years after such 
transfer.\11\ The amendment is intended to ensure that contributions 
and payments by municipal finance professionals are not being made to 
influence the awarding of municipal [[Page 13498]] securities business. 
The amendment also will allow dealers, after this two-year period, to 
remove these persons from their list of municipal finance 
professionals.

    \10\See Letter from Heather L. Ruth, President, PSA to Diane G. 
Klinke, General Counsel, MSRB (July 25, 1994) (``July PSA Letter''), 
supra n. 6.
    \11\However, rule G-37 does not require a firm to monitor and 
record the activities of a municipal finance professional that it no 
longer employs.
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C. Contributions and Other Payments Made to Political Parties

    Contributions to political parties do not trigger rule G-37's 
prohibition on business. Such contributions, however, are subject to 
the rule's recordkeeping and reporting provisions, as set forth in rule 
G-8(a)(xvi). These 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 contributions to 
state or local political parties. For example, if a contribution to a 
political party is earmarked or known to be provided to an official or 
officials of a particular issuer, then the dealer would violate the 
rule's proscription against indirect violations, thereby triggering the 
two-year prohibition on business with that issuer.
    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 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 Board to adopt rule G-37 may be emerging 
in connection with the fundraising practices of certain political 
parties described above.
    The purpose of those disclosure requirements in rule G-37 
pertaining to political parties is to ensure that funds contributed to 
political parties by dealers, Political Action Committees (``PACs''), 
municipal finance professionals and executive officers do not represent 
attempts to make indirect contributions to issuer officials, in 
contravention of rule G-37. The rule change approved today amends the 
recordkeeping and reporting provisions of rule G-37 (as set forth in 
rule G-8(a)(xvi)) to require dealers to record and disclose all 
payments made to political parties. The term ``payment'' is defined as 
any gift, subscription, loan, advance or deposit of money or anything 
of value. This definition is derived from the definition of 
``contribution'' in rule G-37(g)(i), but does not include the limits on 
the purposes for which such money is given, as currently set forth in 
the definition of contribution.
    Thus, the amendment will require dealers to record and report any 
payments to political parties by dealers, PACs, municipal finance 
professionals and executive officers, regardless of whether those 
payments constitute contributions. These disclosure requirements are 
intended to assist in severing any connection between payments to 
political parties and the awarding of municipal securities business. 
The amendment is not intended to restrict the personal volunteer work 
of municipal finance professionals for political parties.

D. Definition of Issuer

    Under rule G-37, the term ``issuer'' is defined as any governmental 
issuer specified in Section 3(a)(29) of the Act (i.e., a state or any 
political subdivision thereof, or any agency or instrumentality of a 
state or any political subdivision thereof, or any municipal corporate 
instrumentality of one or more states) and the issuer of any separate 
security, including a separate security as defined in Rule 3b-5 under 
the Act. In most instances, the issuers of separate securities are 
corporate obligors of industrial revenue bonds and bank issuers of 
letters of credit.
    As noted above, rule G-37 was adopted in order to cleanse the 
municipal securities market of pay-to-play pressures. However, pay-to-
play pressures do not exist when the issuer of a separate security is a 
corporate obligor of industrial revenue bonds or a bank issuer of a 
letter of credit. The Board itself recognized this when it noted in its 
May 1994 Q & A that, when filing Form G-37, dealers do not have to 
include corporate issuers in industrial development bond issues because 
no contributions (as defined in rule G-37) would be made to such 
corporations.\12\ Therefore, the rule change amends the rule G-37 
definition of issuer by omitting issuers of separate securities from 
the definition of issuer.

III. Comment Letters

A. Supervisors of Municipal Finance Professionals

    Chemical and Artemis express unqualified support for designating as 
municipal finance professionals only those supervisors of municipal 
finance professionals who are also municipal securities principals or 
municipal securities sales principals. The PSA Letter also expresses 
general support for this amendment. The Edwards Letter expresses 
support for the views expressed in the PSA Letter; therefore, Edwards 
generally supports this amendment.
    Schwartz opposes this amendment. The Schwartz Letter asserts that 
the amendment would ``open a loophole further'' because political 
fundraising has been happening across departments. The Commission notes 
that the amendment does not purport to exclude all supervisors of 
municipal finance professionals. Furthermore, the MSRB stated that the 
amendment was designed to cover situations in which retail sales 
persons are soliciting municipal securities business at the request of, 
or at least with the knowledge of, their supervisors.
    The Arter & Hadden Letter also expresses opposition to this 
amendment. The Arter & Hadden Letter reasons that the supervisor of a 
retail sales person involved in municipal securities solicitation 
activity may not be involved in supervising that person's solicitation 
activity. The Arter & Hadden Letter argues that the MSRB was correct to 
amend rule G-37 so that a supervisor of persons primarily engaged in 
municipal securities representative activities or who solicit municipal 
securities business is deemed a municipal securities professional only 
if that supervisor is also a municipal securities principal or a 
municipal securities sales principal. However, the Arter & Hadden 
Letter criticizes the proposed amendment because, it asserts, the MSRB 
states that it would deem a branch manager and a branch manager's 
supervisor to be municipal finance professionals if a retail sales 
person in that branch office was soliciting municipal securities 
business. Arter & Hadden asserts that a branch manager does not have 
the background or expertise to supervise the solicitation activities of 
a retail sales representative; therefore, a branch manager should not 
be restricted in the same manner as a person who does have the 
background and expertise to supervise the solicitation activities of a 
retail sales representative.\12\

    \12\Pursuant to rule G-37, a contribution is defined as ``any 
gift, subscription, loan advance, or deposit of money or anything of 
value made: (A) for the purpose of influencing any election for 
federal, state or local office; (B) for payment of debt incurred in 
connection with any such election; or (C) for transition or 
inaugural expenses incurred by the successful candidate for state or 
local office.'' Thus, by definition, any funds given to corporate 
issuers would not constitute a ``contribution'', since such 
corporations are not the issuers or issuer officials contemplated by 
the rule.
[[Page 13499]]

    Smith Barney also opposes this amendment. The Smith Barney Letter 
objects to the MSRB deeming a branch manager and a branch manager's 
supervisor to be municipal finance professionals if a retail sales 
person in that branch office was soliciting municipal securities 
business. It notes that the MSRB is concerned about situations in which 
retail sales persons are soliciting municipal securities business at 
the request of, or at least with the knowledge of, their supervisors; 
Smith Barney does not consider those reasons sufficient to justify the 
apparent breadth of the amendment. Smith Barney states that a simpler 
approach would be to interpret solicitation as asking others to 
solicit, and that the MSRB should not be concerned about supervisors 
who simply know that their sales persons are soliciting municipal 
securities business. The Commission believes that, while Smith Barney 
may be correct in theory, as a practical matter, Smith Barney's 
solution will make enforcement of the rule much more difficult. It 
believes that the practical difficulties of enforcing the rule if it 
were amended as Smith Barney suggests outweigh any compliance burdens 
imposed by the amendment. The Commission thus believes that the need 
for a prophylactic provision also outweighs the concerns expressed by 
Arter & Hadden concerning the burden imposed upon branch managers.\13\

    \13\The Commission notes that the amendment does not add any 
compliance burden that is not imposed under the current version of 
rule G-37.
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B. Designation as a Municipal Finance Professional

    Chemical and Artemis also express support for requiring each person 
designated by a dealer as a municipal finance professional to retain 
this designation for two years after the last activity or position 
which gave rise to the designation. The Chemical Letter states that the 
two year designation period matches the two year disqualification 
length contained in rule G-37(b) and provides clarity.
    NBD opposes this amendment. NBD states that this amendment will 
create an undue reporting burden and would be unworkable from a 
supervisory standpoint. The NBD Letter reasons that if the designated 
municipal finance professional left the firm at which the professional 
engaged in the activity that gave rise to the designation, then that 
firm no longer would maintain any supervisory control over that 
individual, and therefore, any political activities of the individual 
would no longer benefit that firm and would be impossible to monitor. 
The NBD Letter also argues that if an employee is transferred to 
another department, then supervisory authority is severed. NBD regards 
it as ``unlikely'' that an employee would be transferred to another 
department in order to circumvent rule G-37.
    With respect to the issue of monitoring municipal finance 
professionals who have left a firm, the Commission notes that rule G-37 
does not require a firm to monitor the activities of a municipal 
finance professional that it no longer employs. With respect to the 
issue of whether a firm receives any continuing benefits from a 
municipal finance professional no longer employed by that firm, the 
Commission believes that whether or not a firm benefits from the 
political activities of an individual that occur after the individual 
leaves the firm, or is transferred, a firm may continue to enjoy the 
benefits that flow from that employee's activities even after that 
employee left the firm or was transferred. Rule G-37 reflects a 
reasoned judgment that certain activities may corrupt the awarding of 
municipal securities business, not only at the time of the activity, 
but for a certain period of time thereafter.

C. Miscellaneous Comments

    Chemical and Artemis expressed support for the remainder of the 
rule change.
    The PSA believes that the MSRB should further amend rule G-37 to:
    <bullet> establish a threshold percentage of commissions below 
which a registered representative would not be considered a municipal 
finance professional;
    <bullet> establish guidelines concerning how frequently they must 
review their records to identify registered representatives as 
municipal finance professionals;
    <bullet> clarify that the MSRB will not retroactively apply the 
municipal finance professional designation to persons who were not 
initially identified by the broker, dealer or municipal securities 
dealer as a registered representative, but subsequently engage in 
activities that would trigger application.
    <bullet> codify procedures for brokers, dealers and municipal 
securities dealers to follow to ensure that municipal finance 
professionals are being identified.
    The Commission believes that the MSRB may address these comments in 
the context of a separate proposed rule change filed with the 
Commission. It does not believe that these comments must be addressed 
in the context of this rule change.

IV. Discussion and Findings

    The Commission finds that the rule change is consistent with the 
provisions of Section 15B(b)(2)(C)\14\ of the 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 foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in municipal 
securities, to remove impediments to and perfect the mechanism of a 
free and open market in municipal securities, and, in general, to 
protect investors and the public interest. The Commission believes that 
the rule change is in the public interest and removes impediments to 
and perfects the mechanism of a free and open market in municipal 
securities in that the amendments: (i) tailor the application of rule 
G-37 to those persons who may be in a position to make political 
contributions for the purpose of influencing the awarding of municipal 
securities business by issuer officials; (ii) require disclosure of 
certain payments which may have the effect of influencing the awarding 
of municipal securities business; and (iii) eliminate the restrictions 
imposed by rule G-37 with respect to certain transactions and practices 
which are not likely to influence the awarding of municipal securities 
business by issuer officials.

    \14\15 U.S.C. Sec. 78o-4.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that File No. SR-MSRB-94-14 be, and hereby is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 95-6029 Filed 3-10-95; 8:45 am]
BILLING CODE 8010-01-M