Document ID: SEC-2005-0045-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Municipal Securities Rulemaking Board
Posted Date: 2005-09-29T04:00Z

[Federal Register: September 29, 2005 (Volume 70, Number 188)]
[Notices]               
[Page 56944-56947]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29se05-79]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52496, File No. SR-MSRB-2005-12]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Approving 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

September 22, 2005.
    On June 27, 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 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 proposed rule change was 
published for comment in the Federal Register on August 16, 2005.\3\ 
The Commission received four comment letters regarding the proposal.\4\ 
On September 16, 2005,

[[Page 56945]]

the MSRB filed a response to the comment letters from UBS, BMA and 
DSCC.\5\ On September 21, 2005, the MSRB filed a response to the 
comment letter from Griffin, Kubik.\6\ This order approves the proposed 
rule change.
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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. 52235 (August 10, 
2005) 70 FR 48214 (August 16, 2005) (the ``Commission's Notice'').
    \4\ See letter to Jonathan G. Katz, Secretary, Commission, from 
Terry L. Atkinson, Managing Director, UBS Financial Services Inc. 
(``UBS''), dated September 1, 2005 (``UBS' Letter''); letter to 
Jonathan G. Katz, Secretary, Commission, from Leslie M. Norwood, 
Vice President and Assistant General Counsel, The Bond Market 
Association (``BMA''), dated September 2, 2005 (``BMA's Letter''); 
letter to Jonathan G. Katz, Secretary, Commission, from Marc E. 
Elias and Rebecca H. Gordon, Perkins Coie, Counsel to the Democratic 
Senatorial Campaign Committee (``DSCC''), dated September 6, 2005 
(``DSCC's Letter''); and letter to Jonathan G. Katz, Secretary, 
Commission, from David M. Thompson, President, and Robert J. 
Stracks, Counsel, Griffin, Kubik, Stephens & Thompson, Inc. 
(``Griffin, Kubik''), dated August 29, 2005 (``Griffin, Kubik's 
Letter'').
    \5\ See letter from Carolyn Walsh, Senior Associate General 
Counsel, MSRB, to Martha M. Haines, Chief, Office of Municipal 
Securities, Commission, dated September 16, 2005 (``MSRB's First 
Response Letter'').
    \6\ See letter from Carolyn Walsh, Senior Associate General 
Counsel, MSRB, to Martha M. Haines, Chief, Office of Municipal 
Securities, Commission, dated September 21, 2005 (``MSRB's Second 
Response Letter''). Griffin, Kubik's Letter was provided to the MSRB 
after it had sent its First Response Letter.
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    The proposed rule change would prohibit a dealer and certain 
municipal finance professionals (``MFPs'') 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. In addition, the proposed 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. A full 
description of the proposal is contained in the Commission's Notice.
    UBS, BMA and Griffin, Kubik stated in their comment letters that 
they fully support the elimination of pay-to-play practices in the 
municipal securities industry, but raised concerns about implementation 
of the proposal. DSCC expressed concern that the guidance presented in 
the MSRB's proposed Questions and Answers may unnecessarily chill 
contributions to national party committees from MFPs and dealer-
controlled PACs.

Vagueness and First Amendment Concerns

    Both UBS and BMA stated that the proposed Qs&As are vague and do 
not provide clear, uniform standards as to when a contribution to a PAC 
or party committee results in an indirect violation. UBS and BMA also 
stated that the Qs&As represent an expansion of Rule G-37 because the 
Qs&As require that a broker-dealer have procedures in place to 
reasonably ensure that contributions to PACs and party committees do 
not result in indirect contributions to issuer officials, but provide 
no discernable standard as to when such indirect contribution would 
occur. BMA stated that the MSRB had previously established a safe 
harbor where a broker-dealer gets assurances from a party committee or 
PAC that the broker-dealer's contribution will not be used for issuer 
officials (e.g., for housekeeping or conference accounts), and that 
this safe harbor conflicted with the proposal. Both UBS and BMA stated 
that the vagueness of the proposal will allow different firms to 
develop different supervisory procedures depending on their tolerance 
for risk. UBS and BMA further stated that creating a vague standard for 
contributing to PACs and party committees is unconstitutional, and that 
the due diligence suggested by the proposed Qs&As is troublesome under 
the First Amendment. Griffin, Kubik stated that they believe that Rule 
G-37 is unconstitutional.
    The MSRB noted in its Response Letters that the commentators raised 
these concerns to the MSRB during its comment period on the proposed 
guidance, that the MSRB responded to these comments in its filing and 
that the Commission's Notice addresses these issues at some length. The 
MSRB stated that the proposed Qs&As do not extend the reach of Rule G-
37 or create a vague standard of regulation. The MSRB stated that the 
proposed guidance does not change the standard regarding when a payment 
to a political party or PAC could result in either a rule violation or 
a ban on doing business with a municipal issuer. The MSRB further 
stated that 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,'' and that the standard enunciated in 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, is not 
unconstitutionally vague.
    The MSRB further stated that contrary to statements made in the 
commentators' letters, this precise issue raised before the United 
States Court of Appeals in Blount v. SEC,\7\ and that the Court of 
Appeals in Blount directly rejected the challenge that Rule G-37(d) was 
too broad and could not regulate payments to parties and PACs when they 
are intended as end-runs around the direct contribution limits. In 
Blount, the Court stated: ``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.'' \8\
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    \7\ 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).
    \8\ Id., at 948.
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    The MSRB further stated that the cases cited by BMA related to 
different issues and did not discredit the Blount Court's ruling on 
this precise issue. In addition, the MSRB stated that the cases relied 
upon by BMA were decided prior to Blount as well as the Supreme Court's 
decision in McConnell.\9\ Griffin, Kubik stated that the MSRB's 
citations to Blount and McConnell were weak arguments, but did not cite 
any authority for their belief that Rule G-37 is unconstitutional.
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    \9\ McConnell v. Federal Election Commission, 540 U.S. 93, 124 
S.Ct. 619 (Dec. 10, 2003).
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    The MSRB stated in its filing that it was issuing the proposed 
guidance to remind dealers of the need to have adequate supervisory 
procedures. The MSRB guidance makes suggestions concerning such 
procedures but does not require particular procedures. The MSRB stated 
that it is up to individual dealers to create procedures that are 
appropriate to their particular circumstances, and that broker-dealers 
generally do not have uniform supervisory procedures.
    The MSRB stated that it never intended for dealers to treat 
payments to administrative party accounts as a safe harbor and that 
payments to administrative-type accounts have always fallen within the 
rule's regulatory ambit. The MSRB further stated that the SEC's 
approval order of certain early amendments to Rule G-37 clearly 
demonstrates that the MSRB never intended for dealers to treat payments 
to administrative party accounts as a safe harbor.\10\
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    \10\ 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 (``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,

[[Page 56946]]

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 dealer 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.''\11\
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    \11\ Id. at 13498.
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    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.'' \12\
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    \12\ MSRB Notice 2003-32 (August 6, 2003) at pp. 1-2 (emphasis 
added).
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    The MSRB further stated that the commentators continued incorrect 
assertions about a ``housekeeping'' safe harbor only serve to 
illustrate the potential for real (or imagined) safe harbors to become 
dangerous loopholes as parties or PACs tailor their solicitations for 
contributions to the safe harbor's parameters, and that, as noted in 
the MSRB's proposed guidance, the need for dealers to adopt adequate 
written supervisory procedures to prevent indirect violations via 
``housekeeping'' type political party accounts is especially important 
in light of 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 an 
affiliate party's ``housekeeping'' account.

National Party Committees and Federal Leadership PACs

    UBS and BMA requested that the MSRB expressly state that 
contributions made to a national party committee or federal leadership 
PAC be 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. 
The DSCC stated that it is concerned that the guidance presented in the 
MSRB's draft Questions and Answers may unnecessarily chill 
contributions to national party committees from MFPs and dealer-
controlled PACs, and that contributions to national party committees do 
not present the ``pay-to-play'' concerns Rule G-37 was intended to 
address. These commentators are asking the MSRB to create a safe harbor 
for certain national party committees and federal leadership PACs.
    The MSRB responded that there is no evidence that the lack of a 
safe harbor for national party committees and federal leadership PACs 
has inhibited MFPs or dealers from contributing to such parties or 
PACs. 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. The MSRB stated that the Court of Appeals in 
Blount \13\ 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. UBS and BMA stated 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 cannot be used as a means 
to circumvent Rule G-37; the MSRB stated that such a position is 
inconsistent with public perception. The MSRB also stated that the 
Supreme Court's recent decision in McConnell \14\ 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, 
and that 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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    \13\ See supra note 7.
    \14\ See supra note 9.
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The Prohibition on Soliciting Contributions to State and Local Party 
Committees Should be Symmetrical to the Contributions Ban

    UBS stated that the Rule G-37(c) amendment should be symmetrical to 
the contributions ban because it is illogical to impose a greater 
prohibition on soliciting contributions than on making contributions. 
The MSRB responded that the proposed rule amendment is more limited 
than as portrayed by UBS. UBS stated 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 of locality where the dealer is engaging or is seeking to 
engage in municipal securities business. Thus, the MSRB believes that 
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 a means to 
circumvent the rule and the rule's disclosure requirements.
    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 MSRB believes that the 
arguably stricter prohibition can be justified because a violation of 
Rule G-37(c) does

[[Page 56947]]

not result in an automatic ban on business.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the MSRB \15\ and, in particular, the 
requirements of Section 15B(b)(2)(C) of the Act and the rules and 
regulations thereunder.\16\ 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 
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.\17\ In particular, the 
Commission finds that the proposed rule change is consistent with the 
Act because it will help inhibit practices that attempt, or create the 
appearance of attempting, to influence the awarding of municipal 
securities business through an indirect violation of Rule G-37. The 
Commission also finds 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.
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    \15\ 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).
    \16\ 15 U.S.C. 78o-4(b)(2)(C).
    \17\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-MSRB-2005-12) be, and hereby 
is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-19497 Filed 9-28-05; 8:45 am]

BILLING CODE 8010-01-P