Document ID: SEC-2013-0337-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2013-02-14T05:00Z

[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Notices]
[Pages 10656-10663]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03385]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68872; File No. SR-MSRB-2013-01]

Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change Relating to 
Amendments to MSRB Rules G-37 and G-8 and Form G-37

February 8, 2013.
    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 February 4, 2013, 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 Rules G-37, on political contributions and 
prohibitions on municipal securities business, and G-8, on books and 
records, and Form G-37 (the ``proposed rule change''). The MSRB 
requested an effective date for the proposed rule change of no later 
than the start of the second calendar quarter following the date of SEC 
approval.
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2013-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

[[Page 10657]]

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
    The proposed rule change amends Rule G-37 to require the public 
disclosure of additional information related to contributions made by 
brokers, dealers and municipal securities dealers (``dealers''), their 
municipal finance professionals (``MFPs''),\3\ political action 
committees (``PACs'') controlled by the dealer or their MFPs and non-
MFP executive officers \4\ (individually, a ``covered party'' and 
collectively, ``covered parties'') to bond ballot campaigns and the 
municipal securities business \5\ engaged in by dealers resulting from 
voter approval of the bond ballot measure to which such contributions 
were given. The additional information will be required to be reported 
on revised MSRB Form G-37 \6\ and submitted to the MSRB.\7\ The 
proposed rule change also amends Rule G-8 to require dealers to 
maintain records pertaining to the additional information disclosed 
under the proposed amendments to Rule G-37. The proposed rule change is 
further described below under ``Summary of Proposed Rule Change'' and 
under ``Discussion of Comments.''
---------------------------------------------------------------------------

    \3\ Rule G-37(g)(iv) defines municipal finance professional as: 
(A) Any associated person primarily engaged in municipal securities 
representative activities (exclusive of sales activities with 
natural persons); (B) any associated person (including but not 
limited to any affiliated person of the dealer, as defined in Rule 
G-38) who solicits municipal securities business; (C) any associated 
person who is both (i) a municipal securities principal or a 
municipal securities sales principal and (ii) a supervisor of any 
persons described in (A) or (B) above; (D) any associated person who 
is a supervisor of any person described in (C) above up through and 
including, in the case of a 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; or (E) 
any associated person who is a member of the dealer (or, in the case 
of a bank dealer, the separately identifiable department or division 
of the bank) executive or management committee or similarly situated 
officials, if any.
    \4\ Rule G-37(g)(v) defines non-MFP executive officer as an 
associated person in charge of a principal business unit, division 
or function or any other person who performs similar policy making 
functions for the dealer (or, in the case of a bank dealer, the 
separately identifiable department or division of the bank, as 
defined in Rule G-1), but does not include any MFP. Although Rule G-
37 requires disclosure of non-MFP executive officer contributions, 
such contributions do not result in a ban on engaging in municipal 
securities business.
    \5\ Rule G-37(g)(vii) defines municipal securities business as: 
(A) The purchase of a primary offering of municipal securities from 
an issuer on other than a competitive bid basis (e.g., a negotiated 
underwriting); (B) the offer or sale of a primary offering of 
municipal securities on behalf of any issuer (e.g., a private 
placement); (C) the provision of financial advisory or consultant 
services to or on behalf of an issuer with respect to a primary 
offering of municipal securities in which the dealer was chosen to 
provide such services on other than a competitive bid basis; or (D) 
the provision of remarketing agent services to or on behalf of an 
issuer with respect to a primary offering of municipal securities in 
which the dealer was chosen to provide such services on other than a 
competitive bid basis.
    \6\ MSRB Form G-37 is the document pursuant to which dealers 
disclose contribution information as currently required by Rule G-
37. The form is being revised to conform to the requirements 
resulting from the proposed rule change.
    \7\ Form G-37 is submitted by dealers through the existing MSRB 
Political Contribution Submission Service, which is the current 
system that accepts the submissions of Form G-37. Submitted Forms G-
37 are made publicly available through the MSRB Web site.
---------------------------------------------------------------------------

Background

    Rule G-37, in effect since 1994, has provided substantial benefits 
to the industry and the investing public by greatly reducing the direct 
connection between political contributions given to issuer officials 
\8\ and the awarding of municipal securities business to dealers. Rule 
G-37 requires dealers to disclose (on Form G-37) certain contributions 
to issuer officials, contributions to bond ballot campaigns, and 
payments to political parties of states and political subdivisions made 
by covered parties. The rule prohibits dealers from engaging in 
municipal securities business with an issuer within two years after 
contributions to an official of such issuer are made by certain covered 
parties (other than certain permitted de minimis contributions).\9\ The 
rule's prohibition on engaging in municipal securities business is not 
triggered by contributions that are made to bond ballot campaigns by 
covered parties.
---------------------------------------------------------------------------

    \8\ Rule G-37(g)(vi) defines ``official of such issuer'' or 
``official of an issuer'' as any person (including any election 
committee for such person) who was, at the time of the contribution, 
an incumbent, candidate or successful candidate: (A) For elective 
office of the issuer which office is directly or indirectly 
responsible for, or can influence the outcome of, the hiring of a 
broker, dealer or municipal securities dealer for municipal 
securities business by the issuer; or (B) for any elective office of 
a state or of any political subdivision, which office has authority 
to appoint any person who is directly or indirectly responsible for, 
or can influence the outcome of, the hiring of a broker, dealer or 
municipal securities dealer for municipal securities business by an 
issuer.
    \9\ Contributions made by MFPs to issuer officials for whom such 
MFP is entitled to vote will not result in a ban on municipal 
securities business if such contributions, in total, do not exceed 
$250 to each issuer official, per election.
---------------------------------------------------------------------------

Bond Ballot Contributions

    Since February 1, 2010,\10\ the MSRB has required disclosure, under 
Rule G-37, of non-de minimis contributions \11\ to bond ballot 
campaigns made by covered parties. Rule G-37 also requires dealers to 
maintain records of such reportable contributions to bond ballot 
campaigns pursuant to Rule G-8. The 2010 amendments to Rule G-37 and 
the corresponding amendments to Rule G-8 resulted, in part, from 
concerns that contributions by covered parties to bond ballot campaigns 
could assist dealers with obtaining municipal securities business. The 
amendments also resulted from the MSRB's concern about the lack of 
effective transparency regarding bond ballot campaign 
contributions.\12\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 61381 (January 20, 
2010), 75 FR 4126 (January 26, 2010) (File No. SR-MSRB-2009-18).
    \11\ Dealers are not required to disclose contributions made by 
MFPs and non-MFP executive officers to a bond ballot campaign for a 
ballot initiative with respect to which such person is entitled to 
vote if such contributions, in total, do not exceed $250 per ballot 
initiative.
    \12\ The MSRB noted that the lack of effective transparency 
results from political contribution disclosure requirements that 
vary from state to state and the difficulty of locating and 
extracting the relevant dealer-related and bond initiative-related 
information from the various public disclosure facilities. See MSRB 
Notice 2009-35 (June 22, 2009).
---------------------------------------------------------------------------

    Some industry participants and market observers continue to express 
concerns regarding the potential adverse effect on the integrity of the 
municipal securities market from dealer and dealer personnel 
contributions to bond ballot campaigns.\13\ The proposed rule change 
addresses these concerns by augmenting the disclosures currently 
required under Rule G-37. These more detailed disclosures also will 
help inform the Board whether further action regarding bond ballot 
campaign contributions is warranted, up to and including a 
corresponding ban on engaging in

[[Page 10658]]

municipal securities business as a result of certain contributions.
---------------------------------------------------------------------------

    \13\ Similar concerns have been expressed with regard to such 
contributions made by some municipal advisors. The Board expects to 
consider undertaking parallel rulemaking with respect to municipal 
advisor contributions to bond ballot campaigns when it develops 
additional rules for municipal advisors.
---------------------------------------------------------------------------

Summary of Proposed Rule Change

    The MSRB requested comment on a draft of the proposed rule change 
on August 15, 2012.\14\ The description of the proposed rule change 
below revises certain provisions of the draft that was provided for 
comment in the Request for Comment based on the MSRB's review of 
comment letters, as further described below and in ``Discussion of 
Comments'' below. The proposed rule change revises Rule G-
37(e)(i)(B)(2) to provide that, in disclosing the contribution amount 
made to a bond ballot campaign, the dealer also must include, in the 
case of in-kind contributions, the value and nature of the goods or 
services provided, including any ancillary services provided to, on 
behalf of, or in furtherance of the bond ballot campaign. The proposed 
rule change also requires dealers to disclose the specific date on 
which such contributions to bond ballot campaigns were made.
---------------------------------------------------------------------------

    \14\ See MSRB Notice 2012-43 (August 15, 2012) (``Request for 
Comment'').
---------------------------------------------------------------------------

    Proposed Rule G-37(e)(i)(B) requires dealers to disclose the full 
issuer name and full issue description of any primary offering 
resulting from voter approval of a bond ballot measure to which a 
contribution required to be disclosed has been made. All information is 
required to be reported in the calendar quarter in which the closing 
date for the issuance that was authorized by the bond ballot measure 
occurred. The proposed rule change contains a look-back provision for 
bond ballot campaign contributions that are made by an MFP or a non-MFP 
executive officer during the two years prior to an individual becoming 
an MFP or a non-MFP executive officer of a dealer.\15\ The look-back 
provision will limit the additional disclosures required under proposed 
Rule G-37(e)(i)(B) to those items that would have been required to be 
disclosed if such individual had been an MFP or a non-MFP executive 
officer at the time of such contribution. Proposed Rule G-37(e)(i)(B) 
also requires dealers to disclose both the amount and source of any 
payments or reimbursements related to any bond ballot contribution, 
received by a dealer or its MFPs from any third party.\16\
---------------------------------------------------------------------------

    \15\ There is a similar look-back provision in current Rule G-37 
for contributions to issuer officials. See Rule G-37(b)(i). As with 
that provision, disclosure is only required with respect to 
municipal securities business that results from the bond ballot 
measure after the effective date of the proposed rule change.
    \16\ Third parties include issuers.
---------------------------------------------------------------------------

    The proposed rule change revises Rule G-37(g) to expand the 
definition of ``contribution'' and create a new term, the ``reportable 
date of selection.'' The proposed amendments to the definition of 
``contribution'' distinguish between contributions made to an official 
of an issuer and contributions made to a bond ballot campaign. The term 
``reportable date of selection'' is defined to refer to the specific 
date on which a dealer is selected, either in writing or orally, to 
engage in municipal securities business that must be reported on Form 
G-37.
    Lastly, conforming amendments to Rule G-8(a)(xvi)(H) and (I) 
require dealers to maintain records of the supplemental information 
related to bond ballot campaign contributions that are required to be 
disclosed on Form G-37 under the proposed rule change.

Effective Date Of Proposed Rule Change

    The MSRB requested an effective date for the proposed rule change 
no later than the start of the second calendar quarter following the 
date of SEC approval.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act, which provides that the MSRB'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 and 
municipal financial products, to remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products, and, in general, to protect investors, 
municipal entities, obligated persons, and the public interest.

    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act because it is intended to protect 
investors and the public interest and prevent fraudulent and 
manipulative acts and practices by adding greater specificity to the 
public disclosures surrounding contributions made by covered parties to 
bond ballot campaigns, and any municipal securities business awarded 
pursuant to such bond ballot measure. Access to such information in a 
centralized format on the MSRB's Web site (through Form G-37) has and 
will continue to substantially increase the amount of information 
available to market participants, thereby increasing market 
transparency and strengthening market integrity. The revisions also 
will assist the MSRB in its on-going review of Rule G-37 and potential 
conflicts of interest or other practices that may present challenges to 
the integrity of the municipal securities market related to political 
contributions by dealers and dealer personnel.

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

    The MSRB does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The MSRB solicited comment on 
the potential burdens of the proposed rule change in the Request for 
Comment. Among the questions asked were:
     Would the draft amendments help to protect the integrity 
of the municipal securities market, and are there specific benefits 
that issuers, investors and the public (including taxpayers) would 
realize from adopting the draft amendments?
     Would the draft amendments have any negative effects on 
issuers, investors and the public, or on the fairness, efficiency or 
overall integrity of the municipal securities market? If so, please 
describe in detail.
     Dealers are already required to collect, report and retain 
records of certain information in connection with bond ballot campaigns 
under the current provisions of Rules G-37 and G-8. What would be the 
incremental additional burden, if any, to dealers to collect, report 
and retain records of the additional items of information that would be 
required under the draft amendments?
     Are there alternative methods to providing the protections 
sought under the draft amendments that the MSRB should consider and 
that would be more effective and/or less burdensome?
    The specific comments and responses thereto are discussed in Part 
5. Of those commenters addressing issues of burdens, two stated that 
any burden in connection with the proposed rule change would be 
outweighed by the benefits, and five commenters supported even more 
expansive regulation to, among other things, ban dealers from making 
contributions to bond ballot campaigns. The MSRB addressed those 
commenters that were critical of the burdens from the proposed rule 
change by clarifying certain definitions and allowing additional time 
for implementation. The MSRB also notes that dealers already are 
required to report information on certain contributions and municipal

[[Page 10659]]

securities business on Form G-37. The proposed rule change augments 
existing Rule G-37 by providing greater clarity and context to the 
information already provided under the rule. The MSRB believes that the 
burdens resulting from the proposed new disclosures are outweighed by 
the benefits accruing to investors and the marketplace in general.
    The MSRB believes that these incremental burdens are necessary and 
appropriate to address ongoing concerns of pay-to-play practices with 
respect to bond ballot campaign contributions. The additional 
information required to be reported under the proposed rule change 
should be readily available to dealers and the public and is generally 
consistent with the type of information currently required to be 
reported under Rule G-37.

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

    In the Request for Comment,\17\ the MSRB requested comment on a 
draft of the proposed rule change. Specifically, the MSRB sought 
comment on whether the proposed revisions to Rule G-37 and Rule G-8, as 
described herein, that would require additional public disclosure of 
certain information related to contributions made by covered parties to 
bond ballot campaigns, and the municipal securities business engaged in 
by dealers resulting from the bond ballot campaign to which they 
contributed, on revised Form G-37, and the maintenance of records 
related to such contributions, would be useful and helpful to the 
market in monitoring and accessing such dealer contribution 
information. In addition, the Board sought comments from the industry 
and other interested parties on all aspects of the proposed rule change 
and the range of practices that are undertaken by dealers, municipal 
advisors and other market participants in connection with contributions 
to bond ballot campaigns and related activities that can give rise to 
concerns regarding the integrity of the municipal securities market.
---------------------------------------------------------------------------

    \17\ See footnote 14.
---------------------------------------------------------------------------

Discussion Of Comments
    Comments on the Request for Comment were received from: (1) 
Barclays; (2) California Association of County Treasurers and Tax 
Collectors (``CACTTC''); (3) Center for Competitive Politics (``CCP''); 
(4) Government Financial Strategies Inc. (``GFS''); (5) Magis Advisors 
(``Magis''); (6) Morgan Stanley; (7) National Association of 
Independent Public Finance Advisors (``NAIPFA''); and (8) Securities 
Industry and Financial Markets Association (``SIFMA''). Summaries of 
these comments and the MSRB's responses follow.

General Support

    Comments: Barclays stated the ``Board has clearly identified the 
legitimate concerns of industry participants and market observers 
regarding the adverse effect bond ballot activity by dealers and MFPs 
has on the integrity of the municipal securities market. Such concerns 
have a tendency to extend beyond issuances supported by bond ballot 
campaigns and reflect poorly on our industry as a whole.'' GFS stated 
that the disclosures contemplated by the proposed rule change would be 
an important step in preventing pay-to-play activities related to bond 
ballot campaign contributions. The MSRB discusses additional comments 
from these and other commenters below.
    The Board should consider amendments to Rule G-37 to ban dealer 
contributions to bond ballot campaigns, or impose a ban on future 
business similar to that for certain dealer campaign contributions to 
issuer officials.
    Comments: CACTTC recommended that the MSRB consider amendments to 
the rule that would include, ``an outright ban on brokers, dealers, or 
any other municipal finance professionals from contributing to bond 
ballot measures and/or their related committees'' and argued that such 
a ``ban would simply expand the existing ban on political contributions 
to public officials involved in approving related bond transactions.'' 
\18\ CACTTC stated that pay-to-play activities in municipal bond 
elections and transactions undermines the competitive process that 
ensures that taxpayer money is spent in the most efficient and 
effective manner and suggested that the MSRB amend Rule G-37 to 
``either shed light on or eliminate pay-to-play activities.'' Magis 
expressed opposition to any circumstance where any market professional 
is permitted to directly, or indirectly, contribute to bond ballot 
campaigns that serve the interests of such a participant.
---------------------------------------------------------------------------

    \18\ CACTTC indicated that the bond ballot contribution problem 
is most prevalent for school district financings in California due 
to proposition 39. The proposition was enacted in 2000 and, lowered 
to 55% from 66%, the amount of voter approval needed to approve a 
bond ballot measure.
---------------------------------------------------------------------------

    Barclays asked the Board to seek a more direct means to ``address 
conflicts of interest, actual and apparent, raised by cash and in-kind 
contributions of dealers and their municipal finance personnel 
(``MFPs'') to bond ballot campaigns.'' Barclays suggested that the 
Board consider measures that would prohibit dealers from engaging in 
municipal securities business for a clearly defined period of time 
after the dealer or any of its MFPs has made a non-de minimis cash or 
in-kind contribution to support a bond ballot campaign authorizing such 
municipal securities business. Barclays argued that the terms of such a 
prohibition should not turn on whether a dealer expects to be, or is, 
reimbursed for such contributions, and should apply with respect to the 
kinds of support activities identified in the Request for Comment \19\ 
(e.g., polling) whether or not local law would permit an issuer to 
engage in such activity.
---------------------------------------------------------------------------

    \19\ See footnote 14.
---------------------------------------------------------------------------

    Morgan Stanley cited a San Francisco Chronicle article that 
observed that ``in 150 of 155 cases (97%) where a dealer contributed to 
support a bond ballot election that authorized the bonds the 
underwriter was hired to underwrite'' and stated that ``[t]he continued 
allowance of this widely perceived pay-to-play practice damages the 
integrity of the municipal marketplace and allows outsiders 
(regulators, journalists and politicians) to question the practices of 
our marketplace.'' NAIPFA stated that the proposed amendments to Rule 
G-37 do not go far enough in terms of curtailing the practice of 
contributing to bond ballot campaign committees and will likely not 
have a significant impact on such contributions. NAIPFA also stated 
that it is unsure how the amendments alone will benefit issuers or the 
public interest since the proposed rule change does not prohibit or 
limit the practice of contributions to bond ballot campaigns. Finally, 
NAIPFA stated that bond ballot contributions are often made, ``for the 
purpose of influencing the selection or retention of underwriters, and 
are thus the equivalent of the impermissible pay-to-play contributions 
already banned under current Rule G-37.'' GFS believes that further 
action will be warranted as the Board continues to examine this area of 
rulemaking.
    MSRB Response: The MSRB believes that the additional disclosures 
required by the proposed rule change are an appropriate regulatory 
response to the concerns identified. The MSRB believes that providing 
public access to disclosures of dealer contributions to bond ballot 
campaigns in a centralized format on the MSRB's Web site (through Form 
G-37) has substantially increased the amount of information available 
to

[[Page 10660]]

market participants, thereby increasing market transparency and 
strengthening market integrity.
    The information gathered pursuant to the proposed rule change, 
coupled with the existing requirements of Rule G-37, will assist the 
Board as it continues to monitor dealer and dealer personnel 
contribution disclosures. Such monitoring will allow the Board to 
determine, in the future, whether a corresponding ban on business, as a 
result of such contributions, would be necessary to address any real or 
perceived linkage between such contributions to bond ballot campaigns 
(and related activities) and the award of municipal securities 
business.
    The MSRB should amend Rule G-37 to request certain additional 
disclosures related to dealers' and their MFPs' contributions to bond 
ballot campaigns.
    Comments: CACTTC supported the additional disclosure requirements 
for bond ballot campaigns and stated that an amendment to Rule G-37 is 
``necessary to reduce the perception of pay-to-play and to help ensure 
that underwriters and other municipal financial professionals are not 
awarded bond transactions because they have contributed to related bond 
ballot measures.'' SIFMA \20\ also supported the proposed rule change 
to require disclosure of whether a dealer or any of its MFPs or non-MFP 
executive officers received payments or reimbursements, related to any 
bond issuance resulting from a bond ballot campaign to which the 
dealer, its MFP or non-MFP executive officer or applicable PAC 
contributed, from any third party. SIFMA stated that these payments or 
reimbursements are not common and should be disclosed. SIFMA stated 
that such payments would be known to the dealer and disclosure would 
not cause much burden on the dealer and it would be material if any 
such payments were made. SIFMA also supported the proposed rule change 
to require dealers to provide the complete name of the entity that will 
issue the bonds that were authorized by the bond ballot campaign, to 
which a contribution was made by the dealer, its MFP or non-MFP 
executive officer (other than a de minimis contribution) or applicable 
PAC. SIFMA stated that the name of the issuer is always known by the 
dealer and would be beneficial if disclosed on Form G-37 and that such 
increased transparency would create more benefits than burdens on the 
regulated dealer community.
---------------------------------------------------------------------------

    \20\ Morgan Stanley supports the SIFMA comment letter.
---------------------------------------------------------------------------

    GFS expressed concern about the lack of transparency in school bond 
campaign fundings and how it leads to corruption. GFS stated that it 
would be helpful to place in the public record information regarding 
the specific issuers and bond issues implicated through the actions of 
MFPs. GFS suggested requiring the disclosure, ``of compensation in 
excess of general industry compensation practices * * *.'' GFS also 
suggested requiring the disclosure of relevant information to investors 
when firms participating in the bond issue have contributed to election 
campaigns and the election campaigns to which the underwriters have 
contributed are administered by municipal advisors. Magis stated that 
there may be compelling reasons to require that disclosure of potential 
conflicts of interest also be made in official statements ``in order to 
avoid introducing error or omission to the issuer's official 
statement.'' GFS also recommended requiring reporting of payments made 
by underwriters to (not only payments received from) other 
professionals, such as financial advisors and election advisors and 
channeled through bond ballot campaigns.
    MSRB Response: The MSRB believes that the additional disclosures 
that will be required under the proposed rule change provide the 
appropriate types of information that should be disclosed to the 
general public, including investors, about when firms participating in 
bond issues have contributed to election campaigns, by providing 
additional information that has not previously been collected and made 
available to the public. Such additional information includes: (a) 
Requiring dealers to disclose the full issuer name and the full issue 
description, which will provide increased public disclosure of the 
specific primary offering or offerings that resulted from the bond 
ballot campaign to which the dealer, or their personnel, contributed 
and was required to disclose under existing Rule G-37; and (b) 
requiring dealers to disclose additional information about in-kind 
contributions that are made to bond ballot campaigns, including the 
value and nature of goods and services that are provided to the 
campaign and any ancillary services that are provided to, on behalf of, 
or in furtherance of the bond ballot campaign by a dealer.
    The MSRB does not believe there presently is a readily accessible 
standard or a ``base-line'' level of compensation for municipal 
securities transactions that would allow disclosure of ``excess'' 
compensation as urged by GFS. In response to comments suggesting that 
dealers should disclose whether a bond ballot campaign is administered 
by a municipal advisor, the MSRB believes that actual knowledge of 
whether the bond ballot campaign is administered by a municipal advisor 
would be required, and that such information is not generally known or 
available to support a comprehensive disclosure standard for the 
industry at this time.
    In response to Magis's suggestion to require the disclosure of 
potential conflicts of interest in official statements, the MSRB notes 
that it does not have regulatory authority over issuers, and therefore 
does not have the authority to establish requirements regarding the 
content of official statements. The MSRB believes that GFS's 
recommendation to report the payments made by underwriters to other 
professionals that may be channeled through bond election campaigns is 
not necessary because, to the extent that such payments would represent 
indirect contributions by the dealer to a bond ballot campaign, such 
indirect contributions already are required to be disclosed under 
current Rule G-37.
    The proposed amendments to Rule G-37 raise constitutional concerns.
    Comments: CCP noted its concerns that ``the Board may take further 
action regarding dealer and dealer personnel contributions to bond 
ballot campaigns, up to and including a corresponding ban on business 
as a result of certain contributions.'' CCP stated that the Board has 
overlooked the long-standing constitutional distinction between 
contributions to candidates and those given to support or oppose ballot 
initiatives. ``Simply put, ballot measure committees receive stronger 
constitutional protection against government regulation than do 
candidates.'' CCP also argued that the MSRB's concern about certain 
practices related to bond ballot campaigns have nothing to do with the 
creation of a quid pro quo arrangement between the bond ballot measure 
committee and the contributors because the bond ballot measure 
committee is, under the law, an entirely separate entity from the 
issuer. ``There is no identity of interests between the person 
supported for election and the person making hiring and issuing 
decisions, as is the case in the candidate context and as the D.C. 
Circuit required in Blount. The Board's announcement and analysis make 
no mention of this crucial distinction.'' CCP suggested that the Board 
take into consideration the fact that ``ballot issue, ballot measure, 
and independent expenditure committees are granted far more 
constitutional protection than are candidate committees.''

[[Page 10661]]

    MSRB Response: The MSRB recognizes the distinctions between 
contributions to candidates and bond ballot campaigns. The MSRB 
believes that the requirement under the proposed rule change to have 
dealers provides additional, basic information pertaining to 
contributions to bond ballot campaigns and any subsequent municipal 
securities business does not impinge upon the First Amendment rights of 
individuals and/or firms that will be responsible for providing 
disclosure of bond ballot campaign contributions.\21\ As noted 
previously, the proposed rule change only will require disclosure of 
additional information pertaining to contributions to, and municipal 
securities business from, bond ballot campaigns and will not prohibit 
contributions to such campaigns.
---------------------------------------------------------------------------

    \21\ In Blount v. Securities and Exchange Commission, 61 F.3d 
938, 948 (DC Cir. 1995), the District Court determined that existing 
Rule G-37 advanced a compelling governmental interest to protect 
investors that did not abridge First Amendment rights and stated 
that ``municipal finance professionals are not in any way restricted 
from engaging in the vast majority of political activities, 
including making direct expenditures for the expression of their 
views * * *.''
---------------------------------------------------------------------------

    Certain dealer and dealer personnel contributions to, and 
activities related to, bond ballot campaigns violate state laws in 
certain jurisdictions.
    Comments: Magis cited an opinion of the California Legislative 
Counsel's Office that ``a school district or other local agency may not 
condition the award of an agreement to provide bond underwriting 
services on the underwriter also providing campaign services in support 
of that bond measure or another bond measure proposed by the school 
district or other local agency.'' Magis also stated that California law 
prohibits the expenditure of public monies on electioneering.
    GFS argued that certain bond ballot campaign practices are contrary 
to the Best Practice recommendation of the Government Finance Officers 
Association and that

    [t]here are variations in bond election contribution patterns. 
Other underwriters simply administer bond election campaigns 
themselves. In doing so, those firms provide both monetary and in-
kind value. Those underwriters may advertise this function as a 
``service'' provided to issuers. Yet, in California and other states 
the issuers cannot administer bond election campaigns themselves. 
Still, in those facts and circumstances, the issuers invariably 
employ those underwriters to underwrite the bonds the voters 
approve. The practice has the appearance of those issuers doing 
indirectly through municipal finance professionals what the issuers 
cannot do directly.

    MSRB Response: The MSRB has previously stated that contributions 
and expenditures by certain dealers and dealer personnel may assist an 
issuer in avoiding state law restrictions, and depending on the 
totality of the facts and circumstances, could independently violate 
Rule G-17, even if not precluded by Rule G-37.\22\ The MSRB does not 
believe that any additional changes in Rule G-37 are necessary at this 
time.
---------------------------------------------------------------------------

    \22\ MSRB Rule G-17 provides that, in the conduct of its 
municipal securities or municipal advisory activities, each dealer 
and municipal advisor shall deal fairly with all persons and shall 
not engage in any deceptive, dishonest, or unfair practice. These 
principles of fair practice have previously been viewed as 
applicable in the context of the MSRB's efforts to eliminate pay-to-
play activities in the municipal securities market. See, e.g., MSRB 
Notice 2003-32 (August 6, 2003); In the Matter of Pryor, McClendon, 
Counts & Co. et al., Order Making Findings and Imposing Remedial 
Sanctions and a Cease-and-Desist Order (February 6, 2002) (broker-
dealer violated Rule G-17 by concealing certain political 
contributions that would have triggered a ban on business under Rule 
G-37). See also MSRB Reports, Draft Rule G-37, Concerning Political 
Contributions in the Municipal Securities Market, Volume 13, Number 
4 (August, 1993); Testimony of Charles W. Fish, Chairman, Municipal 
Securities Rulemaking Board before the Subcommittee on 
Telecommunications and Finance of the Committee on Energy and 
Commerce, United States House of Representatives (September 7, 1993) 
at 59, n.86.
---------------------------------------------------------------------------

    The proposed amendments to the definitions of ``contribution'' and 
``de minimis'' in Rule G-37 are problematic.
    Comments: SIFMA stated that including election services or 
collateral work provided on behalf of an issuer, in addition to work 
done on behalf of a bond ballot campaign committee, in the revised 
definition of ``contribution'' to include the full range of cash and 
in-kind contributions is a significant change that greatly expands the 
scope of the reporting obligations to cover frequent routine 
communications between issuers and underwriters. SIFMA believes the 
proposed amendment blurs the line between work done for the bond ballot 
campaign committee which is to be reported on Form G-37 and traditional 
work for the issuer completed as part of the public finance 
transaction. SIFMA stated that only in-kind contributions to the bond 
ballot committee itself should be reportable and that references to 
work provided to the issuer should be struck from the proposed rule 
change. SIFMA argued that it would be burdensome on the dealer 
community to separately distinguish, track, quantify and report such 
information to the MSRB. SIFMA agreed that work done for or 
contributions made to the actual bond ballot campaign committee should 
be disclosed, as the bond ballot campaign committee is a separate legal 
entity from the issuer.
    NAIPFA stated its support of the MSRB's proposed amendment to 
address ``in-kind'' contributions. GFS stated that it would be helpful 
to include reporting of in-kind contributions and the value of in-kind 
contributions, which are excluded from current reporting requirements 
under Rule G-37.
    MSRB Response: The MSRB believes the public disclosure of all 
political contributions, including cash and in-kind services, will 
allow for greater public scrutiny of such contributions and the 
potential connection between them and the awarding of municipal 
securities business. However, the MSRB agrees that the definition of 
``contribution'' should not include work provided to or on behalf of 
the issuer that is related to the completion of municipal securities 
business. The MSRB has amended the proposed rule change to clarify the 
appropriate nexus between ancillary services provided to, on behalf of, 
or in furtherance of a bond ballot campaign by a dealer or dealer 
personnel. The revisions will assist with clarifying that in-kind 
contributions that would be required to be reported by dealers will 
solely be required with respect to activities related to a bond ballot 
campaign and not with respect to activities undertaken to complete the 
associated municipal securities business.
    The MSRB also notes that the term ``contribution,'' as defined in 
Rule G-37, includes anything of value, which has been interpreted to 
include in-kind contributions.\23\ The proposed rule change will 
establish that the disclosure of in-kind contributions must include 
both the value and the nature of the goods or services provided.
---------------------------------------------------------------------------

    \23\ See Rule G-37 Interpretations, Questions and Answers 
Concerning Political Contributions and Prohibitions on Municipal 
Securities Business: Rule G-37, Question II. 18 (May 24, 1994). For 
example, if a MFP uses dealer's resources (e.g., a political 
position paper prepared by dealer personnel) or incurs expenses in 
the conduct of dealer volunteer work (e.g., hosting a reception), 
then the value of such resources or expenses would constitute a 
contribution.
---------------------------------------------------------------------------

    The proposed amendments will impose undue burdens on dealers.
    Comment: CCP stated that the proposed rule change would impose only 
recordkeeping burdens and would do little to advance the MSRB's 
anticorruption mission. CCP stated that the recordkeeping requirements 
for in-kind contributions do little to prevent corruption and would 
chill a kind of political participation--volunteer work. In addition, 
CCP stated that by requiring recordkeeping of non-de minimis 
contributions, and defining such contributions at the same rate as 
those

[[Page 10662]]

for candidates, the proposed revisions conflate contributions to 
candidates with those to support or oppose ballot initiatives.
    MSRB Response: The MSRB believes the requirements of the proposed 
rule change are necessary and appropriate and will assist the Board and 
the public in determining whether the awarding of municipal securities 
business is linked to certain dealer and dealer personnel contributions 
to bond ballot campaigns. The proposed rule change will assist with 
advancing the anticorruption objective of Rule G-37. The MSRB believes 
that potential burdens that may be caused by the recordkeeping 
requirements of the proposed rule change will be offset by the benefits 
to the MSRB and the public through greater clarity and context to 
existing bond ballot campaign contribution disclosures. The MSRB notes 
that dealers currently report certain political campaign contributions 
and the increased reporting and submission requirements of the proposed 
rule change will only involve a slight, incremental increase to 
existing requirements.
    The MSRB also notes that certain dealers also are required to 
report bond ballot contribution information at the state and local 
level. These requirements demonstrate the strong public interest for 
reporting such contributions, and for dealers in such jurisdictions, 
the burdens of the proposed rule change are arguably even lower.
    The MSRB does not believe that the proposed rule change will 
prohibit or regulate personal volunteer work by dealers and MFPs nor 
will it chill volunteer work as suggested by CCP. The proposed rule 
change will require the disclosure of the contribution amounts that are 
made to bond ballot campaigns by covered parties which, in the case of 
in-kind contributions, include both the value and the nature of the 
goods or services provided, including any ancillary services provided 
to, on behalf of, or in furtherance of the bond ballot campaign. As 
with existing Rule G-37, the proposed rule change does not prohibit or 
restrict individual personal volunteer work.\24\
---------------------------------------------------------------------------

    \24\ Ibid. The MSRB has previously provided guidance regarding 
the treatment of contributions as the use of dealer resources or the 
incurrence of expenses by dealers in connection with a political 
campaign. The MSRB has made clear that Rule G-37 does not prohibit 
or limit individuals from providing volunteer services in support of 
an issuer official, and has also noted that certain incidental 
expenses incurred by such individual would generally not be treated 
as a contribution. See Rule G-37 Question and Answer II.18 (May 24, 
1994). For example, personal expenses incurred by an MFP in the 
conduct of volunteer work, which expenses are purely incidental to 
the volunteer work and are unreimbursed by the dealer (e.g., cab 
fares and personal meals), would not constitute a contribution. Also 
see Rule G-37, Question II.19 (August 18, 1994). An employee of a 
dealer generally can donate their time to an issuer official's 
campaign without such time being viewed as a contribution by the 
dealer to the official, so long as the employee is volunteering his 
or her time during non-work hours, or is using previously accrued 
vacation time or the dealer is not otherwise paying the employee's 
salary (e.g., an unpaid leave of absence). These principles would 
apply equally to individuals providing volunteer services in 
connection with a bond ballot campaign.
---------------------------------------------------------------------------

    The MSRB does not agree with CCP's comment that defining de minimis 
contributions at the same level as those for candidates, and the 
attendant recordkeeping requirements for in-kind contributions, is 
improper. Rather, the MSRB believes that there are efficiencies in 
maintaining consistent de minimis levels for Rule G-37, even with 
respect to in-kind contributions.
    Comment: SIFMA stated that requiring the dealer to provide the 
specific date on which a contribution was given by the dealer to the 
bond ballot campaign is burdensome depending upon the number of non-de 
minimis reportable contributions that need to be tracked and reported 
to the MSRB. SIFMA requested that the MSRB not expand the Form G-37 
disclosure to include the specific date the dealer was selected to 
engage in municipal securities business because the date the dealer was 
selected to engage in such municipal securities business may not be 
clear or ascertainable by the dealer. SIFMA believes that each issuer 
typically has its own method for the selection and final approval of 
underwriters, which makes it difficult or impossible to standardize the 
process.
    MSRB Response: In response to SIFMA's concern over difficulties in 
identifying the precise date when a dealer is selected to engage in a 
municipal securities business, the MSRB has proposed defining a new 
term: ``reportable date of selection.'' Specifically, the ``reportable 
date of selection'' will be the date of the earliest to occur of (i) 
The execution of an engagement letter, (ii) the execution of a bond 
purchase agreement, or (iii) the receipt of formal notification 
(provided either in writing or orally) from, or on behalf of, the 
issuer that the dealer has been selected to engage in municipal 
securities business.
    Comments: SIFMA requested that any rule change be applied from its 
effective date forward, with no contributions made, or transactions 
sold or issued before the effective date of the rule, be subject to 
reporting. SIFMA proposed ``a two-year look back for contributions by 
current individual MFPs or non-MFPs executive officers for bond ballot 
campaign contributions that result in a municipal bond offering 
underwritten by the dealer, to be phased in from the effective date of 
the rule.'' \25\ SIFMA also proposed a limitation on reporting 
municipal securities business resulting from a bond ballot campaign to 
which a contribution was made so that the dealer would only be required 
to look back two years prior to the business being undertaken, and that 
``transactions underwritten by the dealer after a contribution was made 
to a bond ballot campaign committee by a former employee should not 
need to be reported.''
---------------------------------------------------------------------------

    \25\ SIFMA also stated any applicable look back provision should 
not take into account contributions made, or transactions sold or 
issued before the effective date of the rule.
---------------------------------------------------------------------------

    NAIPFA stated that ``any burden, incremental or otherwise, placed 
upon municipal market participants in connection with the imposition of 
the Amendments will be outweighed by the benefits that the Amendments 
will have to the municipal market in terms of improving hiring 
practices, market transparency, and the policing'' of dealer 
contributions to bond ballot campaigns. Similarly, GFS stated that it 
does not believe the disclosure requirements that are contemplated by 
the proposed rule change would impose undue burdens on underwriters, 
nor would a future extension of the disclosure requirements to 
municipal advisors.
    MSRB Response: The MSRB believes that the proposed rule change 
should only apply with respect to municipal securities business with a 
sale or issuance date on or after the effective date of the proposed 
rule change. As a result, dealers will not be required to supplement 
the bond ballot campaign disclosures made with respect to offerings 
prior to the effective date. However, with respect to offerings after 
the effective date, dealers must look back at any contribution made by 
a covered party on or after February 1, 2010 (the date on which dealers 
were first required to record and disclose contributions to bond ballot 
campaigns).\26\
---------------------------------------------------------------------------

    \26\ See footnote 10.
---------------------------------------------------------------------------

    In addition, the MSRB believes that the look-back provisions for 
contributions made by an individual prior to becoming an MFP or a non-
MFP executive officer of a dealer should be limited to two years, 
consistent with the existing timeframe for which such

[[Page 10663]]

contributions are ordinarily attributable to the dealer under Rule G-
37. The MSRB also believes that dealers must continue to report primary 
offerings pertaining to bond ballot campaign contributions of an MFP or 
non-MFP executive officer that left the dealer, as such contributions 
are properly attributable to such dealer.
    The proposed amendments to Rule G-37 should apply to municipal 
advisors.
    Comments: NAIPFA believes that municipal advisors should be subject 
to the proposed amendments when and if adopted. In addition, NAIPFA 
supported the inclusion of municipal advisors within the provisions of 
current Rule G-37 and, in particular, those portions contained within 
Rule G-37(c) and (d) in order to prevent municipal advisors from 
circumventing their disclosure obligations as well as the ban on 
campaign contributions. GFS stated that ``[a]mong other things, once 
the definition of the `municipal advisor' concept is finalized by the 
Securities and Exchange Commission, financial advisors and other 
municipal advisors can be brought within the scope of the regulation.'' 
Magis and SIFMA also supported the application of the proposed 
amendments to municipal advisors.
    MSRB Response: The MSRB previously proposed a new rule that would 
apply pay-to-play restrictions to municipal advisors but withdrew such 
proposal pending final rulemaking by the SEC on a permanent municipal 
advisor registration rule and related definitional matters.\27\ The 
MSRB will consider including the same types of disclosures required by 
the proposed rule change in any such rule it may propose in the future 
with regard to municipal advisors.
---------------------------------------------------------------------------

    \27\ See MSRB Notice 2011-46 (August 19, 2011); MSRB Notice 
2011-51 (September 12, 2011).
---------------------------------------------------------------------------

    Rule G-37 should have more timely and/or expansive reporting 
requirements.
    Comments: GFS recommended that the Board consider requiring 
reporting promptly after contributions are made, and in any event, 
prior to elections and in time to inform the electorate. Magis 
expressed concern that existing Form G-37 submissions by underwriters 
occur only quarterly and suggested that the Board consider ``more 
timely disclosure of these conflicts of interest prior to the bond 
election. * * *''
    MSRB Response: The MSRB believes that the current quarterly 
reporting scheme required under Rule G-37 provides adequate and timely 
information about dealer and dealer personnel contributions to bond 
ballot campaigns and does not intend to expand the reporting 
requirements at this time.
    The EMMA system should provide for easier access to the disclosures 
submitted by dealers relating to bond ballot campaign contributions and 
related information.
    Comments: GFS stated that ``EMMA's online campaign contribution 
report records are difficult to search in a systematic manner. For 
example, EMMA's records cannot be searched at present by issuer names 
or titles of bond issues, which voters may wish to do.'' GFS 
recommended making campaign contribution reports more easily searchable 
on EMMA by issuer name and by titles of bond issues. Magis also stated 
that EMMA is exceedingly difficult to search by issuer name because the 
records are ``dealer name-centric.'' Magis supports the ability to 
access Form G-37 information by state or type of issuer.
    MSRB Response: Comments about the usability and functionality of 
disclosure on EMMA are beyond the scope of the proposed rule change. 
The MSRB is continually evaluating the effectiveness of EMMA and may 
consider initiating such changes in the future.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove 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 email to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2013-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MSRB-2013-01. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the 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-2013-01 and should be 
submitted on or before March 7, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03385 Filed 2-13-13; 8:45 am]
BILLING CODE 8011-01-P