Document ID: SEC-2009-1773-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2009-12-18T05:00Z

[Federal Register: December 18, 2009 (Volume 74, Number 242)]
[Notices]               
[Page 67285-67287]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18de09-110]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61155; File No. SR-MSRB-2009-18]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Consisting of 
Amendments to Rule G-37 (Political Contributions and Prohibitions on 
Municipal Securities Business) and Rule G-8 (Books and Records To Be 
Made by Brokers, Dealers and Municipal Securities Dealers)

December 11, 2009.
    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 December 4, 2009, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB has filed with the Commission a proposed rule change 
consisting of proposed amendments to Rule G-37 (political contributions 
and prohibitions on municipal securities business) and Rule G-8 (books 
and records to be made by brokers, dealers and municipal securities 
dealers). The MSRB requested that the proposed rule change become 
effective on, and would apply solely to contributions made on or after, 
the first business Monday at least five business days after Commission 
approval.
    The text of the proposed rule change is available on the MSRB's Web 
site (http://www.msrb.org/msrb1/sec.asp), at the MSRB's principal 
office, and at the Commission's Public Reference Room.

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. 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 amendments to Rule G-37 would require the public 
disclosure of contributions to bond ballot campaigns made by dealers, 
municipal finance professionals (``MFPs''), their political action 
committees (``PACs'') and non-MFP executive officers on MSRB Form G-37. 
Dealers would be required to report on revised Form G-37 the official 
name of each bond ballot campaign receiving contributions during such 
calendar quarter, the jurisdiction (including city/county/State or 
political subdivision) by or for which municipal securities, if 
approved, would be issued, the contribution amount made and the 
category of contributor. The proposal would provide a de minimis 
exception from the reporting of contributions on Form G-37 made by an 
MFP or non-MFP executive officer to a bond ballot campaign for a ballot 
initiative with respect to which such person is entitled to vote if all 
contributions by such person to such bond ballot campaign, in total, do 
not exceed $250 per ballot initiative. The amendments would parallel 
the existing disclosure requirements for contributions to issuer 
officials and State and local political parties. Such amendments would 
not, however, provide for a ban on municipal securities business as a 
result of contributions to bond ballot campaigns.
    The proposed amendments to Rule G-8 would require dealers to create 
and maintain records of the non-de minimis contributions to bond ballot 
campaigns that would be required to be disclosed on Form G-37 under the 
proposed amendments to Rule G-37.
2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(C) of the Act,\3\ which provides that the MSRB's rules shall:
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    \3\ 15 U.S.C. 78o-4(b)(2)(C).

    [B]e 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

[[Page 67286]]

market in municipal securities, and, in general, to protect 
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investors and the public interest.

    The MSRB believes that the proposed rule change is consistent with 
the Act because it will protect investors and the public interest and 
will assist with preventing fraudulent and manipulative acts and 
practices by allowing the public and regulators to monitor dealer 
contributions to bond ballot campaigns, thereby further reducing the 
opportunity for pay-to-play practices in the municipal securities 
market.

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

    The MSRB does not believe the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act since it would apply equally to all dealers.

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

    On June 22, 2009, the MSRB published a notice requesting comment on 
draft amendments to Rule G-37.\4\ The MSRB received comments from seven 
commentators.\5\ Three of the seven commentators were generally 
supportive of the proposed change, with certain exceptions detailed 
below.\6\ Two of the seven commentators were against the proposed 
change.\7\ Two other commentators did not express an opinion regarding 
whether they supported the proposed change.\8\
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    \4\ See MSRB Notice 2009-35 (June 22, 2009).
    \5\ See letters from Robert J. Stracks, Counsel, BMO Capital 
Markets (``BMO'') to Leslie Carey, dated August 7, 2009; Robert K. 
Dalton, Vice Chairman, George K. Baum & Company (``Baum'') to Leslie 
Carey, dated July 30, 2009, along with supplemental letter from Kent 
J. Lund, Executive Vice-President, Chief Compliance Officer to 
Leslie Carey, dated August 7, 2009; Stratford Shields, Managing 
Director, Morgan Stanley (``Morgan Stanley'') to Leslie Carey, dated 
July 30, 2009; Frank Fairman, Managing Director and Rebecca 
Lawrence, Assistant General Counsel, Piper Jaffray (``Piper'') to 
Leslie Carey, dated August 7, 2009; Michael Decker, Co-Chief 
Executive Officer and Mike Nichols, Co-Chief Executive Officer, 
Regional Bond Dealers Association (``RBDA'') to Leslie Carey, dated 
August 7, 2009; Leslie Norwood, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA'') to Leslie Carey, dated August 7, 2009; and 
Kenneth E. Williams, President, Chief Executive Officer, Stone & 
Youngberg (``Stone & Youngberg'') to Leslie Carey dated August 13, 
2009.
    \6\ See letters from Morgan Stanley, Piper and SIFMA.
    \7\ See letters from Baum and RDBA.
    \8\ See letters from BMO and Stone & Youngberg.
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    General. Morgan Stanley supported the proposed change but requested 
that the MSRB consider having bond ballot campaign contributions result 
in a ban on municipal securities business. SIFMA also supported the 
proposed change and noted that ``there are no uniform disclosure 
methodologies or transparency vehicles for bond ballot measure campaign 
contributions across the various State and local jurisdictions that may 
have bond ballot measures.'' SIFMA further stated ``the transparency 
this rule change will create would reap benefits that outweigh any 
additional compliance burdens and costs for the municipal securities 
dealer community.''
    Piper supported the disclosure of contributions to bond election 
campaigns but not those by individual MFPs and executive officers. 
Piper noted it is not aware that contributions to bond ballot measures 
by individuals are prevalent and stated that such contributions are 
likely subject to State and local reporting requirements. Stone & 
Youngberg stated that the proposed change may seem a way ``to keep in 
check the appearance of impropriety in the municipal marketplace'' but 
that, unless the MSRB requires disclosures or bans with respect to all 
contributions of time or money that are given by any employee at banks 
and dealer firms to entities that issue municipal bonds, the rules will 
continue to favor certain participants in the municipal finance 
business. BMO stated that it was not sure of the rationale for 
disclosure of dealer contributions to bond ballot campaigns.
    After reviewing the comments, the MSRB is filing the proposed rule 
change to require the public disclosure of dealer contributions to bond 
ballot campaigns. The MSRB believes, as noted by SIFMA, that the 
proposed rule change would create a uniform disclosure regime to track 
and make available to public scrutiny bond ballot campaign 
contributions by dealers in the municipal securities market, thereby 
increasing available information to municipal securities market 
participants and the general public. The MSRB does not believe that a 
ban on municipal securities business as a result of a contribution to a 
bond ballot campaign is warranted at this time but notes that the 
disclosures provided for under the proposed rule change will assist in 
determining, in the future, whether it would be appropriate to consider 
further action in this area.
    The MSRB does not agree with Piper's comments that the proposed 
rule change should not require the disclosure of contributions by 
individual MFPs and executive officers since the MSRB does not believe 
that a satisfactory basis for providing different disclosure 
requirements for bond ballot contributions as compared to other 
political contributions or payments as is currently required under Rule 
G-37 has been established. The MSRB notes that patterns and practices 
observed through the disclosures that would be required under the 
proposed rule change could serve as a basis for making such 
differentiation in connection with any further regulatory action in 
this area in the future, if appropriate.
    In-Kind Contributions. SIFMA stated that the use of in-house 
resources should not be reported because the valuation of such services 
may be difficult to ascertain. BMO also noted that, if the proposed 
amendments are approved, they ``should either only require reporting of 
cash contributions or require much more general information as to in-
kind services as opposed to cash contributions'' because the 
requirement to value and report in-kind contributions is ``fraught with 
impossible practical difficulties.'' The RBDA similarly stated, ``it 
would be extraordinarily difficult in many cases for dealers to 
segregate in-kind services for bond ballot campaigns from other 
services provided in the context of underwriting bond issues and to 
value those services accurately.'' Baum requested that in-kind services 
be treated differently from cash contributions because ``measurement of 
in-kind contributions may represent a real challenge * * *.''
    The existing definition of contribution in Rule G-37 is not limited 
to cash payments and generally would cover anything of value, including 
in-kind contributions.\9\ The MSRB has determined not to amend the term 
contribution and dealers would be required to report such contributions 
to bond ballot campaigns just as they are currently required to report 
such non-cash contributions under Rule G-37 with respect to political 
contributions to issuer officials.\10\ The MSRB believes

[[Page 67287]]

the public disclosure of such contributions, including cash and in-kind 
services, will allow public scrutiny of such contributions and the 
potential connection between such contributions and the awarding of 
municipal securities business.
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    \9\ Contribution is defined in Rule G-37(g) 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.
    \10\ 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 so long as dealer resources were not used, 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 Answers II.18 (May 24, 1994) and II.19 
(August 18, 1994). These principles would apply equally to 
individuals providing volunteer services in connection with a bond 
ballot campaign.
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    Constitutionality. Baum and the RBDA did not support the proposed 
change that would require disclosure of bond ballot campaign 
contributions and noted that such contributions do not have an element 
of pay-to-play that may exist for contributions to campaigns for 
political office because, for bond ballot measures, no individual 
politician benefits directly from the outcome of a bond ballot 
election. They also asserted that bond ballot campaign contributions 
are subject to strict scrutiny for possible violations of the First 
Amendment, citing Dallman et al. v. Ritter et al.\11\
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    \11\ Findings of Fact, Conclusions of Law and Order Entering 
Preliminary Injunction issued in Dallman et al. v. William Ritter 
and Rich L. Gonzales and Daniel Ritchie et al. v. Bill Ritter and 
Rich Gonzales (Case No. 09CV1188 consolidated with 09CV1200), (D. 
Colo. 2009) [hereinafter Dallman].
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    Dallman concerned the constitutionality of an amendment to 
Colorado's constitution, passed by voter election in Colorado in 
November 2008, which prohibits contributions to promote or influence a 
bond ballot issue election by a person wishing to qualify for a sole 
source government contract relating to the ballot issue. Plaintiffs 
claimed that the amendment violated their First Amendment rights to 
free speech and association. The court stated that, ``the part of 
Amendment 54 that bans those subject to it from contributing to ballot 
measure campaigns is subject to strict scrutiny. A vote for or against 
a ballot measure is an exercise of free speech, and an economic 
contribution to a committee designed to support or oppose a ballot 
measure is similarly of constitutional magnitude.'' \12\ The court then 
determined that the amendment to prohibit bond ballot measure 
contributions was not narrowly tailored to advance a compelling state 
interest and was unconstitutional.
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    \12\ Dallman, p. 19.
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    The MSRB believes that the requirement to provide public disclosure 
of contributions to bond ballot campaigns does not hamper or interfere 
with an individual's ability to be involved with and/or support issues 
related to bond ballot campaigns. The MSRB does not believe the 
proposed rule change will impinge upon the First Amendment rights of 
individuals and/or firms that will be responsible for providing 
disclosure of bond ballot measure contributions \13\ because the 
proposed rule change would only require disclosure and would not 
prohibit contributions, as was at issue in Dallman. Disclosure 
obligations do not present the same constitutional issues as do direct 
or indirect prohibitions or limitations on contributions.
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    \13\ 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.''
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2009-18 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-2009-18. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the MSRB. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MSRB-2009-18 and should be 
submitted on or before January 8, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30084 Filed 12-17-09; 8:45 am]

BILLING CODE 8011-01-P