Document ID: SEC-2010-1372-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2010-09-09T04:00Z

[Federal Register: September 9, 2010 (Volume 75, Number 174)]
[Notices]               
[Page 54930-54933]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09se10-125]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62830; File No. SR-MSRB-2010-07]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Relating to Rule G-37, 
on Political Contributions and Prohibitions on Municipal Securities 
Business

September 2, 2010.
    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 August 25, 2010, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 which 
consists of an interpretive notice regarding Rule G-37, on political 
contributions and prohibitions on municipal securities business 
(referred to hereafter as ``proposed rule change''). The MSRB has 
requested an effective date for the proposed rule change of sixty (60) 
days after Commission approval of the proposed rule change.
    The text of the proposed rule change is available on the MSRB's Web 
site at 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 rule change consists of an interpretive notice 
regarding Rule G-37, on political contributions and prohibitions on 
municipal securities business.\3\ Under Rule G-37, certain 
contributions to elected officials of municipal securities issuers made 
by brokers, dealers and municipal securities dealers (``dealers''), 
municipal finance professionals (``MFPs'') associated with dealers, and 
political action committees (``PACs'') controlled by dealers and their 
MFPs (``dealer-controlled PACs'') \4\ may result in prohibitions on 
dealers from engaging in municipal securities business with such 
issuers for a period of two years from the date of any triggering 
contributions.
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    \3\ Rule G-37 defines municipal securities business as: (i) The 
purchase of a primary offering of municipal securities from an 
issuer on other than a competitive bid basis; (ii) the offer or sale 
of a primary offering of municipal securities on behalf of an 
issuer; (iii) 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 (iv) 
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.
    \4\ The MSRB has previously stated that the matter of control 
depends upon whether or not the dealer or the MFP has the ability to 
direct or cause the direction of the management or policies of the 
PAC (MSRB Question & Answer No. IV. 24--Dealer Controlled PAC).
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    Rule G-37 requires dealers to disclose certain contributions to 
issuer officials, state or local political parties, and bond ballot 
campaigns, as well as other information, on Form G-37 to allow public 
scrutiny of such contributions and the municipal securities business of 
a dealer. In addition, dealers and MFPs generally are prohibited from 
soliciting others (including affiliates of the dealer or any PACs) to 
make contributions to officials of issuers with which the dealer is 
engaging or seeking to engage in municipal securities business, or to 
political parties of a state or locality where the dealer is engaging 
or seeking to engage in municipal securities business. Dealers and MFPs 
are prohibited from circumventing Rule G-37 by direct or indirect 
actions through any other persons or means.\5\
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    \5\ Rule G-37(d) provides that no broker, dealer or municipal 
securities dealer or any municipal finance professional shall, 
directly or indirectly, through or by any other person or means, do 
any act which would result in a violation of sections (b) or (c) of 
the rule. Section (b) relates to the ban on business and Section (c) 
relates to the prohibition on soliciting and coordinating 
contributions.
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    Due to changes in the financial markets since the adoption of Rule 
G-37 and recent market turmoil, many dealers have become affiliated 
with a broad range of other entities in increasingly diverse 
organizational structures. Some of these affiliated entities (including 
but not limited to banks, bank holding companies, insurance companies 
and investment management companies) have formed or otherwise maintain 
relationships with PACs (``affiliated PACs'') and other political 
organizations, many of which may make contributions to issuer 
officials. Such relationships raise questions regarding the extent to 
which affiliated PACs may effectively be controlled by dealers or their 
MFPs and thereby constitute dealer-controlled PACs whose contributions 
are subject to Rule G-37. Further, such relationships raise concerns 
regarding whether the contributions of such affiliated PACs, even if 
not viewed as dealer-controlled PACs, may be used by dealers or their 
MFPs to circumvent Rule G-37 as indirect contributions for the purpose 
of obtaining or retaining municipal securities business. As a result, 
the MSRB has filed the proposed rule change to provide additional 
guidance with regard to the potential for affiliated PACs to be viewed 
as dealer-controlled PACs.
    The proposed rule change sets out factors that may result in an 
affiliated PAC being viewed as controlled by a dealer or an MFP of a 
dealer and thereby being treated as a dealer-controlled PAC for 
purposes of Rule G-37. The proposed rule change would: i) provide 
guidance on when a dealer's affiliated PAC might be viewed as 
controlled by the dealer for purposes of Rule G-37; and ii) ensure that 
the industry is

[[Page 54931]]

cognizant of prior MSRB guidance concerning indirect contributions 
under the rule. The proposed rule change notes that, when evaluating 
whether contributions made by affiliated PACs may be subject to the 
provisions of Rule G-37, dealers should first determine whether such 
affiliated PAC would be viewed as a dealer-controlled PAC. If an 
affiliated PAC is determined to be a dealer-controlled PAC, then its 
contributions to issuer officials would subject the dealer to the ban 
on municipal securities business and its contributions to issuer 
officials, state or local political parties, and bond ballot campaigns 
would be subject to disclosure under Rule G-37. Even if the affiliated 
PAC is determined not to be a dealer-controlled PAC, the dealer still 
must consider whether payments made by the dealer or its MFPs to such 
affiliated PAC could ultimately be viewed as an indirect contribution 
under Rule G-37(d) if, for example, the affiliated PAC is being used as 
a conduit for making a contribution to an issuer official.
    Indicators of Control by Dealers and MFPs. Soon after adoption of 
Rule G-37, the MSRB stated that each dealer must determine whether a 
PAC is dealer controlled, with any PAC of a non-bank dealer assumed to 
be a dealer-controlled PAC.\6\ The MSRB has also stated that the 
determination of whether a PAC of a bank dealer \7\ is a dealer-
controlled PAC would depend upon whether the bank dealer or anyone from 
the bank dealer department has the ability to direct or cause the 
direction of the management or the policies of the PAC.\8\ Such ability 
to direct or cause the direction of the management or the policies of a 
PAC also would be indicative of control of such PAC by a non-bank 
dealer or any of its MFPs, although it would not be the exclusive 
indicator of such control. While this guidance establishes basic 
principles with regard to making a determination of control, it does 
not set out an exhaustive list of circumstances under which a PAC may 
or may not be viewed as dealer or MFP controlled. The specific facts 
and circumstances regarding the creation, management, operation and 
control of a particular PAC must be considered in making a 
determination of control with respect to such PAC.
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    \6\ See Rule G-37 Question & Answer No. IV. 24 (May 24, 1994).
    \7\ MSRB Rule D-8 defines a bank dealer as a municipal 
securities dealer which is a bank or a separately identifiable 
department or division of a bank.
    \8\ See Rule G-37 Question & Answer No. IV. 24 (May 24, 1994).
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    Creation of PAC. The proposed rule change provides that, in 
general, a dealer or MFP involved in the creation of a PAC would 
continue to be viewed as controlling such PAC unless and until such 
dealer or MFP becomes wholly disassociated in any direct or indirect 
manner with the PAC. Thus, any PAC created by a dealer, acting either 
in a sole capacity or together with other entities or individuals, 
would be presumed to be a dealer-controlled PAC. This presumption 
continues at least as long as the dealer or any MFP of the dealer 
retains any formal or informal role in connection with such PAC, 
regardless of whether such dealer or MFP has the ability to direct or 
cause the direction of the management or policies of the PAC. This 
presumption also would continue for so long as any non-MFP associated 
person of the dealer (either an individual, whether or not an MFP, or 
an affiliated company directly or indirectly controlling, controlled by 
or under common control with the dealer) has the ability to direct or 
cause the direction of the management or policies of the PAC. In 
effect, a dealer could not attempt to treat a PAC it created and then 
spun off to the control of an affiliated company as not being a dealer-
controlled PAC. However, depending on the totality of the facts and 
circumstances, a PAC originally created by a dealer in which the dealer 
or its MFPs no longer retain any role, and with respect to which any 
other affiliates retain only very limited non-control roles, could be 
viewed as no longer controlled by the dealer.
    Similarly, a PAC created by any person associated with the dealer 
at the time the PAC was created, acting either in a sole capacity or 
together with other entities or individuals, would be presumed to be 
controlled by such person under the proposed rule change. Such 
presumption continues at least for so long as such person retains any 
formal or informal role in connection with such PAC, regardless of 
whether any such person has the ability to direct or cause the 
direction of the management or policies of the PAC. This presumption 
also would continue for so long as any other person associated with the 
same dealer as the creator of the PAC has the ability to direct or 
cause the direction of the management or policies of the PAC. Although 
such PAC may not be viewed as subject to Rule G-37 as an MFP-controlled 
PAC when originally created if such person was not then an MFP, if the 
person creating the PAC, or any other associated person with the 
ability to direct or cause the direction of the management or policies 
of such PAC, is or later becomes an MFP, such PAC would be deemed an 
MFP-controlled PAC.\9\
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    \9\ However, a PAC created by an individual acting in his or her 
formal capacity as an officer, employee, director or other 
representative of a dealer, regardless of whether such individual is 
an MFP, would be deemed a dealer-controlled PAC rather than a PAC 
controlled by the individual.
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    Management, Funding and Control of PAC. Beyond the role of the 
dealer, MFP or other person in creating a PAC and maintaining an 
ongoing association with such PAC, the proposed rule change provides 
that the ability to direct or cause the direction of the management or 
the policies of a PAC is also important. Strong indicators of 
management and control are not mitigated by the fact that such dealer, 
MFP or other person does not have exclusive, predominant or 
``majority'' control of the PAC, its management, its policies, or its 
decisions with regard to making contributions. For example, the fact 
that a dealer or MFP may only have a single vote on a governing board 
or other decision-making or advisory board or committee of a PAC, and 
therefore does not have sole power to cause the PAC to take any action, 
would not obviate the status of such dealer or MFP as having control of 
the PAC, so long as the dealer or MFP has the ability, alone or in 
conjunction with other similarly empowered entities or individuals, to 
direct or cause the direction of the management or the policies of the 
PAC. In essence, it is possible for a single PAC to be viewed as 
controlled by multiple different dealers if the control of such PAC is 
shared among such dealers, although the presumption of control may be 
rebutted as described below.
    The level of funding provided by dealers and their MFPs to a PAC 
may also be indicative of control pursuant to the proposed rule change. 
A PAC that receives a majority of its funding from a single dealer 
(including the collective contributions of its MFPs and employees) or a 
single MFP is conclusively presumed to be controlled by such dealer or 
MFP, regardless of the lack of any of the other indicia of control 
described in this notice. Another important factor is the size or 
frequency of contributions by a dealer or MFP,\10\ viewed in light of 
the size and frequency of contributions made by other contributors not 
affiliated in any way with such dealer or MFP. For example, a limited 
number of small

[[Page 54932]]

contributions freely made by employees of a dealer to an affiliated PAC 
(i.e., not directed by the dealer and not part of an automated or 
otherwise dealer-organized program of contributions) would not, by 
itself, automatically raise a presumption of dealer control so long as 
the collective contributions by the dealer or its employees is not 
significant as compared to the total funding of the affiliated PAC, 
subject to consideration of the other relevant facts and circumstances. 
In addition, contributions made by a dealer or MFP to an affiliated PAC 
could raise a stronger inference of de facto dealer or MFP control than 
when such contributions were made to non-affiliated PACs.
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    \10\ A dealer or an MFP may make sufficiently large or frequent 
contributions to a PAC so as to obtain effective control over the 
PAC, depending on the totality of facts and circumstances.
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    However, even where a dealer or MFP is not viewed as controlling a 
PAC under the principles described above, the proposed rule change 
cautions dealers to remain mindful of the potential for leveraging the 
contribution activities of affiliated PACs in soliciting municipal 
securities business in a way that could raise a presumption of dealer 
or MFP control. For example, an MFP's references to the contributions 
made by an affiliated PAC during solicitations of municipal securities 
business could, depending on the facts and circumstances, serve as 
evidence of coordination of such PAC's activities with the dealer or 
MFP that could, together with other facts, be indicative of direct or 
indirect control of the PAC by such dealer or MFP. Such control could 
be found even in circumstances where the dealer or its MFPs have not 
made contributions to the affiliated PAC.\11\
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    \11\ See Rule G-37 Question & Answer No. III.7 (September 22, 
2005) for a discussion of potential indirect contributions through 
affiliated PACs.
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    Of course, the presumptions described above may be rebutted, 
depending upon the totality of facts and circumstances. The proposed 
rule change notes considerations that may serve to rebut such 
presumptions, which may include whether the dealer or person creating 
the PAC: (i) Participates with a broad-based group of other entities 
and/or individuals in creating the PAC, (ii) at no time undertakes any 
direct or indirect role (and, in the case of a dealer, no person 
associated with the dealer undertakes any direct or indirect role) in 
leading the creation of the PAC or in directing or causing the 
direction of the management or the policies of the PAC, and/or (iii) 
provides funding for such PAC (and, in the case of a dealer, its 
associated persons collectively provide funding for such PAC) that is 
not substantially greater than the typical funding levels of other 
participants in the PAC who do not undertake a direct or indirect role 
in leading the creation of the PAC or in directing or causing the 
direction of the management or the policies of the PAC.
    Indirect Contributions Through Bank PACs or Other Affiliated PACs. 
The proposed rule change reminds dealers that, if an affiliated PAC is 
determined not to be a dealer-controlled PAC, a dealer must still 
consider whether payments made by the dealer or its MFPs to such 
affiliated PAC could be viewed as an indirect contribution that would 
become subject to Rule G-37 pursuant to section (d) thereof. The 
proposed rule change reviews prior extensive guidance on such indirect 
contributions, noting that the MSRB had stated in 1996 that, depending 
on the facts and circumstances, contributions to a non-dealer 
associated PAC that is soliciting funds for the purpose of supporting a 
limited number of issuer officials might result in the same prohibition 
on municipal securities business as would contributions made directly 
to the issuer official.\12\ The MSRB also noted that dealers should 
make inquiries of a non-dealer associated PAC that is soliciting 
contributions in order to ensure that contributions to such a PAC would 
not be treated as an indirect contribution.\13\
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    \12\ See Rule G-37 Question & Answer No. III.4 (August 6, 1996).
    \13\ See Rule G-37 Question & Answer No. III.5 (August 6, 1996).
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    The proposed rule change also notes that the MSRB has previously 
provided guidance in 2005 with regard to supervisory procedures \14\ 
that dealers should have in place in connection with payments to a non-
dealer associated PAC or a political party to avoid indirect rule 
violations of Rule G-37(d). In such guidance, the MSRB stated that in 
order to ensure compliance with Rule G-27(c) as it relates to payments 
to political parties or PACs and Rule G-37(d), each dealer must adopt, 
maintain and enforce written supervisory procedures reasonably designed 
to ensure that neither the dealer nor its MFPs are using payments to 
political parties or non-dealer controlled PACs to contribute 
indirectly to an official of an issuer.\15\ Among other things, dealers 
might seek to establish procedures requiring that, prior to the making 
of any contribution to a PAC, the dealer undertake certain due 
diligence inquiries regarding the intended use of such contributions, 
the motive for making the contribution and whether the contribution was 
solicited. Further, in order to ensure compliance with Rule G-37(d), 
dealers could consider establishing certain information barriers 
between any affiliated PACs and the dealer and its MFPs.\16\ The 
proposed rule change notes that dealers that have established such 
information barriers should review their adequacy to ensure that the 
affiliated entities' contributions, payments or PAC disbursement 
decisions are neither influenced by the dealer or its MFPs, nor 
communicated to the dealers and the MFPs.
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    \14\ Rule G-27, on supervision, provides in section (c) that 
each dealer shall adopt, maintain and enforce written supervisory 
procedures reasonably designed to ensure that the conduct of the 
municipal securities activities of the dealer and its associated 
persons are in compliance with MSRB rules.
    \15\ See Rule G-37 Question & Answer No. III.7 (September 22, 
2005).
    \16\ The potential information barriers described in the 
guidance include: (i) A prohibition on the dealer or MFP from 
recommending, nominating, appointing or approving the management of 
affiliated PACs; (ii) a prohibition on sharing the affiliated PACs 
meeting agenda, meeting schedule, or meeting minutes; (iii) a 
prohibition on identification of prior affiliated PAC contributions, 
planned PAC contributions or anticipated PAC contributions; (iv) a 
prohibition on directly providing or coordinating information about 
prior negotiated municipal securities businesses, solicited 
municipal securities business, and planned solicitations of 
municipal securities business; and (v) other such information 
barriers as the firms deems appropriate to effectively monitor 
conflicting interest and prevent abuses.
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    The MSRB subsequently noted that the 2005 guidance did not 
establish an obligation to put in place the specific procedures and 
information barriers described in the guidance so long as the dealer in 
fact has and enforces other written supervisory procedures reasonably 
designed to ensure that the conduct of the dealer and its MFPs are in 
compliance with Rule G-37(d).\17\ The proposed rule change provides the 
example that, when information regarding past or planned contributions 
of an affiliated PAC is or may be available to or known by the dealer 
or its MFPs, the dealer might establish and enforce written supervisory 
procedures that prohibit the dealer or MFP from providing information 
to issuer personnel regarding past or anticipated affiliated PAC 
contributions.
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    \17\ See Rule G-37 Interpretive Letter--Supervisory procedures 
relating to indirect contributions; conference accounts and 527 
organizations (December 21, 2006).
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2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(C) of the Act,\18\ 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

[[Page 54933]]

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.
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    \18\ 15 U.S.C. 78o-4(b)(2)(C).
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    The MSRB believes that the proposed rule change is consistent with 
the Act because it will help to inhibit practices constituting real and 
perceived attempts to influence the awarding of municipal securities 
business through contributions made by or through dealer-affiliated 
PACs. The MSRB also believes that the proposed rule change will 
facilitate dealer compliance with Rule G-37 and Rule G-27, on 
supervision.

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 since it would apply equally to 
all brokers, dealers and municipal securities dealers.

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

    Written comments were neither solicited nor received.

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.
    The MSRB has requested an effective date for the proposed rule 
change of sixty (60) days after Commission approval of the proposed 
rule change.

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 Comment

     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-2010-07 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-2010-07. 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 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 
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-2010-07 and should be 
submitted on or before September 30, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22450 Filed 9-8-10; 8:45 am]
BILLING CODE 8010-01-P