Document ID: SEC-2005-0404-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Municipal Securities Rulemaking Board
Posted Date: 2005-12-20T05:00Z

[Federal Register: December 20, 2005 (Volume 70, Number 243)]
[Notices]               
[Page 75514-75517]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de05-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52948; File No. SR-MSRB-2005-11]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change and Amendment No. 1 
Thereto Relating to Definition of Solicitation Under MSRB Rules G-37 
and G-38

December 13, 2005.
    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 June 10, 2005, 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. 
On December 7, 2005, the MSRB filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 clarifies that the central element in 
determining whether a communication is a solicitation is whether the 
communication occurs with the purpose of obtaining or retaining 
municipal securities business, and makes certain other changes.
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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 proposal consisting of an 
interpretive notice relating to the definition of solicitation for 
purposes of Rules G-37 and G-38. The text of the proposed rule change, 
as amended, is available on the MSRB's Web site (http://www.msrb.org), 

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 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

[[Page 75515]]

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 MSRB has recently amended Rule G-38, on solicitation of 
municipal securities business, to prohibit brokers, dealers and 
municipal securities dealers (``dealers'') from making direct or 
indirect payments to any persons who are not affiliated persons \4\ of 
the dealers for solicitations of municipal securities business \5\ on 
behalf of the dealers. The proposed rule change provides interpretive 
guidance on the definition of ``solicitation'' as used in Rule G-38 and 
in Rule G-37, on political contributions and prohibitions of municipal 
securities business. This definition is important for purposes of 
determining whether dealer payments to non-affiliated persons of the 
dealer would be prohibited under Rule G-38. In addition, the definition 
is central to determining whether communications by dealer personnel 
would result in such personnel being considered municipal finance 
professionals of the dealer for purposes of Rule G-37.
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    \4\ Rule G-38(b)(ii) generally defines an affiliated person of a 
dealer as an employee or other personnel of the dealer or of an 
affiliated company of the dealer.
    \5\ Municipal securities business is defined in Rule G-37 as the 
purchase of a primary offering from the issuer on other than a 
competitive bid basis (e.g., negotiated underwriting), the offer or 
sale of a primary offering on behalf of an issuer (e.g., private 
placement or offering of municipal fund securities), and the 
provision of financial advisory, consultant or remarketing agent 
services to an issuer for a primary offering in which the dealer was 
chosen on other than a competitive bid basis.
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    The proposed rule change makes clear that the central element in 
determining whether a communication is a solicitation is whether the 
communication occurs with the purpose of obtaining or retaining 
municipal securities business. As a general proposition, the proposed 
rule change provides that a communication made under circumstances 
reasonably calculated to obtain or retain municipal securities business 
could be considered a solicitation unless the circumstances indicate 
otherwise. The proposed rule change provides numerous examples of 
circumstances where a communication may or may not be considered a 
solicitation, including guidance on communications with issuer 
representatives, promotional communications, work-related 
communications, communications with conduit borrowers, and 
communications by non-affiliated professionals.
2. Statutory Basis
    The MSRB believes that the proposed rule change, as amended, is 
consistent with section 15B(b)(2)(C) of the Act,\6\ which provides that 
the MSRB's rules shall:
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    \6\ 15 U.S.C. 78o-4(b)(2)(C).

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market 
in municipal securities, and, in general, to protect investors and 
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the public interest.

The MSRB believes that the proposed rule change, as amended, is 
consistent with the Act because it will further investor protection and 
the public interest by ensuring that dealers understand their 
obligations under MSRB rules designed to maintain standards of fair 
practice and professionalism, thereby helping to maintain public trust 
and confidence in the integrity of the municipal securities market.

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

    The MSRB does not believe that the proposed rule change, as 
amended, will result in any burden on competition that is 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

    The MSRB published notices for comment on draft amendments to Rule 
G-38 on April 5, 2004 (the ``April 2004 Notice'') \7\ and September 29, 
2004 (the ``September 2004 Notice'').\8\ The April 2004 Notice sought 
comments on draft amendments limiting payments by a dealer for the 
solicitation of municipal securities business on its behalf solely to 
its associated persons, and also provided certain guidance on the 
definition of solicitation. The MSRB received comments from 28 
commentators, eight of which provided comments on the definition of 
solicitation.\9\ The September 2004 Notice sought comments on revised 
draft amendments to Rule G-38 prohibiting a dealer from making payments 
for the solicitation of municipal securities business on its behalf to 
any person who is not an associated person of the dealer. The September 
2004 Notice also provided more detailed guidance on the definition of 
solicitation. The MSRB received comments from 19 commentators, five of 
which provided comments on the definition of solicitation.\10\ The 
comments received on the April and September 2004 Notices relating to 
the definition of solicitation are discussed below.\11\
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    \7\ See MSRB Notice 2004-11 (April 5, 2004).
    \8\ See MSRB Notice 2004-32 (September 29, 2004), as modified by 
MSRB Notice 2004-33 (October 12, 2004).
    \9\ Letters commenting on the definition of solicitation 
consisted of letters from Jerry L. Chapman (``Mr. Chapman''), to 
Ernesto A. Lanza, Senior Associate General Counsel, MSRB, dated 
April 22, 2004; Maud Daudon, Managing Director, Investment Banking, 
and John Rose, President & CEO, Seattle-Northwest Securities 
Corporation (``Seattle-Northwest'') to Christopher A. Taylor, MSRB 
Executive Director, dated May 19, 2004; Gordon Reis III, Managing 
Principal, Seasongood & Mayer, LLC (``Seasongood'') to Mr. Taylor, 
dated May 20, 2004; Bruce Moland, Vice President & Assistant General 
Counsel, Wells Fargo & Company (``Wells Fargo''), to Mr. Lanza dated 
June 2, 2004; Sarah A. Miller, General Counsel, ABA Securities 
Association (``ABASA''), to Mr. Lanza dated June 4, 2004; Lynette 
Kelly Hotchkiss, Senior Vice President and Associate General 
Counsel, Bond Market Association (``BMA''), to Mr. Lanza dated June 
4, 2004; Robyn A. Huffman, Vice President and Associate General 
Counsel, Goldman Sachs & Co. (``Goldman''), to Mr. Lanza dated June 
4, 2004; and James S. Keller, Chief Regulatory Counsel, PNC Capital 
Markets, Inc. (``PNC''), to Mr. Lanza dated June 4, 2004.
    \10\ Letters commenting on the definition of solicitation 
consisted of letters from Ms. Daudon and Mr. Rose, Seattle-
Northwest, to Mr. Lanza dated December 13, 2004; Mr. Moland, Wells 
Fargo, to Mr. Lanza dated December 15, 2004; Ms. Hotchkiss, BMA, to 
Mr. Lanza dated December 15, 2004; Ms. Huffman, Goldman, to Mr. 
Lanza dated December 15, 2004; and Ms. Miller, ABASA, to Mr. Lanza 
dated December 17, 2004.
    \11\ The remaining comments received on the April and September 
2004 Notices were discussed in SR-MSRB-2005-04. See Exchange Act 
Release No. 51561, 70 FR 20782 (April 21, 2005).
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Communications With Conduit Borrowers

    In the April 2004 Notice, the MSRB asked whether a communication 
with a conduit borrower to hire a dealer as an underwriter for a 
private activity bond issue where the issuer ultimately must approve 
the underwriter for the issue should be considered an indirect 
communication with the issuer. In the September 2004 Notice, the MSRB 
stated that, from a literal perspective, any communication by a dealer 
with a conduit borrower intended to cause the borrower to select the 
dealer to serve as underwriter for a conduit issue could be considered 
a solicitation of municipal securities business. This is because the

[[Page 75516]]

conduit borrower eventually communicates its selection of the dealer to 
the conduit issuer for approval, with the result that this series of 
communications becomes an indirect communication by the dealer through 
the conduit borrower to the conduit issuer with the intent of obtaining 
municipal securities business. However, if the dealer can establish 
that no reasonable nexus could exist between the making of 
contributions to officials of the conduit issuer and the selection of 
the underwriter for such conduit financing, then a communication with 
the borrower would be deemed not to be a solicitation for purposes of 
Rule G-38. For example, if a conduit issuer historically defers to its 
conduit borrowers' selections of underwriters without influencing the 
selection, communications with the conduit borrower to obtain the 
underwriting assignment would not be treated as a solicitation, even if 
that communication is relayed by the conduit borrower to the conduit 
issuer.
    Comments Received. Several commentators stated that communications 
with conduit borrowers should not be considered solicitations, or that 
the circumstances under which they are so considered should be narrowly 
drawn. ABASA, BMA, PNC and Wells Fargo stated that communications with 
conduit borrowers generally should not be considered solicitations, 
whereas Mr. Chapman stated that communications should be treated as 
solicitations. The ABA noted that, in conduit financings, typically a 
complete package (including the underwriter) is presented to the 
selected conduit issuer, with the issuer either accepting or rejecting 
the package. BMA stated that in a conduit deal, if an employee is only 
communicating with a private obligor and not with the issuer, then 
there is no possibility that a contribution made by that employee to an 
official of such issuer would influence the underwriter selection 
process. ABASA and Wells Fargo asked, in the alternative, that the MSRB 
provide more specific guidance on what would cause a communication to 
be a solicitation.
    ABASA and BMA characterized the MSRB's guidance in the September 
2004 Notice as creating a presumption that a communication with a 
conduit borrower is a solicitation which can be rebutted only under 
narrowly drawn circumstances. They also observed that many 
communications with conduit borrowers occur before the identity of the 
issuer has been determined. As a result, they suggested that a dealer 
often cannot know if a communication with a conduit borrower might 
later be considered a solicitation since the dealer does not know if 
the issuer ultimately used will meet the requirements for rebutting the 
presumption that a communication with the borrower is a solicitation.
    MSRB Response. The MSRB believes that ABASA and BMA incorrectly 
implied that the only way for a dealer to rebut the presumption that a 
communication with a conduit borrower is a solicitation is by 
establishing that a conduit issuer historically defers to its conduit 
borrowers' selections of underwriters. The September 2004 Notice 
provided that a communication would not be considered a solicitation if 
there is no reasonable nexus between the making of contributions to 
officials of a conduit issuer and the selection of the underwriter for 
a conduit financing. The method mentioned by ABASA and BMA was simply 
one example of how a dealer could establish that there was no such 
reasonable nexus.
    Nonetheless, the MSRB agrees that a dealer's communication with a 
conduit borrower generally should not be deemed an indirect 
solicitation of the issuer unless a reasonable nexus can be established 
between the making of contributions to officials of the conduit issuer 
within the meaning of Rule G-37 and the selection of the underwriter 
for such conduit financing. A determination of whether such a 
reasonable nexus could exist depends on the specific facts and 
circumstances. The proposed rule change reflects this position.

Inform and Refer

    In the April 2004 Notice, the MSRB noted that, where an issuer 
representative asks an associated person of a dealer whether the dealer 
has municipal securities capabilities, a limited affirmative response 
by the associated person, together with the provision to the issuer 
representative of contact information for dealer personnel who handle 
municipal securities business, generally would not be presumed to be a 
solicitation by such associated person. In the September 2004 Notice, 
the MSRB provided further elaboration and additional examples, noting 
in particular that the associated person could have an MFP of the 
dealer contact the issuer representative directly in response to such 
an inquiry. In both notices, the MSRB stated that, if the associated 
person receives compensation such as a finder's or referral fee for 
such business, the associated person generally would be viewed as 
having solicited the business.
    Comments Received. In response to the April 2004 Notice, ABASA 
stated that, in a bank holding company, bankers should be free to 
inform issuers that affiliated dealers have municipal securities 
capabilities and provide contact information without such communication 
being deemed a solicitation. PNC stated that the draft amendment would 
``negatively impact the ability of affiliated companies to conduct 
banking business and make referrals. It would require dealers to 
disassemble the structures and controls that have been created to 
address requirements of the rule.''
    ABASA appreciated the clarification of the ``inform and refer'' 
concept provided in the September 2004 Notice. However, ABASA continued 
to object that the MSRB viewed the receipt of a finder's fee or 
referral fee as causing a communication to be considered a 
solicitation. ABASA stated that this would significantly add to the 
regulatory burden of bank dealers and, at a minimum, the MSRB should 
exempt any referral fees permitted under the Gramm-Leach-Bliley Act. 
PNC stated that dealer personnel should be permitted to approach issuer 
representatives to inform them of the dealer's municipal securities 
capabilities without such communication being considered a 
solicitation, but Mr. Chapman disagreed.
    MSRB Response. The MSRB believes that the guidance provided in the 
September 2004 Notice on this topic is appropriate and has not made any 
further changes.

Technical Experts

    Comments Received. BMA, Goldman and Seattle-Northwest requested 
that the MSRB explicitly exempt communications by attorneys, 
accountants, engineers and legislative lobbyists with issuers from the 
definition of solicitation. They noted that such technical experts were 
exempted from former Rule G-38 relating to consultants \12\ and argued 
that such exclusion should be continued in revised Rule G-38. BMA 
argued that

[[Page 75517]]

``the MSRB's broad interpretation of the meaning of solicitation means 
that broker-dealers would be prohibited from hiring outside persons to 
perform necessary services given that they would have to, as a 
practical matter, attend * * * meetings with issuers and will 
ultimately make the broker-dealer more appealing to the issuer by doing 
a good job.'' PNC stated that including conversations through or with 
secondary participants of an issue would not serve to enhance the goal 
of the rule. Seasongood stated that all contact by or through third 
parties should be considered a solicitation.
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    \12\ Attorneys, accountants and engineers were excluded from the 
definition of consultant under former Rule G-38 only so long as 
their sole basis of compensation from the dealer was the actual 
provision of legal, accounting or engineering services on the 
municipal securities business that the dealer is seeking. As BMA 
noted, the rule did not exempt legislative lobbying; rather, the 
MSRB had noted in a Question and Answer guidance that the activity 
of lobbying legislators for legislation granting an issuer authority 
to issue certain types of municipal securities would not, by itself, 
result in the lobbyist being considered a consultant. See Rule G-38 
Question & Answer 5, dated February 28, 1996, published in 
MSRB Rule Book.
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    MSRB Response. The proposed rule change makes clear that, so long 
as non-affiliated persons providing legal, accounting, engineering or 
other professional services \13\ are not being paid directly or 
indirectly for their solicitation activities,\14\ they would not become 
subject to Rule G-38. The MSRB believes that this language adequately 
addresses the concerns raised by the commentators.
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    \13\ The proposed rule change does not enumerate all 
professional services that may be provided in connection with 
municipal securities business but makes clear that such services are 
not strictly limited to legal, accounting and engineering services 
(e.g., another dealer serving as a syndicate member).
    \14\ The proposed rule change reminds dealers that the term 
``payment'' under MSRB rules is broadly defined and can include, 
depending on the facts and circumstances, quid pro quo arrangements 
whereby a non-affiliated person solicits municipal securities 
business for the dealer in exchange for being hired by the dealer to 
provide other unrelated services.
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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, as amended, 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-2005-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-MSRB-2005-11. 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. Copies of such 
filing also will be available for inspection and copying at the MSRB's 
offices. 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-2005-11 and should be submitted on or before January 10, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7523 Filed 12-19-05; 8:45 am]

BILLING CODE 8010-01-P