[Federal Register Volume 61, Number 37 (Friday, February 23, 1996)]
[Notices]
[Pages 7034-7037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4123]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36857; File No. SR-MSRB-96-1]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Municipal
Securities Rulemaking Board Relating to Interpretation of Rule G-37 on
Political Contributions and Prohibitions on Municipal Securities
Business
February 16, 1996.
On January 16, 1996,\1\ the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change, pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),
15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder. The proposed rule
change is described in Items I, II, and III below, which Items have
been prepared by the Board. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
\1\ On February 14, 1996, the MSRB filed Amendment No. 1 with
the Commission. Amendment No. 1 withdraws question-and-answer number
3, as well as certain language in the filing pertaining thereto. See
Letter from Jill C. Finder, Assistant General Counsel, MSRB, to
Katherine A. England, Assistant Director, Division of Market
Regulation, SEC (February 14, 1996) (``February 14 Letter'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Board is filing herewith a notice of interpretation concerning
rule G-37 \2\ on political contributions and prohibitions on municipal
securities business (hereafter referred to as ``the proposed rule
change'').\3\ The Board has requested accelerated approval of the
proposed rule change because the clarifications provided in the
proposed rule change are needed to eliminate uncertainty over the
specific application of rule G-37 to certain situations.
\2\ MSRB Manual. General Rules, rule G-37 (CCH) para.3681.
\3\ The Board published the interpretation as originally
submitted in the January 1996 MSRB Reports (Vol. 16, no. 1, pp. 31-
34). The interpretation is also available for inspection and copying
at the Commission's public reference room and at the Board.
[[Page 7035]]
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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 Board 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
texts of these statements may be examined at the places specified in
Item III below. The Board 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
On April 7, 1994, the Commission approved rule G-37, concerning
political contributions and prohibitions on municipal securities
business.\4\ Since that time, the Board has received inquiries
concerning the application of the rule. In order to assist the
municipal securities industry and, in particular, brokers, dealers and
municipal securities dealers in understanding and complying with the
provisions of the rule, the Board has published five prior notices of
interpretation which set forth, in question-and-answer (``Q&A'')
format, general guidance on rule G-37.\5\
\4\ See Securities Exchange Act Release No. 33868 (April 7,
1994); 59 FR 17621 (April 13, 1994). The rule applies to
contributions made on and after April 25, 1994.
\5\ See MSRB Reports, Vol. 14, No. 3 (June 1994) at 11-16; Vol.
14, No. 4 (August 1994) at 27-31; Vol. 14, No. 5 (December 1994) at
8; Vol. 15, No. 1 (April 1995) at 21; and Vol. 15, No. 2 (July 1995)
at 3-4. See also MSRB Manual, supra n.2, at para.3681.
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In July 1995, the Board published a Q&A notice in MSRB Reports
which addressed the issue of when a municipal finance professional
would be ``entitled to vote'' for an issuer official candidate, and,
thus be able to make a de minimis contribution without causing a two-
year ban on municipal securities business with that issuer.\6\ The
Board stated that a municipal finance professional is entitled to vote
for an official of an issuer if the issuer official is on the ballot in
the locality in which the municipal finance professional may vote.
Since publication of this ``entitled to vote'' interpretation, the
Board has received comments from dealers concerning the burden this
interpretation has placed on their compliance departments. Upon further
review, the Board has decided to withdraw this interpretation and to
issue a new interpretation. Accordingly, a municipal finance
professional is ``entitled to vote'' for an issuer official if the
municipal finance professional's principal residence is in the locality
in which the issuer official seeks election. In such instances, a
municipal finance professional is able to make a de minimis
contribution without resulting in a ban on municipal securities
business. For example, if an issuer official is a governor running for
re-election, then anyone residing in that state may make a de minimis
contribution to the official without causing a ban on municipal
securities business with that issuer. In the example of an issuer
official running for President, anyone in the country may contribute
the de minimis amount to the official's Presidential campaign. By
focusing on the municipal finance professional's principal residence
for determining permissible de minimis contributions, this
interpretation should allow any interested municipal finance
professional to participate in the political process where he or she
lives without resulting in a ban on municipal securities business.
\6\ MSRB Reports, Vol. 15, No. 2 (July 1995) at 3-4.
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In prior filings with the Commission, the Board stated that it will
continue to monitor the application of rule G-37, and, from time to
time, will publish additional notices of interpretations, as
necessary.\7\ Recently, the Board has received several inquiries
concerning the applicability of rule G-37 when a person makes a
contribution to an issuer official on behalf of others. This situation
includes, but is not limited to, the following examples:
\7\ See, e.g., Securities Exchange Act Release No. 35879 (June
21, 1995), 60 FR 33447 (June 28, 1995) (Notice of Filing and
Immediate Effectiveness of SR-MSRB-95-11).
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1. A municipal finance professional signs a check drawn on a joint
account and sends it as a contribution to an issuer official, along
with a writing which states that the contribution is being made, in
whole or in part, on behalf of the other holder of the joint account
(who is not a municipal finance professional).
2. Both holders of a joint account, one of whom is a municipal
finance professional, sign a check and send it as a contribution to an
issuer official.
The Board is of the view that, in these and similar situations, if
a municipal finance professional has his or her name associated with a
contribution, then this creates, at the very least, the appearance that
the contribution is being given by the municipal finance professional.
Accordingly, the Board believes that, for purposes of rule G-37, it is
appropriate to attribute such a contribution to the municipal finance
professional. If the contribution exceeds, or does not qualify for, the
$250 de minimis exception set forth in rule G-37(b), then the two-year
ban on municipal securities business will be triggered.
In addition to questions concerning making contributions to issuer
officials on behalf of other persons, the Board has received other
questions and comments concerning (i) making contributions to a
candidate who later loses the election; (ii) reporting requirements for
holding companies; and (iii) making payments to a national political
party for its non-federal account. In light of these questions, the
Board has determined that it is necessary to provide further guidance
to the municipal industry. Accordingly, the Board is publishing a sixth
set of questions and answers.\8\
\8\ See February 14 Letter.
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The Board believes the proposed rule change is consistent with
section 15B(b)(2)(C) of the Securities Exchange Act of 1934 (``Act''),
which provides that the Board'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, 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.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Board does not believe that 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 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
The Board did not publish or solicit comments on the proposed rule
change. However, the Board has received five letters addressing some of
the issues contained in the proposed rule change. Letters were received
from the following:
Chemical Securities Inc. (``Chemical'')
J.C. Bradford & Co. (``JC Bradford'')
Morgan Keegan & Company, Inc. (``Morgan Keegan'')
Raymond James & Associates, Inc. (``Raymond James'')
[[Page 7036]]
Wolf, Robert R. (``Mr. Wolf'')
As noted previously, in the Q&A notice published in July 1995, the
Board provided clarification of its de minimis exception with regard to
determining when a municipal finance professional is ``entitled to
vote'' for an issuer official. In general, the Board stated that a
municipal finance professional is entitled to vote for an issuer
official (incumbent or candidate) after determining that the issuer
official's name has been placed ``on the ballot'' for the primary or
general election of the locality in which the municipal finance
professional may vote. If the incumbent or candidate is not ``on the
ballot,'' then any contribution given to that issuer official by a
municipal finance professional would trigger the rule's two-year ban on
municipal securities business.
All of the commentators expressed concern over this ``entitled to
vote'' interpretation. In general, the commentators believe that it
creates confusion and will make compliance with the rule more
burdensome. Chemical notes that ``the process of running for office
begins well in advance of a person actually having their name placed
`on the ballot' and that, under the Board's current interpretation,
municipal finance professionals would be precluded from contributing
`early money' to campaign efforts.'' Chemical further notes that in
some jurisdictions ``a candidate's name is not placed `on the ballot'
until very late in the election process--sometimes days before the
election.'' Chemical argues that because the procedures for placing a
candidate on the ballot vary from jurisdiction to jurisdiction,
compliance with the ``on the ballot'' standard will not be uniform.
Therefore, Chemical suggests that the appropriate standard should be
``whether the official is a candidate for an office for which the MFP
is eligible to vote.''
JC Bradford also is concerned about the Board's ``entitled to
vote'' interpretation, particularly as it applies to an issuer
official's campaign for the U.S. Presidency. JC Bradford states that
the interpretation ``has the practical effect of prohibiting any
contribution from a municipal finance professional until such time as .
. . [the issuer official] has qualified for the Presidential primary
ballot in the state of residence of the municipal finance professional.
At the moment . . . [the issuer official] qualifies for the ballot, a
de minimis contribution, impermissible to that point, suddenly becomes
permissible. . . . [This] is both arbitrary and capricious.''
Morgan Keegan and Raymond James both state that the interpretation
has made their compliance efforts significantly more difficult. Mr.
Wolf, a registered representative with Morgan Keegan, notes that
because of the peculiarities of certain state laws vis-a-vis the
Board's interpretation, he is effectively prohibited from making a de
minimis contribution until after an election. Mr. Wolf argues that
``this cannot be the way the rule is intended to operate. . . .''
Board's Response
In light of the concerns expressed by these and other commentators,
and upon further review, the Board has decided to withdraw its previous
``entitled to vote'' interpretation and to issue a new interpretation.
Accordingly, a municipal finance professional is ``entitled to vote''
for an issuer official if the municipal finance professional's
principal residence is in the locality in which the issuer official
seeks election. In such instances, a municipal finance professional may
make a de minimis contribution without triggering the ban on municipal
securities business. For example, if an issuer official is a governor
running for re-election, then anyone residing in that state may make a
de minimis contribution to the official without causing a ban on
municipal securities business with that issuer. In the example of an
issuer official running for President, anyone in the country may
contribute the de minimis amount to the official's Presidential
campaign. The focus on the principal residence of municipal finance
professionals for de minimus contributions should allow interested
municipal finance professionals to participate in the political process
where they live.
If the Board discovers that dealers or municipal finance
professionals are soliciting municipal finance professionals to make de
minimis contributions for Presidential elections, in contravention of
rule G-37(c), then the Board may consider additional rulemaking in this
area.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submissions, 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room. Copies of the filing will also
be available for inspection and copying at the Board's principal
offices. All submissions should refer to File No. SR-MSRB-96-1 and
should be submitted by March 15, 1996.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Board has requested that the Commission find good cause,
pursuant to Section 19(b)(2) of the Act, for approving the proposed
rule change prior to the 30th day after publication in the Federal
Register. The Commission has reviewed the MSRB's proposed rule change
and believes, for the reasons set forth below, that the proposal is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to the Board. Specifically, the
Commission believes the proposal is consistent with Section
15B(b)(2)(C) of the Act,\9\ which provides in pertinent part that, the
rules of the Board shall be designed to remove impediments to and
perfect the mechanism of a free and open market in municipal
securities; and not be designed to permit unfair discrimination between
customers, issuers, municipal securities brokers or municipal
securities dealers.
\9\ 15 U.S.C. 78o-4.
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The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, for approving the proposed rule change prior to the 30th day
after publication in the Federal Register. The clarifications provided
by the proposed rule change are needed to eliminate uncertainty over
the specific application of rule G-37, particularly with respect to the
previous interpretation of ``entitled to vote.'' These clarifications
are intended to reduce compliance burdens and costs relating to the
previous interpretation. The Commission believes that accelerated
approval of the proposed rule change will help to clarify applicable
guidelines for those who wish to participate in the political process
through financial means. The issues addressed in the questions and
answers will assist dealers in understanding the requirements of rule
G-37, and will thereby facilitate compliance with the rule.
[[Page 7037]]
Based on the foregoing, the Commission deems it appropriate to
approve the proposed rule change on an accelerated basis, pursuant to
Section 15B of the Act and the rules and regulations thereunder.\10\
\10\ Id.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change SR-MSRB-96-01 be, and hereby is,
approved.
\11\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4123 Filed 2-22-96; 8:45 am]
BILLING CODE 8010-01-M
