[Federal Register Volume 59, Number 71 (Wednesday, April 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8838]
[[Page Unknown]]
[Federal Register: April 13, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33868; File No. SR-MSRB-94-2]
Self-Regulatory Organization; Municipal Securities Rulemaking
Board
April 7, 1994.
In the matter of Self-regulatory organizations; order approving
proposed rule change by the Municipal Securities Rulemaking Board
relating to political contributions and prohibitions on municipal
securities business and notice of filing and order approving on an
accelerated basis amendment No. 1 relating to the effective date and
contribution date of the proposed rule.
On January 12, 1994, the Municipal Securities Rulemaking Board
(``MSRB'') submitted to the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-MSRB-94-02)
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934,\1\
and Rule 19b-4 thereunder. The MSRB filed the proposal to adopt rules
relating to political contributions and prohibitions on municipal
securities business. The Commission published notice to the proposal in
the Federal Register on January 21, 1994.\2\ On February 4, 1994, the
Commission extended the comment period for the proposal by 30 days, to
March 11, 1994.\3\ On March 29, 1994, the MSRB filed an Amendment to
the proposal relating to the proposal's effective date and contribution
date.\4\
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\1\15 U.S.C. 78s(b)(1).
\2\Securities Exchange Act Release No. 33482 (January 14, 1994),
59 FR 3389.
\3\Securities Exchange Act Release No. 33583 (February 4, 1994),
59 FR 6320.
\4\As originally submitted, the proposal's prohibitions on
municipal securities business would arise from contributions made on
or after April 1, 1994. The MSRB filed an amendment to change the
April 1, 1994 date to a date 10 days after publication in the
Federal Register of the Commission order approving the proposal. The
MSRB also amended the proposal to change the effective date of the
proposal's disclosure and recordkeeping requirements to a date 10
days after publication of the approval order in the Federal
Register. File No. SE-MSRB-94-2, Amendment No. 1 (March 29, 1994).
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The Commission received 69 comment letters on the proposed rule
change. Twenty-four commentators favor the proposal and 33 oppose the
proposal. Several commentators raise concerns without expressly
favoring or opposing the proposal. Several commentators that favor the
proposal make recommendations to better enable municipal securities
dealers to comply with the proposal. The Commission has determined, for
the reasons discussed below, to approve the proposed rule change.
I. Executive Summary
The MSRB's proposed rule change relating to political contributions
and prohibitions on municipal securities business is intended to
address practices known as ``pay to play.'' These practices typically
involve payments in the form of political contributions to help finance
election campaigns of state or local officials or similar arrangements
with these officials. Widespread reports regarding the existence of
such practices has fueled industry and regulatory concerns. These
practices directly affect municipal securities markets by increasing
costs borne by issuers, dealers and ultimately investors, by creating
artificial barriers to competition, and by undermining underwriter and
market integrity. In 1993, state and local governments awarded
negotiated underwriting contracts for the sale of more than $250
billion of municipal bonds, approximately 80% of all municipal
securities underwritings, to facilitate the construction of schools,
highways, hospitals, public housing, bridges, water and sewer systems,
and other infrastructure projects needed to serve public needs and spur
local and regional economic growth.\5\ As of December 31, 1993, private
investors, including households and mutual and money market funds, held
more than $850 billion in municipal securities, representing
approximately 70% of outstanding municipal securities.\6\ While it is
difficult to quantify the cost of fraudulent, unethical, and
manipulative dealer selection practices, at a minimum, these practices
substantially undermine the integrity of the municipal securities
market. Congress recognized the importance of integrity in municipal
securities financing when it directed the formation of the MSRB, as
part of the Securities Acts Amendments of 1975, and authorized the MSRB
to regulate the conduct of municipal securities dealers to, among other
things, prevent fraudulent and manipulative acts and practices, promote
just and equitable principles of trade, remove impediments to free and
open trade, and protect investors and the public interest.
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\5\See Public Securities Association, Review of Studies of
Competitive and Negotiated Financing of Municipal and Corporate
Securities (March 1994).
\6\Board of Governors of the Federal Reserve System, Flow of
Funds Accounts, Flows and Outstandings, Fourth Quarter 1993 (March
9, 1994) (``Flow of Funds Accounts'').
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As the self-regulatory organization (``SRO'') charged with primary
oversight of municipal securities dealers' activities, the MSRB has
proposed a series of measures designed to prevent ``pay to play''
practices in the awarding of municipal securities business. These
measures include a prohibition against municipal securities dealers,
conducting certain types of municipal securities business with an
issuer if the dealer or affiliated persons, subject to exceptions, made
political contributions to officials of the issuer who could influence
the awarding of that business. The measures also include separate
provisions requiring municipal securities dealers to maintain records
and to disclose aggregate information to facilitate compliance and
examinations with the goal of promoting investor confidence in the
integrity of the municipal securities market. As discussed below, the
Commission believes that the proposal is consistent with the Act and
will advance the goals of the Act.
II. Background
The market for municipal securities is characterized by great
diversity and high volume and comprises an estimated 50,000 issuers
including state governments, cities, towns, counties, and special
subdivisions, such as special purpose districts and public
authorities.\7\ There are approximately 1.3 million municipal
securities issues outstanding, representing over $1.2 trillion in
securities.\8\ In 1993, 17,000 new issues took place with a record
value of $335 billion.\9\ As discussed below, negotiated underwritings
have become the predominate method of underwriter selection. The MSRB's
proposal is designed to address abuses involving political
contributions inherent in using negotiated underwriting as a method of
underwriter selection.
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\7\Securities and Exchange Commission, Division of Market
Regulation, Staff Report on the Municipal Securities Market,
(September 1993) (``Municipal Securities Report'') at 1.
\8\See Flow of Funds Accounts, supra note 6.
\9\This record financing was heavily influenced by refundings.
Nevertheless, the level of long term new money financing,
representing 49% of the financing for the year, reflected continued
market growth. In 1993, there were $142 billion of new money long
term financings, compared to $81 billion in 1988, a 75% increase.
``A decade of Municipal Finance,'' The Bond Buyer (Jan. 6, 1994) at
24. See also Securities Act Release No. 7049, Securities Exchange
Act Release No. 33741 (March 9, 1994), 59 FR 12748, and Securities
Exchange Act Release No. 33742, (March 9, 1994), 59 FR 12759.
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A. Increasing Use of Negotiated Underwritings
The types of securities generally issued by municipalities include
general obligation bonds (secured by the full faith and credit and
general taxing power of the issuer), revenue bonds (secured by the
revenues of a particular project), and conduit bonds (securities issued
to finance a project that is to be used in the trade or business of a
third party, typically a private corporation or non-profit entity). At
one time general obligation bonds were most prevalent. Today, however,
most offerings consist of revenue bonds. During the past few years, the
municipal bond market also has experienced a proliferation of complex
derivative products.\10\
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\10\Among these are principal and interest strips, pooled
municipal investment vehicles, detachable call options, and new
variable rate securities.
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Although competitive bidding traditionally has been used for public
financing,\11\ in recent years negotiated underwritings have become
much more common.\12\ in 1993, negotiated underwritings accounted for
approximately 80% of all long-term municipal bond offerings.
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\11\At the time the Exchange Act was enacted, competitive
bidding, in one form or another, was the most accepted method of
financing used by municipalities and other public entities. L. Loss
& J. Seligman, Securities Regulation 343 (1989). In competitive
offerings, the issuer decides who will underwrite its bonds based
almost entirely on price in response to the issuer's ``notice of
sale.'' Firms wishing to bid on an issue will include other firms in
their syndicates based on their marketing or capital needs and the
requirements of the issuer, if any. Some issuers will require the
underwriting syndicate to include one or more firms with significant
minority participation or specific regional capacity. This
requirement usually is stated in the notice of sale. See MSRB,
Glossary of Municipal Terms, (1985), definition of ``competitive
bid'' or ``competitive bidding.''
\12\There can be an element of competition present in negotiated
deals. In a negotiated offering, the issuer typically distributes a
request for proposals (``RFP'') to provide underwriting services for
either a single issue, or more frequently, for a set period of
years. Underwriters that are interested then submit their responses
and the issuer will select one or more of the respondents to provide
underwriting services. Issuers commonly select the entire management
group in a negotiated offering, and often select most members of the
selling group as well. Often an issuer will use the RFP process to
``prequalify'' a pool of underwriters as eligible to provide
services and then select specific underwriters on a transaction by
transaction basis. Consequently, the RFP process may not purge the
selection process of undue influence. Notwithstanding the use of an
RFP, issuers may award the municipal securities business according
to existing non-merit based relationships with an underwriter.
In a large syndicate, one or more firms will serve as senior
syndicate managers or co-managers; a second tier of firms will be
designated as managers; the remaining syndicate members are the
selling group. The issuer will also designate which of the managers
will actually ``run the books'' and manage the syndicate. The senior
managers and managers bear a risk of loss; members of the selling
group do not bear this risk. Some issuers may select all the firms
and delineate the position of each; others choose several firms as
the management group, and give the senior syndicate managers
discretion to choose members of the selling group (or name a few
selling group members, and allow the senior managers to choose the
remainder); still others will choose a senior manager and no others
and the manager may or may not form a selling group.
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Competitive bidding offers the public some protection against the
exertion of inappropriate influence on public officials by municipal
underwriters. When bidding is done competitively and publicly, there is
less possibility of collusion and political patronage. Because the
competitive process offers all potential bidders equal opportunity to
be awarded the deal, bidders must compete with one another based on the
pricing of the issue and the willingness to accept market risk.\13\
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\13\The Government Finance Officers Association (``GFOA'') cites
three advantages to competitive sales: assurance that the bonds are
sold at the lowest cost in the prevailing market; lower gross
underwriting spreads than negotiated sales, historically; and
promotion of the appearance of an open, fair process. ``Taxpayers
have greater assurance that the bonds have been awarded at the
lowest possible cost, and not for the benefit of underwriting firms
engaged in political activities to support elected officials.'' An
Elected Official's Guide to Debt Issuance, Kurish and Tigue, GFOA,
Chicago, IL (1993) (``Elected Official's Guide'').
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In contrast to competitive underwritings, negotiated underwritings
present greater risk of abuse in the underwriter selection process.\14\
Issuers may become involved not only in selecting the lead underwriter,
but also in controlling other provisions of the distribution. Selection
may be based on nonmeritorious considerations, creating a genuine risk
that underwriters will be selected on the basis of political influence
rather than the quality of the underwriter's services in distributing
the securities.\15\
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\14\Negotiated sales do present advantages. GFOA notes three:
ability to delegate tasks such as document preparation, sizing and
structuring to the underwriter; pre-sale period in which structure
may be tailored to investor demand; and flexibility to respond to
market conditions. Elected Official's Guide. See also Public
Securities Association, Review of Studies of Competitive and
Negotiated Financing of Municipal and Corporate Securities, (March
1994).
\15\Regardless of whether an issue is competitive or negotiated,
most issuers also employ financial advisers to assist in a bond
offering. While some financial advisers are chosen on an issue by
issue basis, others are retained to assist the issuer over a period
of time. Financial advisers also are paid by the issuer, and their
fees may be considered an expense of the offering.
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B. ``Pay to Play''
Recent reports regarding ``pay to play'' have raised concerns about
the practices municipal securities dealers employ to obtain municipal
securities business. There have been numerous reported instances where
registered municipal securities dealers, their employees, and related
parties, allegedly have made payments, political contributions, or
entered into business ventures with political figures apparently to
obtain the underwriting business of municipal securities issuers.
Specific abuses have been alleged in several state and local
governments including Alabama,\16\ California,\17\ Colorado,\18\ the
District of Columbia,\19\ Florida,\20\ Illinois,\21\ Kentucky,\22\
Massachusetts,\23\ Michigan,\24\ New Jersey,\25\ New York,\26\
Ohio,\27\ Oklahoma,\28\ and Wisconsin.\29\ The widespread nature of the
complaints concerning abuses has received considerable attention from
Congress, the Commission, the MSRB, the securities industry, the media,
and the public, reflecting concerns regarding the integrity, fairness,
and sound operation of the municipal securities market.
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\16\``Crying Cronyism, Lawmaker Seeks Alabama Ban on Negotiated
Deals,'' The Bond Buyer, (February 7, 1994), at 1.
\17\``Curbs Sought on Bond Firm Contributions,'' The Washington
Post, (January 14, 1994) at B2.
\18\``The Politics of Money,'' U.S. News and World Report,
(September 20, 1993), at 67.
\19\``Lazard Pushed D.C. to Arrange Swaps With Merrill Lynch,
D.C. Official Says,'' The Bond Buyer, (January 19, 1994), at 1;
``Lazard Partner Says Firm Unaware of Ferber's Bid to Share D.C.
Fees,'' The Bond Buyer, (January 20, 1994), at 1; ``Cracking the
`Club' That Controls the Muni Bond Market,'' The Washington Post,
(November 21, 1993), at H1.
\20\``The Bond Merchants: Wall Street Makes Millions on
Municipal Bonds But Guess Who Pays?'' Common Cause Magazine,
(October 1993).
\21\``Chicago Confirms Being Subpoenaed by the Grand Jury in
Ferber Inquiry,'' The Bond Buyer, (January 13, 1994), at 1;
``Illinois Measure Would Restrict Campaign Giving by Bond Dealers,''
The Bond Buyer, (February 4, 1994), at 1; ``Push to Curb Donations
Not So Simple,'' The Chicago Tribune, (November 17, 1993), at 1.
\22\``At Trial, Kentucky's Bill Collins Gets Final Say as
Prosecutors Hammer Away at the Gift Piano,'' The Bond Buyer,
(October 11, 1993), at 1; ``Kentucky Official Says He Served as
Middleman to Solicit Funds,'' The Bond Buyer, September 7, 1993), at
1. Bill Collins is the husband of the former governor of Kentucky,
Martha Layne Collins. On October 14, 1993, following a jury trial in
the United States District Court for the Eastern District of
Kentucky, he was convicted of extortion and conspiracy.
\23\``Treasurer's Office in Massachusetts Confirms Existence of
Investigations,'' The Bond Buyer, (February 7, 1994), at 1;
``Massachusetts Bars Merrill From Top Bond-Sale Role,'' The Wall
Street Journal, (February 7, 1994), at C19; ``Latest Accusations
Leveled Against Ferber Provide New Details on 1990 MIFA Deal,'' The
Bond Buyer, (December 21, 1993), at 1; ``FEDs Subpoena MIFA For
Second Time; Bond Documents Since 1982 Sought,'' The Bond Buyer,
(January 27, 1994); ``Papers Show New Links Between Ferber, Firm,''
The Boston Globe, (December 17, 1993), at 1.
\24\``Curbs Sought on Bond Firm Contributions,'' The Washington
Post, (January 14, 1994), at B2.
\25\``Lazard Freres, Merrill Lynch Fee Splitting Livens
Debate,'' The Bond Buyer, (June 25, 1993), at 1; ``New Jersey
Turnpike, Merrill Lynch at Center of U.S. Attorney Probe,'' The Bond
Buyer, (April 29, 1993), at 1; ``N.J. Governor Bans Negotiated
Underwriting at State Level,'' The Bond Buyer, (May 5, 1993), at 1;
``Turnpike Officials Said Lazard Called the Shots,'' The Bond Buyer,
(May 26, 1993), at 1; ``Ferber Investigators Said to Pick Up Pace;
Lazard Freres Subpoenaed, Others Wait,'' The Bond Buyer, (November
23, 1993), at 1.
\26\``Holtzman Dials Direct for Dollars, Asking Bankers to Help
Pay Off Debt,'' The Bond Buyer (May 12, 1993), at 1; ``Wall Street
Executives Appear on List of Fund-Raiser for N.Y. Comptroller,'' The
Bond Buyer (October 29, 1993), at 1; ``Get Off McCall's Committee,''
The Bond Buyer (November 1, 1993), at 42; ``NYC's Stein Urges Mayor,
Comptroller to Copy New Jersey, Ban Negotiated Debt,'' The Bond
Buyer, (May 12, 1993), at 1; ``N.Y.C. Report Slams Holtzman For
Negligence in Fleet Affair,'' The Bond Buyer, (September 16, 1993),
at 1; ``The Trouble With Consultants, The Market May be Getting
Serious About Campaign Contributions, But There's More Ways to
Peddle Influence,'' The Bond Buyer, (November 16, 1993), at 1;
``Holtzman Says Loan Didn't Sway Choice of Fleet to Handle New York
City Debt,'' The Bond Buyer, (April 26, 1993), at 1.
\27\``Armacon's Ohio Work a Smith Barney Favor After 1991 Lease
Issue Soured in New Jersey,'' The Bond Buyer, (May 17, 1993), at 1.
\28\``Curbs Sought on Bond Firm Contributions,'' The Washington
Post, (January 14, 1994), at B2; ``SEC Investigates Oklahoma Issues
for Possible Law Violations,'' The Bond Buyer, (November 23, 1993),
at 1; ``SEC Inspects Pike Bond Refinancing,'' The Daily Oklahoman,
(November 19, 1993), at 1; ``SEC Asks Agencies in Oklahoma for Data
About Bond Issues,'' The Wall Street Journal, (November 24, 1993),
at A5.
\29\``Curbs Sought on Bond Firm Contributions,'' The Washington
Post, (January 14, 1994), at B2.
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C. Regulation of Municipal Securities Underwritings
It appears that ``pay to play'' practices are considered by many
municipal securities dealers to be an ordinary cost associated with
obtaining municipal underwriting business.\30\ The widespread
perception of such practices calls into question the integrity of the
municipal securities market and the business practices some municipal
underwriters utilize in order to obtain underwriting contracts. Several
reports have suggested that the greatest cost of improper contributions
is the cost to investors, taxpayers, and the public at large.\31\
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\30\``Illegal Payments Mar the Muni Market,'' The Wall Street
Journal, (May 5, 1993), at C1.
\31\``Bond Buyers' Gain, Taxpayers' Loss,''New York Times,
(September 5, 1993), at 11; ``The Trouble With Munis, The Market is
Sound, But Abuses Hurt Both Investors and Taxpayers,'' Business
Week, (September 6, 1993), at 44.
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As a result of reports alleging improper payments regarding the New
Jersey Turnpike refunding, in May 1993, Congress requested the
Commission, the MSRB, and the National Association of Securities
Dealers (``NASD'') to review the adequacy of regulation and oversight
of the municipal securities market.\32\
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\32\Letter from The Honorable John D. Dingell, Chairman,
Committee on Energy and Commerce, United States House of
Representatives, and The Honorable Edward J. Markey, Chairman,
Subcommittee on Energy and Commerce, United States House of
Representatives, to Mary L. Schapiro, Acting Chairman, Commission,
Christopher A. Taylor, Executive Director, MSRB, and Joseph R.
Hardiman, President and Chief Executive officer, NASD (May 24,
1993).
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This culminated in the Division's Municipal Securities Report,\33\
and Congressional hearings on the municipal securities market held on
September 9, 1993. The Municipal Securities Report recommended that
``pay to play'' contributions be addressed promptly.\34\ The Staff
stated that an MSRB proposal to require disclosure of political
contributions and limiting campaign contributions for the purpose of
obtaining underwriting business represented a positive first step to
address the misuse of political contributions.\35\
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\33\Supra note 7.
\34\The Commission's Chairman Arthur Levitt testified that,
``[w]hile the Commission remains confident of the strength and
effectiveness of the municipal securities market, we also share the
Subcommittee's concern that investor confidence in its integrity may
have been impaired as a result of recent serious allegations of
abusive practices.'' Testimony of Arthur Levitt, Chairman,
Commission, Concerning the State of the Municipal Securities Market,
Before the Subcommittee on Telecommunications and Finance, Committee
on Energy and Commerce, United States House of Representatives
(September 9, 1993).
\35\Municipal Securities Report, supra note 7, at 33.
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The MSRB's efforts to examine the role of political contributions
in the underwriting process pre-date recent public interest in the
issue. In August 1991, the MSRB published a notice expressing concern
that the process of selecting an underwriting team should not be
influenced by political contributions, and encouraged underwriters, and
state and local governments to maintain the integrity of the
underwriter selection process.\36\ In May 1993, the MSRB issued a press
release noting continued concern by the MSRB, industry members, and
others regarding political contributions.\37\
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\36\See MSRB Reports, Vol. 11, No. 3, (September 1991) at 11.
\37\See MSRB Reports, Vol. 13, No. 3, (June 1993) at 15.
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In August 1993, the MSRB published for comment draft rule G-37
(``August 1993 draft rule'').\38\ Although the majority of commentators
supported the MSRB proposal, none gave unqualified support. After
considering the commentators' concerns and suggestions at its November
and December 1993 meetings, the MSRB proposed the instant rule change.
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\38\The draft proposal would have (1) prohibited brokers,
dealers and municipal securities dealers and their associated
persons from making political contributions directly or indirectly,
to officials of issuers for the purpose of obtaining or retaining
municipal securities business, and (2) required dealers and their
associated persons to disclose, for a four-year period, all
political contributions to officials of such issuers with whom they
have done business.
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Some state officials and politicians have advocated or introduced
legislation aimed at abuses resulting from political contributions and
have made attempts to reform the municipal securities underwriter
selection process.\39\ Voluntary industry efforts also are underway to
reduce the presence of inappropriate political influence peddling. On
October 18, 1993, seventeen municipal securities dealers agreed to
adopt a ``Statement of Initiative,'' providing the political
contributions made, in any manner, for the purpose of influencing the
awarding of municipal finance business should be prohibited. To date,
over 50 firms have agreed to adhere to the Statement of Initiative.\40\
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\39\E.g., House No. 1824, The Commonwealth of Massachusetts (a
recently introduced bill to prohibit political contributions by
investment bankers and bond counsel); The Commonwealth of
Massachusetts Joint Statement on Debt Policy (issued to ``[r]eaffirm
and extend the statutory presumption that all Commonwealth Debt * *
* shall be issued on a competitive, sealed-bid (lowest true interest
cost) basis, and establish standards for rebutting that presumption
* * *; [e]stablish a basic framework for the establishment of
procurement processes for the selection of underwriters, financial
advisors and attorneys * * *; [and] [f]urther the practice of
requiring disclosure by underwriters, financial advisors and
attorneys which fosters the elimination of conflicts of interest
among those which serve the Commonwealth * * * in * * * issuances of
debt.''). The Commonwealth of Massachusetts Treasury Department
(October 27, 1993).
See also ``Crying Cronyism, Lawmaker Seeks Alabama Ban on
Negotiated Deals,'' The Bond Buyer, (February 7, 1994), at 1;
``Curbs Sought on Bond Firm Contributions,'' The Washington Post,
(January 14, 1994), at B2; ``Shapiro of Maine Seeks MSRB Ban on
Political Contributions from Bond Firms,'' The Bond Buyer, (May 14,
1993), at 1; N.J. Governor Bans Negotiated Underwriting at State
Level,'' The Bond Buyer, (May 5, 1993), at 1; ``Following SEC, Texas
Authority Seeks Disclosure on Political Gifts,'' the Bond Buyer,
(June 23, 1993), at 1; ``Massachusetts Bars Merrill From Top Bond-
Sale Role,'' The Wall Street Journal, (February 7, 1994), at C19;
``Municipal Bond Group Urges End To Being Solicited,'' The Wall
Street Journal, (October 8, 1993), at C1.
\40\Some state and local officials have stated their intention
to boycott those firms that voluntarily stop political
contributions. The Florida Association of Counties, for example,
called for its members to boycott seventeen securities firms that
have voluntarily banned political contributions citing these firms'
endorsement of ``public policy damaging rules.'' See ``Politicians
are Mobilizing to Derail Ban on Muni Underwriters' Campaign Gifts,''
The Wall Street Journal, (December 27, 1993), at C16.
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While the Commission views the voluntary efforts of those firms
adhering to the Statement of Initiative as laudable, these actions
represent only a first step. The MSRB's proposed rule change marks a
second step: industry-wide reform intended to respond to the
detrimental effects of conflicts of interest.
III. Description
The proposed rule change would establish industry-wide restrictions
and requirements aimed at preventing fraudulent and manipulative
practices, promoting just and equitable principles of trade, removing
impediments to free and open trade, and protecting investors and the
public interest. The MSRB's proposal is intended to address the real as
well as perceived abuses resulting from ``pay to play'' practices in
the municipal securities market. The proposal is a comprehensive scheme
composed of several separated requirements affecting municipal
securities dealers, including limitations on business activities
triggered by political contributions, limitations on solicitation and
coordination of political contributions, and dealer recordkeeping and
disclosure.
A. Rule G-37--``Pay to Play'' Restrictions
1. Business Disqualification Provision
Proposed rule G-37 will prohibit brokers, dealers and municipal
securities dealers (``dealers'') from engaging in municipal securities
business with an issuer within two years after proscribed contributions
made by (1) the dealer, (2) any municipal finance professional
associated with the dealer, or (3) any political action committee
(``PAC'') controlled by the dealer or any such associated municipal
finance professional, to an official of the issuer who can, directly or
indirectly, influence the awarding of municipal securities business.
``Municipal securities business'' includes certain dealer activities
such as the purchase of a primary offering of municipal securities from
the issuer on other than a competitive bid basis (i.e. acting as a
managing underwriter or as a syndicate member in negotiated
underwritings), and acting as a financial advisor, consultant,
placement agent, or negotiated remarketing agent.\41\ The proposal
defines an ``official of an issuer'' as any incumbent, candidate or
successful candidate for elective office of the issuer, which office is
directly or indirectly responsible for, or can influence the outcome
of, the hiring of a dealer for municipal securities business. This
includes any issuer official, incumbent or candidate (or successful
candidate) who has influence over the awarding of municipal securities
business. ``Contributions'' include any gift, subscription, loan,
advance, or deposit of money or anything of value made: (1) For the
purpose of influencing any election of any official of a municipal
securities issuer for federal, state,\42\ or local office; (2) for
payment or reduction of debt incurred in connection with any election;
or (3) for transition or inaugural expenses incurred by the successful
candidate for state or local office.
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\41\The proposed rule does not apply to competitive bids, i.e.,
offerings in which the securities are awarded to the underwriting
syndicate presenting the best bid according to stipulated criteria
set forth in the notice of sale. See Glossary of Municipal Terms,
supra note 11. Obviously, there is potential for abuse in
determining the criteria by which eligibility is determined. If such
abuse occurs, we would expect the MSRB to respond appropriately.
\42\The term ``state'' is defined in section 3(a)(16) of the Act
to mean any state of the United States, the District of Columbia,
Puerto Rico, the Virgin Islands, or any other possession of the
United States.
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Thus, contributions to certain state-wide executive or legislative
officials will affect the eligibility of the firm to engage in
municipal securities business.\43\ The proposal applies to
contributions made on or after April 25, 1994.\44\
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\43\For example, governors will be included under the proposal's
definition of official of an issuer.
\44\File No. SR-MSRB-94-2, Amendment No. 1 (March 29, 1994). See
supra note 4.
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The proposal's disqualification provision also would be triggered
by contributions from employees of dealers, defined as ``municipal
finance professionals, '' are primarily engaged in municipal securities
business. The proposal exempts contributions made by municipal finance
professionals of $250 or less per election to each official for whom
the individual is entitled to vote. The proposal defines the term
``municipal finance professional'' to mean:
(1) Any associated person primarily engaged in municipal securities
representative activities, as defined in rule G-3(a)(i);\45\
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\45\Rule G-3(a)(i) defines the term ``municipal securities
representative'' as a person associated with a dealer, other than a
person whose functions are solely clerical or ministerial, whose
activities include one or more of the following: (A) Underwriting,
trading or sales of municipal securities; (B) financial advisory or
consultant services for issuers in connection with the issuance of
municipal securities; (C) research or investment advice with respect
to municipal securities; or (D) any other activities which involve
communication, directly or indirectly, with public investors in
municipal securities; provided, however, that the activities
enumerated in subparagraphs (C) and (D) are limited to such
activities as they relate to the activities enumerated in
subparagraphs (A) and (B).
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(2) Any associated person who solicits municipal securities
business;
(3) Any direct supervisor of such persons 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, as required pursuant to rule G-
1(a); or
(4) Any member of the dealer executive or management committee or
similarly situated officials, if any (or, in the case of a bank dealer,
similarly situated officials in the separately identifiable department
or division of the bank, as defined in rule G-1).\46\
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\46\The proposal's prohibition on business would result if a
municipal finance professional associated with the dealer made the
contribution before becoming associated with the dealer, (the two
year ban on business applies to both the current and prior employer
of the municipal finance professional).
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Family members are not specifically included within the definition
of municipal finance professional. The proposal, however, prohibits a
dealer and any municipal finance professional from doing any act
indirectly which would result in a violation of the proposed rule if
done directly by the dealer or municipal finance professional. This is
intended to prevent dealers from funnelling funds or payments through
other persons or entities to circumvent the proposal's requirements.
For example, a dealer would violate the proposal if it does business
with an issuer after contributions were made to an issuer official from
or by associated persons, family members of associated persons,
consultants, lobbyists, attorneys, other dealer affiliates, their
employees or PACs, or other persons or entities as a means to
circumvent the rule. A dealer also would violate the rule by doing
business with an issuer after providing money to any person or entity
when the dealer knows that the money will be given to an official of an
issuer who could not receive the contribution directly from the dealer
without triggering the rule's prohibition on business.
The proposal will not restrict personal volunteer work by municipal
finance professionals in political campaigns other than soliciting or
coordinating contributions. However, if resources of the dealer are
used or expenses are incurred by the municipal finance professional in
personal volunteer work, the value of the resources or expenses must be
included in determining whether the dealer is restricted from future
negotiated underwritings involving that issuer or whether the municipal
finance professional exceeded the $250 limitation.
2. Solicitation Restriction
The proposal also will prohibit dealers from soliciting
contributions on behalf of officials of issuers with which the dealer
is engaging or seeking to engage in municipal securities business.\47\
This will prevent dealers from engaging in municipal securities
business with issuers if they engage in any kind of fund-raising
activities for officials of the issuers that may influence the
underwriter selection process. This prohibition on solicitation and
coordination also applies to municipal finance professionals. The
proposal prohibits municipal finance professionals from soliciting
contributions to an official of an issuer with which the dealer engages
or is seeking to engage in municipal securities business and from
coordinating contributions.
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\47\The term ``seeking to engage in municipal securities
business'' means dealer activities including responding to requests
for proposals, making presentations of public finance capabilities,
and other soliciting of business with issuer officials.
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B. Disclosure and Recordkeeping
The proposal would establish disclosure and recordkeeping
requirements to facilitate enforcement of rule G-37's ``pay to play''
restrictions and, independently, to function as a public disclosure
mechanism to enhance the integrity of and public confidence in
municipal securities underwritings. Thus, although the disclosure and
recordkeeping provisions will generally supplement the ``pay to play''
restrictions, the purposes served by these provisions are distinct
from, and not dependent on, the business disqualification or
solicitation restriction provisions.
1. Rule G-37
Proposed rule G-37 will require dealers to disclose to the MSRB on
Form G-37 certain information about political contributions, as well as
other summary information, to facilitate public scrutiny of political
contributions in the context of the municipal securities business of a
dealer. Contributions to be reported include those to officials of
issuers and political parties of states and political subdivisions made
by the dealer, any municipal finance professional, any executive
officer, and any PAC controlled by the dealer or by any municipal
finance professional.\48\ Only contributions over $250 by municipal
finance professionals and executive officers are required to be
disclosed. The proposal does not require dealers to disclose the names
of individual municipal finance professionals and executive officers.
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\48\The proposal does not require dealers to maintain a list of
contributions by other employees, affiliated companies and their
employees, spouses of municipal finance professionals, or any other
person or entity unless the contributions were directed by persons
or entities subject to the proposal.
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The proposal requires that dealers report on Form G-37 by state:
(1) The name and title, (including any city/county/state or other
political subdivision) of each official of an issuer and political
party receiving contributions; (2) the total number and dollar amount
of contributions made by the dealer, dealer controlled PACs, and
associated municipal finance professionals, and (3) other identifying
information as required by Form G-37. Dealers also will be required to
disclose issuers with which the dealer has engaged in municipal
securities business during the reporting period, along with the type of
municipal securities business and the name, company, role and
compensation arrangement of any person employed by the dealer to obtain
or retain municipal securities business from the issuers. The reports
are required to be made on Form G-37 and to be submitted to the MSRB in
accordance with rule G-37 filing procedures, quarterly, by dates
determined by the MSRB.
The MSRB will include information reported on Form G-37 in its
electronic library system, the Municipal Securities Information Library
(``MSIL''). The MSRB will develop appropriate filing procedures to
allow for public access to the information, as well as indexing, and
record storage.
2. Rules G-8 and G-9
The proposal will amend rules G-8 and G-9 on recordkeeping and
record retention regarding political contributions. The proposed
amendment to rule G-8 will require a dealer to maintain a list of: (1)
Names, titles, city/county and state of residence of all associated
municipal finance professionals; (2) names, titles, city/county and
state of residence of all executive officers of the dealer; (3) the
states in which the dealer is engaging or is seeking to engage in
municipal securities business; (4) every issuer with which municipal
securities business has been conducted during the current year, as well
as the previous two years and, where applicable, the name, company,
role and compensation arrangement of any person employed by the dealer
to obtain or retain municipal securities business with the issuer; and
(5) all contributions, direct or indirect, to officials of issuers and
to political parties of states and political subdivisions made by the
dealer, each dealer-controlled PAC, and each associated municipal
finance professional and executive officer.\49\ The records required
pursuant to the proposal apply to contributions made or business
engaged in beginning April 25, 1994.\50\
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\49\Dealers will be required to record, per contribution, the
identity of the contributor and the recipient and the amount of the
contribution.
\50\File No. SR-MSRB-94-2, Amendment No. 1 (March 29, 1994). See
supra note 4.
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The proposal does not require the dealer to maintain a list of
contributions by its municipal finance professionals or executive
officers that are made: (1) To officials for whom the person is
entitled to vote, provided such contributions do not exceed $250 to
each issuer official, per election; or (2) to political parties for the
state and political subdivision in which the person is entitled to
vote, provided the contributions do not exceed $250 per party, per
year. The proposal also does not require dealers to maintain a list of
contributions by any other employees, affiliate companies and their
employees, spouses of covered employees, or any other person or entity
unless the contributions were directed by persons or entities subject
to proposed rule G-37.
The proposed amendment to rule G-9 requires dealers to maintain,
for a six-year period, those records required to be made pursuant to
the proposed amendment to rule G-8.
IV. Summary of Comments
The Commission received 69 comment letters on the proposal. A
separate summary of comments was prepared and is available in the
public file. The Discussion section of this order addresses specific
issues addressed by the commentators.
V. Discussion
The MSRB's rule proposal seeks to end ``pay to play'' abuses in
municipal securities underwritings. The MSRB has determined that the
most effective means of accomplishing this goal is through adoption of
several provisions consisting, as described above, of a business
disqualification provision, a solicitation restriction and disclosure
and recordkeeping requirements. These provisions reflect well-
established methods for dealing with conflicts of interest and other
instances where improper influence is used to secure an unmerited
benefit.
The Commission believes that the MSRB's proposal is tailored to
accomplish its stated goals with minimal disruption in the municipal
securities industry and the state and local political process to which
that industry is linked. The Commission agrees with the MSRB that its
proposal represents an appropriate response to a compelling problem
and, therefore, has determined to approve the proposed rule change.
A. Statutory Standard
The proposed rule change is consistent with the requirements of the
Act, and in particular, with sections 15B(b)(2) (C) and (G) of the
Act.\51\ Section 15B(b)(2)(C) authorizes the MSRB to adopt rules
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 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. Section
15B(b)(2)(G) authorizes the MSRB to adopt rules that prescribe the
records to be made and kept by municipal securities dealers and the
periods for which such records shall be preserved. Because the MSRB's
rules are to be preventive in nature, Section 15B defines the scope of
the MSRB's authority in terms of purposes rather than subject matters.
This authority provides the MSRB with flexibility to deal with future
problems in the municipal securities industry.\52\ Thus, Section 15B
provides the MSRB broad rulemaking authority to implement its
enumerated purposes.
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\51\Sections 15B(b)(2) (C), (G); [15 U.S.C. Secs. 78o-4(b)(2)
(C), (G)].
\52\The legislative history to the 1975 Acts Amendments adopting
Section 15B indicated that Congress did not believe it would be
desirable to restrict the MSRB's authority by a specific enumeration
of subject matters. ``The ingenuity of the financial community and
the impossibility of anticipating all future circumstances are
obvious reasons for allowing the [MSRB] a measure of flexibility in
laying down the rules of the municipal securities industry.'' S.
Rep. No. 75, Securities Exchange Act of 1975: Report of the
Committee on Banking, Housing, and Urban Affairs, to Accompany S.
249, 94 Cong., 2d Sess 43 (``Senate Report'') at 225.
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1. Prevent Fraudulent and Manipulative Acts and Practices
The Commission and the MSRB have a significant interest in
preventing fraudulent and manipulative acts and practices, as well as
the appearance of fraud and manipulation, in the municipal securities
market. One of the principal goals of Section 15B is to address threats
to the integrity of the municipal securities market.\53\ Underwriters
perform essential functions in offerings by structuring the offering
and preparing disclosure documents that form the basis of marketing the
offering to the public.\54\ If underwriter selection is swayed by
political contributions or influence, underwriters may be chosen based
on their history of contributions or political contacts, rather than
their expertise or competence.
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\53\``S. 249 would provide, through amendment of the Exchange
Act, a comprehensive pattern for the regulation of brokers, dealers,
and banks trading municipal securities. The Committee feels that the
lack of federal regulation . . . represents a serious threat to the
integrity of the capital-raising system upon which local governments
rely to finance their efforts.'' Senate Report at 215, 16.
\54\In the proposing and adopting releases for Rule 15c2-12, the
Commission set forth its interpretation of the obligation of
municipal securities underwriters under the antifraud provisions of
the federal securities laws. The interpretation discussed the duty
of underwriters to the investing public to have a reasonable basis
for recommending any municipal securities, and their responsibility,
in fulfilling that obligation, to review in a professional manner
the accuracy of statements made in connection with the offering.
Securities Exchange Act Release No. 26100 (September 28, 1988), 53
FR 37778; Securities Exchange Act Release No. 26985 (July 10, 1989),
54 FR 28799.
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Several commentators contend that reports of abuse are
unsubstantiated,\55\ or view the issue as one of voter confidence and
campaign reform, rather than investor protection.\56\ The Commission
believes, however, that ``pay to play'' practices may damage the
municipal securities market in several ways. If political influence is
the determinative factor in the choice of municipal securities dealers
as underwriters in an offering, the underwriter selected may be less
likely or competent to perform a reasonable investigation of statements
made by the issuer in connection with the offering.\57\ A decrease in
the credit quality of the issue after it has been sold could have a
significant adverse impact on investors, and the underwriter's
investigation might reveal information that bears directly on the
issuer's future ability to meet interest and principal payment
obligations on a timely basis.
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\55\For example, one commentator states that ``there have been
relatively few reported instances of improper behavior in the market
where approximately 15,000 issues are sold each year involving
thousands of public officials * * *. Many of the high-profile cases
of improper behavior that have been cited as evidence of corrupt
practices caused by campaign giving are either illegal already or
would not be affected by a prohibition on political contributions.''
Letter from Jeffrey L. Esser, Executive Director, Government Finance
Officers Association, to Jonathan Katz, Secretary, Commission (March
10, 1994). See also letter from Donald J. Borut, Executive Director,
National League of Cities, to Jonathan Katz, Secretary, Commission
(February 7, 1994); letter from Harlan E. Boyles, State Treasurer,
North Carolina, to Arthur Levitt, Chairman, Commission (January 28,
1994).
Several commentators state that the majority of political
contributions by municipal securities dealers and their associated
persons are given for legitimate purposes and are unrelated to the
selection of municipal securities underwriters. E.g., letter from
Jeffrey L. Esser, Executive Director, Government Finance Officers
Association, to Jonathan Katz, Secretary, Commission (March 10,
1994).
\56\E.g., letter from Jeffrey L. Esser, Executive Director,
Government Finance Officers Association, to Jonathan Katz,
Secretary, Commission, (March 10, 1994). The Government Finance
Officers Association ``believes that any improper relationship is
properly a voter, taxpayer and ratepayer concern because of the
potential impact such a relationship could have on the cost of the
financing.''
\57\See supra note 54.
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``Pay to play'' also undermines the integrity of municipal
securities underwriting. The mere perception of political influence in
underwriter selection diminishes investor confidence in an
underwriter's willingness to faithfully fulfill its obligations to the
investing public. The Statement of Initiative itself attests to the
prevalence of industry concerns regarding the effects of these
practices on the integrity of the municipal securities market and
underwriters.
The perception of conflicts of interest is also damaging to
investor confidence. Although some commentators suggest that investor
confidence has not been affected by ``pay to play'' practices,\58\ the
Commission, relying on its own expertise as well as the judgment of the
MSRB, believes that the widespread reports of abuse adversely affect
investor confidence, and that the MSRB's proposal will help to
strengthen the integrity of the underwriting process and will help to
restore and maintain investor confidence.\59\
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\58\One commentator states that ``[t]o my knowledge the practice
of campaign contributions made by participants of the municipal
securities industry has not resulted in bond defaults or other value
losses that directly affect individual investors. Even the most
egregious abuses documented in the national press have not resulted
in investor losses in either primary offerings or in the secondary
markets.'' Letter from Kenneth L. Rust, Debt Manager, Mayor, City of
Portland, Oregon, to Jonathan Katz, Secretary, Commission (February
28, 1994).
\59\Because, as discussed herein, regulation of political
contributions by municipal securities dealers and municipal
securities professionals is intended to enhance the fairness and
efficiency of the municipal securities market, it is directly
related to the purposes of the Act. Some commentators raise
objections to the proposal on federalism grounds. E.g., letter from
David Norcross, General Counsel, Republican National Committee to
Jonathan Katz, Secretary, Commission (March 11, 1994). Although the
MSRB's proposal will have some effect on political fundraising
activities of candidates for certain state and local offices, these
effects do not transgress any limits on federal authority over state
political activities. The MSRB's rules are directed at municipal
securities dealers and municipal finance professionals and do not
regulate the conduct of state officials. Cf. New York v. United
States, 112 S. Ct. 2408 (1992). As such, the proposed rule change
falls within the legitimate scope of the MSRB's congressionally-
mandated jurisdiction regarding the conduct of municipal securities
participants, notwithstanding any incidental effects on state
elections.
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2. Perfect the Mechanism of a Free and Open Market
As discussed above, several reports have indicated that ``pay to
play'' practices are considered by many municipal securities
underwriters to be an ordinary cost of doing business. Because of great
competitive pressures to obtain business, municipal securities firms
and the offering process are susceptible to abusive political
contribution practices. ``Pay to play'' practices raise artificial
barriers to competition for those firms that either cannot afford or
decide not to make political contributions. Moreover, if ``pay to
play'' is the determining factor in the selection of an underwriting
syndicate, an official may not necessarily hire the most qualified
underwriter for the issue. The proposal makes clear to municipal
securities dealers and to officials of issuers that ``pay to play''
practices should no longer be employed to obtain municipal securities
business. The proposal will further merit-based competition between
municipal securities dealers and, thus, will remove impediments to and
perfect the mechanism of a free and open market for municipal
securities.
3. Promote Just and Equitable Principles of Trade
The proposal will promote just and equitable principles of trade.
One of the primary principles of section 15B is to raise the level of
conduct in the municipal securities industry.\60\ ``Pay to play''
practices undermine these principles since underwriters working on a
particular issuance may be assigned similar roles, and take on
equivalent risks, but be given different allocations of bonds to sell--
resulting in differing profits--based on their political contributions
or contacts. The MSRB, under the Commission's supervision, was given
primary rulemaking authority to regulate the conduct of municipal
securities dealers by adopting rules to promote just an equitable
principles of trade. In particular, the MSRB is obligated to assure
that municipal securities dealers observe high professional standards
in their activities with the public. The Statement of Initiative
demonstrates the significance with which municipal securities dealers
address reports of abuse in the municipal securities market. The
proposal will extend the goals of the Statement of Initiative to all
municipal securities dealers attempting to obtain municipal securities
business.
---------------------------------------------------------------------------
\60\See Senate Report at 224, 25. Because the MSRB is an SRO for
municipal securities dealers, it is an appropriate body to establish
just and equitable principles of trade.
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4. Foster Cooperation and Coordination in Regulating Municipal
Securities Transactions
The proposal will foster cooperation and coordination with persons
engaged in regulating transactions in municipal securities. The
proposal's disclosure and recordkeeping requirements will aid the
Commission, the MSRB, and the NASD to oversee enforcement of and dealer
compliance with the proposal.
5. Records and Record Retention
The proposal's record and record retention requirements are
consistent with section 15B(b)(2)(G) of the Act which authorizes the
MSRB to adopt rules that prescribe the records to be made and kept by
municipal securities dealers and the periods for which such records
shall be preserved. As discussed above, the proposal's record and
record retention requirements, along with its prohibitions on municipal
securities business, are designed to prevent ``pay to play'' practices
in the awarding of municipal securities business.
B. First Amendment Guarantee of Free Speech
Several commentators believe that the proposal's prohibitions on
political contributions impermissibly infringe on the First Amendment
guarantees of freedom of speech and association,\61\ and constitutional
guarantees of equal protection.\62\ These commentators believe that
although municipal bond business should not be a ``pay back'' for
political contributions, the proposal restricts the ability of
municipal securities underwriters and their employees to demonstrate
support for state and local officials.\63\
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\61\One commentator, for example, states that ``it is an
infringement on individual first amendment rights to prohibit any
person's financial support of a candidate because it is `presumed'
the contributor is involved in some `pay to play' scheme.'' Letter
from Michael E. Arrington, Chairman, Bi-County Sub-Committee,
Maryland House of Delegates, to Arthur Levitt, Chairman, Commission
(December 22, 1993). See e.g. letter from Jeffrey L. Esser,
Executive Director, Government Finance Officers Association, to
Jonathan Katz, Secretary, Commission (March 10, 1994); letter from
Marshall Bennett, President, and Bob Holden, Ethics Task Force,
National Association of State Treasurers, to Jonathan Katz,
Secretary, Commission (March 11, 1994); letter from David Norcross,
General Counsel, Republican National Committee to Jonathan Katz,
Secretary, Commission (March 11, 1994).
\62\One commentator, for example, states that ``Rule G-37 fails
to treat similarly-situated individuals in a like manner by
classifying municipal broker-dealers and municipal finance
professionals as the only persons subject to the burdens of the rule
while other similarly situated persons, such as consultants and non-
registered municipal finance professionals, are not subject to the
same burden.'' Letter from Raymond J. McClendon, Vice-Chairman and
Chief Operating Officer, Pryor, McClendon, Counts & Co., Inc., to
Margaret H. McFarland, Deputy Secretary, Commission (March 9, 1994).
\63\See e.g. letter from Donald J. Borut, Executive Director,
National League of Cities, to Jonathan Katz, Secretary, Commission
(February 7, 1994); letter from Michael E. Arrington, Chairman, Bi-
County Sub-Committee, Maryland House of Delegates, to Arthur Levitt,
Chairman, Commission (December 22, 1993); letter from Raymond J.
McClendon, Vice-Chairman and Chief Operating Officer, Pryor,
McClendon, Counts & Co., Inc., to Margaret H. McFarland, Deputy
Secretary, Commission (March 9, 1994).
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In light of the Commission's approval and enforcement of MSRB's
rules, the Commission is sensitive to and has carefully considered
these constitutional concerns in reviewing the proposed rule
change.\64\ The Commission acknowledges that the business
disqualification provision may affect the propensity of municipal
securities underwriters to make political contributions. Although
political contributions involve both speech and associational rights
protected by the First Amendment, a ``limitation on the amount that any
one person or group may contribute to a candidate or political
committee entails only a marginal restriction upon the contributor's
ability to engage in free communication.''\65\ Even a significant
interference with rights protected by the First Amendment may be
justified by a sufficiently compelling government interest so long as
the interference is closely drawn to avoid unnecessary abridgment of
those protected rights.\66\
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\64\Several commentators disagree with the MSRB's conclusion
that it is not a state actor for purposes of constitutional
protections. See letter from William H. Ellis, President and Chief
Operating Officer, Piper Jaffray Inc., to Jonathan Katz, Secretary,
Commission (March 10, 1994); letter from Marshall Bennett,
President, and Bob Holden, Ethics Task Force, National Association
of State Treasurers, to Jonathan Katz, Secretary, Commission (March
11, 1994); letter from Raymond J. McClendon, Vice-Chairman and Chief
Operating Officer, Pryor, McClendon, Counts & Co., Inc., to Margaret
H. McFarland, Deputy Secretary, Commission (March 9, 1994).
\65\Buckley v. Valeo, 424 U.S. 1, 20 (1976).
\66\Id. at 25.
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Prevention of fraud and manipulation and the appearance of fraud
and manipulation are compelling government interests. The MSRB's
proposal is in the context of a closely regulated industry and is
directly relevant to the concerns of the regulatory scheme. The MSRB's
interests in seeking approval of the proposed rule change--the
eradication of ``pay to play'' practices and other quid pro quo
arrangements--are precisely the kind of interests which have been
deemed sufficiently compelling to justify restrictions on political
contributions.\67\ As discussed above, ``pay to play'' arrangements can
have detrimental effects on the municipal securities markets; the
widespread perception that these practices are commonplace undermines
the integrity of the market and diminishes investor confidence.
Moreover, the restrictions inherent in the MSRB's proposed rule change
are in the nature of conflict of interest limitations which are
particularly appropriate in cases of government contracting and highly
regulated industries. Unlike general campaign financing restrictions,
such as certain provisions of the Federal Election Campaign Act, which
seek to combat unspecified forms of undue influence and political
corruption, conflict of interest provisions, such as the MSRB's
proposal, are tied to a contributor's business relationship with
governmental entities and are intended to prevent fraud and
manipulation.\68\
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\67\For example, Florida's Division of Bond Finance prohibits
the awarding of municipal securities business to firms that make
political contributions to the governor or to cabinet members.
Florida State Board of Administration, Rule 19A-6.004. Florida also
prohibits investment and law firms and their officers, directors,
and employees that make contributions or engage in fundraising for
state-level candidates from competing for business from the Florida
Housing Finance Agency. Rules of the Florida Housing Finance
Authority (1991). Several states prohibit contributions from
corporations and regulated industries in state elections including
Arizona, Ariz. Rev. Stat. Ann. Sec. 16-919; Connecticut, Conn. Gen.
Stat. Ann. Sec. 9-333o(a); North Dakota, N.D. Cent. Code Secs. 16.1-
08-02(1), 16.1-08-01(10); Pennsylvania, Penn. Stat. Ann. tit. 25,
Sec. 3253; South Dakota, S.D. Codified Laws Ann. Sec. 12-25-2; West
Virginia, W. Va. Code Sec. 3-8-8; Wisconsin, Wis. Stat. Ann.
Sec. 11.38; and Wyoming, Wyo. Stat. Sec. 22-25-102.
\68\Compare 2 U.S.C. 441(a), (b) (general contribution
restrictions in federal campaigns applicable to individuals,
corporations and labor unions) with 2 U.S.C. Sec. 441(c)
(prohibition on contributions by federal contractors). Similarly,
the prohibitions on solicitation and coordination of campaign
contributions are justified by the same overriding purposes which
support the business disqualification provisions. The provisions are
intended to prevent circumvention of the disqualification provisions
in cases where a dealer has or is seeking to establish a business
relationship with a municipal issuer. Absent these restrictions,
solicitation and coordination of contributions could be used as
effectively as political contributions to distort the underwriter
selection process. The solicitation and coordination restriction
relate only to fundraising activities and would not prevent dealers
and municipal finance professionals from expressing support for
candidates in other ways.
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As previously noted, the Commission believes that the MSRB's
proposed rule change is closely tailored to accomplish its goal of
preventing fraudulent and manipulative acts and practices that stem
from quid pro quo arrangements and minimizes any undue burdens on the
protected speech and associational rights of municipal securities
dealers and municipal finance professionals. The proposed rule change
is narrowly crafted in terms of the conduct it prohibits, the persons
who are subject to the restriction, and the circumstances in which it
is triggered.
The proposal is limited to contributions to officials of municipal
issuers who can influence the hiring of a dealer in connection with
negotiated offerings. The restrictions are triggered only in situations
where a business relationship exists or will be established in the near
future between the municipal securities dealer and a municipal issuer.
Most employees and affiliates of dealers are not covered by the
proposal, and the dealer's municipal finance professionals will be able
to avail themselves of a personal contribution exception of up to $250,
individually, with respect to officials for whom they are eligible to
vote. The proposal does not restrict uncoordinated independent
expenditures in support of candidates or political views. Moreover,
because the contribution limitations take the form of a business
disqualification, the proposal does not flatly prohibit individuals
from making, or prevent candidates from receiving contributions. In
addition, the proposal does not, as some commentators suggest, restrict
the ability of municipal securities underwriters and their employees to
demonstrate support for state and local officials. Underwriters and
their employees may continue to contribute in other ways in political
campaigns that do not involve soliciting or coordinating
contributions.\69\
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\69\A number of states separately limit individual contributions
in state elections including, for example: Arizona $640 per state
wide candidate, $250 per other offices, and a maximum of $2,000 in
total contribution per calendar year, Ariz. Rev. Stat. Ann. Sec. 16-
905; Florida, $500 per candidate, Flor. Stat. Ann. Sec. 106.08; and
Montana, $1,500 collectively to candidates for governor and
lieutenant governor, $750 to candidates for state office in a
statewide election, $400 to candidates for public service
commissioner, district court judge, or state senator, $250 to a
candidate for any other public office, Mont. Code Ann. Secs. 13-1-
101, 13-37-216.
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The Commission believes that the proposed rule change is a
necessary and appropriate measure to prevent fraudulent and
manipulative acts and practices and the appearance of fraud and
manipulation in the municipal securities market by eliminating ``Pay to
play'' arranged underwritings. The proposal represents a balanced
response to allegations of corruption in the municipal securities
market; it provides specific prohibitions to help ensure that
underwriter selection is based on expertise, not on the amount of money
given to a particular candidate for office.
C. Municipal Securities Dealers: Small Firms and Minority and Women
Owned Firms
Several commentators believe that the proposal will disadvantage
small, regional municipal securities firms and firms owned by
minorities or women.\70\ Because larger firms may have more employees
that may be eligible to use the de minimis exemption, these
commentators believe that the proposal will provide larger firms an
unfair advantage.\71\
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\70\See e.g., letter from Timothy L. Firestine, Director of
Finance, Montgomery County Government, to Jonathan Katz, Secretary,
Commission (February 24, 1994); letter from Stan W. Helgerson,
Finance Director, Village of Carol Stream, Illinois, to Jonathan
Katz, Secretary, Commission (March 10, 1994); letter from Jeffrey L.
Esser, Executive Director, Government Finance Officers Association,
to Jonathan Katz, Secretary, Commission (March 10, 1994); letter
from Carolie R. Smith, President, Smith Mitchell Investment Group,
Inc., to Jonathan Katz, Secretary, Commission (March 9, 1994).
\71\One commentator, for example, states that ``larger firms
with multiple departments including those not devoted to public
finance will be able to support candidates through contributions
made by corporate or other specialists who are not affected by this
rule. Minority- and women-owned firms typically are small speciality
public finance firms so their employees would be barred from
supporting candidates.'' Letter from Jeffrey L. Esser, Executive
Director, Government Finance Officers Association, to Jonathan Katz,
Secretary, Commission (March 10, 1994).
Another commentator recommends that the proposal should extend
the de minimis exemption to officials for whom the municipal
securities finance professionals are not entitled to vote to allow
``continuing access to clients and [enable] us to exercise our
constitutional and political rights.'' Letter from Carolie R. Smith,
President, Smith Mitchell Investment Group, Inc., to Jonathan Katz,
Secretary, Commission (March 9, 1994). Another commentator
recommends that the proposal exclude small issues (e.g $10,000,000
par value or less) to lessen the impact of the rule on small
regional, minority-owned, and women-owned firms. Letter from Raymond
J. McClendon, Vice-Chairman and Chief Operating Officer, Pryor,
McClendon, Counts & Co., Inc., to Margaret H. McFarland, Deputy
Secretary, Commission (March 9, 1994).
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The Commission believes that the proposal will not have a
disproportionate effect on minority or women-owned firms or on small
and regional firms. The proposal clearly does not prevent local and
state officials from selecting minority or women-owned municipal
securities dealers for participation in municipal securities
issuances.\72\ Moreover, the proposal will apply equally to all
municipal securities dealers seeking to obtain municipal securities
underwriting business. The Commission is not aware of any evidence
indicating that the proposed rule change will disproportionately affect
minority or women-owned firms, or smaller and regional firms vis-a-vis
large dealers. The Commission rejects the notion that campaign
contributions are a unique and essential business development mechanism
for small, regional, or minority and women-owned firms. As a practical
matter, the proposal leaves open all legitimate marketing practices
which firms, both large and small, may use to gain underwriting
business such as sales presentations, seminars, and marketing
documents. Moreover, the Commission believes that the costs of
incidental, unintended effects, if any, are far outweighed by the
benefits of restricting ``pay to play'' practices.
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\72\The Commission believes that promoting minority and women-
owned firms is a valid goal. Other means exist to promote this goal.
For example, the Commission understands that some issuers require
the underwriting syndicate to include one or more minority or women-
owned firms.
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D. Effect on Women and Minority Candidates
Some commentators suggest that the proposal will adversely affect
women and minority candidates for state and local office, or will
inhibit the ability of municipal securities professionals to volunteer
for public service.\73\ The basis for this contention is uncertain, but
the proposal is clearly not intended to affect any particular candidate
or identifiable group of candidates in an adverse manner. As noted
before, the restrictions relate only to those situations where
contributions are directed to an official of a municipal issuer with
which a dealer might do business. It does not prevent other forms of
indirect financial support for a candidate, such as contributions to
political action committees that are not controlled by the dealer or
its municipal finance professionals, or independent expenditures.\74\
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\73\``Many such candidates either lack substantial personal
resources and/or live in districts with limited resources. It is
essential, therefor, that such candidates be able to solicit broad
support from outside sources.'' Letter from Marshall Bennett,
President, and Bob Holden, Ethics Task Force, National Association
of State Treasurers, to Jonathan Katz, Secretary, Commission (March
11, 1994).
\74\The proposal will not prevent contributions to ``special-
interest'' PACs that are not controlled by the dealer or municipal
finance professional unless the special interest PAC solicits
contributions for the purpose of supporting an identifiable
candidate. Thus, the proposal will have no effect on the ability of
market participants to support candidates who represent their
ideological, political, or social interests, or on the ability to
volunteer for public service, notwithstanding concerns expressed by
some commentators to the contrary. Letter from Robin L. Wiessmann,
Principal, Artemis Capital Group, Inc., to Arthur Levitt, Chairman,
Commission (December 21, 1993).
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E. Candidates for Federal Office
Several commentators also suggest that the proposal should apply to
contributions made to officials of or candidates for federal
office.\75\ Several commentators raise concerns that the proposal will
restrict contributions to state and local officials running for federal
office, without a similar limitation on contributions to the incumbent
federal office holder.\76\
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\75\E.g. letter from Jeffrey L. Esser, Executive Director,
Government Finance Officers Association, to Jonathan Katz,
Secretary, Commission (March 10, 1994). One commentator objected to
the proposal on the grounds that, with respect to municipal
officials who are candidates for federal office, the MSRB's
authority to adopt rules, subject to Commission approval, regulating
campaign contributions of dealers and their employees conflicts with
the jurisdiction of the Federal Election Commission (``FEC'') under
the regulatory scheme established in the Federal Election Campaign
Act (``FECA''). Letter from David Norcross, General Counsel,
Republican National Committee, to Jonathan Katz, Secretary,
Commission (March 11, 1994). Although FECA confers exclusive
jurisdiction for enforcing the provisions of FECA, the MSRB rules
would not affect, directly or indirectly, the provisions of FECA or
their enforcement. Rather, as discussed above, the MSRB's proposal
is specifically tailored to eliminate conflicts of interest arising
from political contributions and similar activities in selecting
underwriters in connection with negotiated offerings of municipal
securities.
\76\One comment letter, representing state and local officials,
states: ``While our organizations recognize the importance of
maintaining the integrity of the municipal bond market, we are
greatly concerned that the proposed rule is inherently unfair in its
limited application to only state and local officials. We fail to
understand why this proposed action by the Securities and Exchange
Commission is not coupled with a comprehensive limitation on
contributions to the federal branch of government, which has perhaps
the greatest influence over the strength of the municipal bond
market and investor confidence in that market.''
Letter from Jerry Abramson, President, The United States
Conference of Mayors, Sharpe James, President, The National League
of Cities, Barbara Sheen Todd, President, The National Association
of Counties, and Bonnie R. Kraft, President-Elect, the Government
Finance Officers Association, to Arthur Levitt, Chairman Commission
(February 18, 1994).
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The Commission believes that it is not necessary to extend the
proposal to include contributions to candidates for federal office. The
proposal addresses abusive political contributions to officials of
issuers who may influence the selection of municipal securities
underwriters. Because federal office holders do not influence the
underwriter selection process, the Commission believes that it would
not be appropriate to include federal candidates under the rule's
requirements.
By the same token, the Commission also believes that any resulting
hardship to candidates for federal office who are currently local
officials is not a reason for eliminating these requirements. The MSRB
cannot overlook potential conflicts of interest solely because there
are candidates for the same federal office who do not face the same
conflicts. In any event, the resulting burden to current local
officials does not appear to be significant. Generally, municipal
underwriters play a less significant role as contributors in federal
elections. Moreover, under federal law there exist general contribution
restrictions that limit the amount of contributions that other
candidates are able to obtain from municipal securities dealers and
municipal finance professionals.\77\
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\77\See supra note 68.
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F. Municipal Securities Dealer Affiliates
Several commentators believe that the proposal should apply to
contributions from all employees affiliated with the underwriter and
from affiliated financial institutions and their employees.\78\ Several
commentators specifically express concern that the proposal excludes
contributions by chief executive officers of banks,\79\ or by PACs
controlled by banks or bank holding companies, which have a municipal
securities dealer department or subsidiary.\80\ These commentators
believe that by exempting affiliated banks and bank holding companies,
the proposal provides a ``loophole'' for continued abuse of political
contributions by municipal securities dealers and their affiliates.\81\
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\78\One commentator, for example, believes that the ``rule is
ineffective because it does not cover all related personnel who can
continue to contribute to officials of issuers thereby creating the
actual or apparent conflict of interest which the MSRB rule seeks to
prevent.'' Letter from Raymond J. McClendon, Vice-Chairman and Chief
Operating Officer, Pryor, McClendon, Counts & Co., Inc., to Margaret
H. McFarland, Deputy Secretary, Commission (March 9, 1994).
\79\Once commentator, for example, states that ``[w]e
strenuously object to a narrowly-based requirement that diminishes
the ability of our Chief Executive and members of our executive
committees to participate as community leaders, to engage in
political dialogue and to develop our firm's profile in the
communities in which we do business to the same extent as local bank
chief executives.'' Letter from William H. Ellis, President and
Chief Operating Officer, Piper Jaffray Inc., to Jonathan Katz,
Secretary, Commission (March 10, 1994).
\80\One commentator, for example, states that ``[c]ommercial
banks would be free to continue making PAC contributions to local
and state level political candidates and in the process gain a
significant competitive advantage in the selection process for
public finance undertakings. Those candidates receiving bank PAC
contributions would certainly remember such support when bank dealer
personnel are introduced or accompanied by commercial bankers in the
selection process. It is a typical procedure for the local bank
officer to lobby and/or speak in behalf of the hiring of his public
finance entity.'' Letter from Clifford A. Lanier, Jr., The Frazer
Lanier Company, to David C. Clapp, Chairman, MSRB (March 1, 1994).
Another commentator states that ``[i]t is unreasonable to
believe that political candidates, including `issuer officials,'
will be able or need to, discern between contributions from a bank-
controlled PAC and a bank's municipal securities `dealer-controlled'
PAC. This appears to us to represent `business as usual' for bank-
controlled municipal dealers while we are both stigmatized and
potentially disadvantaged competitively.'' Letter from William H.
Ellis, President and Chief Operating Officer, Piper Jaffray, Inc.,
to Jonathan Katz, Secretary, Commission (March 10, 1994).
\81\``Unfortunately, the proposed rule as written is so severely
deficient in ignoring the sophisticated realities of political
fundraising undertaken by securities firms, that the loopholes and
fine distinctions posed promise to provide a road map for more
sinister activities, possibly making the situation worse.'' Letter
from Mark D. Schwartz, to Arthur Levitt, Chairman, Commission
(January 31, 1994).
Several commentators question the ability of the MSRB or the
NASD to enforce Rule G-37. For example, one commentator believes
that ``[p]olitical favors will to those investment banks that flaunt
or circumvent the rule while those firms who live by the rules will
suffer accordingly.'' Letter from Carolie R. Smith, President, Smith
Mitchell Investment Group, Inc., to Jonathan Katz, Secretary,
Commission (March 9, 1994).
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The Commission believes that the MSRB's proposed rule change is not
deficient merely because it does not include affiliated banks and bank
holding companies. Because of the sensitivity to constitutional and
other concerns, the Commission believes that the coverage of the
proposal is no broader than is necessary to effectuate its purpose and
that extending the scope to cover affiliated banks and bank holding
companies is not necessary.\82\
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\82\The Commission will monitor closely the implementation of
the proposal and its effects on the market, and if it determines
that abusive practices continue to exist, will encourage the MSRB to
expand the scope of the rule. In response to the suggestion that
financial advisers be required to register as municipal securities
broker-dealers and be subject to the proposal, the Commission notes
that such a recommendation is beyond the scope of this proposal. See
e.g., letter from Vivian Altman, Altman & Co., to Jonathan Katz,
Secretary, Commission (January 31, 1994).
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G. De Minimis Exemption
Several commentators recommend that the proposal increase the de
minimis amount that municipal finance professionals may contribute.\83\
Several commentators recommend that the rule should provide a ``good
faith'' exemption for inadvertent violations.\84\ One commentator
recommends that the rule provide a ``safe harbor'' provision for
certain contributions.\85\ Another commentator believes that the
proposal should exempt contributions made for legitimate purposes.\86\
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\83\These commentators express concern that inadvertent
violations by municipal securities dealers or associated persons
covered by the rule may prevent dealers from participating in an
underwriting, and, thus, raise the cost of a municipal securities
issuance. For example, one commentator states that ``we are
concerned that your rule could deprive a state or local government
of the opportunity to work with a company which may be offering the
most desirable rates simply due to a technical infraction.'' Letter
from Jerry Abramson, President, The United States Conference of
Mayors, Sharpe James, President, The National League of Cities,
Barbara Sheen Todd, President, The National Association of Counties,
and Bonnie R. Kraft, President-Elect, the Government Finance
Officers Association, to Arthur Levitt, Chairman, Commission
(February 18, 1994).
\84\For example, one commentator states that ``[c]learly, the
tradition of broker-dealer regulation in the U.S. is based upon the
requirement that securities firms have adequate policies and
procedures in place to assure compliance with laws and regulations
not that each broker-dealer be guarantor of perfect compliance.''
Letter from William H. Ellis, President and Chief Operating Officer,
Piper Jaffray Inc., to Jonathan Katz, Secretary, Commission (March
10, 1994). Another commentator believes that the proposal,
``consistent with many other rules and regulations applicable to the
securities industry, may achieve its purposes but temper its remedy
for firms with adequate compliance procedures and supervision.''
Letter from D. Kelly, A.G. Edwards & Sons, Inc., to Jonathan Katz,
Secretary, Commission (March 10, 1994). See also letter from Raymond
J. McClendon, Vice-Chairman and Chief Operating Officer, Pryor,
McClendon, Counts & Co., Inc., to Margaret H. McFarland, Deputy
Secretary, Commission (March 9, 1994); letter from George B. Pugh,
Jr., Chairman, Municipal Securities Division, Public Securities
Association to Jonathan Katz, Secretary, Commission (March 11,
1994).
Several commentators raise concerns that aggrieved employees may
make contributions to deliberately prevent a firm from obtaining
municipal securities business. E.g., letter from William H. Ellis,
President and Chief Operating Officer, Piper Jaffray Inc., to
Jonathan Katz, Secretary, Commission (March 10, 1994); letter from
D. Kelly, A.G. Edwards & Sons, Inc., to Jonathan Katz, Secretary,
Commission (March 10, 1994).
\85\For example charitable contributions, contributions to non-
partisan associations in which elected officials may be members or
participants, support of ballot propositions, certain services in
the normal course of business, contributions by spouses or household
members, contributions to national political parties, contributions
to state and local political parties and certain contributions to
political action committees. Letter from D. Kelly, A.G. Edwards &
Sons, Inc., to Jonathan Katz, Secretary Commission (March 10, 1994).
\86\Letter from Raymond J. McClendon, Vice-Chairman and Chief
Operating Officer, Pryor, McClendon, Counts and Co., Inc., to
Margaret H. McFarland, Deputy Secretary, Commission (March 9, 1994).
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Several commentators believe that the de minimis exemption should
be expanded to include contributions to officials for whom the
municipal finance professionals are not entitled to vote.\87\ These
commentators believe that the proposal prevents municipal securities
dealers from establishing business relationships with issuers,\88\ and
from supporting candidates with similar views important to the
municipal finance professional or to the municipal securities broker-
dealer firm.\89\ One commentator recommends that the proposal allow
contributions to candidates that represent the area in which the
professionals' principal office is located.\90\
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\87\For example, one commentator believes that ``[d]ealers
should not be prohibited from making contributions to persons for
whom they are unable to vote. They should have a right to support
the candidates of their choice.'' Letter from Jeffrey L. Esser,
Executive Director, Government Finance Officers Association, to
Jonathan Katz, Secretary Commission (March 10, 1994).
\88\Letter from Carolie R. Smith, President, Smith Mitchell
Investment Group, Inc., to Jonathan Katz, Secretary Commission
(March 9, 1994).
\89\For example, one commentator believes that ``[t]he provision
limiting contributions to one's voting jurisdiction denies municipal
securities professionals access to politicians who influence their
corporate and individual political interests. Specifically,
municipal securities professionals will be denied the ability to
support politicians who champion their personal beliefs or corporate
concerns. For example, a firm headquartered in New York City whose
president and employees live on Long Island would be unable to send
a representative to a dinner for the mayor of New York City or for
the mayor's political opponent. Yet the mayor's decisions on issues
such as zoning, corporate taxes, and transportation policy
significantly impact the company's viability.'' Letter from Carolie
R. Smith, President, Smith Mitchell Investment Group, Inc., to
Jonathan Katz, Secretary, Commission (March 9, 1994)
\90\Letter from Gerald E. Pelzer, President, Clayton Brown &
Associates, Inc., to Jonathan Katz, Secretary, Commission (March 10,
1994).
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The Commission believes that the MSRB's determinations as to the
amount of the de minimis exemption and limiting its application to
contributions to officials for whom the municipal finance professional
is entitled to vote are appropriate and reasonable. As discussed, the
proposal provides specific guidelines to prevent ``pay to play''
contributions. The proposal provides an appropriate balance between
limiting ``pay to play'' practices and the ability of dealers and their
employees to demonstrate support for state and local candidates. The
proposal recognizes that certain contributions made for legitimate
political purposes present less risk of a conflict of interest or the
appearance of a conflict of interest. Although an individual may have a
legitimate interest in making contributions to candidates for whom she
is ineligible to vote, there is a greater risk in such circumstances
that the contribution is motivated by an improper attempt to influence
municipal officials. Thus, the proposal enables municipal finance
professionals to contribute $250 per election to candidates for whom
they are entitled to vote without triggering the proposal's business
limitation. As discussed, the proposal does not prevent dealers or
their employees from demonstrating support for local and state
officials in other ways including volunteer political campaign
activity.
H. General Provisions
Several commentators believe that the proposal is operationally too
burdensome to implement. These commentators believe that because of the
number and types of persons subject to the rule's prohibitions, it will
be difficult for municipal securities dealers to implement and enforce
compliance procedures.\91\ Some commentators believe that the
proposal's disclosure and recordkeeping requirements are overly
burdensome.\92\ Several commentators also believe that the scope of the
proposal is uncertain and recommend that it provide more complete
standards regarding employee contributions,\93\ the use of consultants
and law firms,\94\ bonds issued by corporations with the assistance of
local governments,\95\ the definition of ``election,''\96\ and the
definition of ``official of such issuer.''\97\ One commentator requests
that the proposal contain a ``sunset'' provision to require the MSRB to
review rule G-37 after a fixed number of years.\98\
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\91\For example, Piper Jaffray Inc. expresses concern regarding
the ability of broker-dealer firms to screen newly hired employees
or current employees seeking employment with the firm's municipal
securities departments, and the ability to hire civil servants.
Piper Jaffray Inc. believes that ``[t]his would require firms to
screen all applicants for these jobs by requiring them to declare to
whom they made political contributions and make judgmental
evaluations as to whether their earlier campaign activities would be
potentially violative of the rule and not offer a job to any
offending contributor.'' Piper Jaffray Inc. believes that this will
almost certainly expose broker-dealer firms to the risk of civil
litigation. Letter from William H. Ellis, President and Chief
Operating Officer, Piper Jaffray Inc., to Jonathan Katz, Secretary,
Commission (March 10, 1994). Another commentator states that ``a
person who has made a contribution within the past two years
apparently taints a firm which hires the individual even if the
individual was not involved in the municipal securities business at
the time of the contribution. Two serious problems exist. The first
is that even a firm with strict reviews for hiring may find itself
barred * * *. The second is that many active citizens will find
themselves de facto barred from entering the public finance, banking
and brokerage businesses.'' Letter from D. Kelly, A.G. Edwards &
Sons, Inc., to Jonathan Katz, Secretary, Commission (March 10,
1994).
\92\E.g., letter from A.B. Krongard, Chief Executive Officer,
Alex, Brown & Sons, to Jonathan Katz, Secretary, Commission (March
15, 1994); letter from Robert F. Price, Chairman, Federal Regulation
Committee, Securities Industry Association, to Jonathan Katz,
Secretary, Commission (March 17, 1994). The Securities Industry
Association believes that the proposal's reporting provisions should
be amended to: (1) Require quarterly submissions for only those
quarters in which the dealer has any contributions to report; (2)
delete the requirement to report lists of issuers with which the
dealer conducts municipal securities business; and (3) delete the
requirement to disclose the name, company, role, and compensation
arrangement of any person employed by the dealer to obtain municipal
securities business.
\93\For example, A.G. Edwards & Sons, Inc. believes that the
``provision is ambiguous. Read most broadly the definition of
municipal finance professional in proposed Rule G-37 could be
construed to include any retail broker who sells municipal
securities * * *. As a result of the possible ambiguity and the
changing application, firms employing retail brokers likely will
interpret the provision broadly to avoid being barred from the
municipal finance business. The result will be that numerous brokers
who have no participation in securing municipal securities business
will be barred from political activities.'' Letter from D. Kelly,
A.G. Edwards & Sons, Inc., to Jonathan Katz, Secretary, Commission
(March 10, 1994).
\94\E.g., Letter from William H. Ellis, President and Chief
Operating Officer, Piper Jaffray Inc., to Jonathan Katz, Secretary,
Commission (March 10, 1994). One commentator recommends the proposal
clarify that the definition of municipal finance professional
excludes independent law firms or persons retained by a dealer for
purposes other than the solicitation of municipal securities
business. Letter from Richard H. Martin, Attorney, Leonard, Street
and Deinard, to Jonathan Katz, Secretary, Commission (March 8,
1994).
One commentator recommends that the proposal should be clarified
to exclude from the definition of municipal finance professional any
independent firms or persons retained by a broker-dealer for
purposes other than the solicitation of municipal securities
business. Letter from Richard H. Martin, Attorney, Leonard, Street
and Deinard, to Jonathan Katz, Secretary, Commission (March 8,
1994).
\95\Id.
\96\One commentator, for example, states that ``[a]n election
should be defined and it should be made clear that if a contributor
gives for a specified election, the amount shall only be considered
as a contribution for the election for which the amount was given
even if the candidate has the legal right to carry over amounts to
other elections.'' Letter from D. Kelly, A.G. Edwards & Sons, Inc.,
to Jonathan Katz, Secretary, Commission (March 10, 1994).
\97\``An influence standard leaves the industry uncertain as to
whom contributions may be made and, judged retrospectively, may
cause inadvertent violations.'' Id.
\98\This ``would allow all parties to regularly review G-37 to
determine whether G-37 is effective and meeting the goals it was
created to achieve and to accommodate any other relevant
developments such as campaign finance reform.'' Letter from Carolie
R. Smith, President, Smith Mitchell Investment Group, Inc., to
Jonathan Katz, Secretary, Commission (March 9, 1994).
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The Commission believes that the proposal's provisions are
sufficiently specific to permit compliance with its terms. The
Commission also understands that industry efforts are currently
underway to draft proposed guidelines to assist dealer compliance with
the proposal. In addition, the MSRB will provide continued interpretive
guidance to assist dealer compliance with the proposal. The Commission,
in accordance with its statutory mandate, will continue to monitor the
implementation of the proposal and the effects the proposal may have on
the market.
I. Amendment No. 1
The Commission finds good cause for approving the MSRB's Amendment
No. 1, pursuant to Section 19(b)(2) of the Act, prior to the thirtieth
day after the date of publication of notice of the amendment. As
originally submitted, the proposal's prohibitions on municipal
securities business would arise from contributions made on or after
April 1, 1994. The MSRB filed the amendment to change the April 1, 1994
date to a date 10 days after publication in the Federal Register of the
order approving the proposal. The MSRB also amended the proposal to
change the effective date of the proposal's disclosure and
recordkeeping requirements to a date 10 days after publication of the
approval order in the Federal Register. Thus the proposal's
prohibitions will arise from contributions made on or after April 25,
1994. The proposal's disclosure and recordkeeping requirements also
will not be effective until April 25, 1994. The Commission believes
that the amendments will facilitate compliance by municipal securities
dealers. The amendments, in conjunction with the proposal's notice and
comment period, will provide municipal securities dealers sufficient
time to adopt and implement procedures to comply with the proposal.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the MSRB's Amendment No. 1. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street NW., Washington,
DC 20549. Copies of the submission, all subsequent amendments, all
written statements with respect to the amendment that are filed with
the Commission, and all written communications relating to the
amendment 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 Section. Copies of the amendment also
will be available for inspection and copying at the principal office of
the MSRB. All submissions should refer to the file number in the
caption above and should be submitted by May 4, 1994.
VII. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the MSRB and, in particular, section
15B(b)(2)(C).
It is therefore ordered, Pursuant to section 19(b)(2) of the Act,
that the proposed rule change and Amendment No. 1 described above be,
and hereby are, approved, and shall be effective April 25, 1994.\99\
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\99\The Commission simultaneously issued an order relating to
this matter, ``Order Preliminarily Declining to Issue Stay Sua
Sponte and Establishing Guidelines for Consideration of Stay
Applications.'' Securities Exchange Act Release No. 33870 (April 7,
1994).
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-8838 Filed 4-12-94; 8:45 am]
BILLING CODE 8010-01-M
