03-11995. Self-Regulatory Organizations; Order Granting Approval of a Proposed Rule Change and Amendment No. 1 Thereto by the Municipal Securities Rulemaking Board Relating to Amendments to Rules G-37, on Political Contributions and Prohibitions on ...

May 8, 2003.

I. Introduction

On September 26, 2002, the Municipal Securities Rulemaking Board (“Board” or “MSRB”) filed with the Securities and Exchange Commission (“Commission” or “SEC”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”), and rule 19b-4 thereunder,^[1] a proposed rule change to amend rule G-37, on political contributions and prohibitions on municipal securities business, G-8, on books and records, revisions to Form G-37/G-38 and the withdrawal of certain rule G-37 Questions and Answers. On March 26, 2003, the MSRB amended the proposal. The proposed rule change revises the exemption process and the definition of municipal finance professional. Amendment No. 1 alters the text of the amendments to the rule language as it appears in the original filing. The proposed rule change, as modified by Amendment No. 1, was published in the Federal Register on April 8, 2003.^[2]

The Commission received two comment letters on the proposed rule change.^[3] This order approves the proposed rule change as modified by Amendment No. 1.

II. Summary of Comments

The Commission received two comment letters on the proposed rule change, both support the proposal.

The TBMA letter expresses support for the proposal because the TBMA believes that the changes will help reduce some of the burdens associated with rule G-37. According to the TBMA letter, the proposed rule change, “will not undercut [rule G-37's] goal of maintaining the integrity of the municipal underwriting process.” ^[4] Furthermore, TBMA believes that the changes are long overdue and urges the Commission to quickly adopt the proposal.^[5] Similar to the TBMA letter, the ABA/ABASA letter provides support for the proposed rule change as a means to limit the costs and burdens associated with regulatory compliance. On the amended definition of municipal finance professional, the ABA/ABASA letter expressed that the changes will limit the “unintended consequences of preventing dealer firms from hiring otherwise qualified employees.” ^[6] Additionally, the more flexible exemption process will provide some relief for “inadvertent violations” on rule G-37's ban on contributions.^[7]

III. Discussion and Commission Findings

Section 19(b) of the Exchange Act ^[8] requires the Commission to approve the proposed rule change filed by the MSRB if the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder. After careful review of the proposed rule change and comment letters, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder, which govern the MSRB.^[9] The language of section 15B(b)(2)(C) of the Act requires that the MSRB's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principals of trade, to foster cooperation and coordination with persons engaged in regulating, settling, processing information with respect to, and facilitating transactions in 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.^[10]

The Commission acknowledges the MSRB Long-Range Plan, to assess rule G-37's requirements and resulting compliance concerns. Both the Commission and the MSRB believe that rule G-37 is essential to diminish pay-to-play practices in the municipal securities market. The rule has provided substantial benefit to the industry and the investing public by reducing the direct connection between political contributions to issuer officials and the awarding of municipal securities business.

The comment letters welcome the amendments proposed as a means to reduce industry costs and burdens. The Commission does not believe that the proposed rule change will threaten the purpose and efficacy of the pay-to-play restrictions. The Commission believes that the proposed rule change adequately provides essential protections in the exemption process and the revised definition of municipal finance professional. Furthermore, proposed revision of the look back and look forward periods to better correlate with the municipal finance professionals' role and business activity will continue to safeguard against the potential link between obtaining municipal securities business and contributions.

IV. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Exchange Act,^[11] that the proposed rule change (File No. SR-MSRB-2002-12) be and hereby is, approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[12]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1); 17 CFR 240.19b-4.

2.  See Release No. 34-47609 (April 1, 2003), 67 FR 17122.

3.  April 25, 2003, letter from John M. Ramsay, Senior Vice President and Regulatory Counsel, The Bond Market Association to Jonathan G. Katz, Secretary, Commission (“TBMA letter”); April 29, 2003, letter from Sarah Miller, American Bankers Association and ABA Securities Association to Jonathan G. Katz, Secretary, Commission (“ABA/ABASA letter”).

4.  See TBMA letter at 1.

5.  Id. at 2.

6.  See ABA/ABASA letter at 2.

7.  Id.

8.  15 U.S.C. 78s(b).

9.  Additionally, in approving this rule, the Commission notes that it has considered the proposed rule's impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f).

10.  1015 U.S.C. 78o-4(b)(2)(C).

11.  15 U.S.C. 78s(b)(2).

12.  17 CFR 200.30-3(a)(12).