[Federal Register Volume 59, Number 138 (Wednesday, July 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17585]
[[Page Unknown]]
[Federal Register: July 20, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34372; File No. SR-MSRB-94-7]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to
Recordkeeping and Record Retention Requirements Concerning Gifts and
Gratuities
July 13, 1994.
On May 26, 1994, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') submitted to the Securities and Exchange
Commission (``Commission'') a proposed rule change (File No. SR-MSRB-
94-7) pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934 (``Act'').\1\ The MSRB filed the proposed rule change to require
brokers, dealers, and municipal securities dealers (hereinafter
``municipal securities dealers'' or ``dealers'') to make and keep
records relating to MSRB rule G-20. The Commission published notice of
the proposal in the Federal Register on June 10, 1994.\2\ No comments
were received. For the reasons discussed below, the Commission is
approving the proposed rule change.
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\1\15 U.S.C. 78s(b)(1).
\2\Securities Exchange Act Release No. 34162 (June 6, 1994), 59
FR 30069.
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I. Description
The proposal amends MSRB rules G-8 and G-9 concerning the records
to be made and kept by municipal securities dealers. The proposal will
require a dealer to make and keep records relating to MSRB rule G-20,
concerning gifts and gratuities and contracts of employment. The
proposal will become effective 30 days after publication of the
approval order in the Federal Register.
The proposal requires dealers to keep and retain specific records
of (i) gifts and gratuities subject to paragraph (a) of rule G-20, and
(ii) contracts of employment or agreements for compensation for
services, referred to in paragraph (c) of rule G-20, and compensation
paid as a result of those agreements.\3\ Rule G-20(a) prohibits dealers
from, directly or indirectly, giving or permitting to be given any
thing or service of value in excess of $100 per year to any person,
other than to an employee or partner of the dealer, in relation to
municipal securities activities of the person's employer.\4\
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\3\The proposed rule change also clarifies that dealers
complying with Rule 17a-3 of the Act are required to maintain this
information.
\4\``Person'' has been interpreted by the Board in the context
of rule G-20 to apply only to natural persons because the intent of
the rule is to discourage dealers from inducing individual employees
to act in a manner inconsistent with their obligations to, or
contrary to the interests of, their employers. See MSRB
Interpretations, MSRB Manual (CCH) 3596.10 (March 19, 1980).
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The $100 limitation applies to gifts and gratuities by a dealer and
its associated persons to customers, individuals associated with
issuers, and employees of other dealers. Rule G-20 also prohibits a
dealer from indirectly exceeding the $100 limitation. Thus, if a third
party (e.g., a consultant hired by a dealer) gives a gift to any such
person at the request of the dealer, the value of the gift would be
included in the $100 limitation.
Rule G-20(b) exempts certain gifts from the $100 annual limit.
These gifts, called ``normal business dealings,'' include occasional
gifts of meals or tickets to theatrical, sporting, and other
entertainments, as well as the sponsoring of legitimate business
functions that are recognized by the IRS as deductible business
expenses, and gifts of reminder advertising. The rule, however, also
provides that such gifts cannot be so frequent or so expensive as to
raise a suggestion of unethical conduct.
Rule G-20(c) provides that contracts of employment with or
compensation for services rendered are not considered gifts or
gratuities subject to the $100 limitation. Such arrangements, however,
must be in writing and must include the nature of the proposed
services, the amount of the proposed compensation, and the written
consent of such person's employer.
II. Discussion
The proposed rule change is consistent with the requirements of the
Act, and specifically, with Sections 15B(b)(2) (C) and (G) of the
Act.\5\ 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.
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\5\Section 15B(b)(2) (C), (G); [15 U.S.C. 78o-4(b)(2) (C), (G)].
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Rule G-20 is intended to prevent fraud and inappropriate influence
in the municipal securities market by limiting the amount of gifts or
gratuities from municipal securities dealers to persons not employed by
the dealers, including issuer officials and employees of other dealers,
in relation to municipal securities activities.\6\ Concerns have arisen
recently that political contributions and gifts, made by municipal
securities underwriters to officials of municipal securities issuers,
may influence the selection process of an underwriting syndicate.\7\
The proposal addresses excessive gifts and gratuities by dealers to
persons not employed by the dealer, including officials of municipal
securities issuers.
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\6\Rule G-20, as well as the proposed amendments, are comparable
to the National Association of Securities Dealers' (``NASD'') rules
governing gifts and gratuities by registered broker-dealers. See
NASD Rules of Fair Practice, Art. III, Sec. 10, NASD Manual 2160.
\7\MSRB rule G-37, approved by the Commission on April 7, 1994,
addressed the use of political contributions made by municipal
securities dealers to officials of state or local government
issuers, where the dealers also are doing business for or seeking
business from those issuers. Rule G-37 became effective April 25,
1994. Securities Exchange Act Release No. 33868 (April 7, 1994), 59
FR 17621.
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Although rule G-20 prohibits dealers from making certain gifts and
gratuities, dealers currently are not required to keep a record of such
gifts. Recordkeeping and record retention by dealers of gifts and
gratuities will better enable dealers to monitor compliance with rule
G-20. The proposal also will assist enforcement agencies in monitoring
dealer compliance with the rule. In addition, the proposal will enable
the MSRB to determine whether rule G-20 should be amended in the future
to impose more stringent requirements to prevent influence of the
underwriter selection process and to maintain the integrity of the
municipal securities market.
III. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act an the rules and regulations
thereunder applicable to the MSRB and, in particular, Sections
15B(b)(2) (C) and (G).
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change as described above be, and hereby is,
approved and shall be effective August 19, 1994.
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17585 Filed 7-19-94; 8:45 am]
BILLING CODE 8010-01-M
