[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Notices]
[Pages 49368-49371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23975]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37675; File No. SR-MSRB-96-7]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to
Political Contributions and Prohibitions on Municipal Securities
Business
September 12, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on August
6, 1996,\1\ the Municipal Securities Rulemaking Board (``Board'' or
``MSRB'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'')
[[Page 49369]]
the proposed rule change as described in Items I, II, and III below,
which Items have been prepared by the Board. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ On September 9, 1996, the MSRB filed Amendment No. 1 with
the Commission. Amendment No. 1 amends proposed language to rule G-
37(g) (vii). See Letter from Ronald W. Smith, Legal Associate, MSRB,
to Katherine England, Assistant Director, Division of Market
Regulation, SEC (September 9, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Board proposes a rule change to amend rule G-37, on political
contributions and prohibitions on municipal securities business, and
rule G-8, on books and records.
The text of the proposed rule change is available at the offices of
the MSRB.
II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In its filing with the Commission, the Board included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
texts of these statements may be examined at the places specified in
Item IV below. The Board has prepared summaries, set forth in Sections
(A), (B) and (C) below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The Board is filing the proposed rule change to: (i) Amend the
definition of ``municipal finance professional;'' (ii) amend the
definition of ``executive officer;'' (iii) clarify the definition of
``official of an issuer;'' (iv) clarify the definition of ``municipal
securities business;'' and (v) require the retention of Forms G-37/G-38
and of records itemizing mailing of the same.
Definition of ``Municipal Finance Professional''
Rule G-37(g)(iv) defines the term ``municipal finance
professional'' as:
(A) Any associated person primarily engaged in municipal securities
representative activities, as defined in rule G-3(a)(i);
(B) Any associated person who solicits municipal securities
business, as defined in paragraph (vii);
(C) Any associated person who is both (i) a municipal securities
principal or a municipal securities sales principal and (ii) a
supervisor of any person described in subparagraphs (A) or (B);
(D) any associated person who is a supervisor of any person
described in subparagraph (C) up through and including, in the case of
a broker, dealer or municipal securities 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
(E) Any associated person who is a member of the broker, dealer or
municipal securities dealer (or in the case of a bank dealer, the
separately identifiable department or division of the bank, as defined
in rule G-1) executive or management committee or similarly situated
officials, if any.
The activities described in subparagraphs (A) and (B) which would
cause someone to become a municipal finance professional are directly
the result of the individual's actions (e.g., primarily engaged in
underwriting, trading or sales of municipal securities, or soliciting
municipal securities business). The activities described in
subparagraph (C) relate to the supervision of anyone described in
subparagraphs (A) and (B), and the activities described in subparagraph
(D) relate to the supervision of anyone described in subparagraph (C).
Thus, for someone to meet the definition of municipal finance
professional pursuant to subparagraphs (A) through (D), individuals
would have to be directly involved in municipal securities activities
or supervisors of such persons.
Subparagraph (E) states that an associated person who is a member
of the dealer executive or management committee or similarly situated
official is a municipal finance professional. This provision is the
only part of the definition of municipal finance professional that is
not dependent upon the municipal securities activities of the person or
the supervision of persons engaging in municipal securities activities.
This provision was added to the rule because of the belief that issuer
officials may seek out dealers' senior executives for contributions if
municipal finance professionals ceased making contributions. The
Statement of Initiative by Dealers regarding Political Contributions
also included executive or management committee members within its
voluntary prohibition on political contributions.\2\
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\2\ In October 1993, at the urging of SEC Chairman Levitt, a
number of dealers agreed to a Statement of Initiative to support the
principle that political contributions which are intended to
influence the awarding of municipal securities business should be
prohibited.
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The Board understands that there are certain dealers that
occasionally engage in municipal securities sales transactions but do
not engage in municipal securities business as defined in rule G-
37(g)(vii). As a result, the only individuals who meet the definition
of municipal finance professional are executive or management committee
members. Because such dealers do not engage in municipal securities
business, the ban on business based on political contributions is
irrelevant to them. However, such dealers also are required to record
and report the contributions and payments of these municipal finance
professionals. The Board believes that there is no useful purpose
served in requiring dealers to record and report the political
contributions of executive or management committee members if they are
the only individuals in a firm meeting the definition of municipal
finance professional. The proposed rule change amends the definition of
municipal finance professional in rule G-37(g)(iv)(E) to exempt
executive or management committee members from the definition of
municipal finance professional (and thus the applicable recording and
reporting requirements) if these are the only individuals within a firm
who would meet the definition as described in subparagraphs (A) through
(E).\3\
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\3\ Rule G-37(g)(iv) states that each person designated by the
dealer as a municipal finance professional is deemed to be a
municipal finance professional and that each person so designated
will retain this designation for two years after the last activity
or position which gave rise to the designation. Upon approval of the
proposed rule change by the SEC, dealers may remove individuals
subject to the new rule language from their lists of designated
municipal finance professionals and do not have to record and report
their contributions.
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Definition of ``Executive Officer''
Rule G-37(g)(v) defines ``executive officer'' as: An associated
person in charge of a principal business unit, division or function or
any other person who performs similar policy making functions for the
broker, dealer or municipal securities dealer (or, in the case of a
bank dealer, the separately identifiable department or division of the
bank, as defined in rule G-1), but does not include any municipal
finance professional, as defined in paragraph (iv) of this section (g).
Contributions and payments by executive officers are subject to the
recordkeeping and reporting provisions of rule G-37. Contributions by
executive officers do not result in a ban on business; however,
paragraph (d) of rule G-37 prohibits dealers from using executive
officers (as well as any other person or entity) as conduits for making
contributions to officials of issuers. The Board determined to apply
the recordkeeping and reporting
[[Page 49370]]
requirements to contributions by executive officers to ensure that
these individuals are not being used to circumvent the rule.
As in the situation described above involving executive or
management committee members, rule G-37 currently requires a dealer to
record and report the contributions of executive officers even if that
dealer has no one meeting the definition of municipal finance
professional. The Board believes that this serves no useful purpose
because the dealer currently is not engaging in municipal securities
business. The proposed rule change would amend the definition of
executive officer in rule G-37(g)(v) to provide that, if no associated
person of the dealer meets the definition of municipal finance
professional, the dealer shall be deemed to have no executive officers
(and thus the recording and reporting requirements for executive
officers are not applicable).\4\
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\4\ Upon approval of the proposed rule change by the SEC,
dealers may remove individuals subject to the new rule language from
their lists of executive officers and do not have to record and
report their contributions.
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In both situations involving municipal finance professionals and
executive officers described above, if the dealer later engages in
municipal securities business, then the dealer will have to record the
contributions and payments made by any municipal finance professionals,
as well as executive officers, for the previous two calendar years to
determine whether it is banned from any municipal securities
business.\5\
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\5\ Of course, any dealer who has municipal finance
professionals, even if the dealer currently is not engaging in
municipal securities business, must record and report the
contributions and payments of municipal finance professionals and
executive officers.
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Definition of ``Official of an Issuer''
When the Board adopted rule G-37, the term ``official of such
issuer'' or ``official of an issuer'' was initially defined 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. The definition was intended to include any state
or local official or candidate (or successful candidate) who has
influence over the awarding of municipal securities business, including
certain state-wide executive or legislative officials.
After adoption of the rule, the Board became concerned that,
because the definition focused on ``an elective office of the issuer,''
it did not clearly include certain other officials. For example, a
state may have certain issuing authorities whose boards of directors
are appointed by the governor. Although the governor is an official
with influence over the awarding of municipal securities business, the
governor, in this illustration, is not an incumbent or candidate for
``elective office of the issuer'' (i.e., the state authority). Thus, a
contribution to the governor would not prohibit a dealer from engaging
in business with the state authority. The Board intended to include the
governor as an official of the issuer in such circumstances and,
therefore, determined to amend the definition to clarify its intent.\6\
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\6\ See Securities Exchange Act Release No. 34160 (June 3,
1994), 59 FR 30376 (June 13, 1994).
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Accordingly, rule G-37(g)(vi) currently defines the term ``official
of such issuer'' or ``official of an issuer'' as:
any person (including any election committee for such person) who
was, at the time of the contribution, an incumbent, candidate or
successful candidate: (A) For elective office of the issuer which
office is directly or indirectly responsible for, or can influence
the outcome of, the hiring of a broker, dealer or municipal
securities dealer for municipal securities business by the issuer;
or (B) for any elective office of a state or of any political
subdivision, which office has authority to appoint any official(s)
of an issuer, as defined in subparagraph (A), above. [emphasis
added]
Recently, it came to the Board's attention that the revised
definition does not clearly address situations in which an elected
official may appoint someone to an issuer position. Subparagraph (B) in
rule G-37(g)(vi) refers to the definition of official of an issuer as
defined in subparagraph (A), but, subparagraph (A) refers only to an
elective office and not an appointed office. The proposed rule change
amends the definition of ``official of such issuer'' and ``official of
an issuer'' to clarify that the definition includes ``any elective
office of a state or of any political subdivision, which office has
authority to appoint any person who is directly or indirectly
responsible for, or can influence the outcome of, the hiring of a
broker, dealer or municipal securities dealer for municipal securities
business by an issuer.'' Such amendment removes the incorrect reference
to an elective office for those who are appointed by an elected
official.
Definition of ``Municipal Securities Business''
Rule G-37(g)(vii) defines the term ``municipal securities
business'' as:
(A) The purchase of a primary offering (as defined in rule A-13(d))
of municipal securities from the issuer on other than a competitive bid
basis (i.e., negotiated underwriting); or
(B) The offer or sale of a primary offering of municipal securities
on behalf of any issuer (i.e., private placement); or
(C) The provision of financial advisory or consultant services to
or on behalf of an issuer with respect to a primary offering of
municipal securities on other than a competitive bid basis; or
(D) The provision of remarketing agent services to or on behalf of
an issuer with respect to a primary offering of municipal securities on
other than a competitive bid basis.
Under rule G-37, dealers could be subject to a ban on business with
an issuer if certain contributions are made to officials of that
issuer. The ban on business provision applies to municipal securities
business awarded on a negotiated basis; the rule does not prohibit
dealers from engaging in business awarded on a competitive basis.
Some dealers have noted that it is not clear in subparagraph (C) of
rule G-37(g)(vii) whether, for financial advisory services, the rule is
referring to the selection of a financial advisor on other than a
competitive bid basis or whether the rule is referring to financial
advisory services provided only on negotiated deals. The proposed rule
change amends rule G-37(g)(vii)(C) to make clear that the definition of
``municipal securities business'' includes financial advisory services
when the dealer is chosen as financial advisor on a negotiated basis.
It is irrelevant whether the financial advisory services provided by
the dealer are with respect to a negotiated or competitive issue. A
similar change has been made to rule G-37(g)(vii)(D) to clarify that
the definition of ``municipal securities business'' includes
remarketing agent services when the dealer is chosen as remarketing
agent on a negotiated basis.
Recordkeeping
Rule G-37(e) requires dealers to submit Forms G-37/G-38 to the
Board by certified or registered mail or some other equally prompt
means that provides a record of dispatch. While rule G-8(a)(xvi), on
books and records, requires dealers to keep records of all of the
information reported on Form G-37/G-38, it also requires dealers to
keep records of additional information (e.g., a listing of the names,
titles, city/county and state of residence of all municipal finance
professionals). The Board believes it would be helpful to the
[[Page 49371]]
enforcement agencies for rule G-8(a)(xvi) to require dealers to keep
copies of the Forms G-37/G-38 submitted to the Board so that these
forms can be easily retrieved for review. In reviewing the timely
submission of the forms, the Board also believes it would be helpful to
the enforcement agencies to require dealers to keep the certified or
registered mail record or other records indicating dispatch.\7\
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\7\ Rule G-9, on preservation of records, requires dealers to
retain the G-8(a)(xvi) records concerning political contributions
and prohibitions on municipal securities pursuant to rule G-37 for a
six year period.
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The Board believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act, which provides that the Board's rules
shall:
Be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Board does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 submissions, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of the filing will also be
available for inspection and copying at the Board's principal offices.
All submissions should refer to File No. SR-MSRB-96-7 and should be
submitted by October 10, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 96-23975 Filed 9-18-96; 8:45 am]
BILLING CODE 8010-01-M
