[Federal Register: August 16, 2005 (Volume 70, Number 157)]
[Notices]
[Page 48214-48219]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16au05-127]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52235; File No. SR-MSRB-2005-12]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change Concerning Solicitation
and Coordination of Payments to Political Parties and Question and
Answer Guidance on Supervisory Procedures Related to Rule G-37(d) on
Indirect Violations
August 10, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 27, 2005, the Municipal Securities Rulemaking Board (``MSRB''
or ``Board'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the MSRB.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 2 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB has filed with the SEC a proposed rule change consisting
of an amendment to Rule G-37(c), concerning solicitation and
coordination of payments to political parties, and Q&A guidance on
supervisory procedures related to Rule G-37(d), on indirect violations.
The text of the proposed rule change is available on the MSRB's Web
site (http://www.msrb.org), at the MSRB's principal office, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB 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
text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
[[Page 48215]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Rule G-37(c) prohibits a dealer and its municipal finance
professionals (``MFPs'') from soliciting any person or political action
committee (``PAC'') to make or coordinate contributions to an official
of an issuer with which the dealer is engaging or is seeking to engage
in municipal securities business. The proposed amendments would also
prohibit the dealer and certain MFPs\3\ from soliciting any person or
PAC to make or coordinate a payment to a political party of a state or
locality where the dealer is engaging or is seeking to engage in
municipal securities business.\4\ The proposed rule amendments would
specifically define any ``person''\5\ to include any affiliated entity
of the dealer. This clarification is intended to alert dealers and MFPs
that influencing the disbursement decisions of affiliated entities or
PACs may constitute a direct violation of Rule G-37(c), as amended, if
the dealer or MFP solicits the affiliated entity or PAC to make or
coordinate contributions to an official of an issuer or a political
party of a state or locality where the dealer is engaging or is seeking
to engage in municipal securities business. Accordingly, in order to
ensure compliance with Rule G-37(c), dealers should consider the
adequacy of their information barriers with affiliated entities, or
PACs controlled by affiliated entities, to ensure that the affiliated
entities' contributions, payments, or PAC disbursement decisions are
neither influenced by the dealer or its MFPs, nor communicated to its
MFPs.
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\3\ The proposed amendment limits MFPs who would be prohibited
from soliciting or coordinating political party payments to those
persons who are directly involved in the dealer's municipal
securities business. The proposed language provides that only MFPs
who are primarily engaged in municipal representative activities,
solicitors of municipal securities business, or direct supervisors
of MFPs that are ``solicitors'' or ``primarily engaged'' are
prohibited from soliciting political party payments. The MSRB
limited those MFPs covered by the proposed amendments to those
directly involved in the municipal securities business of the
dealer; recognizing that other MFPs more distant from the day-to-day
operations of the dealer's municipal securities business may have
other reasons to solicit or coordinate payments to political parties
(i.e., reasons related to other business activities of the dealer).
\4\ The MSRB notes that, depending upon the facts and
circumstances, an MFP's solicitation of a contribution to an issuer
with which the dealer is engaging or is seeking to engage in
municipal securities business or the solicitation of a political
party payment to a political party of a state or locality where the
dealer is engaging or is seeking to engage in municipal securities
business, may also constitute a violation of Rule G-37(d) on
indirect violations.
\5\ ``Person'' is defined in Sec. 3(a)(9) of the Act, to mean
``a natural person, company, government, or political subdivision,
agency, or instrumentality of a government.'' Unless the context
otherwise specifically requires, the terms used in MSRB rules have
the meanings set forth in the Act. See MSRB Rule D-1.
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The proposed Q&A guidance provides that, in order to ensure
compliance with Rule G-27(c) as it relates to payments to political
parties or PACs and Rule G-37(d), each dealer must adopt, maintain and
enforce written supervisory procedures reasonably designed to ensure
that neither the dealer nor its MFPs are using payments to political
parties and non-dealer controlled PACs to contribute indirectly to an
official of an issuer.\6\ The draft Q&A guidance also explicitly states
that contributing to ``housekeeping'', ``conference'' or ``overhead''
type accounts is not a safe harbor and does not alleviate the dealer's
supervisory obligation to conduct this due diligence.
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\6\ In addition, pursuant to MSRB Rule G-8(a)(xx), on records
concerning compliance with Rule G-27, each dealer must maintain and
keep current the records required under Rules G-27(c) and G-27(d).
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The Qs&As seek to provide dealers with more guidance as they
develop procedures to ensure compliance with both the language and the
spirit of Rule G-37. The Qs&As emphasize the necessity for adequate
supervisory procedures to ensure compliance with Rule G-37(d) not only
with respect to payments to political parties, but also with respect to
contributions to and disbursements by dealer-affiliated (but not
controlled) PACs. The Board reminds dealers that a failure to implement
satisfactory written procedures to ensure compliance with Rule G-37(d)
could subject the dealer to enforcement actions by the appropriate
regulatory authorities.
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act,\7\ which provides that the MSRB's
rules shall:
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\7\ 15 U.S.C. 78o-4(b)(2)(C).
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
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the public interest.
The MSRB believes that the proposed rule change is consistent with
the Act because it will help inhibit practices that create the
appearance of attempting to influence the awarding of municipal
securities business through an indirect violation of Rule G-37. The
MSRB also believes that the Q&A guidance will facilitate dealer
compliance with Rule G-27, on supervision, and Rule G-37(d)'s
prohibitions on indirect rule violations.
B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change will result
in any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act since it would apply equally to
all dealers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
On February 15, 2005 the MSRB published for industry comment draft
amendments to Rule G-37(c), concerning solicitation and coordination of
payments to political parties, and draft Q&A guidance on supervisory
procedures related to Rule G-37(d), on indirect violations (the
``Notice'').\8\ The MSRB received seven comments on the Notice.\9\
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\8\ See MSRB Notice 2005-11 (February 15, 2005).
\9\ The Board received comment letters from the following: Sarah
A. Miller, General Counsel, ABASA Securities Association (``ABASA'')
to Carolyn Walsh, Senior Associate General Counsel, MSRB, dated
April 11, 2005; J. Cooper Petagna, Jr., President, American
Municipal Securities, Inc. (``American Municipal'') to Ms. Walsh,
dated March 10, 2005; Robert E. Foran, Senior Managing Director,
Bear Stearns & Co., Inc. (``Bear Stearns'') to Ms. Walsh, dated
March 31, 2005; Leslie M. Norwood, Vice-President and Assistant
General Counsel, Bond Market Association (``BMA'') to Ms. Walsh,
dated April 1, 2005; Robert J. Stracks, Counsel, Griffin, Kubik,
Stephens & Thompson, Inc. (``Griffin, Kubik'') to Ms. Walsh, dated
March 30, 2005; Marc E. Lackritz, President, Securities Industry
Association (``SIA'') to Ms. Walsh, dated April 5, 2005; and Terry
L. Atkinson, Managing Director, UBS Financial Services Inc.
(``UBS'') to Ms. Walsh, dated April 1, 2005.
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Of the seven commentators, one commentator, American Municipal,
supports the adoption of the amendments to Rule G-37 and the proposed
Qs&As because they will strengthen the effectiveness of the rule in
preventing improper political contributions.\10\ One commentator,
Griffin, Kubik, believes that the existing structure of Rule G-37 is
unconstitutional and complains about the existing operation of Rule G-
37.\11\
[[Page 48216]]
Griffin, Kubik also suggests that requiring full and immediate
disclosure of dealer contributions by the recipient issuer official
would be more effective in policing this arena.
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\10\ American Municipal also suggests that consideration be
given to having the rule applied to all registered personnel and not
just MFPs.
\11\ This commentator complains that if an associated person of
a dealer introduces or solicits municipal securities business for
the dealer while at the same time making political contributions to
an official of a completely different local political body, the
broker-dealer could face a G-37 compliance problem. In fact,
assuming this was the first time the associated person solicited
municipal securities business for the dealer, the contribution to an
issuer official who is not the issuer official solicited would not
result in a ban on doing business with the introduced issuer. It
would, however, result in the associated person becoming a municipal
finance professional of the dealer and being subject to Rule G-37
from the date of the solicitation activity forward.
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The remaining five commentators express support for the MSRB's
efforts to eliminate any vestiges of pay-to-play in the municipal
securities industry, whether they are in the form of a direct or
indirect contribution to an issuer official. However, ABASA, BMA \12\,
SIA and UBS assert that the Qs&As are vague thus making it impossible
for broker-dealers to know exactly what standard to apply. ABASA, BMA,
SIA and UBS request that the MSRB clarify the proposed Qs&As as they
relate to contributions to party committees and PACs so that they
establish clear standards upon which the industry may rely. BMA, SIA
and UBS request that the MSRB expressly state that contributions made
to national party committees and certain federal leadership PACs
(controlled by members of Congress) are permitted. BMA and UBS also
request that the MSRB: (1) Acknowledge that the proposed Qs&As reflect
a new approach to Rule G-37's prohibition on indirect contributions and
not just a restatement of the existing standard; (2) modify the
prohibition on soliciting contributions to state or local parties so
that broker-dealers and MFPs would be permitted to solicit
contributions to the same extent they are able to make a contribution
to them; and (3) clarify what is meant by ``affiliated PAC'' for
purposes of erecting an informational barrier.\13\ ABASA also states
that the MSRB's suggested information barrier concerning past and
current municipal securities business is unrealistic because much of
the information is public. These specific comments are discussed in
detail below.
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\12\ Because the Bear Stearns comment letter simply states that
it supports the BMA letter, for the purposes of this discussion Bear
Stearns' positions will not be separately identified. Rather, it
should be understood that positions attributed to BMA are also
supported by Bear Stearns.
\13\ Griffin, Kubik also seeks this clarification.
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The Draft Amendments to Rule G-37(c)(ii): The Prohibition on Soliciting
Contributions to State and Local Party Committees Should Be Symmetrical
to the Contributions Ban
Comments Received. BMA and UBS assert that the Rule G-37(c)
amendment should be symmetrical to the contributions ban because they
do not believe it makes sense to impose a greater, absolute prohibition
on soliciting contributions than on making contributions. BMA
recommends that dealers and MFPs be permitted to solicit contributions
to the same extent they are allowed to make contributions.
MSRB Response. The proposed rule amendment is more limited than
what the comment letters portray. The comment letters state that the
amendment would completely prohibit MFPs from soliciting contributions
to any state and local party committees when, in fact, it only
prohibits solicitations by the dealer or certain MFPs for contributions
to a political party of a state or locality where the dealer is
engaging or is seeking to engage in municipal securities business.
Thus, the proposed amendment is narrowly tailored to regulate only a
dealer's or certain MFP's solicitation of other persons' payments to
political parties when there can be a perception that MFPs and dealers
are soliciting others to make payments to parties or PACs as an end-run
around the rule and the rule's disclosure requirements.
Current Rule G-37(c) operates as an absolute prohibition on
soliciting contributions for an official of an issuer with which the
dealer is engaging or seeking to engage in municipal securities
business and is not symmetrical with Rule G-37(b) because there is no
de minimis exception in Rule G-37(c). Moreover, because dealers' and
MFPs' payments to political parties do not trigger the automatic ban on
business (unless there is an indirect violation) there is no mechanism
to correlate the party payment disclosure scheme in Rule G-37 with the
proposed prohibition on the solicitation and coordination of payments
to political parties of states or localities where the dealer is
engaging or seeking to engage in municipal securities business.
The MSRB determined that allowing dealers or certain MFPs to
solicit other persons to make political party or PAC payments in states
and localities where they are engaging or seeking to engage in
municipal securities business creates at least the appearance of
attempting to influence the awarding of municipal securities business
through such payments. Moreover, without the proposed prohibition, it
would be very difficult for enforcement agencies to detect such
potential indirect violations because the parties solicited do not have
to disclose the payments. Additionally, the arguably stricter
prohibition can be justified because a violation of Rule G-37(c) does
not result in an automatic ban on business.
Vagueness of the Proposed Q&A Guidance Concerning Rule G-27, on
Supervision, and Rule G-37(d), on Indirect Violations
Comments Received. ABASA, BMA, SIA, and UBS request that the Qs&As
be clarified because they do not present a clear objective standard as
to when party and PAC contributions should be treated as indirect
contributions to issuer candidates. BMA, SIA and UBS also complain that
the Qs&As represent an expansion of Rule G-37. BMA suggests that if the
MSRB's intent is to absolutely eliminate state and local party
committee and PAC contributions, it should come out with a clear
prohibition.
MSRB Response. The MSRB's intent was not to eliminate all state and
local party committee and PAC contributions or to specify which ones
would not be indirect contributions to issuer officials. The MSRB
recognizes that some payments to political parties are made for reasons
that have no connection with influencing the awarding of municipal
securities business. The MSRB's decision to issue the proposed Q&A
guidance was prompted by concern that dealers are not implementing
adequate supervisory procedures reasonably designed to prevent indirect
rule violations. The MSRB also voiced its concern about the emergence
of recent media and other reports that issuer agents have informed
dealers and MFPs that, if they are prohibited from contributing
directly to an issuer official's campaign, they should contribute to
the affiliated party's ``housekeeping'' account.
By voicing a concern that dealers who make such payments to parties
or PACs may be doing so in an effort to avoid the political
contribution limitations embodied in Rule G-37, the MSRB was not
expanding the reach of Rule G-37. The MSRB was, however, alerting
dealers to modern day political realities and practices that may
prove--with hindsight--to be problematic. The MSRB was also suggesting,
though not requiring, general supervisory procedures designed to help
ensure that the party or PAC payments do not result in a violation of
Rule G-37(d). Dealers are required to implement adequate supervisory
procedures, but the MSRB's
[[Page 48217]]
suggestions about general approaches to conducting adequate due
diligence are not meant to be either required procedures or a safe
harbor. Ideally, an adequate supervisory procedure will prevent a Rule
G-37(d) violation, but the existence of adequate supervisory procedures
may only protect the firm from a resulting Rule G-27 violation should a
problem later occur. A payment permitted by the dealer's supervisory
procedures may still result in a violation of Rule G-37(d) if it is
later proven that the MFP in question contributed with the intent to
circumvent the rule. Such instance, of course, could put the dealer in
a good position to seek a waiver of the resulting ban on business from
the NASD.
Moreover, the proposed Qs&As do not broaden the sphere of activity
that is prohibited by Rule G-37. A violation of Rule G-37(d) still will
only occur when the payment is made to other entities ``as a means to
circumvent the rule.'' Rule G-37(d), which prohibits anyone from
``directly or indirectly, through or by any other person or means''
doing what sections (b) and (c) prohibit has previously been challenged
on the grounds that it is unconstitutionally vague. The United States
Court of Appeals in Blount v. SEC \14\ rejected this challenge 10 years
ago. In Blount, the Court stated,
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\14\ Blount v. SEC, 61 F.3d 938, (D.C. Cir. 1995), rehearing and
suggestion for rehearing en banc denied (1995), certiorari denied by
517 U.S. 1119, 116 S.Ct. 1351, 134 L.Ed.2d 520 (1996).
Although the language of section (d) itself is very broad, the SEC has
interpreted it as requiring a showing of culpable intent, that is, a
demonstration that the conduct was undertaken ``as a means to
circumvent'' the requirements of (b) and (c). * * * The SEC states its
``means to circumvent'' qualification in general terms. The
qualification appears, therefore, to apply not only to such items as
contributions made by the broker's or dealer's family members or
employees, but also gifts by a broker to a state or national party
committee, made with the knowledge that some part of the gift is likely
to be transmitted to an official excluded by Rule G-37. In short,
according to the SEC, the rule restricts such gifts and contributions
only when they are intended as end-runs around the direct contribution
limitations.\15\
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\15\ Id. at 948.
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The Standards in the ``Reasons Test'' and ``Activity Test'' Need To Be
Clarified
Comments Received. ABASA, BMA, SIA and UBS assert that the proposed
Q&A guidance should be clarified with bright-line tests to identify the
parties or PACs to which dealers and MFPs can make payments without
violating Rule G-37(d), on indirect violations. In particular, the
commentators object to the guidance that suggests that the dealer
identify the reason for making the payment to the party or PAC (the
``reasons test'') without defining the motivation(s) that should result
in a contribution being classified as an indirect contribution to an
issuer official. BMA suggests that the reasons test be clarified to
only cover contributions to party committees and PACs that are
controlled by, or where the contribution is solicited by, an issuer
official.
The commentators also object to the suggestion that dealers make
inquiries to essentially ``follow the money'' to reasonably ensure that
the party or PAC is not supporting one or a limited number of issuer
officials (the ``activity test'') on the grounds that it is unclear.
BMA asserts that the language is unclear because it could mean one of
two things: (1) If the party or PAC that receives the contribution
supports even one issuer official, then an indirect ban is triggered;
or (2) the dealer must determine that the party's or PAC's expenditures
on issuer officials constitute a large enough portion of its total
expenditures such that an indirect ban is triggered. BMA and UBS ask
the MSRB to revise its guidance to suggest a test based on objective
criteria. UBS suggests that this objective criteria include a
``dilution standard'' that would need to include at least the following
elements: (1) A threshold--50%, 60% or 70%--of a party's or PAC's
expenditures used for non-issuer purposes that would be sufficient to
overcome a presumption that the committee supported one or a limited
number of issuer officials, and (2) a time period over which the party
committee or PAC would be required to examine when calculating the
threshold percentage.
MSRB Response. As discussed above, the proposed Q&A guidance does
not change the existing legal framework concerning the motivation that
would result in a contribution being classified as an indirect
contribution to an issuer official. An MFP or dealer could be found
(after the fact) to have violated Rule G-37(d) if payments to a party
or PAC are intended as end-runs around the direct contribution
limitations. The MSRB does not believe it is appropriate to attempt to
delineate specific reasons that are permissible, and those that are
not. What is important is that dealers institute adequate procedures to
identify potential violations. If the dealer's procedures include
making an inquiry about the reason for making the payment \16\ the
dealer must then exercise its judgment as to whether the facts and
circumstances surrounding the payment indicate that the reason for
making the contribution was to circumvent Rule G-37.
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\16\ To the extent that dealers are concerned that the act of
inquiring about persons' reasons for making payments to PACs and
political partiers may chill political speech, the procedure could
require persons to give negative assurances that the party or PAC
payment is not being made as a means to circumvent the requirements
of Rule G-37.
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With regard to the ``activity test'' comments, the MSRB's existing
Q&A guidance on this issue already states that dealers that make
contributions to organizations such as political parties or PACs (as
well as dealers that allow MFPs to make such payments) have a duty to
make inquiries of such organizations in order to ascertain how the
contributed funds will be used.\17\ Following this guidance, dealers
should be able to develop adequate written supervisory procedures
reasonably designed to ensure that payments to political parties or
PACs are not being used to circumvent the requirements of Rule G-37.
The MSRB does not believe it is useful to provide ``safe harbors''
concerning parties or PACs such that a dealer or MFP could make
payments to certain parties or PACs without investigating whether the
payment is actually being made as a means to circumvent the
requirements of Rule G-37. Such ``safe harbors'' create the potential
for loopholes in Rule G-37's regulatory scheme as parties and PACs
tailor their solicitations for contributions to MSRB suggested
parameters.
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\17\ See Rule G-37 Questions and Answers No. III. 5, reprinted
in MSRB Rule Book. See also Rule G-37 Questions and Answers Nos.
III.3 and III.4, reprinted in MSRB Rule Book.
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However, the MSRB has determined to revise the guidance and remove
some of the specific due diligence suggestions to focus on reminding
dealers that each dealer is required under Rule G-27, on supervision,
to evaluate its own circumstances and develop written supervisory
procedures reasonably designed to ensure that the conduct of the
municipal securities activities of the dealer and its associated
persons are in compliance with Rule G-37(d), on indirect violations.
After evaluating its own circumstances, a dealer could determine that
adequate supervisory procedures would include some of the commentators'
suggested due diligence procedures.
[[Page 48218]]
National Party Committees and Federal Leadership PACs Should Be
Expressly Permitted
Comments Received. BMA, SIA and UBS request that, while they
believe contributions to national party committees and federal
leadership PACs appear to be permitted under the due diligence
standards established by the proposed Qs&As, the MSRB should expressly
state that contributions made to a national party committee or federal
leadership PAC are permitted under the proposed Qs&As as long as (1)
the contribution was not solicited by an issuer official, and (2) the
party committee or leadership PAC is not controlled by an issuer
official.
MSRB Response. Essentially, the commentators are asking the MSRB to
create a safe harbor for certain national party committees and federal
leadership PACs. The creation of such a safe harbor would be a
departure from the intended reach of Rule G-37(d). As noted above, the
Court of Appeals in Blount expressly recognized that Rule G-37(d) was
originally intended to prevent payments to both national and state
parties used as a ``means to circumvent'' Rule G-37. Moreover, although
BMA, SIA and UBS essentially assert that when a contribution is not
solicited by an issuer official and the party leadership PAC is not
controlled by an issuer official the national party committees and
federal leadership PACs can not be used as a means to circumvent Rule
G-37, such a position is inconsistent with public perception.\18\
Additionally, the Supreme Court's recent decision in McConnell v.
Federal Election Commission,\19\ emphasized the potential for payments
to a political party to have undue influence on the actions of the
elected officeholders belonging to the same party. McConnell upheld new
federal statutory restrictions on soft money donations that were
neither solicited by candidates nor used by the party to aid specific
candidates. Given public perception and the Supreme Court's
pronouncements, the MSRB believes it is reasonable to require dealers
to be responsible for having adequate supervisory procedures that
obligate the dealer to exercise its judgment concerning whether
contributions to any party or PAC are being made as a means to
circumvent the provisions of Rule G-37.
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\18\ See e.g., Spina, Naples favors one underwriter GOP backer
gets 80% of county bond business, even at $500,000 higher cost, The
Buffalo News, April 6, 2005 at p. A1 (suggesting that an MFP's
contributions to a PAC run by House Majority Leader Tom Delay were
transferred to the congressional campaign of a sitting issuer
official that awarded 14 of 24 bond deals to firms that the MFP was
associated with).
\19\ McConnell v. Federal Election Commission, 540 U.S. 93, 124
S.Ct. 619 (Dec. 10, 2003).
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The Existence of a ``Safe-Harbor'' for Payments to ``Housekeeping'' or
``Conference'' Accounts
Comments Received. The BMA and UBS assert that the MSRB's
statements in the Notice are a departure from prior statements because
previously the MSRB recognized a ``safe-harbor'' that expressly
permitted contributions to ``conference accounts'' of state and local
party committees. ABASA also states that the MSRB has with the draft
Qs&As, in effect, outlawed contributions to housekeeping and similar
accounts.
MSRB Response. The MSRB's statements in the Notice about the status
of ``housekeeping'' or ``conference'' type accounts were made to
correct a misconception about these types of accounts. Although the
MSRB never recognized such accounts as a safe-harbor, the MSRB learned
that some dealers might have believed that payments to a
``housekeeping'' type account could not result in an indirect violation
of Rule G-37. The SEC's approval order of certain early amendments to
Rule G-37 demonstrates that the MSRB never intended for dealers to
treat payments to administrative accounts as a safe harbor.\20\
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\20\ See Securities Exchange Act Release No. 35446 (SEC Order
Approving Proposed Rule Change by the Municipal Securities
Rulemaking Board Relating to Rule G-37 on Political Contributions
and Prohibitions on Municipal Securities Business, and Rule G-8, on
Recordkeeping) (March 6, 1995), 60 FR 13496 (March 13, 1995) (``1995
SEC Approval Order'').
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In 1995, the MSRB filed and the SEC approved amendments to Rule G-
37's disclosure requirements to require dealers to record and report
all payments to parties by dealers, PACs, MFPs and executive officers
regardless of whether those payments constitute contributions. In the
1995 SEC Approval Order, the SEC reiterated that the party payment
disclosure requirements are intended to help ensure that dealers do not
circumvent the prohibition on business in the rule by indirect
contributions to issuer officials through payments to political
parties. The SEC explained that the need for the language amendment was
motivated by attempts by dealers and/or political parties to assert
that contributions to administrative type accounts did not fall within
the rule's regulatory ambit. In the 1995 SEC Approval Order, the SEC
states:
Certain dealers and other industry participants have notified the
MSRB that certain political parties currently are engaging in
fundraising practices which, according to these political parties,
do not invoke the application of rule G-37. For example, some of
these entities currently are urging dealers to make payments to
political parties earmarked for expenses other than political
contributions (such as administrative expenses or voter registration
drives). Since these payments would not constitute ``contributions''
under the rule, the recordkeeping and reporting provisions would not
apply. The MSRB is concerned, based upon this information, that the
same pay-to-play pressures that motivated the MSRB to adopt rule G-
37 may be emerging in connection with the fundraising practices of
certain political parties described above.\21\
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\21\ Id. at 13498.
In addition, in August 2003, when the MSRB published a notice on
indirect rule violations of Rule G-37, the MSRB referenced the 1995 SEC
Approval Order and specifically stated that, ``The party payment
disclosure requirements were intended to assist in severing any
connection between payments to political parties (even if earmarked for
expenses other than political contributions) and the awarding of
municipal securities business.'' \22\
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\22\ MSRB Notice 2003-32 (August 6, 2003) at pp. 1-2 (emphasis
added).
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The Term Affiliated PAC Should Be Clarified
The BMA states that, while the proposed Qs&As suggest that a
broker-dealer establish an informational barrier between it and its
affiliated PAC, the MSRB does not clarify what it means by the term
``affiliated PAC.'' The BMA also states that the MSRB should clarify
``affiliated PAC'' to mean a PAC that is controlled by a wholly owned
affiliate of the broker-dealer.
MSRB Response. The MSRB has accepted the suggestion that the term
``affiliated PAC'' should be defined in the guidance and has revised
the guidance to provide that for the purposes of this guidance the term
``affiliated PAC'' means a PAC controlled by an affiliated entity of a
dealer. An ``affiliated entity'' is an entity that controls, is
controlled by or is under common control with the dealer. This use of
the term ``affiliated'' is consistent with the use of the term in the
MSRB's proposed amendments to Rule G-38(b)(ii), on consultants.\23\
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\23\ See Securities Exchange Act Release No. 51561 (April 15,
2005), 70 FR 20782 (April 21, 2005) (File No. SR-MSRB-2005-04).
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Recommendations Concerning Information Barriers
Comments Received. ABASA states that the MSRB's suggestion that
dealers establish an information barrier
[[Page 48219]]
prohibiting sharing information about prior negotiated municipal
securities business as well as current and planned solicitations
between the dealer, its MFPs and any affiliated PAC is unrealistic
because much of the information is public.
MSRB Response. The MSRB has revised the language relating to the
municipal securities business information barrier to suggest that
dealers prohibit the dealer and its MFPs from directly providing or
coordinating information about prior negotiated municipal securities
business as well as current and planned solicitations to any affiliated
PAC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of 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 such 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, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or Send an e-mail to rule-comments@sec.gov. Please include File
Number SR-MSRB-2005-12 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
All submissions should refer to File Number SR-MSRB-2005-12. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, 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 such
filing also will be available for inspection and copying at the MSRB's
offices. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
MSRB-2005-12 and should be submitted on or before September 6, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4425 Filed 8-15-05; 8:45 am]
BILLING CODE 8010-01-P