MSRB NOTICE 2011-04 (January 14, 2011)

REQUEST FOR COMMENT ON PAY TO PLAY RULE FOR MUNICIPAL ADVISORS

The Municipal Securities Rulemaking Board (“MSRB”) is requesting comment on a draft proposal to establish “pay to play” and related rules relating to municipal advisors and to make certain conforming changes to existing pay to play rules for brokers, dealers, and municipal securities dealers (“dealers”). Specifically, the draft proposal consists of (i) draft MSRB Rule G-42 (on political contributions and prohibitions on municipal advisory business and certain solicitations); (ii) draft amendments that would make conforming changes to MSRB Rules G-8 (on books and records), G-9 (on records preservation), and G-37 (on political contributions and prohibitions on municipal securities business); and (iii) a draft restatement of a MSRB Rule G-37 interpretive notice issued by the MSRB in 1997 (“Rule G-37 Interpretive Notice”).[1] The text of the draft proposal is set forth below. The MSRB is also requesting comment on: (i) whether Rule G-38 (on the solicitation of municipal securities business) should be eliminated or amended if draft Rule G-42 becomes effective and (ii) whether the electronic filing of Forms G-42 and G-37 should be required.

Comments should be submitted no later than February 25, 2011. Comments should be sent via e-mail to CommentLetters@msrb.org. Please indicate the notice number in the subject line of the e-mail. To submit comments via regular mail, please send them to Ronald W. Smith, Corporate Secretary, MSRB 1900 Duke Street, Alexandria, VA 22134. Written comments will be available for public inspection on the MSRB’s web site. The MSRB will hold an informational webinar on the draft Rule G-42 on February 3, 2011 at 2:00 p.m. Register for the webinar.

Questions about this notice should be directed to Peg Henry, Deputy General Counsel, or Leslie Carey, Associate General Counsel, at (703) 797-6600.

BACKGROUND

Existing MSRB Rule G-37. Rule G-37 was adopted by the MSRB in 1994 due to concerns about the opportunity for abuses and the problems associated with political contributions by dealers in connection with the award of municipal securities business.[2] When it filed proposed Rule G-37 with the Securities and Exchange Commission (“SEC”),[3] the MSRB stated that it believed that there had been numerous instances in which dealers had been awarded municipal securities business because of their political contributions. Even when such improprieties had not occurred, the MSRB believed that political contributions created a potential conflict of interest for issuers, or at the very least the appearance of a conflict, when dealers made contributions to officials responsible for, or capable of influencing the outcome of, the award of municipal securities business and then were awarded business by issuers associated with such officials. The MSRB said:

The problems associated with political contributions undermine investor confidence in the municipal securities market, which is crucial to the long-term health of the market, both in terms of liquidity and capital-raising ability . . . . The payment of such contributions to obtain business creates artificial barriers to those dealers not willing or able to make such payments, thereby harming investors and the public interest by stifling competition and increasing market costs associated with doing municipal securities business. Accordingly, . . . regulatory action is necessary, among other things, to protect investors and maintain the integrity of the market.

Dodd-Frank Act. The Dodd-Frank Act[4] authorized the MSRB to establish a comprehensive body of regulation for all municipal advisors[5] and provides that municipal advisors have a federal fiduciary duty[6] to their municipal entity clients. The Dodd-Frank Act requires the MSRB to adopt rules for municipal advisors that, in addition to implementing the federal fiduciary duty, are designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade.[7] It also expands the mission of the MSRB to include the protection of municipal entities[8] and obligated persons in addition to the protection of investors and the public interest.

DRAFT NEW MSRB RULE G-42

Pursuant to the authority granted to it by the Dodd-Frank Act, the MSRB is requesting comment on draft Rule G-42 (on political contributions and prohibitions on municipal advisory business and certain solicitations). Just as pay to play activities by some dealers had the potential to undermine the integrity of the municipal securities market and were addressed by Rule G-37, pay to play activities by some municipal advisors could similarly damage the public’s confidence in the municipal marketplace.

Municipal advisors that seek to influence the award of business by government officials by making or soliciting political contributions to those officials distort and undermine the fairness of the process by which government business is awarded. These practices can harm municipal entities and their citizens by resulting in inferior services and higher fees, as well as contributing to the violation of the public trust of elected officials that might allow political contributions to influence their decisions regarding public contracting. These same concerns led the SEC to promulgate a rule governing pay to play by investment advisers.[9]

Draft Rule G-42 concerns political contributions made by all municipal advisors, both dealer and non-dealer. Like Rule G-37, which has withstood constitutional scrutiny,[10] the draft rule would not ban political contributions, and the MSRB does not believe the rule would impinge upon the First Amendment activities of municipal advisors. Instead, draft Rule G-42 would:

  • prohibit a municipal advisor from engaging in “municipal advisory business” with a municipal entity for compensation for a period of time beginning on the date of a non-de minimis[11] political contribution to an “official of the municipal entity” and ending two years after all municipal advisory business with the municipal entity has been terminated;[12]
  • prohibit a municipal advisor from soliciting third-party business[13] from a municipal entity for compensation, or receiving compensation for the solicitation of third-party business from a municipal entity, for two years after a non-de minimis political contribution to an “official of the municipal entity;”[14]
  • prohibit municipal advisors and municipal advisor professionals (“MAPs”) from soliciting contributions, or coordinating contributions, to officials of municipal entities with which the municipal advisor is engaging or seeking to engage in municipal advisory business or from which the municipal advisor is soliciting third-party business;[15]
  • prohibit municipal advisors and MAPs from soliciting payments, or coordinating payments, to political parties of states or localities with which the municipal advisor is engaging in, or seeking to engage in, municipal advisory business or from which the municipal advisor is soliciting third-party business;[16]
  • prohibit municipal advisors and MAPs from committing indirect violations of Rule G-42;[17] and
  • require quarterly disclosures to the MSRB of certain contributions and related information.[18]

Look-Back Provision. In general, contributions made within two years[19] before an individual’s employment as a municipal advisor could trigger a ban on municipal advisory business for compensation, a ban on the solicitation of third-party business from a municipal entity for compensation, and a ban on receipt of compensation for the solicitation of third-party business from a municipal entity (the “look-back provision”); however, no contributions made before the effective date of draft Rule G-42 would trigger such a ban, with the exception of contributions made prior to the effective date of the rule by dealer financial advisors already subject to Rule G-37.

Key Terms. Two key terms used in draft Rule G-42 are “municipal advisor professional” and “official of a municipal entity.” “Municipal advisor professional” would be defined[20] to mean any associated person of a municipal advisor[21] that:

  • is engaged in municipal advisory business with a municipal entity;
  • solicits municipal advisory business from a municipal entity on its own behalf or solicits third-party business;
  • is a supervisor of any person who is a municipal advisor professional;
  • is, in turn, part of the supervisory chain up through and including the Chief Executive Officer or similarly situated official; or
  • is a member of the municipal advisor’s executive or management committee or similarly situated officials.

“Official of a municipal entity” would be defined[22] to mean any person (including any election committee for such person) who was, at the time of the contribution, an incumbent, candidate or successful candidate:

  • for elective office of the municipal entity, which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a municipal advisor by the municipal entity or the hiring of a person on behalf of which the municipal advisor is soliciting third-party business; or
  • for any elective office of a municipal entity, 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 municipal advisor by a municipal entity or the hiring of a person on behalf of which the municipal advisor is soliciting third-party business.

Relationship of Draft Rule G-42 to SEC Pay to Play Rule for Investment Advisers. Rule 206(4)-5 under the Investment Advisers Act of 1940[23] imposes pay to play restrictions upon investment advisers. Under an SEC proposal to amend that rule,[24] subparagraph (a)(2)(i) of the rule would provide that it is unlawful for investment advisers subject to the rule “to provide or agree to provide, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of such investment adviser unless such person is: (A) a regulated municipal advisor; or (B) an executive officer, general partner, managing member (or, in each case, a person with similar status or function), or employee of the investment adviser.”

Under the SEC proposed amendment, the term “regulated municipal advisor” would be defined as “a municipal advisor registered with the [SEC] under Section 15B of the [Exchange Act] and subject to the rules of the Municipal Securities Rulemaking Board that: (i) prohibit municipal advisors from engaging in distribution or solicitation activities if certain political contributions have been made; and (ii) the Commission, by order, finds: (A) impose substantially equivalent or more stringent restrictions on municipal advisors than this section imposes on investment advisers; and (iii) are consistent with the objectives of this section.”

Many of the solicitors covered by the SEC proposed amendment are required by Section 15B(a)(1) of the Exchange Act to register with the SEC, because they are “municipal advisors” within the meaning of Section 15B(e)(4) of the Exchange Act, which term includes persons who solicit investment advisory business from municipal entities on behalf of unrelated investment advisers. However, persons who solicit investment advisory business from municipal entities on behalf of their affiliates are not within the statutory definition of “municipal advisor.” The release accompanying the SEC’s proposed permanent registration rule for municipal advisors contemplates that persons who are not within the statutory definition of “municipal advisor,” but seek to be considered “regulated municipal advisors,” may voluntarily register with the SEC as municipal advisors and subject themselves to MSRB rules, including draft Rule G-42.[25] The provisions of draft Rule G-42 concerning persons who solicit third-party business from municipal entities are intended to be at least as stringent as Rule 206(4)-5. Those provisions are highlighted in this request for comment.

Draft Rule G-42 Distinguished from Rule G-37. Draft Rule G-42 differs from Rule G-37 in the following substantive respects.

First, rather than create a ban on new municipal advisory business with municipal entities, in a manner comparable to Rule G-37,[26] Rule G-42(b) would ban municipal advisory business with municipal entities for compensation and solicitations of third-party business from municipal entities for compensation.[27]

Second, the term “municipal advisor professional” would include associated persons who are engaged in municipal advisory business, rather than associated persons who are primarily engaged (as per Rule G-37) in municipal advisory business. The proposed changes to Rule G-37 that would become effective on the effective date of draft Rule G-42 would remove all references to “financial advisory services” from Rule G-37. Were the term “primarily engaged” to be used in draft Rule G-42, persons performing some financial advisory services, but not primarily engaged in municipal advisory business, would not be considered municipal advisor professionals, and their financial advisory activities would, therefore, be subject to neither Rule G-37, nor draft Rule G-42.[28]

Third, the term “municipal advisor professional” also includes any associated person who is a member of the municipal advisor’s executive or management committee or similarly situated officials, regardless of whether there are any other municipal advisor professionals in the municipal advisory firm.[29]

Fourth, the types of supervisors that are included within the definition of “municipal advisor professional” would be different from the types of supervisors that are included in the definition of “municipal finance professional” found in Rule G-37(g)(iv). If an individual who is a municipal advisor professional engages in municipal advisory business or solicits third-party business, as well as other activities (e.g., municipal securities activities), the individual’s supervisors for both types of activities would be considered municipal advisor professionals.

Ban on Business for Compensation. Two types of persons are municipal advisors within the meaning of Section 15B(e)(4) of the Exchange Act. Some provide advice to or on behalf of municipal entities or obligated persons. Others solicit third-party business from municipal entities.

Draft Rule G-42 distinguishes between the two types of municipal advisors in two ways. First, the definition of “municipal advisory business” only covers the activities of the first type of municipal advisor. It does not cover the solicitation activities of the second type of municipal advisor, which are addressed separately.

Second, the duration of the ban on business for compensation differs for the two types of advisors. The first type of municipal advisor is subject to a fiduciary duty to the municipal entity with which it is engaging in municipal advisory business. Accordingly, such a municipal advisor may not be able to cease its municipal advisory business for that municipal entity immediately upon making a non-de minimis political contribution. Instead, it may be necessary for such a municipal advisor to continue providing advisory services to the municipal entity for a reasonable transition period. Accordingly, the ban on municipal advisory business with that municipal entity for compensation for such a municipal advisor does not end until two years after it has terminated all of its municipal advisory business with the municipal entity. The other type of municipal advisor does not have a municipal entity as its client and, accordingly, has no fiduciary duty to the municipal entity. Such a municipal advisor, therefore, has no such need for a transition period before it ceases its solicitation activities. As a result, the ban on solicitation of third-party business from a municipal entity for compensation, and the receipt of compensation for the solicitation of third-party business from a municipal entity, applicable to such a municipal advisor begins immediately upon the making of the non-de minimis political contribution that results in the ban and ends two years after such contribution is made.

Compensation. For purposes of draft Rule G-42, the MSRB would consider compensation to include any economic benefit to the municipal advisor, whether in the form of an advisory fee or some other fee relating to the total services rendered, reimbursements for costs,[30] commissions, or some combination of the foregoing. A municipal advisor would not be permitted to accept a new engagement to provide non-advisory services to the municipal entity in return for the provision of otherwise uncompensated municipal advisory services to the municipal entity, nor could it accept increased compensation for the provision of other services designed to replace the compensation that draft Rule G-42 prohibits it from receiving. For example, a dealer that could not receive compensation for its financial advisory services as a result of a non-de minimis political contribution could not receive increased underwriting compensation attributable to its financial advisory services. Similarly, a municipal advisor that could not be compensated for soliciting investment advisory business from a public pension fund as a result of a non-de minimis contribution could not receive increased compensation for soliciting business from another potential investor to replace the prohibited compensation.

Reasonable Transition Period. Many municipal advisors have long-term contracts or engagements with municipal entities. Such municipal advisors might not be able to immediately resign from such contract or engagement, after a non-de minimis contribution had been made to an official of a municipal entity, without violating their fiduciary obligations to their municipal entity clients. However, the MSRB does not intend for a municipal advisor to engage in municipal advisory business with a municipal entity on an uncompensated basis indefinitely. Instead, a municipal advisor would only need to continue to engage in such business with a municipal entity on an uncompensated basis for a reasonable period of time. This would allow the municipal advisor to fulfill its fiduciary duty to the municipal entity and create an orderly transition period during which the municipal entity could obtain successor advisory services. This transition period should be as short a period of time as possible and is intended to give the municipal entity client the opportunity to receive the benefit of the work already provided by the municipal advisor and to find a replacement to complete the work, as needed. Accordingly, draft Rule G-42 would provide that the ban on municipal advisory business for a municipal entity for compensation would not end until two years after all municipal advisory business with the municipal entity had been terminated.

Disclosure Requirements. Draft Rule G-42 would establish disclosure requirements to facilitate enforcement of “pay to play” restrictions and function as a public disclosure mechanism to enhance the integrity of the municipal market. Draft Rule G-42 would require municipal advisors to publicly disclose on Form G-42[31] all non-de minimis contributions to officials of a municipal entity, payments to political parties of states and political subdivisions, and contributions to bond ballot campaigns made by municipal advisors, MAPs, their political action committees, and non-MAP executive officers, as well as information on the municipal advisory business with municipal entities and solicitations of third-party business from municipal entities.[32] The Board believes that public access to this information would facilitate public scrutiny of political contributions in the context of the municipal advisory business and solicitations of municipal advisors to help assure citizens, investors, municipal entities, and other industry participants that municipal advisors, and those persons on whose behalf they solicit, are awarded business based on merit, not political contributions.

Future Interpretive Guidance. The MSRB has issued a great deal of interpretive guidance under Rule G-37, some of which is in the form of questions and answers. Much of that guidance is equally applicable to draft Rule G-42, and the MSRB expects to adopt similar guidance under Rule G-42. Such interpretive guidance will be subject to review and comment prior to its approval.

DRAFT AMENDMENTS TO EXISTING MSRB RULES

MSRB Rule G-37. The proposed draft amendments to Rule G-37 would remove any references to “financial advisory and consulting services,” because those activities would be covered by draft Rule G-42. The definitions of “solicit,” “affiliated company,” and “affiliated person of the broker, dealer, or municipal securities dealer” would be conformed to those in draft Rule G-42.

MSRB Rules G-8 and G-9. Draft Rule G-42 would necessitate amendments to Rule G-8 (on books and records) and Rule G-9 (on preservation of records). The proposed draft amendments to Rule G-8 would require municipal advisors to create and maintain records of political contributions and payments. The proposed draft amendments to Rule G-9 would require municipal advisors to preserve records required to be made pursuant to the proposed amendments to Rule G-8. The proposed draft amendments to Rules G-8 and G-9 would subject municipal advisors to recordkeeping and record retention requirements related to draft Rule G-42 that are substantially similar to those to which dealers are already subject under Rule G-37.

RESTATED RULE G-37 INTERPRETIVE NOTICE

The Rule G-37 Interpretive Notice was drafted before municipal advisors to municipal entities were subject to a federal fiduciary duty and includes language providing guidance on the application of the ban on municipal securities business in circumstances where a non­-de minimis contribution occurs during the course of an existing financial advisory relationship. The MSRB recognizes that draft Rule G-42 is inconsistent with the Rule G-37 Interpretive Notice. Accordingly, the MSRB is proposing to restate the Rule G-37 Interpretive Notice to remove references to financial advisory services, which would instead be covered by Rule G-42.

REQUEST FOR COMMENT

The MSRB requests comments on (i) draft Rule G-42, (ii) the draft amendments to Rules G-8, G-9, and G-37, and (iii) the draft restated Rule G-37 Interpretive Notice. In addition, the MSRB requests comments on the following topics:

MSRB Rule G-38 (on solicitation of municipal securities business ). Existing Rule G-38 prohibits a dealer from making payments to any person that is not an affiliated person of the dealer for the solicitation of municipal securities business on the dealer’s behalf. The MSRB decided to ban such payments because it was concerned that dealers were using solicitors not subject to MSRB rules as a way to avoid the limitations of Rule G-37. The Dodd-Frank Act provides for the regulation by the MSRB of municipal advisors that solicit certain types of business from municipal entities on behalf of a third party, such as a dealer. Accordingly, the MSRB requests comment on whether Rule G-38 should be eliminated. Alternatively, should the MSRB expand Rule G-38 to include a prohibition on payments by non-dealer municipal advisors to other municipal advisors for the solicitation of municipal advisory business, just as Rule G-38 currently prohibits dealers from paying others to solicit dealer financial advisory business?

Look-Back Provision. Under Rule G-37(b)(i), a dealer will generally be banned from engaging in municipal securities business with an issuer for two years after non-de minimis political contributions have been made by its MFPs, even if the contributions were made before the MFPs were employed by the dealer.[33] This is known as the “look-back provision.” The MSRB included the “look-back” rule in Rule G-37, in part, because of concern that dealers might hire large contributors who could assist the dealers with obtaining municipal securities business from issuer officials that had received contributions. The two-year look-back provision of Rule G-37(b) applies to those MFPs that are primarily engaged in municipal securities representative activities and those MFPs who solicit municipal securities business. Draft Rule G-42 also incorporates a look-back provision.[34] The MSRB requests comment on whether there are any differences in the way that municipal advisors are hired or conduct their business that might warrant not including a look-back provision in draft Rule G-42 or having the look-back provision in draft Rule G-42 differ from the look-back provision in Rule G-37.

Electronic Filings. Rule G-37 and draft Rule G-42 provide that certain forms may be submitted either in paper or electronically. The MSRB requests comment on whether it should require that Forms G-42, G-42x, G-37, and G-37x be submitted in electronic format only. The Board believes that the electronic filing of political contribution information would assist with processing and dissemination of required disclosure information as quickly and efficiently as possible.

January 14, 2011

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TEXT OF DRAFT RULE G-42

Rule G-42 Political Contributions and Prohibitions on Municipal Advisory Activities

(a) Purpose. The purpose and intent of this rule are to ensure that the high standards and integrity of the municipal advisory industry are maintained, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to perfect a free and open market, and to protect investors, municipal entities, obligated persons, and the public interest by: (i) prohibiting municipal advisors from engaging in municipal advisory business with municipal entities for compensation, soliciting third-party business from municipal entities for compensation, and receiving compensation for the solicitation of third-party business, if certain political contributions have been made to officials of municipal entities; and (ii) requiring municipal advisors to disclose certain political contributions, as well as other information, to allow public scrutiny of political contributions and the municipal advisory business and solicitations of a municipal advisor.

(b) Ban on Municipal Advisory Business and Certain Solicitations

(i) No municipal advisor shall engage in municipal advisory business with a municipal entity for compensation, solicit third-party business from a municipal entity for compensation, or receive compensation for the solicitation of third-party business from a municipal entity, within two years after any contribution to an official of such municipal entity made by:

(A) the municipal advisor;

(B) any municipal advisor professional associated with such municipal advisor (other than a de minimis contribution); or

(C) any political action committee controlled by such municipal advisor or by a municipal advisor professional.

(ii) For an individual designated as a municipal advisor professional solely pursuant to subparagraph (B) of paragraph (g)(iv) of this rule, the provisions of paragraph (b)(i) shall apply to contributions made by such individual to officials of a municipal entity prior to becoming a municipal advisor professional only if such individual solicits municipal advisory business from such municipal entity.

(iii) For an individual designated as a municipal advisor professional solely pursuant to subparagraph (C), (D), or (E) of paragraph (g)(iv) of this rule, the provisions of paragraph (b)(i) shall apply only to contributions made during the period beginning six months prior to the individual becoming a municipal advisor professional.

(iv) Notwithstanding paragraph (i) of this section, in the case of a municipal advisor engaged in municipal advisory business with a municipal entity, the prohibition on engaging in municipal advisory business for compensation provided for in paragraph (i) of this section shall begin on the date of the contribution described in such paragraph (i) and end two years after the date on which all of its municipal advisory business with the municipal entity has been terminated.

(c) Prohibition on Soliciting and Coordinating Contributions.

(i) No municipal advisor or any municipal advisor professional of the municipal advisor shall solicit any person, including but not limited to any affiliated company of the municipal advisor, or political action committee to make any contribution, or shall coordinate any contributions, to an official of a municipal entity with which the municipal advisor is engaging or is seeking to engage in municipal advisory business or is soliciting third-party business.

(ii) No municipal advisor or any individual designated as a municipal advisor professional of the municipal advisor shall solicit any person, including but not limited to any affiliated company of the municipal advisor, or political action committee, to make any payment, or shall coordinate any payments, to a political party of a state or locality where the municipal advisor is engaging or is seeking to engage in municipal advisory business with a municipal entity or is soliciting third-party business; provided, however, that the provisions of this paragraph (ii) shall not apply to any individual designated as a municipal advisor professional of a municipal advisor pursuant to subparagraph (D) or (E) of paragraph (g)(iv) of this rule, if such municipal advisor engages solely in municipal advisory business.

(d) Circumvention of Rule. No municipal advisor or any municipal advisor professional shall, directly or indirectly, through or by any other person or means, do any act that would result in a violation of section (b) or (c) of this rule.

(e) Required Disclosure to Board.

(i) Except as otherwise provided in paragraph (e)(ii), each municipal advisor shall, by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31) send to the Board Form G-42 setting forth, in the prescribed format, the following information:

(A) for contributions to officials of municipal entities (other than a contribution made by a municipal advisor professional or a non-MAP executive officer to an official of a municipal entity if all contributions by such person to such official of a municipal entity, in total, are de minimis) and payments to political parties of states and political subdivisions (other than a payment made by a municipal advisor professional or a non-MAP executive officer to a political party if all payments by such person to such political party, in total are de minimis) made by the persons described in clause (2) of this subparagraph (A):

(1) the name and title (including any city/county/state or political subdivision) of each official of a municipal entity and political party receiving contributions or payments during such calendar quarter, listed by state;

(2) the contribution or payment amount made and the contributor category of each of the following persons making such contributions or payments during such calendar quarter:

(a) the municipal advisor;

(b) each municipal advisor professional;

(c) each non-MAP executive officer; and

(d) each political action committee controlled by the municipal advisor or by any municipal advisor professional;

(B) for contributions to bond ballot campaigns (other than a contribution made by a municipal advisor professional or a non-MAP executive officer if all contributions by such person to such bond ballot campaign, in total, are de minimis) made by the persons described in clause (2) of this subparagraph (B):

(1) the official name of each bond ballot campaign receiving contributions during such calendar quarter, and the jurisdiction (including city/county/state or political subdivision) by or for which municipal securities, if approved, would be issued, listed by state;

(2) the contribution amount made and the contributor category of each of the following persons making such contributions during such calendar quarter:

(a) the municipal advisor;

(b) each municipal advisor professional;

(c) each non-MAP executive officer; and

(d) each political action committee controlled by the municipal advisor or by any municipal advisor professional;

(C)(1) in the case of municipal advisory business engaged in by the municipal advisor with or on behalf of municipal entities, a list of municipal entities with which or on behalf of which the municipal advisor has engaged in municipal advisory business during such calendar quarter, listed by state; and (2) in the case of the third-party business solicited, a list of each municipal entity solicited during the calendar quarter by state, along with the names of persons on behalf of which third-party business was solicited and the nature of the third-party business solicited;

(D) any information required to be included on Form G-42 for such calendar quarter pursuant to paragraph (e)(iii);

(E) such other identifying information required by Form G-42; and

(F) whether any contribution listed in this paragraph (e)(i) is the subject of an automatic exemption pursuant to section (j) of this rule, and the date of such automatic exemption.

The Board shall make public a copy of each Form G-42 received from any municipal advisor.

(ii) No municipal advisor shall be required to send Form G-42 to the Board for any calendar quarter in which either:

(A) such municipal advisor has no information that is required to be reported pursuant to subparagraphs (A) through (D) of paragraph (e)(i) for such calendar quarter; or

(B) such municipal advisor has not engaged in municipal advisory business with a municipal entity or made any solicitations described in subparagraph (g)(ix)(B), but only if such municipal advisor:

(1) had not engaged in municipal advisory business with a municipal entity or made any solicitations described in subparagraph (g)(ix)(B) during the seven consecutive calendar quarters immediately preceding such calendar quarter; and

(2) has sent to the Board completed Form G-42x setting forth, in the prescribed format, (a) a certification to the effect that such municipal advisor did not engage in municipal advisory business with a municipal entity or make any solicitations described in subparagraph (g)(ix)(B) during the eight consecutive calendar quarters immediately preceding the date of such certification, (b) certain acknowledgments as are set forth in said Form G-42x regarding the obligations of such municipal advisor in connection with Forms G-42 and G-42x under this paragraph (e)(ii) and Rule G-8(h)(i), and (c) such other identifying information required by Form G-42x; provided that, if a municipal advisor has engaged in municipal advisory business with a municipal entity or made any solicitations described in subparagraph (g)(ix)(B) subsequent to the submission of Form G-42x to the Board, such municipal advisor shall be required to submit a new Form G-42x to the Board in order to again qualify for an exemption under this subparagraph (B). The Board shall make public a copy of each Form G-42x received from any municipal advisor.

(iii) If a municipal advisor engages in municipal advisory business with a municipal entity or makes any solicitations described in subparagraph (g)(ix)(B) during any calendar quarter after not having reported on Form G-42 the information described in subparagraph (A) of paragraph (e)(i) for one or more contributions or payments made during the two-year period preceding such calendar quarter solely as a result of subparagraph (B) of paragraph (e)(ii), such municipal advisor shall include on Form G-42 for such calendar quarter all such information (including year and calendar quarter of such contributions or payments) not so reported during such two-year period.

(iv) A municipal advisor that submits Form G-42 or Form G-42x to the Board shall either:

(A) send two copies of such form to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending; or

(B) submit an electronic version of such form to the Board in such format and manner specified in the current Instructions for Forms G-42 and G-42x.

(f) Voluntary Disclosure to Board. The Board will accept additional information related to contributions made to officials of municipal entities and payments to political parties of states and political subdivisions voluntarily submitted by municipal advisors or others provided that such information is submitted in accordance with section (e) of this rule.

(g) Definitions.

(i) The term "contribution" means any gift, subscription, loan, advance, or deposit of money or anything of value made: (A) for the purpose of influencing any election for federal, state or local office; (B) for payment of debt incurred in connection with any such election; or (C) for transition or inaugural expenses incurred by the successful candidate for state or local office.

(ii) The term “de minimis,” when used in connection with contributions made by a municipal advisor professional or a non-MAP executive officer, refers to contributions made: (A) to bond ballot campaigns for a ballot initiative for which such municipal advisor professional or non-MAP executive officer was entitled to vote and which contributions, in total, were not in excess of $250 per ballot initiative, or (B) to officials of a municipal entity for whom the municipal advisor professional or non-MAP executive officer was entitled to vote and which contributions, in total, were not in excess of $250 to each official of such municipal entity, per election.

(iii) The term “municipal advisor” used in this rule does not include its associated persons.

(iv) The term "municipal advisor professional" means:

(A) any associated person engaged in municipal advisory business with a municipal entity;

(B) any associated person (including but not limited to any affiliated person of the municipal advisor) who solicits municipal advisory business with a municipal entity on its own behalf or solicits third-party business;

(C) any associated person who is a supervisor of any persons 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 the Chief Executive Officer or similarly situated official; or

(E) any associated person who is a member of the municipal advisor’s executive or management committee or similarly situated officials, if any.

Each person designated by the municipal advisor as a municipal advisor professional pursuant to Rule G-8(h)(i) is deemed to be a municipal advisor professional. Each person designated a municipal advisor professional shall retain this designation for one year after the last activity or position that gave rise to the designation.

(v) The term "non-MAP executive officer" means 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 municipal advisor, but does not include any municipal advisor professional, as defined in paragraph (iv) of this section (g).

Each person designated by the municipal advisor as a non-MAP executive officer pursuant to Rule G-8(h)(i) is deemed to be a non-MAP executive officer.

(vi) The term "official of a municipal entity" means 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 municipal entity which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a municipal advisor by the municipal entity or the hiring of any person on behalf of which the municipal advisor is soliciting third-party business; or (B) for any elective office of a municipal entity, 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 municipal advisor by a municipal entity or the hiring of any person on behalf of which the municipal advisor is soliciting third-party business.

(vii) The term “municipal advisory business” means the provision of advice to or on behalf of a municipal entity or an obligated person with respect to municipal financial products or the issuance of municipal securities.

(viii) The term "payment" means any gift, subscription, loan, advance, or deposit of money or anything of value.

(ix) The term “solicit” means, except as used in section (c) of this rule, the taking of any action that would constitute a solicitation, and the term “solicitation” means a direct or indirect communication by any person with a municipal entity for the purpose of obtaining or retaining (A) municipal advisory business with a municipal entity or (B) third-party business. For purposes of this paragraph, an investment adviser to a covered investment pool in which a municipal entity is solicited to invest shall be treated as though that investment adviser were providing or seeking to provide investment advisory services directly to the municipal entity.

(x) The term "affiliated person of the municipal advisor" means any person who is a partner, director, officer, or employee of the municipal advisor or of an affiliated company of the municipal advisor.

(xi) The term "affiliated company of the municipal advisor" means any entity directly or indirectly controlling, controlled by, or under common control with the municipal advisor.

(xii) The term "bond ballot campaign" means any fund, organization or committee that solicits or receives contributions to be used to support ballot initiatives seeking authorization for the issuance of municipal securities through public approval obtained by popular vote.

(xiii) The term “covered investment pool” means:

(A) An investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a) that is an investment option of a plan or program of a government entity (as defined in Rule 206(4)-5 under the Investment Advisers Act of 1940); or

(B) Any company that would be an investment company under section 3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a–3(a)), but for the exclusion provided from that definition by either section 3(c)(1), section 3(c)(7) or section 3(c)(11) of that Act (15 U.S.C. 80a–3(c)(1), (c)(7) or (c)(11)).

(xiv) The term “third-party business” means an engagement by a municipal entity of a broker, dealer, municipal securities dealer, or municipal advisor (other than the municipal advisor who is soliciting the municipal entity) for or in connection with municipal financial products or the issuance of municipal securities, or of an investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) to provide investment advisory services to or on behalf of a municipal entity.

(h) Operative Date. Except as provided in this section, the prohibition on engaging in municipal advisory business with a municipal entity for compensation, solicitation of third-party business from a municipal entity for compensation, and receipt of compensation for the solicitation of third-party business from a municipal entity or , as described in section (b) of this rule, arises only from contributions made on or after ______________________, 2011. In the case of a broker, dealer, or municipal securities dealer that is a municipal advisor (“dealer municipal advisor”), any political contribution that would have triggered a ban on financial advisory or consultant services by such dealer municipal advisor under Rule G-37(b) as in effect prior to [the effective date of this rule] shall also trigger a ban on municipal advisory business with a municipal entity under section (b) of this rule.

(i) Application for Exemption. The Commission may exempt a municipal advisor, conditionally or unconditionally, from the prohibition under section (b) of this rule of engaging in municipal advisory business with a municipal entity for compensation, soliciting third-party business from a municipal entity for compensation, or receiving compensation for the solicitation of third-party business from a municipal entity. In determining whether to grant such exemption, the Commission may consider, among other factors that it may deem relevant:

(i) whether such exemption is consistent with the public interest, the protection of investors, municipal entities, and obligated persons, and the purposes of this rule;

(ii) whether such municipal advisor (A) prior to the time the contribution(s) that resulted in such prohibition was made, had developed and instituted procedures reasonably designed to ensure compliance with this rule; (B) prior to or at the time the contribution(s) that resulted in such prohibition was made, had no actual knowledge of the contribution(s); (C) has taken all available steps to cause the contributor involved in making the contribution(s) that resulted in such prohibition to obtain a return of the contribution(s); and (D) has taken such other remedial or preventive measures, as may be appropriate under the circumstances, and the nature of such other remedial or preventive measures directed specifically toward the contributor who made the relevant contribution and all employees of the municipal advisor;

(iii) whether, at the time of the contribution, the contributor was a municipal advisor professional or otherwise an employee of the municipal advisor, or was seeking such employment;

(iv) the timing and amount of the contribution that resulted in the prohibition;

(v) the nature of the election (e.g, federal, state or local); and

(vi) the contributor’s apparent intent or motive in making the contribution that resulted in the prohibition, as evidenced by the facts and circumstances surrounding such contribution.

(j) Automatic Exemptions.

(i) A municipal advisor that is prohibited from engaging in municipal advisory business with a municipal entity for compensation, soliciting third-party business from a municipal entity for compensation, or receiving compensation for the solicitation of third-party business from a municipal entity pursuant to section (b) of this rule as a result of a contribution made by a municipal advisor professional may exempt itself from such prohibition, subject to paragraphs (ii) and (iii) of this section, upon satisfaction of the following requirements: (A) the municipal advisor must have discovered the contribution that resulted in the prohibition on business within four months of the date of such contribution; (B) such contribution must not have exceeded $250; and (C) the contributor must obtain a return of the contribution within 60 calendar days of the date of discovery of such contribution by the municipal advisor.

(ii) A municipal advisor is entitled to no more than two automatic exemptions during any 12-month period.

(iii) A municipal advisor may not execute more than one automatic exemption relating to contributions by the same municipal advisor professional regardless of the time period.

TEXT OF DRAFT AMENDMENTS TO RULES G-8, G-9, AND G-37[35]

Rule G-8 Books and Records to be Made by Brokers, Dealers, and Municipal Securities Dealers, and Municipal Advisors

(a)-(g) No change.

(h) Municipal Advisor Records. Each municipal advisor shall maintain:

(i) Records Concerning Political Contributions and Prohibitions on Municipal Advisory Activities Pursuant to Rule G-42. Records reflecting:

(A) a listing of the names, titles, city/county and state of residence of all municipal advisor professionals;

(B) a listing of the names, titles, city/county and state of residence of all non-MAP executive officers;

(C) the states in which the municipal advisor is engaging or is seeking to engage in municipal advisory business with municipal entities or soliciting third-party business (as defined in Rule G-42(g)(xiv)) from a municipal entity ;

(D) in the case of municipal advisory business engaged in by the municipal advisor with or on behalf of municipal entities, a list of municipal entities with which the municipal advisor has engaged in municipal advisory business , along with the type of municipal advisory business with municipal entities engaged in, during the current year and separate listings for each of the previous two calendar years ; and (2) in the case of third-party business solicited from a municipal entity, a list of each municipal entity solicited , along with the names of the persons on behalf of which business was solicited and the nature of the business solicited , during the current year and separate listings for each of the previous two calendar years ;

(E) the contributions, direct or indirect, to officials of a municipal entity and payments, direct or indirect, made to political parties of states and political subdivisions, by the municipal advisor and each political action committee controlled by the municipal advisor for the current year and separate listings for each of the previous two calendar years, which records shall include: (i) the identity of the contributors, (ii) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions and payments, and (iii) the amounts and dates of such contributions and payments;

(F) the contributions, direct or indirect, to officials of a municipal entity made by each municipal advisor professional, any political action committee controlled by a municipal advisor professional, and non-MAP executive officer for the current year, which records shall include: (i) the names, titles, city/county and state of residence of contributors, (ii) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions, (iii) the amounts and dates of such contributions; and (iv) whether any such contribution was the subject of an automatic exemption, pursuant to Rule G-42(j), including the amount of the contribution, the date the municipal advisor discovered the contribution, the name of the contributor, and the date the contributor obtained a return of the contribution; provided, however, that such records need not reflect any de minimis contribution made by a municipal advisor professional or non-MAP executive officer. In addition, municipal advisors shall maintain separate listings for each of the previous two calendar years containing the information required pursuant to this subparagraph (F) for those individuals meeting the definition of municipal advisor professional pursuant to subparagraphs (A) and (B) of Rule G-42(g)(iv) and for any political action committee controlled by such individuals, and separate listings for the previous six months containing the information required pursuant to this subparagraph (F) for those individuals meeting the definition of municipal advisor professional pursuant to subparagraphs (C), (D) and (E) of Rule G-42(g)(iv) and for any political action committee controlled by such individuals and for any non-MAP executive officers; and

(G) the payments, direct or indirect, to political parties of states and political subdivisions made by all municipal advisor professionals, any political action committee controlled by a municipal advisor professional, and non-MAP executive officers for the current year, which records shall include: (i) the names, titles, city/county and state of residence of contributors, (ii) the names, and titles (including any city/county/state or other political subdivision) of the recipients of such payments and (iii) the amounts and dates of such payments; provided, however, that such records need not reflect those payments made by any municipal advisor professional or non-MAP executive officer that are de minimis. In addition, municipal advisors shall maintain separate listings for each of the previous two calendar years containing the information required pursuant to this subparagraph (G) for those individuals meeting the definition of municipal advisor professional pursuant to subparagraphs (A) and (B) of Rule G-42(g)(iv) and for any political action committee controlled by such individuals, and separate listings for the previous six months containing the information required pursuant to this subparagraph (G) for those individuals meeting the definition of municipal advisor professional pursuant to subparagraphs (C), (D) and (E) of Rule G-42(g)(iv) and for any political action committee controlled by such individuals and for any non-MAP executive officers.

(H) the contributions, direct or indirect, to bond ballot campaigns made by the municipal advisor and each political action committee controlled by the municipal advisor for the current year, which records shall include: (i) the identity of the contributors, (ii) the official name of each bond ballot campaign receiving such contributions, and the jurisdiction (including city/county/state or political subdivision) by or for which municipal securities, if approved, would be issued, and (iii) the amounts and dates of such contributions;

(I) the contributions, direct or indirect, to bond ballot campaigns made by each municipal advisor professional, any political action committee controlled by a municipal advisor professional, and non-MAP executive officer for the current year, which records shall include: (i) the names, titles, city/county and state of residence of contributors, (ii) the official name of each bond ballot campaign receiving such contributions, and the jurisdiction (including city/county/state or political subdivision) by or for which municipal securities, if approved, would be issued, and (iii) the amounts and dates of such contributions; provided, however, that such records need not reflect any contribution made by a municipal advisor professional or non-MAP executive officer to a bond ballot campaign for a ballot initiative that is de minimis.

(J) Municipal advisors shall maintain copies of the Forms G-42 and G-42x sent to the Board along with the certified or registered mail receipt or other record of sending such forms to the Board.

(K) Terms used in this paragraph (i) have the same meaning as in Rule G-42.

(L) No record is required by this paragraph (i) of (1) any municipal advisory business, or solicitations of third-party business, engaged in, or (2) contributions to officials of municipal entities or payments to political parties of states or political subdivisions, made prior to _______________.

(M) No municipal advisor shall be subject to the requirements of this paragraph (i) during any period that such municipal advisor has qualified for and invoked the exemption set forth in subparagraph (B) of paragraph (e)(ii) of Rule G-42; provided, however, that such municipal advisor shall remain obligated to comply with subparagraph (H) of this paragraph (i) during such period of exemption. At such time as a municipal advisor that has been exempted by this subparagraph (M) from the requirements of this paragraph (i) engages in any municipal advisory business with municipal entities, all requirements of this paragraph (i) covering the periods of time set forth herein (beginning with the then current calendar year and the two preceding calendar years) shall become applicable to such municipal advisor.

(ii) The records required by section (h) of this rule shall be maintained in the manner described in section (b) of this rule.

* * * * * *

Rule G-9: Preservation of Records

(a)-(g) No change.

(h) Municipal Advisor Records. Every municipal advisor shall preserve for no less than six years the records to be maintained pursuant to rule G-8(h)(i); provided, however, that copies of Forms G-42x shall be preserved for the period during which such Forms G-42x are effective and for at least six years following the end of such effectiveness. Such records shall be accessible and available as required by section (d) of this rule and retained in the manner required by section (e) of this rule.

* * * * * *

Rule G-37 Political Contributions and Prohibitions on Municipal Securities Business

(a)-(b) No change.

(c) Prohibition on Soliciting and Coordinating Contributions.

(i) No broker, dealer or municipal securities dealer or any municipal finance professional of the broker, dealer or municipal securities dealer shall solicit any person, including but not limited to any affiliated company entity of the broker, dealer or municipal securities dealer, or political action committee to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business.

(ii) No broker, dealer or municipal securities dealer or any individual designated as a municipal finance professional of the broker, dealer or municipal securities dealer pursuant to subparagraphs (A), (B), or (C) of paragraph (g)(iv) of this rule shall solicit any person, including but not limited to any affiliated company entity of the broker, dealer or municipal securities dealer, or political action committee to make any payment, or shall coordinate any payments, to a political party of a state or locality where the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business.

(d)-(f) No change.

(g) Definitions.

(i)-(iii) No change.

(iv) The term "municipal finance professional" means:

(A) any associated person primarily engaged in municipal securities representative activities, as defined in rule G-3(a)(i) without regard to subparagraph (B) thereof, provided, however, that sales activities with natural persons shall not be considered to be municipal securities representative activities for purposes of this subparagraph (A);

(B) any associated person (including but not limited to any affiliated person of the broker, dealer or municipal securities dealer, as defined in rule G-38) who solicits municipal securities business;[*]

(C)-(E) No change.

(v)-(vi) No change.

(vii) The term "municipal securities business" means:

(A)-(B) No change.

(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 in which the dealer was chosen to provide such services on other than a competitive bid basis; or

(CD) the provision of remarketing agent services to or on behalf of an issuer with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on other than a competitive bid basis.

(viii) No change.

(ix) Except as used in section (c) of this rule, the term “solicit” means the taking of any action that would constitute a solicitation as defined in rule G-38(b)(i) to communicate directly or indirectly with an issuer for the purpose of obtaining or retaining municipal securities business.

(x) No change.

(xi) The term "affiliated person of the broker, dealer or municipal securities dealer” means any person who is a partner, director, officer, or employee of the broker, dealer or municipal securities dealer or of an affiliated company of the broker, dealer or municipal securities dealer.

(xii) The term "affiliated company of the broker, dealer or municipal securities dealer" means any entity directly or indirectly controlling, controlled by, or under common control with the broker, dealer or municipal securities dealer.

(h)-(i) No change.

(j)(i) No change.

(ii) A broker, dealer or municipal securities dealer is entitled to no more than two automatic exemptions during any per 12-month period.

(iii) No change.

TEXT OF DRAFT RESTATED G-37 INTERPRETIVE NOTICE

INTERPRETATION OF PROHIBITION ON MUNICIPAL SECURITIES BUSINESS PURSUANT TO RULE G-37 - February 21, 1997 [RESTATED]

Recently, dealers have raised questions regarding how the prohibition on municipal securities business in rule G-37, on political contributions and prohibitions on municipal securities business, applies to certain situations. Rule G-37 prohibits any dealer from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the dealer; (ii) any municipal finance professional associated with such dealer; or (iii) any political action committee controlled by the dealer or any municipal finance professional.[1] If a municipal finance professional makes a political contribution to an issuer official for whom he is not entitled to vote, the dealer is prohibited from engaging in municipal securities business with that issuer for two years. The Board has been asked whether the prohibition on municipal securities business extends to certain services provided under contractual agreements with an issuer that pre-date the contribution. The Board is issuing the following interpretation of the prohibition on municipal securities business pursuant to rule G-37.

"New" Municipal Securities Business

A dealer subject to a prohibition on municipal securities business with an issuer may not enter into any new contractual obligations with that issuer for municipal securities business.[2] The Board adopted rule G-37 in an effort to sever any connection between the making of political contributions and the awarding of municipal securities business. The Board believes that the problems associated with political contributions––including the practice known as "pay-to-play"––undermine investor confidence in the municipal securities market, which confidence is crucial to the long-term health of the market, both in terms of liquidity and capital-raising ability.

Pre-Existing Issue-Specific Contractual Undertakings

The Board believes that it is consistent with the intent of rule G-37 that a dealer subject to a prohibition on municipal securities business with an issuer be allowed to continue to execute certain issue-specific contractual obligations in effect prior to the date of the contribution that caused the prohibition. For example, if a bond purchase agreement was signed prior to the date of the contribution, a dealer may continue to perform its services as an underwriter on the issue. Also, if an issue-specific agreement for financial advisory services was in effect prior to the date of the contribution, the dealer may continue in its role as financial advisor for that issue. In the same manner, a dealer may act as remarketing agent or placement agent for an issue and also may continue to underwrite a commercial paper program as long as the contract to perform these services was in effect prior to the date of the contribution. Subject to the limitations noted below, these activities are not considered new municipal securities business and thus can be performed by dealers under a prohibition on municipal securities business with the issuer.

Dealers also have asked questions regarding certain terms in contracts to provide on-going municipal securities business that allow for additional services or compensation. For example, a dealer may have an agreement to provide remarketing services for a municipal securities issue, the terms of which allow the issuer to change the "mode" of the outstanding bonds from variable to a fixed rate of interest or from Rule 2a-7 eligible to non-Rule 2a-7 eligible. [3] Generally, the per bond fee increases if the dealer sells fixed rate municipal securities or non-money market fund securities. Also, an agreement to underwrite a commercial paper program may include terms for increasing the size of the program. While the per bond fee probably does not increase if more commercial paper is underwritten, the amount of money paid to the dealer does increase. The Board views the provisions in existing contracts that allow for changes in the services provided by the dealer or compensation paid by the issuer as new municipal securities business and, therefore, rule G-37 precludes a dealer subject to a prohibition on municipal securities business from performing such additional functions or receiving additional compensation.

Non-Issue Specific Contractual Undertakings

Dealers also at times enter into long-term contracts with issuers for municipal securities business, e.g., a five-year financial advisory agreement. If a contribution is given after such a non-issue-specific contract is entered into that results in a prohibition on municipal securities business, the Board believes the dealer should not be allowed to continue with the municipal securities business, subject to an orderly transition to another entity to perform such business. This transition should be as short a period of time as possible and is intended to give the issuer the opportunity to receive the benefit of the work already provided by the dealer and to find a replacement to complete the work, as needed.

* * *

The Board recognizes that there is a great variety in the terms of agreements regarding municipal securities business and that the interpretation noted above may not adequately deal with all such agreements. Thus, the Board is seeking comment on how a prohibition on municipal securities business pursuant to rule G-37 affects contracts for municipal securities business entered into with issuers prior to the date of the contribution triggering the prohibition on business. In particular, the Board is seeking comment on other examples whereby a dealer may be contractually obligated to perform certain activities after the date of the triggering contribution. If other examples are provided, the Board would like comments on how these situations should be addressed pursuant to rule G-37.

Based upon the comments received on this notice, the Board may issue additional interpretations or amend the language of rule G-37.


[1] The only exception to rule G-37’s absolute prohibition on municipal securities business is for certain contributions made to issuer officials by municipal finance professionals. Contributions by such persons to officials of issuers do not invoke application of the prohibition on business if (i) the municipal finance professional is entitled to vote for such official and (ii) contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election.

[2] The term "municipal securities business" is defined in the rule to encompass certain activities of dealers, such as acting as negotiated underwriters (as managing underwriter or as syndicate member), financial advisors, placement agents and negotiated remarketing agents. The rule does not prohibit dealers from engaging in business awarded on a competitive bid basis.

[3] SEC Rule 2a-7 under the Investment Company Act of 1940 defines eligible securities for inclusion in money market funds.

[*] This proposed rule language was modified after the publication of the notice to retain original language.



[1] Interpretation of Prohibition on Municipal Securities Business Pursuant to Rule G-37 (February 21, 1997), reprinted in MSRB Rule Book.

[2] Municipal securities business generally consists of negotiated underwritings, private placements, and serving as remarketing agent or financial advisor on a new issue of municipal securities.

[3] See File No. SR-MSRB-94-2 (January 12, 1994); “Political Contributions and Prohibitions on Municipal Securities Business: Proposed Rule G-37,” MSRB Reports, Vol. 14, No. 1 (January 1994).

[4] See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[5] “Municipal advisor” is defined in Section 15B(e)(4) of the Securities Exchange Act of 1934, as amended by the Dodd-Frank Act (the “Exchange Act”), as “a person (who is not a municipal entity or an employee of a municipal entity) that: (i) provides advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or (ii) undertakes a solicitation of a municipal entity.

[6] See 15B(c)(1) of the Exchange Act.

[7] See Section 15B(b)(2)(C) of the Exchange Act.

[8] “Municipal entity” is defined in Section 15B(e)(8) of the Exchange Act as “any State, political subdivision of a State, or municipal corporate instrumentality of a State, including (A) any agency, authority, or instrumentality of the State, political subdivision, or municipal corporate instrumentality; (B) any plan, program, or pool of assets sponsored or established by the State, political subdivision, or municipal corporate instrumentality or any agency, authority, or instrumentality thereof; and (C) any other issuer of municipal securities.”

[9] See “Relationship of Draft Rule G-42 to SEC Pay to Play Rule for Investment Advisers” herein.

[10] Blount v. SEC, 61 F.3d 938 (D.C. Cir. 1995), cert. denied, 517 U.S. 1119 (1996). In Blount, the court determined that Rule G-37 was constitutional under a strict scrutiny analysis by finding that the rule was narrowly tailored to serve a compelling government interest. The court found the SEC’s interests in protecting investors from fraud and protecting underwriters from unfair, corrupt practices to be compelling.

[11] Draft Rule G-42(g)(ii) would provide in pertinent part: “The term “de minimis,” when used in connection with contributions made by a municipal advisor professional or a non-MAP executive officer, refers to contributions made . . . to officials of a municipal entity for whom the municipal advisor professional or non-MAP executive officer was entitled to vote and which contributions, in total, were not in excess of $250 to each official of such municipal entity, per election.”

[12] See draft Rule G-42(b)(i).

[13] Draft Rule G-42(g)(xiv) would provide that “third-party business” means “an engagement by a municipal entity of a broker, dealer, municipal securities dealer, or municipal advisor (other than the municipal advisor who is soliciting the municipal entity) for or in connection with municipal financial products or the issuance of municipal securities, or of an investment adviser (as defined in section 202 of the Investment Advisers Act of 1940) to provide investment advisory services to or on behalf of a municipal entity.” The MSRB notes that the effect of this definition of “third-party business” would be to include solicitations on behalf of affiliated persons, as well as solicitations on behalf of unrelated third parties, within the scope of draft Rule G-42. This is necessary to allow persons soliciting investment advisory business on behalf of affiliates to voluntarily subject themselves to draft Rule G-42. See “Relationship of Draft Rule G-42 to SEC Pay to Play Rule for Investment Advisers” herein.

[14] See draft Rule G-42(b)(i).

[15] See draft Rule G-42(c)(i).

[16] See draft Rule G-42(c)(ii). An exception from this prohibition would be provided for certain supervisors and executives of municipal advisors that are only municipal advisors because they provide advice to municipal entities or obligated persons and do not solicit any third-party business from municipal entities.

[17] See draft Rule G-42(d).

[18] See draft Rule G-42(e).

[19] See draft Rule G-42(b)(i). Limitations on the look-back provision would apply to persons who are municipal advisor professionals only due to: (i) their solicitation of municipal advisory business (only contributions to officials of municipal entities solicited would count) or (ii) their supervisory activities (only six-month look back). See draft Rule G-42(b)(ii) and (iii), respectively. The limitation on the look-back provision for persons who are only municipal advisor professionals as a result of solicitation activities would only apply to persons who solicit municipal advisory business on their own behalf. It would not apply to persons who solicit third-party business, who would be subject to the regular two-year look-back provision. This distinction was drawn to ensure that draft Rule G-42 is at least as stringent with respect to such solicitors as SEC Rule 206(4)-5 under the Investment Advisers Act. See “Relationship of Draft Rule G-42 to SEC Pay to Play Rule for Investment Advisers” herein.

[20] See draft Rule G-42(g)(iv).

[21] Section 15B(e)(7) of the Exchange Act defines the term “associated person of a municipal advisor” to mean: “(A) any partner, officer, director, or branch manager of such municipal advisor (or any person occupying a similar status or performing similar functions); (B) any other employee of such municipal advisor who is engaged in the management, direction, supervision, or performance of any activities relating to the provision of advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities; and (C) any person directly or indirectly controlling, controlled by, or under common control with such municipal advisor.”

[22] See draft Rule G-42(g)(vi).

[23] Release No. IA-3043 (July 1, 2010); File No. S7-18-09.

[24] Release No. IA-3110 (November 19, 2010); File No. S7-36-10.

[25] Exchange Act Release No. 63576 (see text accompanying note 104).

[26] Rule G-37(b)(i) provides for a ban on municipal securities business. The MSRB interpreted the ban to be a ban on new municipal securities business in the Rule G-37 Interpretive Notice.

[27] The draft rule would also ban the receipt of compensation for the solicitation of third-party business from a municipal entity within two years after a non-de minimis contribution to address those situations in which the solicitation might have been made at the time of the contribution.

[28] This change from Rule G-37 also was made to ensure that draft Rule G-42 is at least as stringent as SEC Rule 206(4)-5 for investment advisers.

[29] Under Rule G-37, members of a dealer’s executive or management committee or similarly situated officials are not municipal finance professionals (or “MFPs”) if the dealer has no other MFPs. This change from Rule G-37 was made to ensure that draft Rule G-42 is at least as stringent as SEC Rule 206(4)-5.

[30] Reimbursements for costs would be considered compensation whether for out-of-pocket costs or internal costs.

[31] Form G-42 would require the submission of the information described in draft Rule G-42(e) and would be submitted by municipal advisors through the existing MSRB Political Contribution Submission Service, which is the service that would accept the submissions of Form G-42. Submitted Forms G-42 would be made publicly available through the MSRB website. Under the draft rule, Form G-42x would be filed by a municipal advisor that is no longer engaged in municipal advisory business for municipal entities or the solicitation activities covered by the rule (e.g., a municipal advisor that is no longer providing advice to, or soliciting, municipal entities but is still engaged in providing advice to obligated persons).

[32] Draft Rule G-42 would not require municipal advisors to disclose the names of individual MAPs and executive officers. Further, proposed Draft Rule G-42 would not require municipal advisors to maintain a list of contributions or payments by other employees, affiliated companies, and their employees, spouses of MAPs, or any other person unless the contributions or payments were directed by persons subject to draft Rule G-42.

[33] Limitations on the Rule G-37 look-back provision apply to persons who are municipal finance professionals only due to: (i) their solicitation of municipal securities business (only contributions to officials of issuers solicited count) or (ii) their supervisory activities (only six-month look back). See Rule G-37(b)(ii) and (iii), respectively.

[34] See the text accompanying note 19, infra.

[35] Underlining indicates additions; strikethrough indicates deletions.