( Volume 16, Number 1 ) -- JANUARY 1996
N0TICE OF NEW INTERPRETATION OF "ENTITLED TO VOTE" AND PUBLICATION OF ADDITIONAL QUESTIONS AND ANSWERS: RULE G-37
Route To: Manager, Muni Department Underwriting Trading Sales Public Finance Compliance
Notice of Intrepretation and Additional Questions & Answers Published The Board is issuing a new intrepetation of "entitled to vote" and publishing a sixth set of Questions and Answers to provide additional guidance on rule G-37.
Questions about this notice may be directed to Ronald W. Smith, Legal Associate.
The Board adopted rule G-37 to sever any connection between the making of political contributions and the awarding of municipal securities business. Since the rule became effective on April 25, 1994, the Board has attempted to provide industry guidance through the publication of various question-and-answer ("Q&A") notices.[1] The Board believes that this provides an effective means of alerting dealers to issues arising in connection with rule G-37 that have been brought to the Board's attention. Recently, the Board has received a number of comments from dealers concerning a prior interpretation for determining whether a municipal finance professional is "entitled to vote" for an official of an issuer for purposes of the de minimis exception. [2] The Board also has received several other requests for interpretive guidance, including whether the rule applies to contributions made on behalf of other persons. In response to these comments, the Board, as discussed below, has determined to withdraw its prior interpretation relating to "entitled to vote" and to issue a new interpretation in this regard, and to publish a sixth set of Qs & As to provide additional guidance on rule G-37. The Board filed this notice of interpretation with the Securities and Exchange Commission ("SEC") on January 16, 1996, and asked for accelerated approval of the notice by February 8, 1996.[3]
Rule G-37 prohibits a 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. The only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals. Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. In adopting this de minimis exception, the Board stated that this exception is appropriate because contributions of this nature present less opportunity for a conflict of interest or the appearance of a conflict of interest on the part of an issuer official in the awarding of municipal securities business.
In May 1995, the Board received a letter from a campaign committee for a governor who was running for U.S. President. The letter asked whether rule G-37 applied to candidates for President. The Board responded that rule G-37 is applicable to issuer officials who run for the House of Representatives, the Senate or the Presidency because "contribution" as defined in rule G-37(g)(i), includes payments "for the purpose of influencing any election for federal, state or local office."
The letter also asked whether the $250 de minimis exception for contributions applied to Presidential candidates who are currently issuer officials. In considering this issue, the Board recognized that any municipal finance professional, regardless of state residency, would be entitled to vote for a person if such person is on a Presidential primary ballot in that state; however, at an early stage of the campaign, it is not possible to determine whether a "candidate" will continue his or her efforts long enough to be on the Presidential primary ballot, or considered at a caucus, of a particular state. The Board was concerned that issuer officials would go outside the state in which they hold office to seek contributions from individuals, including municipal finance professionals, residing in other states. Under this scenario, the issuer official could collect a large sum of money from the de minimis contributions of municipal finance professionals throughout the country. The Board believed that a dealer could be awarded municipal securities business as a result of the contributions given by its municipal finance professionals in such instances or at least raise the appearance of impropriety.
In addressing the specific questions raised in the letter concerning contributions to Presidential candidates, the Board attempted to establish a uniform standard to be used for all elections. In July 1995, the Board published in MSRB Reports a Question and Answer notice to address the issue of when a municipal finance professional is "entitled to vote" for an issuer official candidate, and, thus, able to make a de minimis contribution without causing a two-year ban on municipal securities business with that issuer. The Board stated that a municipal finance professional is entitled to vote for an official of an issuer if the issuer official is on the ballot in the locality in which the municipal finance professional may vote. For example, with regard to a local general election campaign, all municipal finance professionals may contribute the $250 de minimis amount to an issuer official whose name has been placed on the ballot of the general election in the locality in which the municipal finance professional may vote without causing the dealer to be banned from business with the issuer. So too, with regard to a state-wide primary election campaign, all municipal finance professionals may contribute the $250 de minimis amount to an issuer official whose name has been placed on the primary ballot in their state of residence without causing the dealer to be banned from business with the issuer. The Board believed that this "on the ballot" requirement would help to ensure that the de minimis contributions by municipal finance professionals would be provided only to candidates who have qualified through state and/or local requirements to participate in an election in which the municipal finance professional may vote.
Since its publication, this "entitled to vote" interpretation generated a number of comments from dealers. Dealers noted the burden this interpretation has placed on their compliance departments which approve contributions before they may be given by municipal finance professionals. Apparently, many compliance departments believe they must contact each state and local election board in which a municipal finance professional wishes to make a contribution to determine whether a candidate has met all applicable requirements for having his or her name on the ballot. This requires the compliance officers to keep track of the different deadlines for qualification within each state, city and county. The compliance officers must then make follow-up calls to ensure that, prior to the contribution, the candidate's name is on the ballot. There also was concern expressed about the situation in which a candidate is able to withdraw from an election up to the day of the election and, therefore, certain dealers argued that they cannot be assured of the candidate's name appearing "on the ballot" until election day.
Upon further review, the Board has decided to withdraw Question and Answer number 2 from the notice published in July 1995. The Board has determined that a municipal finance professional is "entitled to vote" for an issuer official if the municipal finance professional's principal residence is in the locality in which the issuer official seeks election. In such instances, a municipal finance professional is able to make a de minimis contribution without resulting in a ban on municipal securities business.[5] Thus, for example, if an issuer official who is a governor is running for re-election, anyone residing in that state may make a de minimis contribution to the official without causing a ban on municipal securities business with that issuer. In the example of an issuer official running for President, anyone in the country can contribute the de minimis amount to the official's Presidential campaign. The focus on the primary residence of municipal finance professionals for de minimis contributions should allow interested municipal finance professionals to participate in the political process where they live.
If the Board discovers that dealers or municipal finance professionals are soliciting municipal finance professionals to make de minimis contributions for Presidential elections, in violation of rule G-37(c), then the Board may consider additional rulemaking in this area.
Recently, the Board has received several inquiries concerning the applicability of rule G-37 when a person makes a contribution to an issuer official on behalf of others. This situation includes, but is not limited to, the following examples:
1. A municipal finance professional signs a check drawn on a joint account and sends it as a contribution to an issuer official, along with a writing which states that the contribution is being made, in whole or in part, on behalf of the other holder of the joint account (who is not a municipal finance professional).
2. A person, who is not associated with a dealer, sends a contribution to an issuer official, along with a writing which states that all or a portion of the contribution is being made on behalf of another person, who is a municipal finance professional.
3. Both holders of a joint account, one of whom is a municipal finance professional, sign a check and send it as a contribution to an issuer official.
The Board is of the view that, in these and similar situations, if a municipal finance professional has his or her name associated with a contribution, then this creates, at the very least, the appearance that the contribution is being given by the municipal finance professional. Accordingly, the Board believes that, for purposes of rule G-37, it is appropriate to attribute such a contribution to the municipal finance professional. If the contribution exceeds, or does not qualify for, the $250 de minimis exception set forth in rule G-37(b), then the two-year ban on municipal securities business will be triggered. The Board recognizes that a situation could arise where the municipal finance professional does not knowingly or willingly have his or her name associated with a contribution, and the person making the contribution does so purposely to injure the municipal finance professional or the dealer that employs him. Where this is the case, the Board believes that a dealer may, pursuant to section (i) of rule G-37, petition the appropriate regulatory agency for an exemption from the two-year ban on business. As previously stated, the Board is strongly of the view that exemptions should be granted only in limited circumstances. See MSRB Reports, Vol. 15, No. 2 (July 1995) at 3-4.
In addition to questions concerning making contributions to issuer officials on behalf of other persons, the Board has received other questions and comments on the rule. The following Qs & As are intended to provide additional guidance on rule G-37.
1. Q: A municipal finance professional signs a check drawn on a joint account, which is owned by the municipal finance professional and another person, and submits it to an issuer official as a contribution along with a writing which states that the contribution is being made solely by the other holder of the joint account. Would any portion of this contribution be attributable to the municipal finance professional under rule G-37?
A: If a municipal finance professional signs a check, whether the check was drawn on a joint account or not, and submits it as a contribution to an issuer official, then the municipal finance professional is deemed to have made the full contribution, regardless of any writing accompanying the check that provides or directs otherwise. Moreover, if this amount exceeds, or does not qualify for, the de minimis exception, then by making such a contribution the municipal finance professional will trigger the rule's ban on business thereby prohibiting his dealer/employer from engaging in municipal securities business with the particular issuer for two years.
2. Q: If a municipal finance professional and another person (e.g., her spouse) both sign a check drawn on their joint account and submit the check to an issuer official as a contribution, would the contribution amount be attributable equally between them (i.e., 50% to each person) for purposes of rule G-37?
A: Yes. If a municipal finance professional and any other person both sign a check drawn on their joint account and submit it to an issuer official as a contribution, then each person is deemed to have made half of the contribution, regardless of any writing accompanying the check that provides or directs otherwise.
3. Q: If a person, who is not associated with a dealer, sends a contribution to an issuer official, along with a writing which states that the contribution is being made, in whole or in part, on behalf of a person who is a municipal finance professional, would any portion of the contribution be attributable to the municipal finance professional for purposes of rule G-37?
A: If the writing states that all or part of the contribution is being made on behalf of another person who is a municipal finance professional, then the amount so designated is attributable to the municipal finance professional. If there is no such designation (i.e., the municipal finance professional is named as a contributor, but no specific amount is designated as his part of the contribution), then the municipal finance professional is deemed to have made a pro rata share of the contribution. For example, if the writing states that the contribution is from two people (including the municipal finance professional), then half of it is attributable to the municipal finance professional. If the writing names three people, then one-third of the contribution is attributable to the municipal finance professional. If the particular amount attributed to the municipal finance professional exceeds, or does not qualify for, the de minimis exception, then the two-year ban on municipal securities business will be triggered. Moreover, if the municipal finance professional directed the person signing the check to make the contribution in this manner, then in addition to triggering the ban, the municipal finance professional will have violated section (d) of rule G-37, regarding indirect violations. If, however, the municipal finance professional believes that the person signing the check made the contribution purposely to injure the municipal finance professional or his employer by triggering the ban, then the dealer may wish to apply to the appropriate regulatory agency for a waiver of the two-year ban, pursuant to section (i) of rule G-37. For further guidance, please refer to Q&A number 2 in MSRB Reports, Vol. 14, No. 5 (August 1994) at 31-32; and Q&A number 4 in MSRB Reports, Vol. 15, No. 2 (July 1995) at 3-4. See also CCH Manual at paragraph 3681.
4. Q: If a municipal finance professional made a political contribution which was not subject to the de minimis exception to an issuer official candidate who subsequently did not win the election, is the dealer banned from engaging in municipal securities business with that issuer (i.e., the governmental entity)?
A: Yes. Rule G-37 defines the term "official of such issuer" or "official of an issuer" as "any person (including any election committee for such person) who was, at the time of the contribution, an incumbent, candidate or successful candidate: (A) for elective office of the issuer which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer; or (B) for any elective office of a state or of any political subdivision, which office has authority to appoint any official(s) of an issuer, as defined in subparagraph (A), above." It is clear from the rule that, at the time the contribution is made, if the recipient of that contribution is an "official of an issuer," then the dealer is subject to the two-year ban on business with the issuer, regardless of whether the candidate wins or loses the election. Any other result would mean that municipal finance professionals could make contributions to issuer officials, but the ban on business would not be triggered (if at all) until election results were known.
5. Q: May a holding company submit to the Board one Form G-37 reflecting information for various dealers within the control of the holding company?
A: No. A separate Form G-37 must be submitted for each dealer.
6. Q: If a national political party accepts payments in which contributors have designated that their payments be deposited into the account for a state or local political party, must the dealer record such payments and report them on Form G-37?
A: Yes. Rule G-37 requires that dealers record and report payments made to state and local political parties and the ultimate recipient in the above scenario is a state or local political party so designated by the contributor.
January 16, 1996
[1] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 11-16; Vol. 14, No.4 (August 1994) at 27-31; Vol. 14, No. 5 (December 1994) at 8; Vol. 15, No.1 (April 1995) at 21; and Vol. 15, No.2 (July 1995) at 3-4. See also CCH Manual paragraph 3681.
[2] This interpretation appeared in MSRB Reports, Vol. 15, No.2 (July 1995) at 3.
[3] File No. SR-MSRB-96-1. Comments submitted to the SEC should refer to this file number.
[4] See "Letter of Interpretation," MSRB Reports, Vol. 15, No. 2 (July 1995) at 5.
[5] Portions of the Board's response letter to the campaign committee for the governor who was running for U.S. President regarding de mininis contributions to an issuer official whose name is "on the ballot" are also being withdrawn.
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