( Volume 16, Number 3 ) SEPTEMBER 1996
Route To: Manager, Muni Department Underwriting Trading Sales Public Finance Compliance
Additional Questions & Answers Notice Published The Board is publishing a seventh Question & Answer notice concerning certain provisions of rule G-37.
Since May 1994, the Board has provided interpretive guidance on rule G-37 through the publication of six Question & Answer (Q&A) notices.[1] In light of questions recently received from market participants concerning the applicability of the rule to contributions to non-dealer associated PACs and payments to state or local political parties, as well as the two-year designation period for municipal finance professionals, the Board has determined that it is necessary to provide further guidance to the municipal industry. Accordingly, the Board is publishing this seventh set of questions and answers.
1. Q: Could contributions to a non-dealer associated PAC or payments to a state or local political party lead to a ban on municipal securities business with an issuer under rule G-37?
A: Rule G-37(d) prohibits a dealer and any municipal finance professional from doing any act indirectly which would result in a violation of the rule if done directly by the dealer or municipal finance professional. A dealer would violate rule G-37 by doing business with an issuer after providing money to any person or entity when the dealer knows that such money will be given to an official of an issuer who could not receive such a contribution directly from the dealer without triggering the rule's prohibition on business. For example, in certain instances, a non-dealer associated PAC or a local political party may be soliciting funds for the purpose of supporting a limited number of issuer officials. Depending upon the facts and circumstances, contributions to the PAC or payments to the political party might well result in the same prohibition on municipal securities business as would a contribution made directly to the issuer official.
2. Q: If a dealer receives a fund raising solicitation from a non-dealer associated PAC or a political party with no indication of how the collected funds will be used, can the dealer make contributions to the non-dealer associated PAC or payments to the political party without causing a ban on municipal securities business?
A: Dealers should inquire of the non-dealer associated PAC or political party how any funds received from the dealer would be used. For example, if the non-dealer associated PAC or political party is soliciting funds for the purpose of supporting a limited number of issuer officials, then, depending upon the facts and circumstances, contributions to the PAC or payments to the political party might well result in the same prohibition on municipal securities business as would a contribution made directly to the issuer official.
3. Q: Rule G-37(g)(iv) states that each person designated a municipal finance professional shall retain this designation for two years after the last activity or position which gave rise to the designation. If a dealer terminates a municipal finance professional's employment, and that person is no longer associated in any way with the dealer (including any affiliated entities of the dealer), must the dealer continue to designate that person a "municipal finance professional" for recordkeeping and reporting purposes under rules G-37(g)(iv) and G-8(a)(xvi)?
A: No. If a municipal finance professional is no longer employed by the dealer, and is not an "associated person" of the dealer, then the dealer is not required to designate that person a municipal finance professional and the dealer may cease its recordkeeping and reporting obligations with respect to that person.
4. Q: If a municipal finance professional is transferred from a firm's dealer department to another non-municipal department, such as the corporate department, must the dealer continue to designate this person a municipal finance professional for recordkeeping and reporting purposes?
A: If a municipal finance professional is transferred to another department within the same firm (such as corporate, equities, etc.) and remains an "associated person" of the dealer, the dealer must continue to designate this person a municipal finance professional for two years from the date of the last activity or position which gave rise to this designation and must continue its recordkeeping and reporting obligations under rules G-37 and G-8. It is incumbent upon each dealer to determine whether the person is an associated person pursuant to Section 3(a)(18) of the Securities Exchange Act of 1934. If so, then in addition to recordkeeping and reporting obligations, dealers should be mindful that any contributions made by this associated person during the two-year designation period (other than contributions that qualify for the rule's $250 de minimis exception) will subject the dealer to the rule's ban on municipal securities business for two years from the date of such contribution. Of course, the ban can only be triggered if the person previously was a municipal finance professional.
5. Q: A municipal finance professional resigns from a dealer, but still remains an associated person of the dealer (e.g., by retaining a position in the dealer's holding company). May the dealer cease designating this person a municipal finance professional for purposes of the recordkeeping and reporting requirements under rules G-37 and G-8? In addition, may this person make contributions to issuer officials without causing the dealer to be banned from municipal securities business with such issuers?
A: As noted above in Q&A number 4, if a person is no longer a municipal finance professional because he or she has left the dealer's employ, but nevertheless remains an associated person of the dealer, then the dealer must continue to designate this person a municipal finance professional for two years from the last activity or position which gave rise to such designation. Moreover, any contributions by this associated person (other than those that qualify for the de minimis exception under rule G-37(b)) will subject the dealer to the rule's ban on municipal securities business for two years from the date of the contribution.
August 6, 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; Vol. 15, No. 2 (July 1995) at 3-4; and Vol. 16, No. 1 (Jan. 1996) at 31. See also CCH Manual paragraph 3681.
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