Request for Comments on Notice Regarding Draft Amendments to Rule G-37 on Political Contributions
In June 2001, the Municipal Securities Rulemaking Board (MSRB) published a notice asking for comment on all aspects of Rule G-37 on political contributions and prohibitions on municipal securities business (2001 Notice).[1] Rule G‑37 was adopted to ensure that the high standards and integrity of the municipal securities industry are maintained by severing the connection between political contributions by dealers and municipal finance professionals (MFPs) and the awarding of municipal securities business. The MSRB noted that seven years had passed since the adoption of Rule G-37 and, pursuant to its Long Range Plan, a review of the Rule was in order. The MSRB’s review of the Rule is intended to maintain its effectiveness while seeking to determine whether further refinements may be called for, given the experience of the industry during the last seven years.
The MSRB appreciates the 28 comments it received in response to the 2001 Notice. Commentators asked for a number of revisions to the rule in the categories highlighted in the 2001 Notice (i.e., the definition of MFP, amount and timing of de minimus contributions, the exemption provision, contributions by bank PACs and the role of syndicate and selling group members), as well as in other areas of the Rule.
The MSRB has determined to publish for comment draft amendments to Rule G‑37 in two areas: the exemptive provision and the definition of MFP. The revisions to the exemption provision are designed to make the exemption process more efficient and responsive to situations involving minor, inadvertent contributions to issuer officials. The MSRB believes that many of the questions that have been raised regarding the scope of Rule G‑37 can more effectively be dealt with by improving the exemptive process rather than by revising other portions of the Rule. The revised definition of MFP more accurately focuses the Rule’s requirements on those individuals who have a significant interest in the dealer’s municipal securities business.
The draft amendments will improve the operation of Rule G‑37 without reducing its overall effectiveness. The ban on business which results when certain contributions are given remains, as does the exemption from the ban on business for de minimis contributions of $250 or less to issuer officials for whom MFPs are entitled to vote. The MSRB believes that retaining these provisions is necessary to ensure that pay-to-play practices do not return to the industry.
In addition to proposing the draft amendments, the MSRB shortly will be providing on its website links to information currently available from federal and state agencies about political contributions by political action committees (PACs) and others. As discussed in more detail below, the MSRB believes that this will assist the public in monitoring contributions that are made by entities associated in some way with a dealer but not covered by the Rule.
The advent of college savings plans established under Section 529 of the Internal Revenue Code (529 Plans) has raised certain issues about the impact of a ban on business for those dealers involved in multi-year contractual relationships with issuers of these municipal fund securities, as well as the status of selling dealers as selling group members. As discussed in detail below, the MSRB is publishing an interpretive notice on the effect of a ban on business under Rule G-37 arising during a pre-existing engagement relating to municipal fund securities and reviews the status of selling dealers of 529 Plans.
REVIEW OF DRAFT AMENDMENTS
THE EXEMPTION PROCESS
Under Rule G-37(i), a dealer that has triggered the rule’s two-year ban on municipal securities business may seek an exemption from that ban from the appropriate regulatory agency.[2] The appropriate regulatory agency may grant a dealer’s request for an exemption either “conditionally or unconditionally.” The MSRB specifically intended that the regulatory agencies have flexibility in dealing with the various factual situations that may arise pursuant to exemption requests. In determining whether to grant an exemption request, the appropriate regulatory agency is required to consider, among other factors, whether an exemption would be consistent with the public interest, the protection of investors and the purposes of Rule G-37. The regulatory agency also is required to examine whether the dealer had appropriate procedures in place to ensure compliance with the rule, had no actual knowledge that the contribution was being made, has taken all steps to obtain a return of the contribution, and has taken any other appropriate remedial or preventive measures.
In its 2001 Notice, the MSRB stated that there must be a viable exemption process in place to provide relief from the two-year ban on business in appropriate circumstances. The MSRB was concerned that the current process was not operating as intended. Accordingly, the MSRB solicited industry comment on the exemption provision and specifically requested comment on the following:
- Should the list of relevant factors set forth in Rule G-37(i) be revised?
- Should some of these factors be more important than others in determining whether to grant an exemption (e.g., obtaining a prompt return of the contribution)?
- Should the rule provide for an automatic exemption in certain limited circumstances (e.g., if the dealer obtains a refund of the offending contribution within a reasonable time period)?
In response, certain commentators recommended that the MSRB adopt additional “relevant factors.” One commentator, the NASD, stated that “strengthening the list of relevant factors would make the exemption process more transparent to all interested parties.” The NASD supported the concept of an automatic exemption in certain limited circumstances, such as “the timely return of a comparatively small and inadvertent contribution.” It stated that an automatic exemption “might serve as an effective firm incentive to self-police contributions closely…[and] might eliminate…prohibitions resulting from inadvertent small dollar contributions.” Other commentators also supported the adoption of an automatic exemption if the dealer requests and obtains a return of the offending contribution within a reasonable period of time. Most of these commentators suggested that making a written request for a refund within 30 days of discovering the contribution is a reasonable time period. One commentator further recommended that a refund be obtained within 60 days of the written request. One commentator did not support the adoption of an automatic exemption, believing that exemptions should be granted sparingly.
Finally, certain commentators recommended that the MSRB retract specific interpretive Questions & Answers (Qs &As) regarding instances where an exemption may or may not be appropriate and confirm that the appropriate enforcement agencies have unfettered discretion in exercising their exemptive authority.
Draft Amendments to the Exemptive Provision
Addition of Relevant Factors and Withdrawal of Qs & As. Rule G-37 has been in effect for eight years. During this time, the MSRB and the regulatory agencies responsible for enforcing MSRB rules have developed a greater understanding of the Rule’s impact on the industry and how dealers seek to ensure compliance. During this same period, the industry has gained a greater understanding of the rule’s purposes and complexities, and compliance with the various provisions of the rule has improved greatly. After carefully reviewing the current issues surrounding the exemptive provision and the comment letters received, the MSRB believes it is appropriate to request comment on draft amendments to the exemptive provision.
The MSRB is proposing to add the following additional relevant factors to be considered by the appropriate regulatory agency in determining whether to grant an exemption:
- The nature of remedial or preventive measures directed specifically toward the contributor and all employees of the dealer.
- Whether, at the time of the contribution, the contributor was an MFP or otherwise an employee of the dealer, or was seeking such employment.
- The timing and amount of the contribution.
- The nature of the election (e.g., federal, state or local).
- The contributor’s apparent intent or motive in making the contribution, as evidenced by the facts and circumstances surrounding such contribution.
While these additional factors will help to clarify the facts and circumstances the MSRB believes are relevant to exemptive requests, the MSRB also is withdrawing several Qs & As previously published concerning when an exemption may or may not be appropriate. The MSRB believes that this action is necessary in order to clarify that the regulatory agencies have discretion in administering the exemption process. The MSRB is confident that the draft amendments will assist these regulatory agencies in exercising their discretion in a manner that will fulfill the purposes of Rule G-37.
Adoption of an Automatic Exemption Provision. The MSRB is proposing draft amendments that would provide an automatic exemption from a dealer’s ban on business in certain limited instances. The provision sets out procedures that would permit dealers to execute two such exemptions per 12-month period for contributions made by an MFP of $250 or less if (1) the dealer discovers the contribution within four months of the date of such contribution; (2) the contributor makes a written request for a return of the contribution within 30 calendar days of the dealer’s discovery; and (3) the contributor obtains a refund within 30 calendar days of the written request. A dealer would not be permitted to execute more than one automatic exemption relating to contributions by the same MFP. The automatic exemption would not be available for contributions made by a dealer or a dealer-controlled political action committee (PAC).
Dealers would be required to report the exemption on Form G-37/G-38 and to maintain records of such exemptions pursuant to Rule G-8, on books and records. A dealer would be banned from municipal securities business until the contribution was returned.
The MSRB believes that a limited automatic exemption provision would provide a measure of relief to the industry without compromising the purposes of Rule G-37. The automatic exemption would, for example, allow dealers who wish to hire as an MFP someone who previously gave a small contribution to an issuer official to lift the ban on business with that issuer after meeting the requirements of the new provision. Also, a dealer could lift the ban on business if an MFP contributes to an issuer official for whom he or she is not entitled to vote without knowing that his or her firm does business with that issuer. The MSRB has determined to limit the number of exemptions, as well as the dollar amounts involved, in order to ensure that the automatic exemption provision could only be used in limited circumstances and not as an avenue for circumvention of the rule. For situations not covered by the automatic exemption, the regular exemptive process would still be available to dealers.
Such a provision also would relieve some of the regulatory agencies’ burden of administering the exemption process by removing from this process certain limited cases as described above. The MSRB believes that the time periods proposed are reasonable and will encourage dealers to discover contributions that could give rise to a ban on business in a timely manner (e.g., in preparation for the filing of quarterly Forms G-37/G-38) and to seek quick refunds of these contributions.
DEFINITION OF MUNICIPAL FINANCE PROFESSIONAL
In its 2001 Notice, the MSRB reviewed a number of issues arising from the definition of MFP and asked numerous questions regarding new MFPs and the two-year look-back period, MFPs primarily engaged in municipal securities representative activities, solicitor MFPs and supervisor and management-level MFPs. After careful consideration of the numerous comments made in all these areas, the MSRB has decided to propose draft amendments to the definition of MFP in three areas: MFPs primarily engaged in municipal securities representative activities and the look-back and look-forward provisions.
Draft Amendments to the Definition of MFP
MFPs Primarily Engaged in Municipal Securities Representative Activities.
Under rule G-37, associated persons of a dealer are MFPs if they are primarily engaged in municipal securities representative activities. The rule does not define the level of municipal securities representative activities that would constitute being “primarily engaged in” such activities and it does not set forth a time frame or weighting method to be used in making such a determination.
In its 2001 Notice, the MSRB asked the following questions:
- What level of municipal securities representative activities are dealers currently using as the threshold for making an associated person an MFP?
- Would a specified safe harbor figure be helpful to the industry? If so, what should that safe harbor be and how should it be measured (i.e., should it be based on revenue generated, principal amount of sales, percentage of time expended, etc., and should it be measured over a period of a month, a quarter, six months, etc.)?
- “Municipal securities representative activities” currently include activities in both the primary and secondary markets. Would limiting application of such term to primary market activities be appropriate for purposes of determining who is an MFP? Can dealers reliably track which municipal securities representative activities of individual representatives are in the primary market as opposed to the secondary market?
- Would establishing a safe harbor level of municipal securities representative activities and/or limiting such activities to the primary market provide significant opportunities for circumventing the rule or otherwise weaken the effectiveness of the rule?
Some commentators noted difficulties caused by the term “primarily engaged” as it applies to municipal securities representative activities because it is not further defined. Commentators were also opposed to including retail representatives within the definition of MFP. They noted that such brokers, engaged in both primary and secondary market sales, are not motivated to solicit municipal securities business from issuers and are often junior brokers just starting out in the business. One commentator noted that retail brokers at full-service firms are not assigned to sell only municipal securities; rather they sell those securities that are consistent with the investment objectives of their clients. Since both their clientele and the investment objectives of their clients change, a broker who would not qualify as “primarily engaged” in the sales of municipal securities at one time may fit that description at another time. And, because these brokers are not assigned to sell municipal securities in the way that, for example, traders are, firms can only identify which of their brokers satisfy the “primarily engaged” test by looking at what they have already done, not what they are about to do. Commentators stated that it is unreasonably burdensome to establish and monitor procedures relating to the contributions of these MFPs, particularly for firms with a large retail network.
From the time Rule G-37 was adopted in 1994, there has been concern about including retail sales persons primarily engaged in municipal securities representative activities as MFPs. Just months after Rule G-37 was approved, the MSRB filed with the SEC an amendment to delete retail sales persons from the rule. The MSRB noted that, while there may be limited instances in which retail sales persons make contributions to obtain municipal securities business for dealers this does not outweigh the compliance burden of determining which of these persons are included in the rule. In addition, it is important to note that any retail sales person who solicits municipal securities business still would be covered under the Rule. However, at the request of the SEC, the MSRB withdrew this amendment.
The MSRB is proposing draft amendments to the definition of MFP to exempt retail sales representatives. If retail sales persons are not soliciting municipal securities business, the MSRB believes that the connection between the retail sales person’s contributions and any awarding of municipal business is very tenuous. Thus, the compliance burden of determining who may be primarily engaged in municipal securities representative activities based on primary and secondary market retail sales is not outweighed by the benefit of including retail sales representatives within the rule.
Look Back Provision. Most of the commentators on the look back provision were opposed to the requirements and/or suggested substantial revisions. [3] Commentators stated that it is unlikely that a contribution made by an individual as much as two years prior to becoming an MFP would be able to influence an issuer official in his or her awarding of municipal securities business. Several commentators noted how the look back provision has precluded dealers from hiring individuals and some commentators noted how the look back provision has affected individuals with regard to in-firm transfers or promotions. One commentator believed that a look back provision is appropriate “to ensure compliance with the spirit of the Rule.”
The MSRB has determined to retain the two-year look back for certain MFPs but is proposing to eliminate the look back for others. The two-year look back will be retained for those MFPs who are primarily engaged in municipal securities representative activities and for those who solicit municipal securities business. The MSRB is proposing the elimination of the look back for supervisor and management-level MFPs.[4] The MSRB believes that supervisors and management-level MFPs should remain subject to the Rule while they hold their supervisory positions; however, the potential link between obtaining municipal securities business and contributions made by an individual prior to becoming an MFP solely by reason of taking on a new supervisory or management position is tenuous and therefore should not continue to be subject to the Rule. This should assist dealers with in-house transfers of non-MFP branch managers and promotions of non-MFP dealer personnel into dealer-wide executive and management positions without fear of bans on business from the prior contributions of these individuals. The MSRB notes that most supervisors in the municipal securities department would still be covered by the two-year look back because such individuals are “primarily engaged” in municipal securities representative activities.
In addition, certain commentators noted that if dealers bring non-MFPs to meetings with issuers to solicit municipal securities business (e.g., an individual with expertise in asset-backed securities may be asked to attend a meeting with an issuer that is considering a securitization of tobacco settlement revenue or delinquent tax receipts), the prior contributions of this individual could result in a ban on business, even if made to issuers other than that solicited. Commentators believed that such a result is unreasonable given that the contribution by the solicitor MFP to another issuer’s official would have no impact on the underwriter selection process of the issuer that he or she is soliciting. The MSRB agrees and is proposing draft amendments that would limit the look back for solicitor MFPs (i.e., persons not primarily engaged in municipal securities representative activities) only to contributions to officials of the issuer solicited. This should assist dealers in staffing issuer presentations with appropriate non-MFP personnel without fear of a completely unrelated ban on business. Of course, once these solicitors become MFPs, all of their subsequent contributions to any issuer official still would be covered by the Rule.
Look Forward Provision. Some commentators were opposed to the rule’s look forward provision. These commentators noted that it is doubtful that once someone has left an MFP position that any contributions given by such person are for the purpose of influencing the awarding of municipal securities business. One commentator noted the compliance difficulties caused by the look forward provision because of the large number of employees who transfer positions. This commentator also noted that those employees who leave their MFP positions “tend to forget, or get confused, about the fact that they are still MFPs and subject to the relevant policies on contributions.”
The MSRB has determined to reduce the two-year look forward provision to one year for those MFPs who are primarily engaged in municipal securities representative activities and for those who solicit municipal securities business. The look forward will be eliminated for supervisor and management-level MFPs.[5] These revisions should reduce the compliance burden while keeping those contributions most likely to have a potential connection to municipal securities business subject to the Rule.
OTHER MSRB ACTIONS
BANK PAC CONTRIBUTIONS
Under Rule G-37, the ban on business is not triggered by contributions by bank political action committees (PACs) or bank holding company (BHC) PACs so long as neither the affiliated dealer nor any of its MFPs control such PACs. Also, disclosure of such contributions is not required.
In the 2001 Notice, the MSRB asked three questions:
- Are contributions by bank PACs and BHC PACs made, even in part, to secure business for the bank’s dealer affiliate?
- Should contributions by bank PACs and BHC PACs continue to be excluded as a triggering event for the ban on business?
- Alternatively, should the MSRB require the disclosure of contributions by bank PACs and BHC PACs, similar to the disclosure required for contributions made by non-MFP executive officers (i.e., such contributions would be subject to disclosure but would not trigger the two-year ban on business)
The majority of commentators that responded to the request for comment on this topic were opposed to any changes to Rule G-37 in this area. None of the commentators requested a revision to the Rule to have bank and BHC PAC contributions included as a triggering event for a ban on business. The commentators stated that bank and BHC PAC contributions are not made in order to secure municipal securities business for an affiliated dealer and there is no evidence that this has taken place. For example, they pointed out that banks and BHCs have legitimate concerns of banking institutions and their employees independent of municipal securities business that can be addressed through the political process. The commentators also noted that, to the extent that regulators may be concerned that a bank or BHC PAC may be used by a dealer to influence the awarding of municipal securities business, Rule G-37 already contains a provision expressly prohibiting an indirect violation of the rule (see rule G-37(d)). In addition, rule G-37(c) prohibits a dealer from soliciting or coordinating covered contributions by others.
A few commentators suggested, or would not be opposed to, a revision of the rule to require that bank and BHC PAC contributions be disclosed. However, the majority of commentators pointed out that sufficient disclosure of PAC contributions and disbursements currently exists under federal law. For example, the Federal Election Commission (FEC) requires PACs that participate in federal elections to file detailed financial reports with the FEC. These financial reports are available for viewing at https://www.fec.gov/finance_reports.html. In addition, in June 2000, Congress passed a law requiring political organizations organized under Section 527 of the Internal Revenue Code to identify themselves and their contributions and disbursements to the Internal Revenue Service (IRS).[6] The forms the political organizations have filed are available online at http://eforms.irs.gov/search_result.asp, and include contributions and disbursement information regarding PACs that contribute only to state or local elections. The FEC also maintains a comprehensive directory of state election and campaign finance resources at https://www.fec.gov/pubrec/staterec.htm.
The MSRB has determined to provide links on its Rule G-37 web page to the websites described above that provide contribution and disbursement disclosure information, including information on contributions made by, but not limited to, PACs of banks, BHCs and broker/dealer affiliates. These links will be available shortly. This should assist the public in monitoring contributions that are made by entities associated in some way with a dealer but not covered by Rule G-37. Because of the ready availability of extensive information about PAC and other contributions of dealer affiliates, the MSRB has determined not to propose any further disclosure of such information at this time. The MSRB will review this information and consider whether any additional action may be called for in the future.
Application of Rule G-37 to Municipal Fund Securities Activities
Several commentators addressed the application of various provisions of Rule G-37 to their activities with respect to municipal fund securities, particularly 529 Plans. Commentators noted that issuers of 529 Plan securities often enter into long-term contracts with dealers to serve as principal underwriters or primary distributors (“primary distributors”) for terms of up to 15 years. Further, primary distributors typically are engaged by issuers in conjunction with affiliated investment advisers and other organizations to provide a bundle of services to the 529 Plan, such as preparing the offering documents, marketing and distributing the securities, investing the resulting contributions made by plan participants, providing customer service, recordkeeping, and performing transfer agent and back office services.
Effect of Ban on Municipal Securities Business
Some commentators expressed concern that a ban on business in connection with a 529 Plan would have a substantially larger impact on dealers, issuers and investors as compared to a ban on business relating to debt securities. Commentators noted that, because many engagements are long-term, a ban on business that is in effect at the time that an issuer is selecting its primary distributor often may result in a dealer being unable to engage in business with the issuer for a period significantly longer than two years. Commentators also noted that, if a dealer becomes subject to a ban on business during the term of an existing engagement and therefore must withdraw as primary distributor, the termination of services may have a severe negative impact on the issuer and investors since the withdrawal may result in fundamental changes in the investments underlying the 529 Plan securities and the nature of services that the issuer and investors receive over an extended period of time. These commentators argued that, in contrast, a ban that results in a dealer withdrawing as an underwriter for an issue of debt securities typically would cause only limited disruption to the issuer for a short period of time. One commentator argued that a non-de minimis contribution made by an MFP many years after the dealer was selected to serve as primary distributor should not result in that dealer being banned from continuing in that engagement since it would be highly unlikely that the MFP’s contribution had any influence or even the appearance of any influence in the selection process several years earlier. This commentator suggested that this problem could be addressed by permitting a dealer that becomes subject to a ban as a result of a contribution to avoid the ban by taking certain curative actions, including seeking a return of the contribution.
The MSRB believes that many of the revisions to Rule G-37 included in the draft amendments, such as the more tailored definition of MFP and adjustments to the look-back and look-forward provisions, will help to ensure that bans on business will take effect only in circumstances that are consistent with the intent of the Rule. These revisions should allow dealers to more easily manage the activities of their MFPs so as to avoid inadvertent bans on business. Nonetheless, a dealer seeking to undertake primary distributor services for an issuer must remain particularly vigilant to ensure that none of its MFPs makes a contribution that could subject the dealer to a ban on business with such issuer. Should a contribution in fact subject a dealer to a ban with an issuer from which the dealer is seeking to become engaged as a primary distributor, the dealer may seek an exemption from the ban on business under the draft amendments that provide an expanded list of factors for consideration by the enforcement agencies and provide for automatic exemptions under the appropriate facts and circumstances.
The MSRB has previously published interpretive guidance providing that a dealer subject to a ban on business with an issuer is allowed to continue to execute certain issue-specific contractual obligations in effect prior to the date of the contribution that caused the prohibition.[7] For example, dealers that already had executed a contract with the issuer to serve as underwriter or financial advisor for a new issue of debt securities prior to the contribution could continue in these capacities. In addition, the interpretative guidance also addressed certain types of on-going, non-issue-specific municipal securities business that a dealer may have contracted with an issuer to perform prior to the making of a contribution that causes a ban on business. Thus, the MSRB noted that a dealer may continue to act as remarketing agent for an outstanding issue of municipal securities or to underwrite a specific commercial paper program after a contribution has been made so long as the contract for such services was in effect prior to the contribution, provided that certain conditions were met.
The MSRB has determined to provide further interpretive guidance with regard to the ability of a primary distributor of municipal fund securities (including, but not limited to, 529 plan securities) to continue serving an issuer in that capacity after a contribution has been made that would otherwise subject the dealer to a ban on business with that issuer. The guidance notes that any dealer that becomes subject to a ban on business with an issuer of municipal fund securities with which it is currently serving as primary distributor may continue underwriting such securities as long as the basis for determining compensation does not change, even if total compensation increases based on net in-flows of cash. In addition, additional services may be provided as detailed in the notice. This interpretive guidance is set forth at the end of this notice.
Status of Selling Dealers as Selling Group Members.
With respect to 529 Plans that use a multi-tiered distribution system with a dealer serving as primary distributor and multiple dealers entering into selling relationships with the primary distributor, two commentators stated that selling dealers should be treated as selling group members. As a result, they argued that selling dealers should not be considered to be engaging in municipal securities business.[8] One commentator believed that these selling dealers should be exempt from all Rule G-8 recordkeeping requirements relating to Rules G-37 and G-38.
The MSRB has determined not to make any changes with regard to its prior interpretive positions on the status of selling group members. The MSRB agrees that, with respect to any particular issue of municipal fund securities, selling dealers that do not also serve as a primary distributor of such securities should be treated as a selling group member and therefore should not be viewed as engaging in municipal securities business for purposes of Rule G-37.[9] Those dealers that are treated as selling group members and therefore not engaged in municipal securities business for purposes of Rule G-37 can file Form G-37x with the MSRB and thereby become exempt from most recordkeeping and other procedural requirements relating to Rule G-37.
REQUEST FOR COMMENTS
The MSRB requests comment on the draft amendments regarding the exemption provision and the definition of MFP. There were many other recommendations for changes to Rule G-37 made by commentators in response to questions posed in the 2001 Notice, as well as in areas not specifically discussed in the notice. The MSRB has carefully reviewed all comments received, but has decided to take no other action on Rule G-37. The MSRB understands that the Rule imposes certain compliance burdens on dealers. Through the draft amendments, the MSRB seeks to reduce certain of these burdens while maintaining an effective Rule. In order to ensure that Rule G-37 remains an effective deterrent to pay-to-play practices in the municipal securities market, the MSRB has determined that the efforts required by dealers to comply with the Rule are justified and appropriate.
Comments should be submitted no later than June 3, 2002, and may be directed to Jill C. Finder, Assistant General Counsel, or Ronald W. Smith, Senior Legal Associate. Written comments will be available for public inspection.
April 2, 2002
Draft Rule Language [10]Rule G-37: Political Contributions and Prohibitions on Municipal Securities Business
(a) No change.
(b)(i) No broker, dealer or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the broker, dealer or municipal securities dealer; (ii) any municipal finance professional associated with such broker, dealer or municipal securities dealer; or (iii) any political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional; provided, however, that this section shall not prohibit the broker, dealer or municipal securities dealer from engaging in municipal securities business with an issuer if the only contributions made by the persons and entities noted above to officials of such issuer within the previous two years were made by municipal finance professionals to officials of such issuer for whom the municipal finance professionals were entitled to vote and which contributions, in total, were not in excess of $250 by any municipal finance professional to each official of such issuer, per election.
(ii) For an individual designated as a municipal finance professional solely pursuant to subparagraphs (C), (D) or (E) of paragraph (g)(iv) of this rule, the provisions of paragraph (b)(i) shall apply only to contributions made during such time as the individual is a municipal finance professional.
(iii) For an individual designated as a municipal finance 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 prior to becoming a municipal finance professional only if made to an official of an issuer solicited for municipal securities business by such individual.
(c) through (d) No change.
(e)(i) Except as otherwise provided in paragraph (e)(ii), each broker, dealer or municipal securities dealer 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 by certified or registered mail, or some other equally prompt means that provides a record of sending, two copies of Form G-37/G-38 setting forth, in the prescribed format, the following information:
(A) – (C) No change.
(D) any information required to be disclosed pursuant to section (e) of rule G-38; [and]
(E) such other identifying information required by Form G-37/G-38[.] ; 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-37/G-38 received from any broker, dealer or municipal securities dealer.
(ii) through (iii) No change.
(f) No change.
(g) Definitions.
(i) through (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), provided, however, that sales activities with accounts other than institutional accounts, as defined in rule G-8(a)(xi), shall not be considered to be municipal securities representative activities for purposes of this subparagraph (A); (B) any associated person who solicits municipal securities business, as defined in paragraph (vii); (C) any associated person who is both (i) a municipal securities principal or a municipal securities sales principal and (ii) a supervisor of any 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, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer or similarly situated official and, in the case of a bank dealer, the officer or officers designated by the MSRB of directors of the bank as responsible for the day-to-day conduct of the bank’s municipal securities dealer activities, as required pursuant to rule G-1(a); or (E) any associated person who is a member of the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1) executive or management committee or similarly situated officials, if any; provided, however, that, if the only associated persons meeting the definition of municipal finance professional are those described in this subparagraph (E), the broker, dealer or municipal securities dealer shall be deemed to have no municipal finance professionals.
Each person designated by the broker, dealer or municipal securities dealer as a municipal finance professional pursuant to rule G-8(a)(xvi) is deemed to be a municipal finance professional. [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.] Persons designated as municipal finance professionals pursuant to subparagraphs (A) and (B) shall retain this designation for one year after the last activity or position that gave rise to the designation.
(v) through (viii) No change.
(h) No change.
(i) A registered securities association with respect to a broker, dealer or municipal securities dealer who is a member of such association, or the appropriate regulatory agency as defined in Section 3(a)(34) of the Act with respect to any other broker, dealer or municipal securities dealer, upon application, may exempt, conditionally or unconditionally, a broker, dealer or municipal securities dealer who is prohibited from engaging in municipal securities business with an issuer pursuant to section (b) of this rule from such prohibition. In determining whether to grant such exemption, the registered securities association or appropriate regulatory agency shall consider, among other factors [whether]:
(i) whether such exemption is consistent with the public interest, the protection of investors and the purposes of this rule; [and]
(ii) whether such broker, dealer or municipal securities dealer
(A) prior to the time the contribution(s) which 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) which resulted in such prohibition was made, had no actual knowledge of the contribution(s);
(C) has taken all available steps to cause the [person or persons] contributor involved in making the contribution(s) which 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 as directed specifically toward the contributor who made the relevant contribution and all employees of the broker, dealer or municipal securities dealer;
(iii) whether, at the time of the contribution, the contributor was a municipal finance professional or otherwise an employee of the broker, dealer or municipal securities dealer, or was seeking such employment;
(iv) the timing and amount of the contribution which 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 which resulted in the prohibition, as evidenced by the facts and circumstances surrounding such contribution.
(j) Automatic Exemptions.
(i) A broker, dealer or municipal securities dealer that is prohibited from engaging in municipal securities business with an issuer pursuant to section (b) of this rule as a result of a contribution made by a municipal finance professional may exempt itself from such prohibition, subject to subparagraphs (ii) and (iii) of this section, upon completion of the following requirements: (1) the broker, dealer or municipal securities dealer discovered the contribution which resulted in the prohibition on business within four months of the date of such contribution; (2) such contribution did not exceed $250; (3) the contributor made a written request for the return of such contribution within 30 calendar days of the date of discovery of such contribution by the broker, dealer or municipal securities dealer; and (4) the contributor obtained a return of the contribution within 30 calendar days of the date of the written request for such return.
(ii) A broker, dealer or municipal securities dealer is entitled to no more than two automatic exemptions per 12-month period.
(iii) A broker, dealer or municipal securities dealer may not execute more than one automatic exemption relating to contributions by the same municipal finance professional regardless of the time period.
* * * * *
Rule G-8: Books and Records To Be Made by Brokers, Dealers and Municipal Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:
(i) - (xv) No change.
(xvi) Records Concerning Political Contributions and Prohibitions on Municipal Securities Business Pursuant to Rule G-37.
Records reflecting:
(A) – (D) No change.
(E) the contributions, direct or indirect, to officials of an issuer and payments, direct or indirect, made to political parties of states and political subdivisions, by the broker, dealer or municipal securities dealer and each political action committee controlled by the broker, dealer or municipal securities dealer [(or controlled by any municipal finance professional of such broker, dealer or municipal securities dealer)] 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 an issuer made by each municipal finance professional, any political action committee controlled by a municipal finance professional, and non-MFP executive officer for the current year [and separate listings for each of the previous two calendar years], 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, [and] (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-37(j), including the amount of the contribution, the date the broker, dealer or municipal securities dealer discovered the contribution, the name of the contributor, the date the contributor made a written request for a return of the contribution, and the date the contributor obtained a return of the contribution; provided, however, that such records need not reflect any contributions made by a municipal finance professional or non-MFP executive officer to officials of an issuer for whom such person is entitled to vote if the contributions made by such person, in total, are not in excess of $250 to any official of an issuer, per election[; and]. In addition, brokers, dealers and municipal securities dealers 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 finance professional pursuant to subparagraphs (A) and (B) of rule G-37(g)(iv) and for any political action committee controlled by such individuals; and
(G) the payments, direct or indirect, to political parties of states and political subdivisions made by all municipal finance professionals, any political action committee controlled by a municipal finance professional, and non-MFP executive officers for the current year [and separate listings for each of the previous two calendar years], 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 finance professional or non-MFP executive officer to a political party of a state or political subdivision in which such persons are entitled to vote if the payments made by such person, in total, are not in excess of $250 per political party, per year. In addition, brokers, dealers and municipal securities dealers 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 finance professional pursuant to subparagraphs (A) and (B) of rule G-37(g)(iv) and for any political action committee controlled by such individuals.
(H) – (K) No change.
* * * * * *
FORM G-37/G-38
Name of dealer: ________________________________________________________
Report period: _________________________________________________________
I. CONTRIBUTIONS made to issuer officials (list by state)
State Complete name, title (including) Contributions by each contributor category
any city/county/state or other (i.e., dealer, dealer controlled PAC, municipal
political subdivision) of issuer finance professional controlled PAC,
official municipal finance professionals and
executive officers). For each contribution, list contribution amount
and contributor category (for example,
($500 contribution by non-MFP executive
officer).
If any contribution is the subject of an
automatic exemption pursuant to Rule
G-37 (j), list amount of contribution and
date of such automatic exemption.
II. PAYMENTS made to political parties of states or political subdivisions (list by state)
No change
III. ISSUERS with which dealer has engaged in municipal securities business (list by state)
No change
IV. CONSULTANTS
No change
* * * * *
RULE G-37 QUESTIONS & ANSWERS TO BE WITHDRAWN [11]
May 24, 1994 (Q&A #12)
[Q: A dealer may discover that a "disgruntled" municipal finance professional made a contribution to an issuer official deliberately to prohibit the dealer from engaging in municipal securities business with the issuer. Is there a procedure in place whereby the dealer can seek an exemption from the prohibition on municipal securities business in such circumstances?]
[A: The Board recognizes that there may be limited circumstances in which a dealer should be able to request an exemption from the prohibition on business. Thus, the Board has filed with the SEC an amendment to rule G-37 that allows bank regulatory authorities (the Office of the Comptroller of the Currency, Federal Reserve Board and Federal Deposit Insurance Corporation), upon application by a dealer, to grant such exemption, conditionally or unconditionally, in certain circumstances. See the rule filing, SR-MSRB-94-5, for more information about this procedure.]
June 15, 1995 (Q&A #4)
[Q: Rule G-37(i) provides a procedure whereby dealers may request that the NASD or the appropriate regulatory agency (i.e., federal bank regulatory authorities) grant an exemption from the rule’s two-year ban on municipal securities business with an issuer which resulted from political contributions made to officials of that issuer by the dealer, a PAC controlled by the dealer, or a municipal finance professional. If a municipal finance professional made a contribution to an issuer official which triggered the ban, what factors would be relevant to the dealer’s decision to request an exemption from that ban, and to the NASD or appropriate regulatory agency in determining whether the exemption should be granted?]
[A: In determining whether to grant such an exemption, rule G-37(i) requires the NASD or the appropriate regulatory agency to consider, among other factors, whether (i) such exemption is consistent with the public interest, the protection of investors and the purposes of rule G-37; and (ii) such dealer (A) prior to the time the contribution(s) which resulted in such prohibition was made, had developed and instituted procedures reasonably designed to ensure compliance with the rule; (B) prior to or at the time the contribution(s) which resulted in such prohibition was made, had no actual knowledge of the contribution(s); (C) has taken all available steps to cause the person or persons involved in making the contribution(s) which 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.
In reviewing the facts and circumstances presented by the dealer, as well as the factors set forth above, the NASD or the appropriate regulatory agency will consider whether, prior to the time the contribution was made, the dealer had developed and instituted procedures reasonably designed to ensure compliance with the rule. Such procedures are required by rule G-27 on supervision. Effective compliance procedures are essential because rule G-37 requires the dealer to have information regarding each contribution made by the dealer, dealer-controlled PACs and municipal finance professionals so that the dealer can determine where and with whom it may or may not engage in municipal securities business. In addition, for disclosure purposes, the dealer must maintain information on executive officers’ contributions and payments to political parties, as well as consultant hiring practices. Moreover, because of the "directly and indirectly" provision in rule G-37(d), as well as the no solicitation and no bundling provisions in section (c) of the rule, the dealer must ensure that those persons and entities subject to the rule are not causing the dealer to be in violation thereof. In this regard, the Board wishes to remind dealers that they are responsible for determining which of their employees, supervisors (e.g., branch managers), and management personnel (e.g., members of the dealer’s executive or management committee or similarly situated officials) are "municipal finance professionals." In addition to those persons and entities covered by the rule, the dealer must ensure that other persons and entities hired to assist in municipal securities activities (e.g., consultants) are not being directed to make contributions, or otherwise being used as conduits, in violation of the rule. In reviewing a request for exemption, the NASD or the appropriate regulatory agency also will consider whether the dealer has taken all available steps to obtain a return of the contribution. The return of the contribution, while important, is only one of the factors to be considered, and is not dispositive of whether an exemption should be granted.
Finally, the NASD or appropriate regulatory agency will consider whether the dealer has taken remedial or preventive measures as may be appropriate under the circumstances. Thus, dealers should provide information on any changes to compliance procedures and/or personnel action taken to address the particular situation which resulted in the prohibition so that such problems do not recur. For additional guidance on the exemption provision, please refer to Q&A number 2 in the August 1994 issue of MSRB Reports (Vol. 14, No. 4).
The Board previously provided two examples in which exemptions may be appropriate. The first example described a situation in which a disgruntled municipal finance professional made a contribution purposely to injure the dealer, its management or employees. The second example involved a municipal finance professional who was eligible to vote for a particular issuer official and who made a number of small contributions during an election cycle (e.g., over four years) which, when consolidated, amounted to slightly over the $250 de minimis exemption (e.g., $255).
The Board believes that the following situations are not sufficient to justify the granting of an exemption from a ban on business: (1) a contribution was made by a municipal finance professional which subjected the dealer to the two-year ban on business, but the municipal finance professional was not aware of rule G-37 or any of its particular provisions; (2) the dealer or a municipal finance professional did not know that the recipient of a particular contribution was an "official of an issuer"; and (3) at the time the contribution was made, an associated person did not know that he was a "municipal finance professional" by virtue of his supervisory capacity, by being primarily engaged in municipal securities representative activities, or by virtue of any of the other activities listed in the rule’s definition of municipal finance professional.
The Board is strongly of the view that exemptions should be granted only in limited circumstances. If a significant number of exemptions are granted by the regulatory agencies, then the Board may reexamine the propriety of the exemption provision.]
June 29, 1998 (Q&A #1 (partial withdrawal), 2 and 3)
1. Q: A person is associated with a dealer in a non-municipal finance professional capacity and makes a political contribution to an official of an issuer for whom such person is not entitled to vote. Less than two years after such person made the contribution, the dealer merges with another dealer and, solely as a result of the merger, that person becomes a municipal finance professional of the surviving dealer. Would the surviving dealer be prohibited from engaging in municipal securities business with that issuer?
A: Yes. Rule G-37 would prohibit the surviving dealer from engaging in municipal securities business with the issuer for two years from the date the contribution was made. Of course, the surviving dealer’s prohibition on business would only begin when the person who made the contribution becomes a municipal finance professional of the surviving dealer.
The Board notes, however, that rule G-37 was not intended to prevent mergers in the municipal securities industry or, once a merger is consummated, to seriously hinder the surviving dealer’s municipal securities business if the merger was not an attempt to circumvent the letter or spirit of rule G-37. [Thus, the Board believes that it would be appropriate for the NASD or the appropriate regulatory agency (i.e., federal bank regulatory authorities) to grant conditional or unconditional exemptions from bans on municipal securities business arising from such mergers if the NASD or the appropriate regulatory agency determines that, pursuant to rule G-37(i), the exemption is consistent with the public interest, the protection of investors and the purposes of the rule, as well as any other factors set forth in the rule or any other factors deemed relevant by the NASD or the appropriate regulatory agency.]
[2. Q: The Board has previously provided two examples in which exemptions from a ban on municipal securities business may be appropriate under rule G-37(i). Are these the only situations in which the NASD or the appropriate regulatory agency may provide an exemption under rule G-37(i)?]
[A: No. The two examples noted in Q&A number 4 (June 15, 1995), MSRB Reports, Vol. 15, No. 2 (July 1995) at 3-4, MSRB Manual (CCH) & 3681, were not meant to be the only instances in which exemptions might appropriately be given. Because of the varying factual situations that arise with each exemptive request, the Board believes that the NASD and the appropriate regulatory agencies should review such other factual situations presented by dealers in exemptive requests pursuant to the requirements in rule G-37(i) and, based on the facts, either approve or reject the request. Rule G-37(i) allows the NASD and the appropriate regulatory agencies to grant exemptions from the ban on business "conditionally or unconditionally" and, if the NASD or the appropriate regulatory agency believes it would be appropriate to shorten the ban on business or limit its scope, it is authorized to do so as long as the requirements of rule G-37(i) are met.]
[3. Q: The Board has previously described three situations which it believes are not sufficient to justify the granting of an exemption from a ban on municipal securities business under rule G-37(i). Does this mean that the NASD or the appropriate regulatory agency may never provide an exemption under rule G-37(i) if any of these situations exist?]
[A: No. The Board’s intent in describing these three scenarios in Q&A number 4 (June 15, 1995), MSRB Reports, Vol. 15, No. 2 (July 1995) at 3-4, MSRB Manual (CCH) & 3681, was to note that none of these situations was sufficient, in and of itself, to justify the granting of an exemption from a ban on municipal securities business. However, any such scenario in combination with other facts and circumstances deemed relevant by the NASD or the appropriate regulatory agency (including, but not limited to, the factors set forth in rule G-37(i)) could, in the judgment of the NASD or the appropriate regulatory agency, be sufficient to justify a conditional or unconditional exemption from the ban.
The Board also notes that none of the three situations previously cited as insufficient to justify an exemption involved a contribution made prior to an individual becoming a municipal finance professional. Thus, for example, where a non-de minimis contribution was made by a person who later becomes a municipal finance professional (whether by reason of a merger, as a newly hired associated person, as an existing associated person becoming involved in municipal securities activities, or otherwise), neither the NASD nor any appropriate regulatory agency is constrained from granting a conditional or unconditional exemption if, in its judgment, such exemption is consistent with rule G-37(i).]
* * * * *
INTERPRETATION ON THE EFFECT OF A BAN ON MUNICIPAL SECURITIES BUSINESS UNDER RULE G-37 ARISING DURING A PRE-EXISTING ENGAGEMENT RELATING TO MUNICIPAL FUND SECURITIES
Rule G-37, on political contributions and prohibitions on municipal securities business, prohibits any broker, dealer or municipal securities dealer (a “dealer”) from engaging in municipal securities business with an issuer within two years after any contribution (other than certain de minimis contributions) 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 Municipal Securities Rulemaking Board (“MSRB”) has received inquiries regarding the effect of a ban on municipal securities business with an issuer arising from a contribution made after a dealer has entered into a long-term contract to serve as the primary distributor of the issuer’s municipal fund securities.
In an interpretive notice published in 1997 (the “1997 Interpretation”), the MSRB stated that a dealer subject to a prohibition on municipal securities business with an issuer is allowed to continue to execute certain issue-specific contractual obligations in effect prior to the date of the contribution that caused the prohibition.[12] For example, dealers that had already executed a contract with the issuer to serve as underwriter or financial advisor for a new issue of debt securities prior to the contribution could continue in these capacities.
The 1997 Interpretation also addressed certain types of on-going, non-issue-specific municipal securities business that a dealer may have contracted with an issuer to perform prior to the making of a contribution that causes a prohibition on municipal securities business with the issuer. For example, the MSRB noted that a dealer may act as remarketing agent for an outstanding issue of municipal securities or may continue to underwrite a specific commercial paper program so long as the contract for such services was in effect prior to the contribution. The MSRB stated that these activities are not considered new municipal securities business and may be performed by dealers that are banned from municipal securities business with an issuer. The MSRB further stated, however, that provisions in existing contracts that allow for changes in the services provided by the dealer or compensation paid by the issuer would be viewed by the MSRB as new municipal securities business and, therefore, rule G-37 would preclude a dealer subject to a ban on municipal securities business from performing such additional functions or receiving additional compensation. The MSRB cited two examples of these types of provisions. The first involved a contract to serve as remarketing agent for a variable rate issue that might permit a fixed rate conversion, with a concomitant increase in the per bond compensation. The second example involved an agreement to underwrite a commercial paper program that might include terms for increasing the size of the program, with no increase in per bond fees but an increase in overall compensation resulting from the larger outstanding balance of commercial paper. In both cases, the MSRB viewed the exercise of these provisions as new municipal securities business that would be banned under the rule.
In the 1997 Interpretation, the MSRB recognized that there is great variety in the terms of agreements regarding municipal securities business and that its guidance in the 1997 Interpretation may not adequately deal with all such agreements. The MSRB sought input on other situations where contracts obligate dealers to perform various types of activities after the date of a contribution that triggers a ban on municipal securities business and stated that additional interpretations might be issued based upon such input.
The MSRB understands that dealers typically are selected by issuers to serve as primary distributors of municipal fund securities on terms that differ significantly from those of a dealer selected to underwrite an issue of debt securities. Issuers generally enter into long-term agreements (in many cases with terms of ten years or longer) with the primary distributor of municipal fund securities for services that include the sale in a continuous primary offering of one or more categories or classes of the securities issued within the framework of a single program of investments.[13] In addition, an issuer may often engage a particular dealer to serve as the primary distributor of its municipal fund securities as part of a team of professionals that includes the dealer’s affiliated investment management firm, which is charged with managing the investment of the underlying portfolios.
The MSRB believes that the guidance provided in the 1997 Interpretation, although appropriate for the circumstances discussed therein, may not be adequate to address the unique features of municipal fund securities programs. For example, so long as a program realizes net in-flows of investor cash, the size of an offering of municipal fund securities will necessarily increase over time. Under most compensation arrangements in the market, any net in-flow of cash generally would result in an increase in total compensation, causing any new sales of municipal fund securities that exceed redemptions to be considered new municipal securities business under the 1997 Interpretation. Also, the addition by the issuer of a new category of investments (e.g., a new portfolio in an aged-based Section 529 college savings plan created for children born in the most recent year) could be considered a new offering from which such dealer might be banned, even where such new category may have been clearly contemplated at the outset of the dealer’s engagement. Further, the MSRB understands that the repercussions to an issuer of municipal fund securities or investors in such securities of a sudden change in the primary distributor (and possible concurrent change in the investment manager) resulting from a ban on municipal securities business arising during the term of an existing arrangement often will be significantly greater than in the case of an underwriting or other primary market activity relating to the typical debt offering. Issuers could be faced with redesigning existing programs and investors may need to establish new relationships with different dealers in order to maintain their investments.
As a result, the MSRB believes that further interpretive guidance is necessary in this area. The MSRB is of the view that, where a dealer has become subject to a ban on municipal securities business with an issuer of municipal fund securities with which it is currently serving as primary distributor, any continued sales of existing categories of municipal fund securities for such issuer during the duration of the ban would not be considered new municipal securities business if the basis for determining compensation does not change during that period, even if total compensation increases as a result of net in-flows of cash. Further, the MSRB believes that any changes in the services to be provided by the dealer to the issuer throughout the duration of the ban that are contemplated under the pre-existing contractual arrangement (e.g., the addition of new categories of securities within the framework of the existing program) would not be considered new municipal securities business so long as such changes do not result in: (1) an increase in total compensation received by the dealer for services performed for the duration of the ban (whether paid during the ban or as a deferred payment after the ban); or (2) in an extension of the term of the dealer in its current role.
April 2, 2002
[1] See MSRB Review of Rule G-37, MSRB Reports, Vol. 21, No. 2 (July 2001) at 15.
[2] The appropriate regulatory agencies include the NASD for securities firms and the federal bankregulators for bank dealers.
[3] Two commentators incorrectly stated that, by interpretation and not rule language, the MSRB created a two-year look back provision for contributions that were made up to two years prior to someone becoming an MFP. Rule G-37(b) states that no dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (1) the dealer; (2) any MFP associated with such dealer; or (3) any political action committee controlled by the dealer or by any MFP.Rule G‑8(a)(xvi) requires dealers to keep records of, among other things, contributions to officials of an issuer made by each MFP for the current year and separate listings for each of the two previous years.
[4] The MSRB is also proposing a technical amendment to rule G‑8(a)(xvi) relating to records of contributions made by non-MFP executive officers to make this provision consistent with the proposed amendments relating to supervisor and management-level MFPs.
[5] The MSRB is also proposing the elimination of the look forward for non-MFP executive officers.
[6] Political parties, campaign committees for candidates for federal, state, or local office, and political action committees are all political organizations subject to tax under Section 527. Any organization required to report to the FEC as a political committee does not have to file with the IRS. Additionally, any organization which reasonably anticipates that it will have less than $25,000 in gross receipts for any taxable year is excepted from these new disclosure requirements.
[7] See Rule G-37 Interpretation – Interpretation on Prohibition on Municipal Securities Business Pursuant to Rule G-37, February 21, 1997, MSRB Rule Book (January 2002) at 232.
[8] The MSRB has stated that, absent unusual circumstances, the primary distributor is considered to be engaged in municipal securities business. See Municipal Fund Securities – Qualification of Municipal Securities Principals and Application of MSRB Rules to Fees, Disclosure and Other Market Practices, MSRB Reports, Vol. 21, No. 2 (July 2001) at 27.
[9] The MSRB notes, however, that a dealer that acts as a wholesaler of municipal fund securities must review the specific facts and circumstances of its contractual relationship with the issuer and the manner in which it was selected to serve as a wholesaler, as well as the definition of “underwriter” in Exchange Act Rule 15c2-12(f)(8), to determine whether it should be treated as engaging in municipal securities business.
[10] Underlining denotes new rule language; [brackets] denote deletions.
[11] [Brackets] indicate deletions.
[12] See Rule G-37 Interpretation – Interpretation on Prohibition on Municipal Securities Business Pursuant to Rule G-37, February 21, 1997, MSRB Rule Book (January 2002) at 232.
[13] The various categories generally reflect interests in funds having different allocations of underlying investments. For example, a so-called Section 529 college savings plan may offer one category that represents investments primarily in equity securities and another in debt securities, or may have categories where the allocation shifts from primarily equity securities to primarily debt or money market securities as the number of years remaining until the beginning of college decreases. In the case of state and local government pools, the types of securities in the underlying portfolios may be allocated so as to create one category of short-term “money market” like investments (i.e., with net asset value maintained at approximately $1 per share) and another with a longer timeframe and fluctuating net asset value.
