Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Approving Proposed Rule Change Concerning Solicitation and Coordination of Payments to Political Parties and Question and Answer Guidance on Supervisory Procedures Related to Rule G-37(d) on Indirect Violations, 56944-56947 [05-19497]

Download as PDF 56944 Federal Register / Vol. 70, No. 188 / Thursday, September 29, 2005 / Notices October 12, 2005, the Exchange proposes to extend the pilot program. Given the success of the pilot program in attracting market-maker volume to the Exchange, the Exchange proposes to extend the pilot program’s duration an additional year, until October 12, 2006. 2. Statutory Basis The Exchange believes that the extension of the pilot program will allow the Exchange to continue to provide auto-ex access to all marketmakers. Accordingly, the Exchange believes the proposed rule change is consistent with the Act 8 and the rules and regulations under the Act applicable to a national securities exchange and, in particular, the requirements of Section 6(b) of the Act.9 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5)10 requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and, in general, to protect investors and the public interest. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange neither solicited nor received comments on the proposal. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) required between entry of multiple market-maker orders (including non-CBOE market-maker orders) on the same side of the market in an option class for an account or accounts of the same beneficial owner using Hybrid. This change went into effect on July 18, 2005 and was announced to the membership via Regulatory Circular RG05–61. 8 15 U.S.C. 78a et seq. 9 15 U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 13:52 Sep 28, 2005 Jkt 205001 of the Act 11 and Rule 19b–4(f)(6) thereunder.12 At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–CBOE–2005–70 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–9303. All submissions should refer to File Number SR–CBOE–2005–70. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You 11 15 12 17 PO 00000 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). Frm 00059 Fmt 4703 Sfmt 4703 should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE–2005–70 and should be submitted on or before October 20, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.13 Jonathan G. Katz, Secretary. [FR Doc. 05–19498 Filed 9–28–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52496, File No. SR–MSRB– 2005–12] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Approving Proposed Rule Change Concerning Solicitation and Coordination of Payments to Political Parties and Question and Answer Guidance on Supervisory Procedures Related to Rule G–37(d) on Indirect Violations September 22, 2005. On June 27, 2005, the Municipal Securities Rulemaking Board (‘‘MSRB’’ or ‘‘Board’’), filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change consisting of an amendment to Rule G– 37(c), concerning solicitation and coordination of payments to political parties, and Q&A guidance on supervisory procedures related to Rule G–37(d), on indirect violations. The proposed rule change was published for comment in the Federal Register on August 16, 2005.3 The Commission received four comment letters regarding the proposal.4 On September 16, 2005, 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 52235 (August 10, 2005) 70 FR 48214 (August 16, 2005) (the ‘‘Commission’s Notice’’). 4 See letter to Jonathan G. Katz, Secretary, Commission, from Terry L. Atkinson, Managing Director, UBS Financial Services Inc. (‘‘UBS’’), dated September 1, 2005 (‘‘UBS’ Letter’’); letter to Jonathan G. Katz, Secretary, Commission, from Leslie M. Norwood, Vice President and Assistant General Counsel, The Bond Market Association (‘‘BMA’’), dated September 2, 2005 (‘‘BMA’s Letter’’); letter to Jonathan G. Katz, Secretary, Commission, from Marc E. Elias and Rebecca H. Gordon, Perkins Coie, Counsel to the Democratic Senatorial Campaign Committee (‘‘DSCC’’), dated September 6, 2005 (‘‘DSCC’s Letter’’); and letter to Jonathan G. Katz, Secretary, Commission, from David M. Thompson, President, and Robert J. 1 15 E:\FR\FM\29SEN1.SGM 29SEN1 Federal Register / Vol. 70, No. 188 / Thursday, September 29, 2005 / Notices the MSRB filed a response to the comment letters from UBS, BMA and DSCC.5 On September 21, 2005, the MSRB filed a response to the comment letter from Griffin, Kubik.6 This order approves the proposed rule change. The proposed rule change would prohibit a dealer and certain municipal finance professionals (‘‘MFPs’’) from soliciting any person or PAC to make or coordinate a payment to a political party of a state or locality where the dealer is engaging or is seeking to engage in municipal securities business. In addition, the proposed Qs&As seek to provide dealers with more guidance as they develop procedures to ensure compliance with both the language and the spirit of Rule G–37. A full description of the proposal is contained in the Commission’s Notice. UBS, BMA and Griffin, Kubik stated in their comment letters that they fully support the elimination of pay-to-play practices in the municipal securities industry, but raised concerns about implementation of the proposal. DSCC expressed concern that the guidance presented in the MSRB’s proposed Questions and Answers may unnecessarily chill contributions to national party committees from MFPs and dealer-controlled PACs. Vagueness and First Amendment Concerns Both UBS and BMA stated that the proposed Qs&As are vague and do not provide clear, uniform standards as to when a contribution to a PAC or party committee results in an indirect violation. UBS and BMA also stated that the Qs&As represent an expansion of Rule G–37 because the Qs&As require that a broker-dealer have procedures in place to reasonably ensure that contributions to PACs and party committees do not result in indirect contributions to issuer officials, but provide no discernable standard as to when such indirect contribution would occur. BMA stated that the MSRB had previously established a safe harbor where a broker-dealer gets assurances from a party committee or PAC that the Stracks, Counsel, Griffin, Kubik, Stephens & Thompson, Inc. (‘‘Griffin, Kubik’’), dated August 29, 2005 (‘‘Griffin, Kubik’s Letter’’). 5 See letter from Carolyn Walsh, Senior Associate General Counsel, MSRB, to Martha M. Haines, Chief, Office of Municipal Securities, Commission, dated September 16, 2005 (‘‘MSRB’s First Response Letter’’). 6 See letter from Carolyn Walsh, Senior Associate General Counsel, MSRB, to Martha M. Haines, Chief, Office of Municipal Securities, Commission, dated September 21, 2005 (‘‘MSRB’s Second Response Letter’’). Griffin, Kubik’s Letter was provided to the MSRB after it had sent its First Response Letter. VerDate Aug<31>2005 13:52 Sep 28, 2005 Jkt 205001 broker-dealer’s contribution will not be used for issuer officials (e.g., for housekeeping or conference accounts), and that this safe harbor conflicted with the proposal. Both UBS and BMA stated that the vagueness of the proposal will allow different firms to develop different supervisory procedures depending on their tolerance for risk. UBS and BMA further stated that creating a vague standard for contributing to PACs and party committees is unconstitutional, and that the due diligence suggested by the proposed Qs&As is troublesome under the First Amendment. Griffin, Kubik stated that they believe that Rule G–37 is unconstitutional. The MSRB noted in its Response Letters that the commentators raised these concerns to the MSRB during its comment period on the proposed guidance, that the MSRB responded to these comments in its filing and that the Commission’s Notice addresses these issues at some length. The MSRB stated that the proposed Qs&As do not extend the reach of Rule G–37 or create a vague standard of regulation. The MSRB stated that the proposed guidance does not change the standard regarding when a payment to a political party or PAC could result in either a rule violation or a ban on doing business with a municipal issuer. The MSRB further stated that a violation of Rule G–37(d) still will only occur when the payment is made to other entities ‘‘as a means to circumvent the rule,’’ and that the standard enunciated in Rule G–37(d), which prohibits anyone from ‘‘directly or indirectly, through or by any other person or means’’ doing what sections (b) and (c) prohibit, is not unconstitutionally vague. The MSRB further stated that contrary to statements made in the commentators’ letters, this precise issue raised before the United States Court of Appeals in Blount v. SEC,7 and that the Court of Appeals in Blount directly rejected the challenge that Rule G–37(d) was too broad and could not regulate payments to parties and PACs when they are intended as end-runs around the direct contribution limits. In Blount, the Court stated: ‘‘Although the language of section (d) itself is very broad, the SEC has interpreted it as requiring a showing of culpable intent, that is, a demonstration that the conduct was undertaken ‘as a means to circumvent’ the requirements of (b) and (c) * * * The SEC states its ‘means to 7 Blount v. SEC, 61 F.3d 938 (D.C. Cir 1995), rehearing and suggestion for rehearing en banc denied (1995), certiorari denied by 517 U.S. 1119, 116 S.Ct. 1351, 134 L.Ed.2d 520 (1996). PO 00000 Frm 00060 Fmt 4703 Sfmt 4703 56945 circumvent’ qualification in general terms. The qualification appears, therefore, to apply not only to such items as contributions made by the broker’s or dealer’s family members or employees, but also gifts by a broker to a state or national party committee, made with the knowledge that some part of the gift is likely to be transmitted to an official excluded by Rule G–37. In short, according to the SEC, the rule restricts such gifts and contributions only when they are intended as endruns around the direct contribution limitations.’’ 8 The MSRB further stated that the cases cited by BMA related to different issues and did not discredit the Blount Court’s ruling on this precise issue. In addition, the MSRB stated that the cases relied upon by BMA were decided prior to Blount as well as the Supreme Court’s decision in McConnell.9 Griffin, Kubik stated that the MSRB’s citations to Blount and McConnell were weak arguments, but did not cite any authority for their belief that Rule G–37 is unconstitutional. The MSRB stated in its filing that it was issuing the proposed guidance to remind dealers of the need to have adequate supervisory procedures. The MSRB guidance makes suggestions concerning such procedures but does not require particular procedures. The MSRB stated that it is up to individual dealers to create procedures that are appropriate to their particular circumstances, and that broker-dealers generally do not have uniform supervisory procedures. The MSRB stated that it never intended for dealers to treat payments to administrative party accounts as a safe harbor and that payments to administrative-type accounts have always fallen within the rule’s regulatory ambit. The MSRB further stated that the SEC’s approval order of certain early amendments to Rule G–37 clearly demonstrates that the MSRB never intended for dealers to treat payments to administrative party accounts as a safe harbor.10 In 1995, the MSRB filed and the SEC approved amendments to Rule G–37’s disclosure requirements to require dealers to record and report all payments to parties by dealers, PACs, 8 Id., at 948. 9 McConnell v. Federal Election Commission, 540 U.S. 93, 124 S.Ct. 619 (Dec. 10, 2003). 10 See Securities Exchange Act Release No. 35446 (SEC Order Approving Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Rule G–37 on Political Contributions and Prohibitions on Municipal Securities Business, and Rule G–8, on Recordkeeping) (March 6, 1995), 60 FR 13496 (‘‘1995 SEC Approval Order’’). E:\FR\FM\29SEN1.SGM 29SEN1 56946 Federal Register / Vol. 70, No. 188 / Thursday, September 29, 2005 / Notices MFPs and executive officers regardless of whether those payments constitute contributions. In the 1995 SEC Approval Order, the SEC reiterated that the party payment disclosure requirements are intended to help ensure that dealers do not circumvent the prohibition on business in the rule by indirect contributions to issuer officials through payments to political parties. The SEC explained that the need for the language amendment was motivated by attempts by dealer and/or political parties to assert that contributions to administrative-type accounts did not fall within the rule’s regulatory ambit. In the 1995 SEC Approval Order, the SEC states: ‘‘Certain dealers and other industry participants have notified the MSRB that certain political parties currently are engaging in fundraising practices which, according to these political parties, do not invoke the application of rule G–37. For example, some of these entities currently are urging dealers to make payments to political parties earmarked for expenses other than political contributions (such as administrative expenses or voter registration drives). Since these payments would not constitute ‘contributions’ under the rule, the recordkeeping and reporting provisions would not apply. The MSRB is concerned, based upon this information, that the same pay-to-play pressures that motivated the MSRB to adopt rule G–37 may be emerging in connection with the fundraising practices of certain political parties described above.’’11 In addition, in August 2003, when the MSRB published a notice on indirect rule violations of Rule G–37, the MSRB referenced the 1995 SEC Approval Order and specifically stated that, ‘‘The party payment disclosure requirements were intended to assist in severing any connection between payments to political parties (even if earmarked for expenses other than political contributions) and the awarding of municipal securities business.’’ 12 The MSRB further stated that the commentators continued incorrect assertions about a ‘‘housekeeping’’ safe harbor only serve to illustrate the potential for real (or imagined) safe harbors to become dangerous loopholes as parties or PACs tailor their solicitations for contributions to the safe harbor’s parameters, and that, as noted in the MSRB’s proposed guidance, the need for dealers to adopt adequate written supervisory procedures to prevent indirect violations via at 13498. Notice 2003–32 (August 6, 2003) at pp. 1–2 (emphasis added). ‘‘housekeeping’’ type political party accounts is especially important in light of media and other reports that issuer agents have informed dealers and MFPs that, if they are prohibited from contributing directly to an issuer official’s campaign, they should contribute to an affiliate party’s ‘‘housekeeping’’ account. National Party Committees and Federal Leadership PACs UBS and BMA requested that the MSRB expressly state that contributions made to a national party committee or federal leadership PAC be permitted under the proposed Qs&As as long as (1) the contribution was not solicited by an issuer official, and (2) the party committee or leadership PAC is not controlled by an issuer official. The DSCC stated that it is concerned that the guidance presented in the MSRB’s draft Questions and Answers may unnecessarily chill contributions to national party committees from MFPs and dealer-controlled PACs, and that contributions to national party committees do not present the ‘‘pay-toplay’’ concerns Rule G–37 was intended to address. These commentators are asking the MSRB to create a safe harbor for certain national party committees and federal leadership PACs. The MSRB responded that there is no evidence that the lack of a safe harbor for national party committees and federal leadership PACs has inhibited MFPs or dealers from contributing to such parties or PACs. The MSRB does not believe it is useful to provide ‘‘safe harbors’’ concerning parties or PACs such that a dealer or MFP could make payments to certain parties or PACs without investigating whether the payment is actually being made as a means to circumvent the requirements of Rule G–37. The MSRB stated that the Court of Appeals in Blount 13 expressly recognized that Rule G–37(d) was originally intended to prevent payments to both national and state parties used as a ‘‘means to circumvent’’ Rule G–37. UBS and BMA stated that when a contribution is not solicited by an issuer official and the party leadership PAC is not controlled by an issuer official the national party committees and federal leadership PACs cannot be used as a means to circumvent Rule G–37; the MSRB stated that such a position is inconsistent with public perception. The MSRB also stated that the Supreme Court’s recent decision in McConnell 14 emphasized the potential for payments to a political party to have undue 11 Id. 12 MSRB VerDate Aug<31>2005 13:52 Sep 28, 2005 Jkt 205001 13 See 14 See PO 00000 supra note 7. supra note 9. Frm 00061 Fmt 4703 Sfmt 4703 influence on the actions of the elected officeholders belonging to the same party, and that McConnell upheld new federal statutory restrictions on soft money donations that were neither solicited by candidates nor used by the party to aid specific candidates. Given public perception and the Supreme Court’s pronouncements, the MSRB believes it is reasonable to require dealers to be responsible for having adequate supervisory procedures that obligate the dealer to exercise its judgment concerning whether contributions to any party or PAC are being made as a means to circumvent the provisions of Rule G–37. The Prohibition on Soliciting Contributions to State and Local Party Committees Should be Symmetrical to the Contributions Ban UBS stated that the Rule G–37(c) amendment should be symmetrical to the contributions ban because it is illogical to impose a greater prohibition on soliciting contributions than on making contributions. The MSRB responded that the proposed rule amendment is more limited than as portrayed by UBS. UBS stated that the amendment would completely prohibit MFPs from soliciting contributions to any state and local party committees when, in fact, it only prohibits solicitations by the dealer or certain MFPs for contributions to a political party of a state of locality where the dealer is engaging or is seeking to engage in municipal securities business. Thus, the MSRB believes that the proposed amendment is narrowly tailored to regulate only a dealer’s or certain MFP’s solicitation of other persons’ payments to political parties when there can be a perception that MFPs and dealers are soliciting others to make payments to parties or PACs as a means to circumvent the rule and the rule’s disclosure requirements. The MSRB determined that allowing dealers or certain MFPs to solicit other persons to make political party or PAC payments in states and localities where they are engaging or seeking to engage in municipal securities business creates at least the appearance of attempting to influence the awarding of municipal securities business through such payments. Moreover, without the proposed prohibition, it would be very difficult for enforcement agencies to detect such potential indirect violations because the parties solicited do not have to disclose the payments. Additionally, the MSRB believes that the arguably stricter prohibition can be justified because a violation of Rule G–37(c) does E:\FR\FM\29SEN1.SGM 29SEN1 Federal Register / Vol. 70, No. 188 / Thursday, September 29, 2005 / Notices not result in an automatic ban on business. The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the MSRB 15 and, in particular, the requirements of Section 15B(b)(2)(C) of the Act and the rules and regulations thereunder.16 Section 15B(b)(2)(C) of the Act requires, among other things, that the MSRB’s rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities, to remove impediments to and perfect the mechanism of a free and open market in municipal securities, and, in general, to protect investors and the public interest.17 In particular, the Commission finds that the proposed rule change is consistent with the Act because it will help inhibit practices that attempt, or create the appearance of attempting, to influence the awarding of municipal securities business through an indirect violation of Rule G–37. The Commission also finds that the Q&A guidance will facilitate dealer compliance with Rule G–27, on supervision, and Rule G–37(d)’s prohibitions on indirect rule violations. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,18 that the proposed rule change (SR–MSRB–2005– 12) be, and hereby is, approved. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.19 Jonathan G. Katz, Secretary. [FR Doc. 05–19497 Filed 9–28–05; 8:45 am] BILLING CODE 8010–01–P 15 In approving this rule the Commission notes that it has considered the proposed rule’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 16 15 U.S.C. 78o–4(b)(2)(C). 17 Id. 18 15 U.S.C. 78s(b)(2). 19 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 13:52 Sep 28, 2005 Jkt 205001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52488; File No. SR–MSRB– 2005–14] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendment to Rule A–8(a), on Adoption of Proposed Rules and Submission to Commission September 21, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 12, 2005, the Municipal Securities Rulemaking Board (‘‘MSRB’’ or ‘‘Board’’), filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the MSRB. The MSRB has filed the proposal pursuant to Section 19(b)(3)(A)(iii) of the Act,3 and Rule 19b–4(f)(3) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The MSRB is filing with the Commission a proposed rule change consisting of an amendment to Rule A– 8(a), on adoption of proposed rules and submission to Commission. The text of the proposed rule change is available on the MSRB’s Web site (https:// www.msrb.org), at the MSRB’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b–4(f)(3). A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose In November 2004, the SEC’s Electronic Form 19b–4 Filing System became operative. Self-regulatory organizations are required to use this electronic filing system for submitting rule filings to the SEC instead of submitting paper filings. As part of the process for using this electronic filing system, the person submitting the filing is required to ‘‘sign’’ the filing with an electronic signature and such signature is associated with a particular computer. Due to the procedural steps involved in submitting filings to the SEC through its electronic system, the MSRB is revising Rule A–8(a) to delete the Chairman of the Board from the list of persons authorized to sign rule filings. Thus, rule filings will be signed by one of the staff members designated by the Board to perform this function. 2. Statutory Basis The MSRB believes that the proposed rule change is consistent with Section 15B(b)(2)(I) of the Act,5 which authorizes the MSRB to adopt rules that provide for the operation and administration of the MSRB. The proposed rule change is concerned solely with the operation and administration of the MSRB. B. Self-Regulatory Organization’s Statement on Burden on Competition The MSRB does not believe that the proposed rule change will result in any burden on competition not necessary or appropriate in furtherance of the purposes of the Act since it only applies to the operation and administration of the MSRB. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 6 and Rule 19b–4(f)(3) thereunder.7 At any time within 60 days of the filing of the proposed rule change, the Commission may summarily 1 15 2 17 PO 00000 Frm 00062 Fmt 4703 Sfmt 4703 56947 5 15 U.S.C. 78o–4(b)(2)(I). U.S.C. 78s(b)(3)(A). 7 17 CFR 240.19b–4(f)(3). 6 15 E:\FR\FM\29SEN1.SGM 29SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 188 (Thursday, September 29, 2005)]
[Notices]
[Pages 56944-56947]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-19497]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52496, File No. SR-MSRB-2005-12]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Approving Proposed Rule Change Concerning Solicitation and 
Coordination of Payments to Political Parties and Question and Answer 
Guidance on Supervisory Procedures Related to Rule G-37(d) on Indirect 
Violations

September 22, 2005.
    On June 27, 2005, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change consisting of an amendment to 
Rule G-37(c), concerning solicitation and coordination of payments to 
political parties, and Q&A guidance on supervisory procedures related 
to Rule G-37(d), on indirect violations. The proposed rule change was 
published for comment in the Federal Register on August 16, 2005.\3\ 
The Commission received four comment letters regarding the proposal.\4\ 
On September 16, 2005,

[[Page 56945]]

the MSRB filed a response to the comment letters from UBS, BMA and 
DSCC.\5\ On September 21, 2005, the MSRB filed a response to the 
comment letter from Griffin, Kubik.\6\ This order approves the proposed 
rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 52235 (August 10, 
2005) 70 FR 48214 (August 16, 2005) (the ``Commission's Notice'').
    \4\ See letter to Jonathan G. Katz, Secretary, Commission, from 
Terry L. Atkinson, Managing Director, UBS Financial Services Inc. 
(``UBS''), dated September 1, 2005 (``UBS' Letter''); letter to 
Jonathan G. Katz, Secretary, Commission, from Leslie M. Norwood, 
Vice President and Assistant General Counsel, The Bond Market 
Association (``BMA''), dated September 2, 2005 (``BMA's Letter''); 
letter to Jonathan G. Katz, Secretary, Commission, from Marc E. 
Elias and Rebecca H. Gordon, Perkins Coie, Counsel to the Democratic 
Senatorial Campaign Committee (``DSCC''), dated September 6, 2005 
(``DSCC's Letter''); and letter to Jonathan G. Katz, Secretary, 
Commission, from David M. Thompson, President, and Robert J. 
Stracks, Counsel, Griffin, Kubik, Stephens & Thompson, Inc. 
(``Griffin, Kubik''), dated August 29, 2005 (``Griffin, Kubik's 
Letter'').
    \5\ See letter from Carolyn Walsh, Senior Associate General 
Counsel, MSRB, to Martha M. Haines, Chief, Office of Municipal 
Securities, Commission, dated September 16, 2005 (``MSRB's First 
Response Letter'').
    \6\ See letter from Carolyn Walsh, Senior Associate General 
Counsel, MSRB, to Martha M. Haines, Chief, Office of Municipal 
Securities, Commission, dated September 21, 2005 (``MSRB's Second 
Response Letter''). Griffin, Kubik's Letter was provided to the MSRB 
after it had sent its First Response Letter.
---------------------------------------------------------------------------

    The proposed rule change would prohibit a dealer and certain 
municipal finance professionals (``MFPs'') from soliciting any person 
or PAC to make or coordinate a payment to a political party of a state 
or locality where the dealer is engaging or is seeking to engage in 
municipal securities business. In addition, the proposed Qs&As seek to 
provide dealers with more guidance as they develop procedures to ensure 
compliance with both the language and the spirit of Rule G-37. A full 
description of the proposal is contained in the Commission's Notice.
    UBS, BMA and Griffin, Kubik stated in their comment letters that 
they fully support the elimination of pay-to-play practices in the 
municipal securities industry, but raised concerns about implementation 
of the proposal. DSCC expressed concern that the guidance presented in 
the MSRB's proposed Questions and Answers may unnecessarily chill 
contributions to national party committees from MFPs and dealer-
controlled PACs.

Vagueness and First Amendment Concerns

    Both UBS and BMA stated that the proposed Qs&As are vague and do 
not provide clear, uniform standards as to when a contribution to a PAC 
or party committee results in an indirect violation. UBS and BMA also 
stated that the Qs&As represent an expansion of Rule G-37 because the 
Qs&As require that a broker-dealer have procedures in place to 
reasonably ensure that contributions to PACs and party committees do 
not result in indirect contributions to issuer officials, but provide 
no discernable standard as to when such indirect contribution would 
occur. BMA stated that the MSRB had previously established a safe 
harbor where a broker-dealer gets assurances from a party committee or 
PAC that the broker-dealer's contribution will not be used for issuer 
officials (e.g., for housekeeping or conference accounts), and that 
this safe harbor conflicted with the proposal. Both UBS and BMA stated 
that the vagueness of the proposal will allow different firms to 
develop different supervisory procedures depending on their tolerance 
for risk. UBS and BMA further stated that creating a vague standard for 
contributing to PACs and party committees is unconstitutional, and that 
the due diligence suggested by the proposed Qs&As is troublesome under 
the First Amendment. Griffin, Kubik stated that they believe that Rule 
G-37 is unconstitutional.
    The MSRB noted in its Response Letters that the commentators raised 
these concerns to the MSRB during its comment period on the proposed 
guidance, that the MSRB responded to these comments in its filing and 
that the Commission's Notice addresses these issues at some length. The 
MSRB stated that the proposed Qs&As do not extend the reach of Rule G-
37 or create a vague standard of regulation. The MSRB stated that the 
proposed guidance does not change the standard regarding when a payment 
to a political party or PAC could result in either a rule violation or 
a ban on doing business with a municipal issuer. The MSRB further 
stated that a violation of Rule G-37(d) still will only occur when the 
payment is made to other entities ``as a means to circumvent the 
rule,'' and that the standard enunciated in Rule G-37(d), which 
prohibits anyone from ``directly or indirectly, through or by any other 
person or means'' doing what sections (b) and (c) prohibit, is not 
unconstitutionally vague.
    The MSRB further stated that contrary to statements made in the 
commentators' letters, this precise issue raised before the United 
States Court of Appeals in Blount v. SEC,\7\ and that the Court of 
Appeals in Blount directly rejected the challenge that Rule G-37(d) was 
too broad and could not regulate payments to parties and PACs when they 
are intended as end-runs around the direct contribution limits. In 
Blount, the Court stated: ``Although the language of section (d) itself 
is very broad, the SEC has interpreted it as requiring a showing of 
culpable intent, that is, a demonstration that the conduct was 
undertaken `as a means to circumvent' the requirements of (b) and (c) * 
* * The SEC states its `means to circumvent' qualification in general 
terms. The qualification appears, therefore, to apply not only to such 
items as contributions made by the broker's or dealer's family members 
or employees, but also gifts by a broker to a state or national party 
committee, made with the knowledge that some part of the gift is likely 
to be transmitted to an official excluded by Rule G-37. In short, 
according to the SEC, the rule restricts such gifts and contributions 
only when they are intended as end-runs around the direct contribution 
limitations.'' \8\
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    \7\ Blount v. SEC, 61 F.3d 938 (D.C. Cir 1995), rehearing and 
suggestion for rehearing en banc denied (1995), certiorari denied by 
517 U.S. 1119, 116 S.Ct. 1351, 134 L.Ed.2d 520 (1996).
    \8\ Id., at 948.
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    The MSRB further stated that the cases cited by BMA related to 
different issues and did not discredit the Blount Court's ruling on 
this precise issue. In addition, the MSRB stated that the cases relied 
upon by BMA were decided prior to Blount as well as the Supreme Court's 
decision in McConnell.\9\ Griffin, Kubik stated that the MSRB's 
citations to Blount and McConnell were weak arguments, but did not cite 
any authority for their belief that Rule G-37 is unconstitutional.
---------------------------------------------------------------------------

    \9\ McConnell v. Federal Election Commission, 540 U.S. 93, 124 
S.Ct. 619 (Dec. 10, 2003).
---------------------------------------------------------------------------

    The MSRB stated in its filing that it was issuing the proposed 
guidance to remind dealers of the need to have adequate supervisory 
procedures. The MSRB guidance makes suggestions concerning such 
procedures but does not require particular procedures. The MSRB stated 
that it is up to individual dealers to create procedures that are 
appropriate to their particular circumstances, and that broker-dealers 
generally do not have uniform supervisory procedures.
    The MSRB stated that it never intended for dealers to treat 
payments to administrative party accounts as a safe harbor and that 
payments to administrative-type accounts have always fallen within the 
rule's regulatory ambit. The MSRB further stated that the SEC's 
approval order of certain early amendments to Rule G-37 clearly 
demonstrates that the MSRB never intended for dealers to treat payments 
to administrative party accounts as a safe harbor.\10\
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    \10\ See Securities Exchange Act Release No. 35446 (SEC Order 
Approving Proposed Rule Change by the Municipal Securities 
Rulemaking Board Relating to Rule G-37 on Political Contributions 
and Prohibitions on Municipal Securities Business, and Rule G-8, on 
Recordkeeping) (March 6, 1995), 60 FR 13496 (``1995 SEC Approval 
Order'').
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    In 1995, the MSRB filed and the SEC approved amendments to Rule G-
37's disclosure requirements to require dealers to record and report 
all payments to parties by dealers, PACs,

[[Page 56946]]

MFPs and executive officers regardless of whether those payments 
constitute contributions. In the 1995 SEC Approval Order, the SEC 
reiterated that the party payment disclosure requirements are intended 
to help ensure that dealers do not circumvent the prohibition on 
business in the rule by indirect contributions to issuer officials 
through payments to political parties. The SEC explained that the need 
for the language amendment was motivated by attempts by dealer and/or 
political parties to assert that contributions to administrative-type 
accounts did not fall within the rule's regulatory ambit. In the 1995 
SEC Approval Order, the SEC states: ``Certain dealers and other 
industry participants have notified the MSRB that certain political 
parties currently are engaging in fundraising practices which, 
according to these political parties, do not invoke the application of 
rule G-37. For example, some of these entities currently are urging 
dealers to make payments to political parties earmarked for expenses 
other than political contributions (such as administrative expenses or 
voter registration drives). Since these payments would not constitute 
`contributions' under the rule, the recordkeeping and reporting 
provisions would not apply. The MSRB is concerned, based upon this 
information, that the same pay-to-play pressures that motivated the 
MSRB to adopt rule G-37 may be emerging in connection with the 
fundraising practices of certain political parties described 
above.''\11\
---------------------------------------------------------------------------

    \11\ Id. at 13498.
---------------------------------------------------------------------------

    In addition, in August 2003, when the MSRB published a notice on 
indirect rule violations of Rule G-37, the MSRB referenced the 1995 SEC 
Approval Order and specifically stated that, ``The party payment 
disclosure requirements were intended to assist in severing any 
connection between payments to political parties (even if earmarked for 
expenses other than political contributions) and the awarding of 
municipal securities business.'' \12\
---------------------------------------------------------------------------

    \12\ MSRB Notice 2003-32 (August 6, 2003) at pp. 1-2 (emphasis 
added).
---------------------------------------------------------------------------

    The MSRB further stated that the commentators continued incorrect 
assertions about a ``housekeeping'' safe harbor only serve to 
illustrate the potential for real (or imagined) safe harbors to become 
dangerous loopholes as parties or PACs tailor their solicitations for 
contributions to the safe harbor's parameters, and that, as noted in 
the MSRB's proposed guidance, the need for dealers to adopt adequate 
written supervisory procedures to prevent indirect violations via 
``housekeeping'' type political party accounts is especially important 
in light of media and other reports that issuer agents have informed 
dealers and MFPs that, if they are prohibited from contributing 
directly to an issuer official's campaign, they should contribute to an 
affiliate party's ``housekeeping'' account.

National Party Committees and Federal Leadership PACs

    UBS and BMA requested that the MSRB expressly state that 
contributions made to a national party committee or federal leadership 
PAC be permitted under the proposed Qs&As as long as (1) the 
contribution was not solicited by an issuer official, and (2) the party 
committee or leadership PAC is not controlled by an issuer official. 
The DSCC stated that it is concerned that the guidance presented in the 
MSRB's draft Questions and Answers may unnecessarily chill 
contributions to national party committees from MFPs and dealer-
controlled PACs, and that contributions to national party committees do 
not present the ``pay-to-play'' concerns Rule G-37 was intended to 
address. These commentators are asking the MSRB to create a safe harbor 
for certain national party committees and federal leadership PACs.
    The MSRB responded that there is no evidence that the lack of a 
safe harbor for national party committees and federal leadership PACs 
has inhibited MFPs or dealers from contributing to such parties or 
PACs. The MSRB does not believe it is useful to provide ``safe 
harbors'' concerning parties or PACs such that a dealer or MFP could 
make payments to certain parties or PACs without investigating whether 
the payment is actually being made as a means to circumvent the 
requirements of Rule G-37. The MSRB stated that the Court of Appeals in 
Blount \13\ expressly recognized that Rule G-37(d) was originally 
intended to prevent payments to both national and state parties used as 
a ``means to circumvent'' Rule G-37. UBS and BMA stated that when a 
contribution is not solicited by an issuer official and the party 
leadership PAC is not controlled by an issuer official the national 
party committees and federal leadership PACs cannot be used as a means 
to circumvent Rule G-37; the MSRB stated that such a position is 
inconsistent with public perception. The MSRB also stated that the 
Supreme Court's recent decision in McConnell \14\ emphasized the 
potential for payments to a political party to have undue influence on 
the actions of the elected officeholders belonging to the same party, 
and that McConnell upheld new federal statutory restrictions on soft 
money donations that were neither solicited by candidates nor used by 
the party to aid specific candidates. Given public perception and the 
Supreme Court's pronouncements, the MSRB believes it is reasonable to 
require dealers to be responsible for having adequate supervisory 
procedures that obligate the dealer to exercise its judgment concerning 
whether contributions to any party or PAC are being made as a means to 
circumvent the provisions of Rule G-37.
---------------------------------------------------------------------------

    \13\ See supra note 7.
    \14\ See supra note 9.
---------------------------------------------------------------------------

The Prohibition on Soliciting Contributions to State and Local Party 
Committees Should be Symmetrical to the Contributions Ban

    UBS stated that the Rule G-37(c) amendment should be symmetrical to 
the contributions ban because it is illogical to impose a greater 
prohibition on soliciting contributions than on making contributions. 
The MSRB responded that the proposed rule amendment is more limited 
than as portrayed by UBS. UBS stated that the amendment would 
completely prohibit MFPs from soliciting contributions to any state and 
local party committees when, in fact, it only prohibits solicitations 
by the dealer or certain MFPs for contributions to a political party of 
a state of locality where the dealer is engaging or is seeking to 
engage in municipal securities business. Thus, the MSRB believes that 
the proposed amendment is narrowly tailored to regulate only a dealer's 
or certain MFP's solicitation of other persons' payments to political 
parties when there can be a perception that MFPs and dealers are 
soliciting others to make payments to parties or PACs as a means to 
circumvent the rule and the rule's disclosure requirements.
    The MSRB determined that allowing dealers or certain MFPs to 
solicit other persons to make political party or PAC payments in states 
and localities where they are engaging or seeking to engage in 
municipal securities business creates at least the appearance of 
attempting to influence the awarding of municipal securities business 
through such payments. Moreover, without the proposed prohibition, it 
would be very difficult for enforcement agencies to detect such 
potential indirect violations because the parties solicited do not have 
to disclose the payments. Additionally, the MSRB believes that the 
arguably stricter prohibition can be justified because a violation of 
Rule G-37(c) does

[[Page 56947]]

not result in an automatic ban on business.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the MSRB \15\ and, in particular, the 
requirements of Section 15B(b)(2)(C) of the Act and the rules and 
regulations thereunder.\16\ Section 15B(b)(2)(C) of the Act requires, 
among other things, that the MSRB's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in municipal 
securities, to remove impediments to and perfect the mechanism of a 
free and open market in municipal securities, and, in general, to 
protect investors and the public interest.\17\ In particular, the 
Commission finds that the proposed rule change is consistent with the 
Act because it will help inhibit practices that attempt, or create the 
appearance of attempting, to influence the awarding of municipal 
securities business through an indirect violation of Rule G-37. The 
Commission also finds that the Q&A guidance will facilitate dealer 
compliance with Rule G-27, on supervision, and Rule G-37(d)'s 
prohibitions on indirect rule violations.
---------------------------------------------------------------------------

    \15\ In approving this rule the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78o-4(b)(2)(C).
    \17\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-MSRB-2005-12) be, and hereby 
is, approved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-19497 Filed 9-28-05; 8:45 am]
BILLING CODE 8010-01-P

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