Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed Rule Change Relating to Rule G-37, on Political Contributions and Prohibitions on Municipal Securities Business, 54930-54933 [2010-22450]
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Federal Register / Vol. 75, No. 174 / Thursday, September 9, 2010 / Notices
requirements of Section 17A of the Act 8
and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,9 that the
proposed rule change (File No. SR–
FICC–2010–02) be, and hereby is,
approved.10
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.11
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–22448 Filed 9–8–10; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62830; File No. SR–MSRB–
2010–07]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of Proposed
Rule Change Relating to Rule G–37, on
Political Contributions and
Prohibitions on Municipal Securities
Business
September 2, 2010.
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 August
25, 2010, the Municipal Securities
Rulemaking Board (‘‘MSRB’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the MSRB. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
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I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The MSRB has filed with the
Commission a proposed rule change
which consists of an interpretive notice
regarding Rule G–37, on political
contributions and prohibitions on
municipal securities business (referred
to hereafter as ‘‘proposed rule change’’).
The MSRB has requested an effective
date for the proposed rule change of
sixty (60) days after Commission
approval of the proposed rule change.
8 15
U.S.C. 78q–1.
U.S.C. 78s(b)(2).
10 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
11 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
9 15
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The text of the proposed rule change
is available on the MSRB’s Web site at
https://www.msrb.org/msrb1/sec.asp, 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. 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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The proposed rule change consists of
an interpretive notice regarding Rule G–
37, on political contributions and
prohibitions on municipal securities
business.3 Under Rule G–37, certain
contributions to elected officials of
municipal securities issuers made by
brokers, dealers and municipal
securities dealers (‘‘dealers’’), municipal
finance professionals (‘‘MFPs’’)
associated with dealers, and political
action committees (‘‘PACs’’) controlled
by dealers and their MFPs (‘‘dealercontrolled PACs’’) 4 may result in
prohibitions on dealers from engaging in
municipal securities business with such
issuers for a period of two years from
the date of any triggering contributions.
Rule G–37 requires dealers to disclose
certain contributions to issuer officials,
state or local political parties, and bond
ballot campaigns, as well as other
information, on Form G–37 to allow
public scrutiny of such contributions
3 Rule G–37 defines municipal securities business
as: (i) The purchase of a primary offering of
municipal securities from an issuer on other than
a competitive bid basis; (ii) the offer or sale of a
primary offering of municipal securities on behalf
of an issuer; (iii) the provision of financial advisory
or consultant services to or on behalf of an issuer
with respect to a primary offering of municipal
securities in which the dealer was chosen to
provide such services on other than a competitive
bid basis; or (iv) the provision of remarketing agent
services to or on behalf of an issuer with respect
to a primary offering of municipal securities in
which the dealer was chosen to provide such
services on other than a competitive bid basis.
4 The MSRB has previously stated that the matter
of control depends upon whether or not the dealer
or the MFP has the ability to direct or cause the
direction of the management or policies of the PAC
(MSRB Question & Answer No. IV. 24—Dealer
Controlled PAC).
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and the municipal securities business of
a dealer. In addition, dealers and MFPs
generally are prohibited from soliciting
others (including affiliates of the dealer
or any PACs) to make contributions to
officials of issuers with which the dealer
is engaging or seeking to engage in
municipal securities business, or to
political parties of a state or locality
where the dealer is engaging or seeking
to engage in municipal securities
business. Dealers and MFPs are
prohibited from circumventing Rule G–
37 by direct or indirect actions through
any other persons or means.5
Due to changes in the financial
markets since the adoption of Rule G–
37 and recent market turmoil, many
dealers have become affiliated with a
broad range of other entities in
increasingly diverse organizational
structures. Some of these affiliated
entities (including but not limited to
banks, bank holding companies,
insurance companies and investment
management companies) have formed or
otherwise maintain relationships with
PACs (‘‘affiliated PACs’’) and other
political organizations, many of which
may make contributions to issuer
officials. Such relationships raise
questions regarding the extent to which
affiliated PACs may effectively be
controlled by dealers or their MFPs and
thereby constitute dealer-controlled
PACs whose contributions are subject to
Rule G–37. Further, such relationships
raise concerns regarding whether the
contributions of such affiliated PACs,
even if not viewed as dealer-controlled
PACs, may be used by dealers or their
MFPs to circumvent Rule G–37 as
indirect contributions for the purpose of
obtaining or retaining municipal
securities business. As a result, the
MSRB has filed the proposed rule
change to provide additional guidance
with regard to the potential for affiliated
PACs to be viewed as dealer-controlled
PACs.
The proposed rule change sets out
factors that may result in an affiliated
PAC being viewed as controlled by a
dealer or an MFP of a dealer and thereby
being treated as a dealer-controlled PAC
for purposes of Rule G–37. The
proposed rule change would: i) provide
guidance on when a dealer’s affiliated
PAC might be viewed as controlled by
the dealer for purposes of Rule G–37;
and ii) ensure that the industry is
5 Rule G–37(d) provides that no broker, dealer or
municipal securities dealer or any municipal
finance professional shall, directly or indirectly,
through or by any other person or means, do any
act which would result in a violation of sections (b)
or (c) of the rule. Section (b) relates to the ban on
business and Section (c) relates to the prohibition
on soliciting and coordinating contributions.
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Federal Register / Vol. 75, No. 174 / Thursday, September 9, 2010 / Notices
cognizant of prior MSRB guidance
concerning indirect contributions under
the rule. The proposed rule change
notes that, when evaluating whether
contributions made by affiliated PACs
may be subject to the provisions of Rule
G–37, dealers should first determine
whether such affiliated PAC would be
viewed as a dealer-controlled PAC. If an
affiliated PAC is determined to be a
dealer-controlled PAC, then its
contributions to issuer officials would
subject the dealer to the ban on
municipal securities business and its
contributions to issuer officials, state or
local political parties, and bond ballot
campaigns would be subject to
disclosure under Rule G–37. Even if the
affiliated PAC is determined not to be a
dealer-controlled PAC, the dealer still
must consider whether payments made
by the dealer or its MFPs to such
affiliated PAC could ultimately be
viewed as an indirect contribution
under Rule G–37(d) if, for example, the
affiliated PAC is being used as a conduit
for making a contribution to an issuer
official.
Indicators of Control by Dealers and
MFPs. Soon after adoption of Rule G–37,
the MSRB stated that each dealer must
determine whether a PAC is dealer
controlled, with any PAC of a non-bank
dealer assumed to be a dealer-controlled
PAC.6 The MSRB has also stated that the
determination of whether a PAC of a
bank dealer 7 is a dealer-controlled PAC
would depend upon whether the bank
dealer or anyone from the bank dealer
department has the ability to direct or
cause the direction of the management
or the policies of the PAC.8 Such ability
to direct or cause the direction of the
management or the policies of a PAC
also would be indicative of control of
such PAC by a non-bank dealer or any
of its MFPs, although it would not be
the exclusive indicator of such control.
While this guidance establishes basic
principles with regard to making a
determination of control, it does not set
out an exhaustive list of circumstances
under which a PAC may or may not be
viewed as dealer or MFP controlled. The
specific facts and circumstances
regarding the creation, management,
operation and control of a particular
PAC must be considered in making a
determination of control with respect to
such PAC.
6 See
Rule G–37 Question & Answer No. IV. 24
(May 24, 1994).
7 MSRB Rule D–8 defines a bank dealer as a
municipal securities dealer which is a bank or a
separately identifiable department or division of a
bank.
8 See Rule G–37 Question & Answer No. IV. 24
(May 24, 1994).
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Creation of PAC. The proposed rule
change provides that, in general, a
dealer or MFP involved in the creation
of a PAC would continue to be viewed
as controlling such PAC unless and
until such dealer or MFP becomes
wholly disassociated in any direct or
indirect manner with the PAC. Thus,
any PAC created by a dealer, acting
either in a sole capacity or together with
other entities or individuals, would be
presumed to be a dealer-controlled PAC.
This presumption continues at least as
long as the dealer or any MFP of the
dealer retains any formal or informal
role in connection with such PAC,
regardless of whether such dealer or
MFP has the ability to direct or cause
the direction of the management or
policies of the PAC. This presumption
also would continue for so long as any
non-MFP associated person of the dealer
(either an individual, whether or not an
MFP, or an affiliated company directly
or indirectly controlling, controlled by
or under common control with the
dealer) has the ability to direct or cause
the direction of the management or
policies of the PAC. In effect, a dealer
could not attempt to treat a PAC it
created and then spun off to the control
of an affiliated company as not being a
dealer-controlled PAC. However,
depending on the totality of the facts
and circumstances, a PAC originally
created by a dealer in which the dealer
or its MFPs no longer retain any role,
and with respect to which any other
affiliates retain only very limited noncontrol roles, could be viewed as no
longer controlled by the dealer.
Similarly, a PAC created by any
person associated with the dealer at the
time the PAC was created, acting either
in a sole capacity or together with other
entities or individuals, would be
presumed to be controlled by such
person under the proposed rule change.
Such presumption continues at least for
so long as such person retains any
formal or informal role in connection
with such PAC, regardless of whether
any such person has the ability to direct
or cause the direction of the
management or policies of the PAC.
This presumption also would continue
for so long as any other person
associated with the same dealer as the
creator of the PAC has the ability to
direct or cause the direction of the
management or policies of the PAC.
Although such PAC may not be viewed
as subject to Rule G–37 as an MFPcontrolled PAC when originally created
if such person was not then an MFP, if
the person creating the PAC, or any
other associated person with the ability
to direct or cause the direction of the
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54931
management or policies of such PAC, is
or later becomes an MFP, such PAC
would be deemed an MFP-controlled
PAC.9
Management, Funding and Control of
PAC. Beyond the role of the dealer, MFP
or other person in creating a PAC and
maintaining an ongoing association with
such PAC, the proposed rule change
provides that the ability to direct or
cause the direction of the management
or the policies of a PAC is also
important. Strong indicators of
management and control are not
mitigated by the fact that such dealer,
MFP or other person does not have
exclusive, predominant or ‘‘majority’’
control of the PAC, its management, its
policies, or its decisions with regard to
making contributions. For example, the
fact that a dealer or MFP may only have
a single vote on a governing board or
other decision-making or advisory board
or committee of a PAC, and therefore
does not have sole power to cause the
PAC to take any action, would not
obviate the status of such dealer or MFP
as having control of the PAC, so long as
the dealer or MFP has the ability, alone
or in conjunction with other similarly
empowered entities or individuals, to
direct or cause the direction of the
management or the policies of the PAC.
In essence, it is possible for a single
PAC to be viewed as controlled by
multiple different dealers if the control
of such PAC is shared among such
dealers, although the presumption of
control may be rebutted as described
below.
The level of funding provided by
dealers and their MFPs to a PAC may
also be indicative of control pursuant to
the proposed rule change. A PAC that
receives a majority of its funding from
a single dealer (including the collective
contributions of its MFPs and
employees) or a single MFP is
conclusively presumed to be controlled
by such dealer or MFP, regardless of the
lack of any of the other indicia of
control described in this notice. Another
important factor is the size or frequency
of contributions by a dealer or MFP,10
viewed in light of the size and
frequency of contributions made by
other contributors not affiliated in any
way with such dealer or MFP. For
example, a limited number of small
9 However, a PAC created by an individual acting
in his or her formal capacity as an officer,
employee, director or other representative of a
dealer, regardless of whether such individual is an
MFP, would be deemed a dealer-controlled PAC
rather than a PAC controlled by the individual.
10 A dealer or an MFP may make sufficiently large
or frequent contributions to a PAC so as to obtain
effective control over the PAC, depending on the
totality of facts and circumstances.
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Federal Register / Vol. 75, No. 174 / Thursday, September 9, 2010 / Notices
contributions freely made by employees
of a dealer to an affiliated PAC (i.e., not
directed by the dealer and not part of an
automated or otherwise dealerorganized program of contributions)
would not, by itself, automatically raise
a presumption of dealer control so long
as the collective contributions by the
dealer or its employees is not significant
as compared to the total funding of the
affiliated PAC, subject to consideration
of the other relevant facts and
circumstances. In addition,
contributions made by a dealer or MFP
to an affiliated PAC could raise a
stronger inference of de facto dealer or
MFP control than when such
contributions were made to nonaffiliated PACs.
However, even where a dealer or MFP
is not viewed as controlling a PAC
under the principles described above,
the proposed rule change cautions
dealers to remain mindful of the
potential for leveraging the contribution
activities of affiliated PACs in soliciting
municipal securities business in a way
that could raise a presumption of dealer
or MFP control. For example, an MFP’s
references to the contributions made by
an affiliated PAC during solicitations of
municipal securities business could,
depending on the facts and
circumstances, serve as evidence of
coordination of such PAC’s activities
with the dealer or MFP that could,
together with other facts, be indicative
of direct or indirect control of the PAC
by such dealer or MFP. Such control
could be found even in circumstances
where the dealer or its MFPs have not
made contributions to the affiliated
PAC.11
Of course, the presumptions
described above may be rebutted,
depending upon the totality of facts and
circumstances. The proposed rule
change notes considerations that may
serve to rebut such presumptions,
which may include whether the dealer
or person creating the PAC: (i)
Participates with a broad-based group of
other entities and/or individuals in
creating the PAC, (ii) at no time
undertakes any direct or indirect role
(and, in the case of a dealer, no person
associated with the dealer undertakes
any direct or indirect role) in leading
the creation of the PAC or in directing
or causing the direction of the
management or the policies of the PAC,
and/or (iii) provides funding for such
PAC (and, in the case of a dealer, its
associated persons collectively provide
funding for such PAC) that is not
11 See Rule G–37 Question & Answer No. III.7
(September 22, 2005) for a discussion of potential
indirect contributions through affiliated PACs.
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substantially greater than the typical
funding levels of other participants in
the PAC who do not undertake a direct
or indirect role in leading the creation
of the PAC or in directing or causing the
direction of the management or the
policies of the PAC.
Indirect Contributions Through Bank
PACs or Other Affiliated PACs. The
proposed rule change reminds dealers
that, if an affiliated PAC is determined
not to be a dealer-controlled PAC, a
dealer must still consider whether
payments made by the dealer or its
MFPs to such affiliated PAC could be
viewed as an indirect contribution that
would become subject to Rule G–37
pursuant to section (d) thereof. The
proposed rule change reviews prior
extensive guidance on such indirect
contributions, noting that the MSRB had
stated in 1996 that, depending on the
facts and circumstances, contributions
to a non-dealer associated PAC that is
soliciting funds for the purpose of
supporting a limited number of issuer
officials might result in the same
prohibition on municipal securities
business as would contributions made
directly to the issuer official.12 The
MSRB also noted that dealers should
make inquiries of a non-dealer
associated PAC that is soliciting
contributions in order to ensure that
contributions to such a PAC would not
be treated as an indirect contribution.13
The proposed rule change also notes
that the MSRB has previously provided
guidance in 2005 with regard to
supervisory procedures 14 that dealers
should have in place in connection with
payments to a non-dealer associated
PAC or a political party to avoid
indirect rule violations of Rule G–37(d).
In such guidance, the MSRB stated that
in order to ensure compliance with Rule
G–27(c) as it relates to payments to
political parties or PACs and Rule G–
37(d), each dealer must adopt, maintain
and enforce written supervisory
procedures reasonably designed to
ensure that neither the dealer nor its
MFPs are using payments to political
parties or non-dealer controlled PACs to
contribute indirectly to an official of an
issuer.15 Among other things, dealers
might seek to establish procedures
12 See Rule G–37 Question & Answer No. III.4
(August 6, 1996).
13 See Rule G–37 Question & Answer No. III.5
(August 6, 1996).
14 Rule G–27, on supervision, provides in section
(c) that each dealer shall adopt, maintain and
enforce written supervisory procedures reasonably
designed to ensure that the conduct of the
municipal securities activities of the dealer and its
associated persons are in compliance with MSRB
rules.
15 See Rule G–37 Question & Answer No. III.7
(September 22, 2005).
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requiring that, prior to the making of
any contribution to a PAC, the dealer
undertake certain due diligence
inquiries regarding the intended use of
such contributions, the motive for
making the contribution and whether
the contribution was solicited. Further,
in order to ensure compliance with Rule
G–37(d), dealers could consider
establishing certain information barriers
between any affiliated PACs and the
dealer and its MFPs.16 The proposed
rule change notes that dealers that have
established such information barriers
should review their adequacy to ensure
that the affiliated entities’ contributions,
payments or PAC disbursement
decisions are neither influenced by the
dealer or its MFPs, nor communicated
to the dealers and the MFPs.
The MSRB subsequently noted that
the 2005 guidance did not establish an
obligation to put in place the specific
procedures and information barriers
described in the guidance so long as the
dealer in fact has and enforces other
written supervisory procedures
reasonably designed to ensure that the
conduct of the dealer and its MFPs are
in compliance with Rule G–37(d).17 The
proposed rule change provides the
example that, when information
regarding past or planned contributions
of an affiliated PAC is or may be
available to or known by the dealer or
its MFPs, the dealer might establish and
enforce written supervisory procedures
that prohibit the dealer or MFP from
providing information to issuer
personnel regarding past or anticipated
affiliated PAC contributions.
2. Statutory Basis
The MSRB has adopted the proposed
rule change pursuant to Section
15B(b)(2)(C) of the Act,18 which
provides that the MSRB’s rules shall be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
16 The potential information barriers described in
the guidance include: (i) A prohibition on the
dealer or MFP from recommending, nominating,
appointing or approving the management of
affiliated PACs; (ii) a prohibition on sharing the
affiliated PACs meeting agenda, meeting schedule,
or meeting minutes; (iii) a prohibition on
identification of prior affiliated PAC contributions,
planned PAC contributions or anticipated PAC
contributions; (iv) a prohibition on directly
providing or coordinating information about prior
negotiated municipal securities businesses,
solicited municipal securities business, and
planned solicitations of municipal securities
business; and (v) other such information barriers as
the firms deems appropriate to effectively monitor
conflicting interest and prevent abuses.
17 See Rule G–37 Interpretive Letter—Supervisory
procedures relating to indirect contributions;
conference accounts and 527 organizations
(December 21, 2006).
18 15 U.S.C. 78o–4(b)(2)(C).
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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.
The MSRB believes that the proposed
rule change is consistent with the Act
because it will help to inhibit practices
constituting real and perceived attempts
to influence the awarding of municipal
securities business through
contributions made by or through
dealer-affiliated PACs. The MSRB also
believes that the proposed rule change
will facilitate dealer compliance with
Rule G–37 and Rule G–27, on
supervision.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The MSRB does not believe that the
proposed rule change would impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act since it would apply
equally to all brokers, dealers and
municipal securities dealers.
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.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
The MSRB has requested an effective
date for the proposed rule change of
sixty (60) days after Commission
approval of the proposed rule change.
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.
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Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comment
• 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–MSRB–2010–07 on the
subject line.
[Release No. 34–62829; File No. SR–BX–
2010–061]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change To Permit
Concurrent Listing of $2.50 and $1
Strikes on MNX Options
September 2, 2010.
Paper Comments
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on August
30, 2010, NASDAQ OMX BX, Inc. (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
All submissions should refer to File
‘‘Commission’’) the proposed rule
Number SR–MSRB–2010–07. This file
change as described in Items I and II
number should be included on the
below, which Items have been prepared
subject line if e-mail is used. To help the by the Exchange. The Commission is
Commission process and review your
publishing this notice to solicit
comments more efficiently, please use
comments on the proposed rule change
only one method. The Commission will from interested persons.
post all comments on the Commission’s
I. Self-Regulatory Organization’s
Internet Web site (https://www.sec.gov/
Statement of the Terms of Substance of
rules/sro.shtml). Copies of the
the Proposed Rule Change
submission, all subsequent
amendments, all written statements
The Exchange proposes to amend
with respect to the proposed rule
Chapter XIV, Section 10 (Terms of Index
change that are filed with the
Options Contracts) of the Rules of the
Commission, and all written
Boston Options Exchange Group, LLC
communications relating to the
(‘‘BOX’’) to allow the Exchange to
proposed rule change between the
concurrently list $2.50 and $1 strikes on
Commission and any person, other than Mini- Nasdaq-100 Index (‘‘MNX’’)
those that may be withheld from the
options, and that certain listing
public in accordance with the
parameters only apply to $1 strikes on
provisions of 5 U.S.C. 552, will be
MNX options. The text of the proposed
available for Web site viewing and
rule change is available from the
printing in the Commission’s Public
principal office of the Exchange, on the
Reference Room, 100 F Street, NE.,
Commission’s Web site at https://
Washington, DC 20549, on official
www.sec.gov, at the Commission’s
business days between the hours of 10
Public Reference Room and also on the
a.m. and 3 p.m. Copies of such filing
Exchange’s Internet Web site at https://
also will be available for inspection and nasdaqomxbx.cchwallstreet.com/
copying at the principal office of the
NASDAQOMXBX/Filings/.
MSRB. All comments received will be
posted without change; the Commission II. Self-Regulatory Organization’s
Statement of the Purpose of, and
does not edit personal identifying
Statutory Basis for, the Proposed Rule
information from submissions. You
Change
should submit only information that
In its filing with the Commission, the
you wish to make available publicly. All
self-regulatory organization included
submissions should refer to File
Number SR–MSRB–2010–07 and should statements concerning the purpose of,
be submitted on or before September 30, and basis for, the proposed rule change
and discussed any comments it received
2010.
on the proposed rule change. The text
For the Commission, by the Division of
of these statements may be examined at
Trading and Markets, pursuant to delegated
the places specified in Item IV below.
authority.19
The self-regulatory organization has
Florence E. Harmon,
prepared summaries, set forth in
Deputy Secretary.
Sections A, B, and C below, of the most
[FR Doc. 2010–22450 Filed 9–8–10; 8:45 am]
significant aspects of such statements.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
BILLING CODE 8010–01–P
1 15
19 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00088
Fmt 4703
Sfmt 4703
2 17
E:\FR\FM\09SEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
09SEN1
]]>Agencies
[Federal Register Volume 75, Number 174 (Thursday, September 9, 2010)]
[Notices]
[Pages 54930-54933]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-22450]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62830; File No. SR-MSRB-2010-07]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change Relating to Rule G-37,
on Political Contributions and Prohibitions on Municipal Securities
Business
September 2, 2010.
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 August 25, 2010, the Municipal Securities Rulemaking Board
(``MSRB'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the MSRB. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB has filed with the Commission a proposed rule change which
consists of an interpretive notice regarding Rule G-37, on political
contributions and prohibitions on municipal securities business
(referred to hereafter as ``proposed rule change''). The MSRB has
requested an effective date for the proposed rule change of sixty (60)
days after Commission approval of the proposed rule change.
The text of the proposed rule change is available on the MSRB's Web
site at https://www.msrb.org/msrb1/sec.asp, 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. 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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change consists of an interpretive notice
regarding Rule G-37, on political contributions and prohibitions on
municipal securities business.\3\ Under Rule G-37, certain
contributions to elected officials of municipal securities issuers made
by brokers, dealers and municipal securities dealers (``dealers''),
municipal finance professionals (``MFPs'') associated with dealers, and
political action committees (``PACs'') controlled by dealers and their
MFPs (``dealer-controlled PACs'') \4\ may result in prohibitions on
dealers from engaging in municipal securities business with such
issuers for a period of two years from the date of any triggering
contributions.
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\3\ Rule G-37 defines municipal securities business as: (i) The
purchase of a primary offering of municipal securities from an
issuer on other than a competitive bid basis; (ii) the offer or sale
of a primary offering of municipal securities on behalf of an
issuer; (iii) the provision of financial advisory or consultant
services to or on behalf of an issuer with respect to a primary
offering of municipal securities in which the dealer was chosen to
provide such services on other than a competitive bid basis; or (iv)
the provision of remarketing agent services to or on behalf of an
issuer with respect to a primary offering of municipal securities in
which the dealer was chosen to provide such services on other than a
competitive bid basis.
\4\ The MSRB has previously stated that the matter of control
depends upon whether or not the dealer or the MFP has the ability to
direct or cause the direction of the management or policies of the
PAC (MSRB Question & Answer No. IV. 24--Dealer Controlled PAC).
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Rule G-37 requires dealers to disclose certain contributions to
issuer officials, state or local political parties, and bond ballot
campaigns, as well as other information, on Form G-37 to allow public
scrutiny of such contributions and the municipal securities business of
a dealer. In addition, dealers and MFPs generally are prohibited from
soliciting others (including affiliates of the dealer or any PACs) to
make contributions to officials of issuers with which the dealer is
engaging or seeking to engage in municipal securities business, or to
political parties of a state or locality where the dealer is engaging
or seeking to engage in municipal securities business. Dealers and MFPs
are prohibited from circumventing Rule G-37 by direct or indirect
actions through any other persons or means.\5\
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\5\ Rule G-37(d) provides that no broker, dealer or municipal
securities dealer or any municipal finance professional shall,
directly or indirectly, through or by any other person or means, do
any act which would result in a violation of sections (b) or (c) of
the rule. Section (b) relates to the ban on business and Section (c)
relates to the prohibition on soliciting and coordinating
contributions.
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Due to changes in the financial markets since the adoption of Rule
G-37 and recent market turmoil, many dealers have become affiliated
with a broad range of other entities in increasingly diverse
organizational structures. Some of these affiliated entities (including
but not limited to banks, bank holding companies, insurance companies
and investment management companies) have formed or otherwise maintain
relationships with PACs (``affiliated PACs'') and other political
organizations, many of which may make contributions to issuer
officials. Such relationships raise questions regarding the extent to
which affiliated PACs may effectively be controlled by dealers or their
MFPs and thereby constitute dealer-controlled PACs whose contributions
are subject to Rule G-37. Further, such relationships raise concerns
regarding whether the contributions of such affiliated PACs, even if
not viewed as dealer-controlled PACs, may be used by dealers or their
MFPs to circumvent Rule G-37 as indirect contributions for the purpose
of obtaining or retaining municipal securities business. As a result,
the MSRB has filed the proposed rule change to provide additional
guidance with regard to the potential for affiliated PACs to be viewed
as dealer-controlled PACs.
The proposed rule change sets out factors that may result in an
affiliated PAC being viewed as controlled by a dealer or an MFP of a
dealer and thereby being treated as a dealer-controlled PAC for
purposes of Rule G-37. The proposed rule change would: i) provide
guidance on when a dealer's affiliated PAC might be viewed as
controlled by the dealer for purposes of Rule G-37; and ii) ensure that
the industry is
[[Page 54931]]
cognizant of prior MSRB guidance concerning indirect contributions
under the rule. The proposed rule change notes that, when evaluating
whether contributions made by affiliated PACs may be subject to the
provisions of Rule G-37, dealers should first determine whether such
affiliated PAC would be viewed as a dealer-controlled PAC. If an
affiliated PAC is determined to be a dealer-controlled PAC, then its
contributions to issuer officials would subject the dealer to the ban
on municipal securities business and its contributions to issuer
officials, state or local political parties, and bond ballot campaigns
would be subject to disclosure under Rule G-37. Even if the affiliated
PAC is determined not to be a dealer-controlled PAC, the dealer still
must consider whether payments made by the dealer or its MFPs to such
affiliated PAC could ultimately be viewed as an indirect contribution
under Rule G-37(d) if, for example, the affiliated PAC is being used as
a conduit for making a contribution to an issuer official.
Indicators of Control by Dealers and MFPs. Soon after adoption of
Rule G-37, the MSRB stated that each dealer must determine whether a
PAC is dealer controlled, with any PAC of a non-bank dealer assumed to
be a dealer-controlled PAC.\6\ The MSRB has also stated that the
determination of whether a PAC of a bank dealer \7\ is a dealer-
controlled PAC would depend upon whether the bank dealer or anyone from
the bank dealer department has the ability to direct or cause the
direction of the management or the policies of the PAC.\8\ Such ability
to direct or cause the direction of the management or the policies of a
PAC also would be indicative of control of such PAC by a non-bank
dealer or any of its MFPs, although it would not be the exclusive
indicator of such control. While this guidance establishes basic
principles with regard to making a determination of control, it does
not set out an exhaustive list of circumstances under which a PAC may
or may not be viewed as dealer or MFP controlled. The specific facts
and circumstances regarding the creation, management, operation and
control of a particular PAC must be considered in making a
determination of control with respect to such PAC.
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\6\ See Rule G-37 Question & Answer No. IV. 24 (May 24, 1994).
\7\ MSRB Rule D-8 defines a bank dealer as a municipal
securities dealer which is a bank or a separately identifiable
department or division of a bank.
\8\ See Rule G-37 Question & Answer No. IV. 24 (May 24, 1994).
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Creation of PAC. The proposed rule change provides that, in
general, a dealer or MFP involved in the creation of a PAC would
continue to be viewed as controlling such PAC unless and until such
dealer or MFP becomes wholly disassociated in any direct or indirect
manner with the PAC. Thus, any PAC created by a dealer, acting either
in a sole capacity or together with other entities or individuals,
would be presumed to be a dealer-controlled PAC. This presumption
continues at least as long as the dealer or any MFP of the dealer
retains any formal or informal role in connection with such PAC,
regardless of whether such dealer or MFP has the ability to direct or
cause the direction of the management or policies of the PAC. This
presumption also would continue for so long as any non-MFP associated
person of the dealer (either an individual, whether or not an MFP, or
an affiliated company directly or indirectly controlling, controlled by
or under common control with the dealer) has the ability to direct or
cause the direction of the management or policies of the PAC. In
effect, a dealer could not attempt to treat a PAC it created and then
spun off to the control of an affiliated company as not being a dealer-
controlled PAC. However, depending on the totality of the facts and
circumstances, a PAC originally created by a dealer in which the dealer
or its MFPs no longer retain any role, and with respect to which any
other affiliates retain only very limited non-control roles, could be
viewed as no longer controlled by the dealer.
Similarly, a PAC created by any person associated with the dealer
at the time the PAC was created, acting either in a sole capacity or
together with other entities or individuals, would be presumed to be
controlled by such person under the proposed rule change. Such
presumption continues at least for so long as such person retains any
formal or informal role in connection with such PAC, regardless of
whether any such person has the ability to direct or cause the
direction of the management or policies of the PAC. This presumption
also would continue for so long as any other person associated with the
same dealer as the creator of the PAC has the ability to direct or
cause the direction of the management or policies of the PAC. Although
such PAC may not be viewed as subject to Rule G-37 as an MFP-controlled
PAC when originally created if such person was not then an MFP, if the
person creating the PAC, or any other associated person with the
ability to direct or cause the direction of the management or policies
of such PAC, is or later becomes an MFP, such PAC would be deemed an
MFP-controlled PAC.\9\
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\9\ However, a PAC created by an individual acting in his or her
formal capacity as an officer, employee, director or other
representative of a dealer, regardless of whether such individual is
an MFP, would be deemed a dealer-controlled PAC rather than a PAC
controlled by the individual.
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Management, Funding and Control of PAC. Beyond the role of the
dealer, MFP or other person in creating a PAC and maintaining an
ongoing association with such PAC, the proposed rule change provides
that the ability to direct or cause the direction of the management or
the policies of a PAC is also important. Strong indicators of
management and control are not mitigated by the fact that such dealer,
MFP or other person does not have exclusive, predominant or
``majority'' control of the PAC, its management, its policies, or its
decisions with regard to making contributions. For example, the fact
that a dealer or MFP may only have a single vote on a governing board
or other decision-making or advisory board or committee of a PAC, and
therefore does not have sole power to cause the PAC to take any action,
would not obviate the status of such dealer or MFP as having control of
the PAC, so long as the dealer or MFP has the ability, alone or in
conjunction with other similarly empowered entities or individuals, to
direct or cause the direction of the management or the policies of the
PAC. In essence, it is possible for a single PAC to be viewed as
controlled by multiple different dealers if the control of such PAC is
shared among such dealers, although the presumption of control may be
rebutted as described below.
The level of funding provided by dealers and their MFPs to a PAC
may also be indicative of control pursuant to the proposed rule change.
A PAC that receives a majority of its funding from a single dealer
(including the collective contributions of its MFPs and employees) or a
single MFP is conclusively presumed to be controlled by such dealer or
MFP, regardless of the lack of any of the other indicia of control
described in this notice. Another important factor is the size or
frequency of contributions by a dealer or MFP,\10\ viewed in light of
the size and frequency of contributions made by other contributors not
affiliated in any way with such dealer or MFP. For example, a limited
number of small
[[Page 54932]]
contributions freely made by employees of a dealer to an affiliated PAC
(i.e., not directed by the dealer and not part of an automated or
otherwise dealer-organized program of contributions) would not, by
itself, automatically raise a presumption of dealer control so long as
the collective contributions by the dealer or its employees is not
significant as compared to the total funding of the affiliated PAC,
subject to consideration of the other relevant facts and circumstances.
In addition, contributions made by a dealer or MFP to an affiliated PAC
could raise a stronger inference of de facto dealer or MFP control than
when such contributions were made to non-affiliated PACs.
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\10\ A dealer or an MFP may make sufficiently large or frequent
contributions to a PAC so as to obtain effective control over the
PAC, depending on the totality of facts and circumstances.
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However, even where a dealer or MFP is not viewed as controlling a
PAC under the principles described above, the proposed rule change
cautions dealers to remain mindful of the potential for leveraging the
contribution activities of affiliated PACs in soliciting municipal
securities business in a way that could raise a presumption of dealer
or MFP control. For example, an MFP's references to the contributions
made by an affiliated PAC during solicitations of municipal securities
business could, depending on the facts and circumstances, serve as
evidence of coordination of such PAC's activities with the dealer or
MFP that could, together with other facts, be indicative of direct or
indirect control of the PAC by such dealer or MFP. Such control could
be found even in circumstances where the dealer or its MFPs have not
made contributions to the affiliated PAC.\11\
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\11\ See Rule G-37 Question & Answer No. III.7 (September 22,
2005) for a discussion of potential indirect contributions through
affiliated PACs.
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Of course, the presumptions described above may be rebutted,
depending upon the totality of facts and circumstances. The proposed
rule change notes considerations that may serve to rebut such
presumptions, which may include whether the dealer or person creating
the PAC: (i) Participates with a broad-based group of other entities
and/or individuals in creating the PAC, (ii) at no time undertakes any
direct or indirect role (and, in the case of a dealer, no person
associated with the dealer undertakes any direct or indirect role) in
leading the creation of the PAC or in directing or causing the
direction of the management or the policies of the PAC, and/or (iii)
provides funding for such PAC (and, in the case of a dealer, its
associated persons collectively provide funding for such PAC) that is
not substantially greater than the typical funding levels of other
participants in the PAC who do not undertake a direct or indirect role
in leading the creation of the PAC or in directing or causing the
direction of the management or the policies of the PAC.
Indirect Contributions Through Bank PACs or Other Affiliated PACs.
The proposed rule change reminds dealers that, if an affiliated PAC is
determined not to be a dealer-controlled PAC, a dealer must still
consider whether payments made by the dealer or its MFPs to such
affiliated PAC could be viewed as an indirect contribution that would
become subject to Rule G-37 pursuant to section (d) thereof. The
proposed rule change reviews prior extensive guidance on such indirect
contributions, noting that the MSRB had stated in 1996 that, depending
on the facts and circumstances, contributions to a non-dealer
associated PAC that is soliciting funds for the purpose of supporting a
limited number of issuer officials might result in the same prohibition
on municipal securities business as would contributions made directly
to the issuer official.\12\ The MSRB also noted that dealers should
make inquiries of a non-dealer associated PAC that is soliciting
contributions in order to ensure that contributions to such a PAC would
not be treated as an indirect contribution.\13\
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\12\ See Rule G-37 Question & Answer No. III.4 (August 6, 1996).
\13\ See Rule G-37 Question & Answer No. III.5 (August 6, 1996).
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The proposed rule change also notes that the MSRB has previously
provided guidance in 2005 with regard to supervisory procedures \14\
that dealers should have in place in connection with payments to a non-
dealer associated PAC or a political party to avoid indirect rule
violations of Rule G-37(d). In such guidance, the MSRB stated that in
order to ensure compliance with Rule G-27(c) as it relates to payments
to political parties or PACs and Rule G-37(d), each dealer must adopt,
maintain and enforce written supervisory procedures reasonably designed
to ensure that neither the dealer nor its MFPs are using payments to
political parties or non-dealer controlled PACs to contribute
indirectly to an official of an issuer.\15\ Among other things, dealers
might seek to establish procedures requiring that, prior to the making
of any contribution to a PAC, the dealer undertake certain due
diligence inquiries regarding the intended use of such contributions,
the motive for making the contribution and whether the contribution was
solicited. Further, in order to ensure compliance with Rule G-37(d),
dealers could consider establishing certain information barriers
between any affiliated PACs and the dealer and its MFPs.\16\ The
proposed rule change notes that dealers that have established such
information barriers should review their adequacy to ensure that the
affiliated entities' contributions, payments or PAC disbursement
decisions are neither influenced by the dealer or its MFPs, nor
communicated to the dealers and the MFPs.
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\14\ Rule G-27, on supervision, provides in section (c) that
each dealer shall adopt, maintain and enforce written supervisory
procedures reasonably designed to ensure that the conduct of the
municipal securities activities of the dealer and its associated
persons are in compliance with MSRB rules.
\15\ See Rule G-37 Question & Answer No. III.7 (September 22,
2005).
\16\ The potential information barriers described in the
guidance include: (i) A prohibition on the dealer or MFP from
recommending, nominating, appointing or approving the management of
affiliated PACs; (ii) a prohibition on sharing the affiliated PACs
meeting agenda, meeting schedule, or meeting minutes; (iii) a
prohibition on identification of prior affiliated PAC contributions,
planned PAC contributions or anticipated PAC contributions; (iv) a
prohibition on directly providing or coordinating information about
prior negotiated municipal securities businesses, solicited
municipal securities business, and planned solicitations of
municipal securities business; and (v) other such information
barriers as the firms deems appropriate to effectively monitor
conflicting interest and prevent abuses.
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The MSRB subsequently noted that the 2005 guidance did not
establish an obligation to put in place the specific procedures and
information barriers described in the guidance so long as the dealer in
fact has and enforces other written supervisory procedures reasonably
designed to ensure that the conduct of the dealer and its MFPs are in
compliance with Rule G-37(d).\17\ The proposed rule change provides the
example that, when information regarding past or planned contributions
of an affiliated PAC is or may be available to or known by the dealer
or its MFPs, the dealer might establish and enforce written supervisory
procedures that prohibit the dealer or MFP from providing information
to issuer personnel regarding past or anticipated affiliated PAC
contributions.
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\17\ See Rule G-37 Interpretive Letter--Supervisory procedures
relating to indirect contributions; conference accounts and 527
organizations (December 21, 2006).
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2. Statutory Basis
The MSRB has adopted the proposed rule change pursuant to Section
15B(b)(2)(C) of the Act,\18\ which provides that the MSRB's rules shall
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of
[[Page 54933]]
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.
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\18\ 15 U.S.C. 78o-4(b)(2)(C).
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The MSRB believes that the proposed rule change is consistent with
the Act because it will help to inhibit practices constituting real and
perceived attempts to influence the awarding of municipal securities
business through contributions made by or through dealer-affiliated
PACs. The MSRB also believes that the proposed rule change will
facilitate dealer compliance with Rule G-37 and Rule G-27, on
supervision.
B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change would
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act since it would apply equally to
all brokers, dealers and municipal securities dealers.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
The MSRB has requested an effective date for the proposed rule
change of sixty (60) days after Commission approval of the proposed
rule change.
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 Comment
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-MSRB-2010-07 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-MSRB-2010-07. 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 Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the MSRB. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-MSRB-2010-07 and should be
submitted on or before September 30, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-22450 Filed 9-8-10; 8:45 am]
BILLING CODE 8010-01-P
