Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed Rule Change by the Municipal Securities Rulemaking Board Consisting of Amendments to MSRB Rule G-20 (Gifts and Gratuities) and Related Amendments to MSRB Rule G-8 (Books and Records) and MSRB Rule G-9 (Preservation of Records), and To Clarify That Certain Interpretations by the Financial Industry Regulatory Authority and the National Association of Securities Dealers Would Be Applicable to Municipal Advisors, 55449-55453 [2011-22726]
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Federal Register / Vol. 76, No. 173 / Wednesday, September 7, 2011 / Notices
submissions should refer to File
Number SR–CBOE–2011–081 and
should be submitted on or before
September 28, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–22774 Filed 9–6–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65234; File No. SR–MSRB–
2011–10]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of Proposed
Rule Change by the Municipal
Securities Rulemaking Board
Consisting of Amendments to MSRB
Rule G–20 (Gifts and Gratuities) and
Related Amendments to MSRB Rule
G–8 (Books and Records) and MSRB
Rule G–9 (Preservation of Records),
and To Clarify That Certain
Interpretations by the Financial
Industry Regulatory Authority and the
National Association of Securities
Dealers Would Be Applicable to
Municipal Advisors
August 31, 2011.
emcdonald on DSK5VPTVN1PROD with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) 1 and Rule 19b-4
thereunder,2 notice is hereby given that
on August 16, 2011, the Municipal
Securities Rulemaking Board (the
‘‘MSRB’’) filed with the Securities and
Exchange Commission (the
‘‘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
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 has filed with the
Commission a proposed rule change
consisting of proposed amendments to
MSRB Rule G–20 (on gifts and
gratuities), which would apply the rule
to municipal advisors, along with
related proposed amendments to Rule
G–8 (on books and records) and Rule G–
9 (on preservation of records), and to
clarify that certain interpretations by the
18 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Financial Industry Regulatory Authority
(‘‘FINRA’’) of its gifts rule (FINRA Rule
3220) and its predecessor, the National
Association of Securities Dealers
(‘‘NASD’’) of its gift rule (NASD Rule
3060), would be applicable to municipal
advisors. The MSRB requested that the
proposed rule change be made effective
on the date that rules defining the term
‘‘municipal advisor’’ under the
Exchange Act are first made effective by
the Commission.
The text of the proposed rule change
is available on the MSRB’s Web site at
https://www.msrb.org/Rules-andInterpretations/SEC-Filings/2011Filings.aspx, 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
Changes
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
Changes
1. Purpose
Existing MSRB Rule G–20. Rule G–20
was adopted by the MSRB to prevent
brokers, dealers, and municipal
securities dealers (‘‘dealers’’) from
attempting to induce other organizations
active in the municipal securities
market to engage in business with such
dealers by means of personal gifts or
gratuities given to employees of the
organizations, including, but not limited
to, acts of commercial bribery,3 and to
help to ensure that dealers’ municipal
securities activities are undertaken in
arm’s-length, merit-based transactions
in which conflicts of interest are
minimized. The MSRB has interpreted
Rule G–20 to preclude the payment by
dealers of ‘‘excessive or lavish’’
entertainment or travel expenses of
issuer personnel, as follows: 4
3 See
MSRB Notice 2004–17 (June 15, 2004).
Rule G–20 Interpretation—Dealer Payments
in Connection with the Municipal Securities
Issuance Process (January 29, 2007); see also In the
Matter of RBC Capital Markets Corporation, SEC
Rel. No. 34–59439 (Feb. 24, 2009) (settlement in
connection with broker-dealer alleged to have
violated MSRB Rules G–20 and G–17 for payment
of lavish travel and entertainment expenses of city
4 See
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55449
Payment of excessive or lavish
entertainment or travel expenses may violate
Rule G–20 if they result in benefits to issuer
personnel that exceed the limits set forth in
the rule, and can be especially problematic
where such payments cover expenses
incurred by family or other guests of issuer
personnel. Depending on the specific facts
and circumstances, excessive payments
could be considered to be gifts or gratuities
made to such issuer personnel in relation to
the issuer’s municipal securities activities.
Dodd-Frank Act. The Dodd-Frank
Wall Street Reform and Consumer
Protection Act (‘‘Dodd-Frank Act’’) 5
authorized the MSRB to establish a
comprehensive body of regulation for all
municipal advisors.6 The Dodd-Frank
Act requires the MSRB to adopt rules for
municipal advisors that are designed to
prevent fraudulent and manipulative
acts and practices and to promote just
and equitable principles of trade.7 It
also expands the mission of the MSRB
to include the protection of municipal
entities 8 and obligated persons, in
addition to the protection of investors
and the public interest.
Proposed amendments to MSRB Rule
G–20. Pursuant to the authority granted
to it by the Dodd-Frank Act, the MSRB
is proposing the amendments to Rule G–
20. Just as the existing rule helps to
ensure that dealers’ municipal securities
activities are undertaken in arm’slength, merit-based transactions in
which conflicts of interest are
minimized, the MSRB seeks to reduce
the potential for conflicts of interest in
municipal advisory activities.9 The
officials and their families associated with rating
agency trips, which expenditures were
subsequently reimbursed from bond proceeds as
costs of issuance); In the Matter of Merchant
Capital, L.L.C., SEC Rel. No. 34–60043 (June 4,
2009) (settlement in connection with broker-dealer
alleged to have violated MSRB rules for payment of
travel and entertainment expenses of family and
friends of senior officials of issuer and
reimbursement of the expenses from issuers and
from proceeds of bond offerings).
5 Dodd-Frank Wall Street Reform and Consumer
Protection Act, Public Law 111–203, 124 Stat. 1376
(2010).
6 ‘‘Municipal advisor’’ is defined in Section
15B(e)(4) of the Exchange Act.
7 See Section 15B(b)(2)(C) of the Exchange Act.
8 ‘‘Municipal entity’’ is defined in Section
15B(e)(8) of the Exchange Act as ‘‘any State,
political subdivision of a State, or municipal
corporate instrumentality of a State, including—(A)
any agency, authority, or instrumentality of the
State, political subdivision, or municipal corporate
instrumentality; (B) any plan, program, or pool of
assets sponsored or established by the State,
political subdivision, or municipal corporate
instrumentality or any agency, authority, or
instrumentality thereof; and (C) any other issuer of
municipal securities.’’
9 MSRB Rule D–13 defines the term ‘‘municipal
advisory activities’’ by reference to Section
15B(e)(4)(A) of the Exchange Act (i.e., (i) providing
advice to municipal entities or obligated persons on
municipal financial products or the issuance of
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emcdonald on DSK5VPTVN1PROD with NOTICES
proposed amendments to Rule G–20
would help to ensure that engagements
of municipal advisors, as well as
engagements of dealers, other municipal
advisors, and investment advisers for
which municipal advisors serve as
solicitors, are awarded on the basis of
merit and not as a result of gifts made
to employees controlling the award of
such business. The proposed
amendments to Rule G–20 would make
the rule applicable to municipal
advisors and would:
• Prohibit municipal advisors, in
connection with their municipal
advisory activities, from, directly or
indirectly, making a gift or permitting a
gift to be made in excess of $100 per
year to a natural person other than an
employee or partner of the municipal
advisor, if such gifts are in relation to
the activities of the employer of the
recipient of the gift;10
• Provide certain exemptions from
the above prohibition, including: (i)
occasional gifts of meals or tickets to
theatrical, sporting, and other
entertainments hosted by the municipal
municipal securities and (ii) solicitations of
municipal entities on behalf of others).
Section 15B(e)(9) of the Exchange Act defines the
term ‘‘solicitation of a municipal entity or obligated
person’’ to mean: ‘‘a direct or indirect
communication with a municipal entity or
obligated person made by a person, for direct or
indirect compensation, on behalf of a broker, dealer,
municipal securities dealer, municipal advisor, or
investment adviser (as defined in section 202 of the
Investment Advisers Act of 1940) that does not
control, is not controlled by, or is not under
common control with the person undertaking such
solicitation for the purpose of obtaining or retaining
an engagement by a municipal entity or obligated
person of a broker, dealer, municipal securities
dealer, or municipal advisor for or in connection
with municipal financial products, the issuance of
municipal securities, or of an investment adviser to
provide investment advisory services to or on
behalf of a municipal entity.’’
10 See proposed Rule G–20(a). The ‘‘municipal
advisory activities’’ of the municipal advisor
covered by the proposed amendments to Rule G–
20(a) would include both advice provided to
municipal entities and obligated persons and
solicitations of municipal entities on behalf of third
parties. For example, the proposed rule
amendments would apply to gifts and
entertainment provided by a municipal advisor to
employees of municipal entities and obligated
persons for which the municipal advisor is
providing advice or seeking to provide advisory
services. It would also apply to gifts and
entertainment provided by a municipal advisor to
employees of municipal entities being solicited by
a municipal advisor to award business to a client
of the municipal advisor (e.g., employees of a
public pension fund who could influence the
pension fund’s decision award investment advisory
business). Even if a municipal advisor is not then
engaging in any municipal advisory activities with
a municipal entity or obligated person, a gift that
could be reasonably viewed as an attempt by the
municipal advisor to curry favor with a municipal
entity or obligated person for the purpose of
becoming engaged to undertake municipal advisory
activities at some point in the future also would be
covered by the provisions of proposed Rule G–20.
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advisor; or (ii) legitimate business
functions sponsored by the municipal
advisor that are recognized by the
Internal Revenue Service as deductible
business expenses;11
• Permit contracts of employment or
compensation for services rendered by a
person other than an employee of the
municipal advisor; provided that there
is a written agreement 12 between the
municipal advisor and the person who
is to perform such services, prior to the
time of employment or before the
services are rendered;13
• Remove gifts of reminder
advertising as a permissible exemption
from the $100 gift limit of Rule G–20(a)
for municipal advisors and dealers;14
and
• Clarify that existing FINRA and
NASD interpretations of the FINRA and
NASD gift rules, respectively,15 apply to
comparable MSRB provisions of Rule
G–20 applicable to municipal advisors,
with new FINRA interpretations of its
gifts rule made applicable to municipal
advisors if the MSRB determines that it
is appropriate to do so and receives the
approval of the Commission. All NASD
and FINRA interpretations that would
be made applicable to municipal
advisors by this proposed rule change
are cited in this filing and would be
posted on the MSRB Web site, and cited
in the MSRB Rule Book, as
interpretations of comparable provisions
of Rule G–20.
Municipal advisors would not be
subject to Rule G–20(d), which relates to
non-cash compensation in connection
with primary offerings.
Proposed amendments to MSRB Rule
G–8 and Rule G–9. The proposed
amendments to Rule G–20 would
necessitate related amendments to Rule
G–8 (on books and records) and Rule G–
9 (on preservation of records). The
proposed amendments to Rules G–8 and
G–9 would subject municipal advisors
to the same recordkeeping and record
retention requirements to which dealers
would be subject under amended Rule
11 See
proposed Rule G–20(b).
written agreement must include the nature
of the proposed services, the amount of the
proposed compensation, and the written consent of
such person’s employer.
13 See proposed Rule G–20(c).
14 See proposed Rule G–20(b). Those gifts would
be addressed, instead, by NASD Notice to Members
06–69 (December 2006), which the proposed rule
change would make applicable to municipal
advisors (‘‘NASD Notice to Members 06–69’’).
15 See NASD Notice to Members 06–69; FINRA
Interpretive Letter to Amal Aly, SIFMA (Reasonable
and Customary Bereavement Gifts) dated December
17, 2007; FINRA Interpretive Letter to Charles
Wiegert, NFP Securities dated March 15, 2001; and
Interpretive Letter to Henry H. Hopkins and Sarah
McCafferty, T. Rowe Price Investment Services, Inc.
dated June 10, 1999.
12 The
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G–20. Specifically, the proposed
amendments to Rule G–8 would require
municipal advisors and dealers to create
and maintain records of any gifts
referred to in Rule G–20 16 and all
agreements for services referred to in
Rule G–20 along with the compensation
paid as a result of such agreements. The
proposed amendments to Rule G–9
would require municipal advisors to
preserve the records required to be
made pursuant to the proposed
amendments to Rule G–8 for six years.
2. Statutory Basis
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2) of the Exchange Act, which
provides that:
The Board shall propose and adopt rules to
effect the purposes of this title with respect
to transactions in municipal securities
effected by brokers, dealers, and municipal
securities dealers and advice provided to or
on behalf of municipal entities or obligated
persons by brokers, dealers, municipal
securities dealers, and municipal advisors
with respect to municipal financial products,
the issuance of municipal securities, and
solicitations of municipal entities or
obligated persons undertaken by brokers,
dealers, municipal securities dealers, and
municipal advisors.
Section 15B(b)(2)(C) of the Exchange
Act provides that the rules of the MSRB
shall:
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 and municipal financial products,
to remove impediments to and perfect the
mechanism of a free and open market in
municipal securities and municipal financial
products, and, in general, to protect
investors, municipal entities, obligated
persons, and the public interest.
The proposed rule change is consistent
with Section 15B(b)(2) and Section
15B(b)(2)(C) of the Exchange Act
because it would reduce the potential
for conflicts of interest in municipal
advisory activities. The proposed
amendments to Rule G–20 would also
help ensure that engagements of
municipal advisors, as well as
engagements of dealers, municipal
advisors, and investment advisers for
which municipal advisors serve as
solicitors, are awarded on the basis of
16 The requirement to keep a record of all gifts,
including those of business meals and
entertainment and sponsored business functions
would be a new requirement for dealers, as well as
municipal advisors. Those gifts are covered by Rule
G–20(b). Previously, only records of gifts covered by
Rule G–20(a) were required to be kept.
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Federal Register / Vol. 76, No. 173 / Wednesday, September 7, 2011 / Notices
merit and not as a result of gifts made
to employees controlling the award of
such business. The proposed
amendments to Rules G–8 and G–9
would assist in the enforcement of Rule
G–20 by requiring that dealers and
municipal advisors create and maintain
records of any gifts referred to in Rule
G–20 and all agreements for services
referred to in Rule G–20, along with the
compensation paid as a result of such
agreements.
Section 15B(b)(2)(L)(iv) of the
Exchange Act requires that rules
adopted by the Board:
not impose a regulatory burden on small
municipal advisors that is not necessary or
appropriate in the public interest and for the
protection of investors, municipal entities,
and obligated persons, provided that there is
robust protection of investors against fraud.
While the proposed rule change will
affect all municipal advisors, it is a
necessary regulatory burden because it
hampers practices that can harm
municipal entities and their citizens by
contributing to the violation of the
public trust of elected officials that
might allow gifts to influence their
decisions regarding the awarding of
municipal advisory business. While the
proposed rule change may burden some
small municipal advisors, any such
burden is outweighed by the need to
protect their issuer clients.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The MSRB 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 Exchange Act since it
would apply equally to all municipal
advisors and dealers.
emcdonald on DSK5VPTVN1PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
On February 22, 2011, the MSRB
requested comment on draft
amendments to Rule G–20.17 The MSRB
received eight comment letters
(‘‘Comment Letters’’) from the following
commenters: (1) Catholic Finance
Corporation (‘‘CFC’’); (2) Robert Fisher
(‘‘Mr. Fisher’’); (3) Municipal Regulatory
Consulting LLC (‘‘MRC’’); (4) National
Association of Independent Public
Finance Advisors (‘‘NAIPFA’’); (5)
Public Financial Management (‘‘PFM’’);
(6) Securities Industry and Financial
Markets Association (‘‘SIFMA’’); and (7)
17 See MSRB Notice 2011–16 (February 22, 2011)
(‘‘Notice’’).
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WM Financial Strategies (‘‘WM
Financial’’).
The Comment Letters are summarized
by topic as follows:
• Comment: The draft amendments to
Rule G–20 would prohibit payments for
ordinary business expenses of
municipal advisors, including, but not
limited to, rent and salaries.
Mr. Fisher and PFM stated that a
literal reading of the draft amendments
to Rule G–20 would restrict payments
made by a municipal advisor related to
any part of their municipal advisory
business, including the payment of rent
and the purchasing of supplies. SIFMA
noted that it understood why the
wording of the gift prohibition for
municipal advisors differed from that of
the gift prohibition for dealers (i.e.,
municipal entities do not have
municipal advisory activities), but
requested that the MSRB clarify that the
municipal advisor provision was
intended to be interpreted in the same
manner as the dealer provision. NAIPFA
stated that the proposed amendments
would curtail gifts and gratuities given
by municipal advisors for the purpose of
soliciting municipal advisory business
while leaving the rule for dealers
unchanged, which would allow such
gift giving related to dealer solicitations
of municipal securities business.
MSRB Response: The MSRB did not
intend for the draft amendments to Rule
G–20 to apply to municipal advisors in
a different manner than the rule
currently applies to dealers. The
difference in wording between draft
Rule G–20(a)(ii) (applicable to
municipal advisors) and Rule G–20(a)(i)
(applicable to dealers) was not
substantive. However, the MSRB has
determined to revise the draft
amendments to Rule G–20 to clarify that
dealers and municipal advisors are
subject to the same gift limits. Those
revisions are reflected in the proposed
amendments to Rule G–20(a).
For the avoidance of doubt, the
proposed amendments to Rule G–20
that are part of the proposed rule change
use the word ‘‘gift,’’ rather than
‘‘payment’’ in section (a). Such
amendment would clarify that the thing
or service of value to be given would
have to be an actual gift and not
payments and/or costs associated with
normal business activities of the
municipal advisor or the dealer.
Because of the use of the term ‘‘gift,’’ the
proposed amendments would remove
references to the terms ‘‘gratuity’’ and
‘‘gratuities,’’ which are subsumed
within the term ‘‘gift.’’
• Comment: The MSRB should clarify
that references to ‘‘persons’’ in the rule
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55451
mean ‘‘natural persons,’’ consistent with
previous MSRB interpretive guidance.18
This change would have the effect of
permitting charitable contributions
without violation of the rule.
MRC requested that the MSRB speak
directly to the issue of charitable
contributions by incorporating language
addressing such concerns in Rule G–20,
or in guidance applicable to either Rule
G–20 or Rule G–17, that charitable
contributions are not gifts for purposes
of Rule G–20 and are not covered by
Rule G–20 because Rule G–20 only
covers gifts to natural persons. MRC also
stated that it is unclear if certain
charitable (or similar) contributions
might constitute an unfair practice and
thereby cause a municipal advisor
making the contribution to violate Rule
G–17. NAIPFA also requested guidance
and clarification regarding charitable
contributions that are made either as a
result of a solicitation from an employee
or elected official of a municipal entity
or with a view toward influencing the
decision-making of an employee or
elected official of a municipal entity.
MSRB Response: The MSRB believes
that the concerns raised by MRC will be
addressed by amendments to the rule
that would change the term ‘‘persons’’
to ‘‘natural persons.’’ Such amendment
would clarify that Rule G–20 covers
gifts to individuals and not
organizations. In response to the
concerns raised by MRC and NAIPFA,
the Board has previously determined
that the occasional pay to play problems
that might be associated with the
solicitation of charitable contributions
by issuers do not outweigh the benefits
of such contributions and that such
restrictions would have a negative
impact on charitable giving. The
proposed rule change does not address
gifts under Rule G–17. The MSRB will
take MRC’s comment regarding the
potential applicability of Rule G–17 to
gifts under advisement for when it
considers future interpretations of Rule
G–17.
• Comment: The draft amendments to
Rule G–20 should include an exception
to the prohibition of gifts, grants, loans,
and other financial assistance or
services by a section 501(c)(3)
organization within its exempt purpose
for the benefit of other nonprofit
corporations.
18 The MSRB has previously stated that, for
purposes of Rule G–20, the term ‘‘person’’ refers
only to a natural person and that Rule G–20 is
intended to discourage municipal securities
professionals from attempting to induce individual
employees from acting in a manner inconsistent
with their obligations to, or contrary to the interests
of, their employers. See Rule G–20; Interpretive
Letter, ‘‘Person’’ (March 19, 1980).
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CFC stated that the proposed
rulemaking should include an exception
to the prohibition on payments for any
thing of value donated by a municipal
advisor that is a nonprofit entity as
previously determined by the Internal
Revenue Service under Section 501(c)(3)
of the Internal Revenue Code, so long as
such donation is within the exempt
purpose of such entity.
MSRB Response: The MSRB has
determined to use the term ‘‘natural
person,’’ which has the effect of
permitting gifts to be made to
organizations.
• Comment: The draft amendments to
Rule G–20 should prohibit gift giving
and/or provide an annual cap for de
minimis gifts in order to prevent pay to
play activities under the rule.
Mr. Fisher suggested a general
prohibition on gifts under draft Rule G–
20(a), subject to a $100 safe harbor for
de minimis gifts. NAIPFA recommended
a prohibition on occasional gifts and,
along with WM Financial, suggested an
annual gift or gratuity maximum of $100
with the aggregate of all gifts, gratuities,
and entertainment not to exceed $250
annually.
MSRB Response: Rule G–20 is
intended to prevent commercial bribery
and certain activities, such as excessive
gift giving, from influencing dealer and
municipal advisor selection. The
purpose of the proposed amendments to
Rule G–20 is only to extend the existing
rule to municipal advisors. The
proposed amendments would not
impose more stringent limitations at this
time. However, should the MSRB
become aware of abusive behavior in
this area, it might determine to revisit
these comments.
• Comment: The draft amendments
should apply to gifts to family members
of issuer personnel because such gifts
can be problematic.
NAIPFA stated that the proposed
amendments to Rule G–20 should apply
to gifts and gratuities given to family
members of issuer personnel.
MSRB Response: The MSRB has
previously stated that the intent of the
rule is not to restrict social relationships
that do not suggest impropriety.19 The
MSRB believes that an expansion of the
rule to family members, as suggested by
NAIPFA, would unduly burden dealers
and municipal advisors. The MSRB
notes, however, that both the existing
rule and the proposed amendments
prohibit indirect, as well as direct, gifts.
A gift to a family member of someone
in a position to award business to a
municipal advisor would violate the
rule if it was indirectly a gift to the
19 See
20 Records of gifts under Rule G–20(a) are
required to be kept.
File No. SR–MSRB–77–12.
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17:37 Sep 06, 2011
person awarding the business and it
violated the rule’s limits.
• Comment: The draft amendments to
Rule G–8 (on books and records) are
burdensome and unnecessary because
they would require municipal advisors
to collect all third-party employment
and service agreements of any kind. In
addition, the draft amendments to Rule
G–8 do not require reporting of gifts
made under existing Rule G–20(b) or the
draft amendments to Rule G–20(b).
PFM stated that the draft
recordkeeping requirements increase the
data-collection burden of municipal
advisors to collect all third party
employment and service agreements of
any kind. NAIPFA stated that the fact
that existing Rule G–8 and the draft
amendments to Rule G–8 do not require
the reporting of gifts made under Rule
G–20(b) exacerbates the potential for
pay to play as it relates to such
‘‘occasional gifts’’ that are permitted
under the rule.
MSRB Response: The MSRB has
determined not to make changes to Rule
G–20 as a result of PFM’s comment in
order to maintain consistency of the
recordkeeping requirements of the rule
for dealers and municipal advisors. The
MSRB notes that records of employment
agreements need only be kept if a
municipal advisor is employing some
other person’s employee, such as an
obligated person client’s employee. The
MSRB also notes that the recordkeeping
requirements would facilitate municipal
advisor compliance with proposed Rule
G–20 and assist enforcement agencies in
monitoring compliance with the rule.
The MSRB has considered NAIPFA’s
comment and has determined to require
municipal advisors and dealers to
maintain records of all gifts provided
under Rule G–20. Rule G–8 does not
currently require recordkeeping of gifts
that are described in Rule G–20(b) (e.g.,
tax deductible business meals and
entertainment).20 While gifts provided
under Rule G–20(b) must not be so
frequent or so extensive as to raise any
question of propriety, the MSRB
believes records of such gifts would
assist with enforcement efforts. The
proposed amendments would likely not
be burdensome because, in most cases,
records are already kept of such gifts
when reimbursement is sought, even if
only for Federal income tax purposes.
Therefore, from a practical standpoint,
the amendments would merely add a
requirement that records of such gifts be
kept even though reimbursement is not
sought. Accordingly, the recordation of
all gifts that are given or permitted to be
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Frm 00108
Fmt 4703
Sfmt 4703
given under Rule G–20 would be
required under Rule G–8(a)(xvii)(A) as it
applies to dealers and proposed Rule G–
8(h)(ii) as it applies to municipal
advisors.
• Comment: The MSRB should
confirm that (i) guidance under existing
Rule G–20 applies to all provisions of
the proposed rulemaking and (ii)
relevant FINRA guidance would be
applicable to the rule as amended as it
has previously applied to the existing
rule.
SIFMA requested that the MSRB
reiterate its intent to apply relevant
FINRA guidance to the proposed
amendments. SIFMA also requested that
the MSRB confirm that existing
guidance under Rule G–20 applies to all
provisions of the proposed rule change.
MSRB Response: The MSRB has
previously provided that FINRA and
NASD interpretations of comparable
provisions of their gifts rules will apply
to dealers unless otherwise specified by
the MSRB.21 While the MSRB believes
that the existing FINRA and NASD
interpretations should also be
applicable to municipal advisors, new
FINRA interpretations of its gifts rule
will not automatically be applicable to
municipal advisors. New FINRA
interpretations of its gifts rule will be
made applicable to municipal advisors
if the MSRB determines that it is
appropriate to do so and receives the
approval of the SEC. All NASD and
FINRA interpretations that would be
made applicable to municipal advisors
by this proposed rule change are cited
in this filing and would be posted on
the MSRB Web site, and cited in the
MSRB Rule Book, as interpretations of
comparable provisions of Rule G–20.
The MSRB intends that existing
MSRB interpretive guidance under Rule
G–20 would be equally applicable to
Rule G–20, as amended by the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of publication of this
notice in the Federal Register or within
such longer period (i) as the
Commission may designate up to 90
days of such date 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.
21 See
E:\FR\FM\07SEN1.SGM
File No. SR–MSRB–2005–02.
07SEN1
Federal Register / Vol. 76, No. 173 / Wednesday, September 7, 2011 / Notices
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 Exchange
Act. Interested persons are also invited
to submit views and arguments as to
whether they can effectively comment
on the proposed rule change prior to the
date of final adoption of the
Commission’s permanent rules for the
registration of municipal advisors.
Comments may be submitted by any of
the following methods:
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.22
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–22726 Filed 9–6–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65228; File No. SR–Phlx–
2011–119]
• 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–2011–10 on the subject line.
emcdonald on DSK5VPTVN1PROD with NOTICES
Electronic Comments
August 30, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1, and Rule 19b–4 2 thereunder,
Paper Comments
notice is hereby given that, on August
18, 2011, NASDAQ OMX PHLX LLC
• Send paper comments in triplicate
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission
Securities and Exchange Commission,
(‘‘SEC’’ or ‘‘Commission’’) the proposed
100 F Street, NE., Washington, DC
rule change as described in Items I, II,
20549–1090.
and III below, which Items have been
All submissions should refer to File
prepared by the Exchange. The
Number SR–MSRB–2011–10. This file
Commission is publishing this notice to
number should be included on the
solicit comments on the proposed rule
subject line if e-mail is used. To help the
change from interested persons.
Commission process and review your
comments more efficiently, please use
I. Self-Regulatory Organization’s
only one method. The Commission will Statement of the Terms of Substance of
post all comments on the Commission’s the Proposed Rule Change
Web site (https://www.sec.gov/rules/sro.
The Exchange proposes to establish a
shtml). Copies of the submission, all
fee cap on equity options transactions
subsequent amendments, all written
on certain reversals and conversion
statements with respect to the proposed strategies. The text of the proposed rule
rule change that are filed with the
change is available on the Exchange’s
Commission, and all written
Web site at https://nasdaqtrader.com/
communications relating to the
micro.aspx?id=PHLXRulefilings, at the
proposed rule change between the
principal office of the Exchange, at the
Commission and any person, other than Commission’s Public Reference Room,
those that may be withheld from the
and on the Commission’s Web site at
public in accordance with the
www.sec.gov.
provisions of 5 U.S.C. 552, will be
II. Self-Regulatory Organization’s
available for Web site viewing and
Statement of the Purpose of, and
printing in the Commission’s Public
Statutory Basis for, the Proposed Rule
Reference Room, 100 F Street, NE.,
Change
Washington, DC 20549, on official
business days between the hours of 10
In its filing with the Commission, the
a.m. and 3 p.m. Copies of such filing
Exchange included statements
also will be available for inspection and concerning the purpose of and basis for
copying at the MSRB’s offices.
the proposed rule change and discussed
All comments received will be posted any comments it received on the
without change; the Commission does
proposed rule change. The text of these
not edit personal identifying
statements may be examined at the
information from submissions. You
places specified in Item IV below. The
should submit only information that
Exchange has prepared summaries, set
you wish to make available publicly. All forth in sections A, B, and C below, of
submissions should refer to File
Number SR–MSRB–2011–10 and should
22 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
be submitted on or before September 28,
2 17 CFR 240.19b–4.
2011.
17:37 Sep 06, 2011
Jkt 223001
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
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Relating to
Reversal and Conversion Strategies
VerDate Mar<15>2010
55453
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
The purpose of the proposed rule
change is to incentivize market
participants by capping option
transaction fees related to reversal and
conversion strategies to encourage
trading on the Exchange. Reversals are
established by combining a short stock
position with a short put and a long call
position that shares the same strike and
expiration. Conversions are established
by combining a long position in the
underlying security with a long put and
a short call position that shares the same
strike and expiration.
The Exchange proposes to cap
Specialist,3 Registered Option Trader
(‘‘ROT’’),4 SQT,5 RSQT,6 Professional,7
Broker-Dealer and Firm option
transaction fees in Multiply Listed
Options 8 at $500 per day for reversal
and conversion strategies which are
executed on the same trading day in the
same options class (‘‘Reversal and
Conversion Cap’’). The Reversal and
Conversion Cap will only apply to
executions occurring on either of the
two days preceding the standard options
expiration date, which is typically the
third Thursday and Friday of every
3 A Specialist is an Exchange member who is
registered as an options specialist pursuant to Rule
1020(a).
4 A Registered Options Trader (‘‘ROT’’) includes
a SQT, a RSQT and a Non-SQT ROT, which by
definition is neither a SQT or a RSQT. A ROT is
defined in Exchange Rule 1014(b) as a regular
member or a foreign currency options participant of
the Exchange located on the trading floor who has
received permission from the Exchange to trade in
options for his own account. See Exchange Rule
1014 (b)(i) and (ii).
5 An SQT is defined in Exchange Rule
1014(b)(ii)(A) as an ROT who has received
permission from the Exchange to generate and
submit option quotations electronically in options
to which such SQT is assigned.
6 An RSQT is defined Exchange Rule in
1014(b)(ii)(B) as an ROT that is a member or
member organization with no physical trading floor
presence who has received permission from the
Exchange to generate and submit option quotations
electronically in options to which such RSQT has
been assigned. An RSQT may only submit such
quotations electronically from off the floor of the
Exchange.
7 The Exchange defines a ‘‘professional’’ as any
person or entity that (i) is not a broker or dealer in
securities, and (ii) places more than 390 orders in
listed options per day on average during a calendar
month for its own beneficial account(s) (hereinafter
‘‘Professional’’).
8 For purposes of this filing, a Multiply Listed
security means an option that is listed on more than
one exchange.
E:\FR\FM\07SEN1.SGM
07SEN1
]]>Agencies
[Federal Register Volume 76, Number 173 (Wednesday, September 7, 2011)]
[Notices]
[Pages 55449-55453]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-22726]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65234; File No. SR-MSRB-2011-10]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change by the Municipal
Securities Rulemaking Board Consisting of Amendments to MSRB Rule G-20
(Gifts and Gratuities) and Related Amendments to MSRB Rule G-8 (Books
and Records) and MSRB Rule G-9 (Preservation of Records), and To
Clarify That Certain Interpretations by the Financial Industry
Regulatory Authority and the National Association of Securities Dealers
Would Be Applicable to Municipal Advisors
August 31, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on August 16, 2011, the Municipal Securities
Rulemaking Board (the ``MSRB'') filed with the Securities and Exchange
Commission (the ``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 Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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
consisting of proposed amendments to MSRB Rule G-20 (on gifts and
gratuities), which would apply the rule to municipal advisors, along
with related proposed amendments to Rule G-8 (on books and records) and
Rule G-9 (on preservation of records), and to clarify that certain
interpretations by the Financial Industry Regulatory Authority
(``FINRA'') of its gifts rule (FINRA Rule 3220) and its predecessor,
the National Association of Securities Dealers (``NASD'') of its gift
rule (NASD Rule 3060), would be applicable to municipal advisors. The
MSRB requested that the proposed rule change be made effective on the
date that rules defining the term ``municipal advisor'' under the
Exchange Act are first made effective by the Commission.
The text of the proposed rule change is available on the MSRB's Web
site at https://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-Filings.aspx, 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 Changes
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 Changes
1. Purpose
Existing MSRB Rule G-20. Rule G-20 was adopted by the MSRB to
prevent brokers, dealers, and municipal securities dealers
(``dealers'') from attempting to induce other organizations active in
the municipal securities market to engage in business with such dealers
by means of personal gifts or gratuities given to employees of the
organizations, including, but not limited to, acts of commercial
bribery,\3\ and to help to ensure that dealers' municipal securities
activities are undertaken in arm's-length, merit-based transactions in
which conflicts of interest are minimized. The MSRB has interpreted
Rule G-20 to preclude the payment by dealers of ``excessive or lavish''
entertainment or travel expenses of issuer personnel, as follows: \4\
---------------------------------------------------------------------------
\3\ See MSRB Notice 2004-17 (June 15, 2004).
\4\ See Rule G-20 Interpretation--Dealer Payments in Connection
with the Municipal Securities Issuance Process (January 29, 2007);
see also In the Matter of RBC Capital Markets Corporation, SEC Rel.
No. 34-59439 (Feb. 24, 2009) (settlement in connection with broker-
dealer alleged to have violated MSRB Rules G-20 and G-17 for payment
of lavish travel and entertainment expenses of city officials and
their families associated with rating agency trips, which
expenditures were subsequently reimbursed from bond proceeds as
costs of issuance); In the Matter of Merchant Capital, L.L.C., SEC
Rel. No. 34-60043 (June 4, 2009) (settlement in connection with
broker-dealer alleged to have violated MSRB rules for payment of
travel and entertainment expenses of family and friends of senior
officials of issuer and reimbursement of the expenses from issuers
and from proceeds of bond offerings).
Payment of excessive or lavish entertainment or travel expenses
may violate Rule G-20 if they result in benefits to issuer personnel
that exceed the limits set forth in the rule, and can be especially
problematic where such payments cover expenses incurred by family or
other guests of issuer personnel. Depending on the specific facts
and circumstances, excessive payments could be considered to be
gifts or gratuities made to such issuer personnel in relation to the
---------------------------------------------------------------------------
issuer's municipal securities activities.
Dodd-Frank Act. The Dodd-Frank Wall Street Reform and Consumer
Protection Act (``Dodd-Frank Act'') \5\ authorized the MSRB to
establish a comprehensive body of regulation for all municipal
advisors.\6\ The Dodd-Frank Act requires the MSRB to adopt rules for
municipal advisors that are designed to prevent fraudulent and
manipulative acts and practices and to promote just and equitable
principles of trade.\7\ It also expands the mission of the MSRB to
include the protection of municipal entities \8\ and obligated persons,
in addition to the protection of investors and the public interest.
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\5\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\6\ ``Municipal advisor'' is defined in Section 15B(e)(4) of the
Exchange Act.
\7\ See Section 15B(b)(2)(C) of the Exchange Act.
\8\ ``Municipal entity'' is defined in Section 15B(e)(8) of the
Exchange Act as ``any State, political subdivision of a State, or
municipal corporate instrumentality of a State, including--(A) any
agency, authority, or instrumentality of the State, political
subdivision, or municipal corporate instrumentality; (B) any plan,
program, or pool of assets sponsored or established by the State,
political subdivision, or municipal corporate instrumentality or any
agency, authority, or instrumentality thereof; and (C) any other
issuer of municipal securities.''
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Proposed amendments to MSRB Rule G-20. Pursuant to the authority
granted to it by the Dodd-Frank Act, the MSRB is proposing the
amendments to Rule G-20. Just as the existing rule helps to ensure that
dealers' municipal securities activities are undertaken in arm's-
length, merit-based transactions in which conflicts of interest are
minimized, the MSRB seeks to reduce the potential for conflicts of
interest in municipal advisory activities.\9\ The
[[Page 55450]]
proposed amendments to Rule G-20 would help to ensure that engagements
of municipal advisors, as well as engagements of dealers, other
municipal advisors, and investment advisers for which municipal
advisors serve as solicitors, are awarded on the basis of merit and not
as a result of gifts made to employees controlling the award of such
business. The proposed amendments to Rule G-20 would make the rule
applicable to municipal advisors and would:
---------------------------------------------------------------------------
\9\ MSRB Rule D-13 defines the term ``municipal advisory
activities'' by reference to Section 15B(e)(4)(A) of the Exchange
Act (i.e., (i) providing advice to municipal entities or obligated
persons on municipal financial products or the issuance of municipal
securities and (ii) solicitations of municipal entities on behalf of
others).
Section 15B(e)(9) of the Exchange Act defines the term
``solicitation of a municipal entity or obligated person'' to mean:
``a direct or indirect communication with a municipal entity or
obligated person made by a person, for direct or indirect
compensation, on behalf of a broker, dealer, municipal securities
dealer, municipal advisor, or investment adviser (as defined in
section 202 of the Investment Advisers Act of 1940) that does not
control, is not controlled by, or is not under common control with
the person undertaking such solicitation for the purpose of
obtaining or retaining an engagement by a municipal entity or
obligated person of a broker, dealer, municipal securities dealer,
or municipal advisor for or in connection with municipal financial
products, the issuance of municipal securities, or of an investment
adviser to provide investment advisory services to or on behalf of a
municipal entity.''
---------------------------------------------------------------------------
Prohibit municipal advisors, in connection with their
municipal advisory activities, from, directly or indirectly, making a
gift or permitting a gift to be made in excess of $100 per year to a
natural person other than an employee or partner of the municipal
advisor, if such gifts are in relation to the activities of the
employer of the recipient of the gift;\10\
---------------------------------------------------------------------------
\10\ See proposed Rule G-20(a). The ``municipal advisory
activities'' of the municipal advisor covered by the proposed
amendments to Rule G-20(a) would include both advice provided to
municipal entities and obligated persons and solicitations of
municipal entities on behalf of third parties. For example, the
proposed rule amendments would apply to gifts and entertainment
provided by a municipal advisor to employees of municipal entities
and obligated persons for which the municipal advisor is providing
advice or seeking to provide advisory services. It would also apply
to gifts and entertainment provided by a municipal advisor to
employees of municipal entities being solicited by a municipal
advisor to award business to a client of the municipal advisor
(e.g., employees of a public pension fund who could influence the
pension fund's decision award investment advisory business). Even if
a municipal advisor is not then engaging in any municipal advisory
activities with a municipal entity or obligated person, a gift that
could be reasonably viewed as an attempt by the municipal advisor to
curry favor with a municipal entity or obligated person for the
purpose of becoming engaged to undertake municipal advisory
activities at some point in the future also would be covered by the
provisions of proposed Rule G-20.
---------------------------------------------------------------------------
Provide certain exemptions from the above prohibition,
including: (i) occasional gifts of meals or tickets to theatrical,
sporting, and other entertainments hosted by the municipal advisor; or
(ii) legitimate business functions sponsored by the municipal advisor
that are recognized by the Internal Revenue Service as deductible
business expenses;\11\
---------------------------------------------------------------------------
\11\ See proposed Rule G-20(b).
---------------------------------------------------------------------------
Permit contracts of employment or compensation for
services rendered by a person other than an employee of the municipal
advisor; provided that there is a written agreement \12\ between the
municipal advisor and the person who is to perform such services, prior
to the time of employment or before the services are rendered;\13\
---------------------------------------------------------------------------
\12\ The written agreement must include the nature of the
proposed services, the amount of the proposed compensation, and the
written consent of such person's employer.
\13\ See proposed Rule G-20(c).
---------------------------------------------------------------------------
Remove gifts of reminder advertising as a permissible
exemption from the $100 gift limit of Rule G-20(a) for municipal
advisors and dealers;\14\ and
---------------------------------------------------------------------------
\14\ See proposed Rule G-20(b). Those gifts would be addressed,
instead, by NASD Notice to Members 06-69 (December 2006), which the
proposed rule change would make applicable to municipal advisors
(``NASD Notice to Members 06-69'').
---------------------------------------------------------------------------
Clarify that existing FINRA and NASD interpretations of
the FINRA and NASD gift rules, respectively,\15\ apply to comparable
MSRB provisions of Rule G-20 applicable to municipal advisors, with new
FINRA interpretations of its gifts rule made applicable to municipal
advisors if the MSRB determines that it is appropriate to do so and
receives the approval of the Commission. All NASD and FINRA
interpretations that would be made applicable to municipal advisors by
this proposed rule change are cited in this filing and would be posted
on the MSRB Web site, and cited in the MSRB Rule Book, as
interpretations of comparable provisions of Rule G-20.
---------------------------------------------------------------------------
\15\ See NASD Notice to Members 06-69; FINRA Interpretive Letter
to Amal Aly, SIFMA (Reasonable and Customary Bereavement Gifts)
dated December 17, 2007; FINRA Interpretive Letter to Charles
Wiegert, NFP Securities dated March 15, 2001; and Interpretive
Letter to Henry H. Hopkins and Sarah McCafferty, T. Rowe Price
Investment Services, Inc. dated June 10, 1999.
Municipal advisors would not be subject to Rule G-20(d), which relates
to non-cash compensation in connection with primary offerings.
Proposed amendments to MSRB Rule G-8 and Rule G-9. The proposed
amendments to Rule G-20 would necessitate related amendments to Rule G-
8 (on books and records) and Rule G-9 (on preservation of records). The
proposed amendments to Rules G-8 and G-9 would subject municipal
advisors to the same recordkeeping and record retention requirements to
which dealers would be subject under amended Rule G-20. Specifically,
the proposed amendments to Rule G-8 would require municipal advisors
and dealers to create and maintain records of any gifts referred to in
Rule G-20 \16\ and all agreements for services referred to in Rule G-20
along with the compensation paid as a result of such agreements. The
proposed amendments to Rule G-9 would require municipal advisors to
preserve the records required to be made pursuant to the proposed
amendments to Rule G-8 for six years.
---------------------------------------------------------------------------
\16\ The requirement to keep a record of all gifts, including
those of business meals and entertainment and sponsored business
functions would be a new requirement for dealers, as well as
municipal advisors. Those gifts are covered by Rule G-20(b).
Previously, only records of gifts covered by Rule G-20(a) were
required to be kept.
---------------------------------------------------------------------------
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2) of the Exchange Act, which provides that:
The Board shall propose and adopt rules to effect the purposes
of this title with respect to transactions in municipal securities
effected by brokers, dealers, and municipal securities dealers and
advice provided to or on behalf of municipal entities or obligated
persons by brokers, dealers, municipal securities dealers, and
municipal advisors with respect to municipal financial products, the
issuance of municipal securities, and solicitations of municipal
entities or obligated persons undertaken by brokers, dealers,
municipal securities dealers, and municipal advisors.
Section 15B(b)(2)(C) of the Exchange Act provides that the rules of
the MSRB shall:
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 and
municipal financial products, to remove impediments to and perfect
the mechanism of a free and open market in municipal securities and
municipal financial products, and, in general, to protect investors,
municipal entities, obligated persons, and the public interest.
The proposed rule change is consistent with Section 15B(b)(2) and
Section 15B(b)(2)(C) of the Exchange Act because it would reduce the
potential for conflicts of interest in municipal advisory activities.
The proposed amendments to Rule G-20 would also help ensure that
engagements of municipal advisors, as well as engagements of dealers,
municipal advisors, and investment advisers for which municipal
advisors serve as solicitors, are awarded on the basis of
[[Page 55451]]
merit and not as a result of gifts made to employees controlling the
award of such business. The proposed amendments to Rules G-8 and G-9
would assist in the enforcement of Rule G-20 by requiring that dealers
and municipal advisors create and maintain records of any gifts
referred to in Rule G-20 and all agreements for services referred to in
Rule G-20, along with the compensation paid as a result of such
agreements.
Section 15B(b)(2)(L)(iv) of the Exchange Act requires that rules
adopted by the Board:
not impose a regulatory burden on small municipal advisors that is
not necessary or appropriate in the public interest and for the
protection of investors, municipal entities, and obligated persons,
provided that there is robust protection of investors against fraud.
While the proposed rule change will affect all municipal advisors,
it is a necessary regulatory burden because it hampers practices that
can harm municipal entities and their citizens by contributing to the
violation of the public trust of elected officials that might allow
gifts to influence their decisions regarding the awarding of municipal
advisory business. While the proposed rule change may burden some small
municipal advisors, any such burden is outweighed by the need to
protect their issuer clients.
B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB 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 Exchange Act since it would apply equally to all
municipal advisors and dealers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
On February 22, 2011, the MSRB requested comment on draft
amendments to Rule G-20.\17\ The MSRB received eight comment letters
(``Comment Letters'') from the following commenters: (1) Catholic
Finance Corporation (``CFC''); (2) Robert Fisher (``Mr. Fisher''); (3)
Municipal Regulatory Consulting LLC (``MRC''); (4) National Association
of Independent Public Finance Advisors (``NAIPFA''); (5) Public
Financial Management (``PFM''); (6) Securities Industry and Financial
Markets Association (``SIFMA''); and (7) WM Financial Strategies (``WM
Financial'').
---------------------------------------------------------------------------
\17\ See MSRB Notice 2011-16 (February 22, 2011) (``Notice'').
---------------------------------------------------------------------------
The Comment Letters are summarized by topic as follows:
Comment: The draft amendments to Rule G-20 would prohibit
payments for ordinary business expenses of municipal advisors,
including, but not limited to, rent and salaries.
Mr. Fisher and PFM stated that a literal reading of the draft
amendments to Rule G-20 would restrict payments made by a municipal
advisor related to any part of their municipal advisory business,
including the payment of rent and the purchasing of supplies. SIFMA
noted that it understood why the wording of the gift prohibition for
municipal advisors differed from that of the gift prohibition for
dealers (i.e., municipal entities do not have municipal advisory
activities), but requested that the MSRB clarify that the municipal
advisor provision was intended to be interpreted in the same manner as
the dealer provision. NAIPFA stated that the proposed amendments would
curtail gifts and gratuities given by municipal advisors for the
purpose of soliciting municipal advisory business while leaving the
rule for dealers unchanged, which would allow such gift giving related
to dealer solicitations of municipal securities business.
MSRB Response: The MSRB did not intend for the draft amendments to
Rule G-20 to apply to municipal advisors in a different manner than the
rule currently applies to dealers. The difference in wording between
draft Rule G-20(a)(ii) (applicable to municipal advisors) and Rule G-
20(a)(i) (applicable to dealers) was not substantive. However, the MSRB
has determined to revise the draft amendments to Rule G-20 to clarify
that dealers and municipal advisors are subject to the same gift
limits. Those revisions are reflected in the proposed amendments to
Rule G-20(a).
For the avoidance of doubt, the proposed amendments to Rule G-20
that are part of the proposed rule change use the word ``gift,'' rather
than ``payment'' in section (a). Such amendment would clarify that the
thing or service of value to be given would have to be an actual gift
and not payments and/or costs associated with normal business
activities of the municipal advisor or the dealer. Because of the use
of the term ``gift,'' the proposed amendments would remove references
to the terms ``gratuity'' and ``gratuities,'' which are subsumed within
the term ``gift.''
Comment: The MSRB should clarify that references to
``persons'' in the rule mean ``natural persons,'' consistent with
previous MSRB interpretive guidance.\18\
This change would have the effect of permitting charitable
contributions without violation of the rule.
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\18\ The MSRB has previously stated that, for purposes of Rule
G-20, the term ``person'' refers only to a natural person and that
Rule G-20 is intended to discourage municipal securities
professionals from attempting to induce individual employees from
acting in a manner inconsistent with their obligations to, or
contrary to the interests of, their employers. See Rule G-20;
Interpretive Letter, ``Person'' (March 19, 1980).
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MRC requested that the MSRB speak directly to the issue of
charitable contributions by incorporating language addressing such
concerns in Rule G-20, or in guidance applicable to either Rule G-20 or
Rule G-17, that charitable contributions are not gifts for purposes of
Rule G-20 and are not covered by Rule G-20 because Rule G-20 only
covers gifts to natural persons. MRC also stated that it is unclear if
certain charitable (or similar) contributions might constitute an
unfair practice and thereby cause a municipal advisor making the
contribution to violate Rule G-17. NAIPFA also requested guidance and
clarification regarding charitable contributions that are made either
as a result of a solicitation from an employee or elected official of a
municipal entity or with a view toward influencing the decision-making
of an employee or elected official of a municipal entity.
MSRB Response: The MSRB believes that the concerns raised by MRC
will be addressed by amendments to the rule that would change the term
``persons'' to ``natural persons.'' Such amendment would clarify that
Rule G-20 covers gifts to individuals and not organizations. In
response to the concerns raised by MRC and NAIPFA, the Board has
previously determined that the occasional pay to play problems that
might be associated with the solicitation of charitable contributions
by issuers do not outweigh the benefits of such contributions and that
such restrictions would have a negative impact on charitable giving.
The proposed rule change does not address gifts under Rule G-17. The
MSRB will take MRC's comment regarding the potential applicability of
Rule G-17 to gifts under advisement for when it considers future
interpretations of Rule G-17.
Comment: The draft amendments to Rule G-20 should include
an exception to the prohibition of gifts, grants, loans, and other
financial assistance or services by a section 501(c)(3) organization
within its exempt purpose for the benefit of other nonprofit
corporations.
[[Page 55452]]
CFC stated that the proposed rulemaking should include an exception
to the prohibition on payments for any thing of value donated by a
municipal advisor that is a nonprofit entity as previously determined
by the Internal Revenue Service under Section 501(c)(3) of the Internal
Revenue Code, so long as such donation is within the exempt purpose of
such entity.
MSRB Response: The MSRB has determined to use the term ``natural
person,'' which has the effect of permitting gifts to be made to
organizations.
Comment: The draft amendments to Rule G-20 should prohibit
gift giving and/or provide an annual cap for de minimis gifts in order
to prevent pay to play activities under the rule.
Mr. Fisher suggested a general prohibition on gifts under draft
Rule G-20(a), subject to a $100 safe harbor for de minimis gifts.
NAIPFA recommended a prohibition on occasional gifts and, along with WM
Financial, suggested an annual gift or gratuity maximum of $100 with
the aggregate of all gifts, gratuities, and entertainment not to exceed
$250 annually.
MSRB Response: Rule G-20 is intended to prevent commercial bribery
and certain activities, such as excessive gift giving, from influencing
dealer and municipal advisor selection. The purpose of the proposed
amendments to Rule G-20 is only to extend the existing rule to
municipal advisors. The proposed amendments would not impose more
stringent limitations at this time. However, should the MSRB become
aware of abusive behavior in this area, it might determine to revisit
these comments.
Comment: The draft amendments should apply to gifts to
family members of issuer personnel because such gifts can be
problematic.
NAIPFA stated that the proposed amendments to Rule G-20 should
apply to gifts and gratuities given to family members of issuer
personnel.
MSRB Response: The MSRB has previously stated that the intent of
the rule is not to restrict social relationships that do not suggest
impropriety.\19\ The MSRB believes that an expansion of the rule to
family members, as suggested by NAIPFA, would unduly burden dealers and
municipal advisors. The MSRB notes, however, that both the existing
rule and the proposed amendments prohibit indirect, as well as direct,
gifts. A gift to a family member of someone in a position to award
business to a municipal advisor would violate the rule if it was
indirectly a gift to the person awarding the business and it violated
the rule's limits.
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\19\ See File No. SR-MSRB-77-12.
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Comment: The draft amendments to Rule G-8 (on books and
records) are burdensome and unnecessary because they would require
municipal advisors to collect all third-party employment and service
agreements of any kind. In addition, the draft amendments to Rule G-8
do not require reporting of gifts made under existing Rule G-20(b) or
the draft amendments to Rule G-20(b).
PFM stated that the draft recordkeeping requirements increase the
data-collection burden of municipal advisors to collect all third party
employment and service agreements of any kind. NAIPFA stated that the
fact that existing Rule G-8 and the draft amendments to Rule G-8 do not
require the reporting of gifts made under Rule G-20(b) exacerbates the
potential for pay to play as it relates to such ``occasional gifts''
that are permitted under the rule.
MSRB Response: The MSRB has determined not to make changes to Rule
G-20 as a result of PFM's comment in order to maintain consistency of
the recordkeeping requirements of the rule for dealers and municipal
advisors. The MSRB notes that records of employment agreements need
only be kept if a municipal advisor is employing some other person's
employee, such as an obligated person client's employee. The MSRB also
notes that the recordkeeping requirements would facilitate municipal
advisor compliance with proposed Rule G-20 and assist enforcement
agencies in monitoring compliance with the rule.
The MSRB has considered NAIPFA's comment and has determined to
require municipal advisors and dealers to maintain records of all gifts
provided under Rule G-20. Rule G-8 does not currently require
recordkeeping of gifts that are described in Rule G-20(b) (e.g., tax
deductible business meals and entertainment).\20\ While gifts provided
under Rule G-20(b) must not be so frequent or so extensive as to raise
any question of propriety, the MSRB believes records of such gifts
would assist with enforcement efforts. The proposed amendments would
likely not be burdensome because, in most cases, records are already
kept of such gifts when reimbursement is sought, even if only for
Federal income tax purposes. Therefore, from a practical standpoint,
the amendments would merely add a requirement that records of such
gifts be kept even though reimbursement is not sought. Accordingly, the
recordation of all gifts that are given or permitted to be given under
Rule G-20 would be required under Rule G-8(a)(xvii)(A) as it applies to
dealers and proposed Rule G-8(h)(ii) as it applies to municipal
advisors.
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\20\ Records of gifts under Rule G-20(a) are required to be
kept.
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Comment: The MSRB should confirm that (i) guidance under
existing Rule G-20 applies to all provisions of the proposed rulemaking
and (ii) relevant FINRA guidance would be applicable to the rule as
amended as it has previously applied to the existing rule.
SIFMA requested that the MSRB reiterate its intent to apply
relevant FINRA guidance to the proposed amendments. SIFMA also
requested that the MSRB confirm that existing guidance under Rule G-20
applies to all provisions of the proposed rule change.
MSRB Response: The MSRB has previously provided that FINRA and NASD
interpretations of comparable provisions of their gifts rules will
apply to dealers unless otherwise specified by the MSRB.\21\ While the
MSRB believes that the existing FINRA and NASD interpretations should
also be applicable to municipal advisors, new FINRA interpretations of
its gifts rule will not automatically be applicable to municipal
advisors. New FINRA interpretations of its gifts rule will be made
applicable to municipal advisors if the MSRB determines that it is
appropriate to do so and receives the approval of the SEC. All NASD and
FINRA interpretations that would be made applicable to municipal
advisors by this proposed rule change are cited in this filing and
would be posted on the MSRB Web site, and cited in the MSRB Rule Book,
as interpretations of comparable provisions of Rule G-20.
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\21\ See File No. SR-MSRB-2005-02.
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The MSRB intends that existing MSRB interpretive guidance under
Rule G-20 would be equally applicable to Rule G-20, as amended by the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date 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.
[[Page 55453]]
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 Exchange Act. Interested persons are also
invited to submit views and arguments as to whether they can
effectively comment on the proposed rule change prior to the date of
final adoption of the Commission's permanent rules for the registration
of municipal advisors. 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 rule-comments@sec.gov. Please include
File Number SR-MSRB-2011-10 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-2011-10. 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 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 MSRB's offices.
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-2011-10
and should be submitted on or before September 28, 2011.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-22726 Filed 9-6-11; 8:45 am]
BILLING CODE 8011-01-P
