Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed New Rule G-42, on Political Contributions and Prohibitions on Municipal Advisory Activities; Proposed Amendments to Rules G-8, on Books and Records, G-9, on Preservation of Records, and G-37, on Political Contributions and Prohibitions on Municipal Securities Business; Proposed Form G-37/G-42 and Form G-37x/G-42x; and a Proposed Restatement of a Rule G-37 Interpretive Notice, 55976-55984 [2011-23046]
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Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices
equities markets. In particular, the data
collected from C2’s pilot program will
help inform the Commission’s
consideration of whether the SPXPM
pilot should be modified, discontinued,
extended, or permanently approved. It
also could benefit investors and the
public interest to the extent it attracts
trading in p.m.-settled S&P 500 index
options from the opaque OTC market to
the more transparent exchange-listed
markets, where trading in the product
will be subject to exchange trading rules
and exchange surveillance.
Thus, based on the discussion above,
the Commission finds that C2’s current
proposal is consistent with the Act,
including Section 6(b)(5) thereof in that
it is designed to remove impediments to
and perfect the mechanism of a free and
open market, and, in general, to protect
investors and the public interest. In
light of the enhanced closing procedures
and the potential benefits to investors
discussed above, the Commission finds
that it is appropriate and consistent
with the Act to approve C2’s proposal
on a pilot basis. The collection of data
during the pilot and C2’s active
monitoring of any effects of SPXPM on
the markets will help the Commission
assess the impact of p.m. settlement in
today’s market.
V. Conclusion
It Is Therefore Ordered, pursuant to
Section 19(b)(2) of the Act,93 that the
proposed rule change (SR–C2–2011–
008) be, and hereby is, approved on a
14-month pilot basis only.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–23045 Filed 9–8–11; 8:45 am]
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[RELEASE NO. 34–65255; File No. SR–
MSRB–2011–12]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of Proposed
New Rule G–42, on Political
Contributions and Prohibitions on
Municipal Advisory Activities;
Proposed Amendments to Rules G–8,
on Books and Records, G–9, on
Preservation of Records, and G–37, on
Political Contributions and
Prohibitions on Municipal Securities
Business; Proposed Form G–37/G–42
and Form G–37x/G–42x; and a
Proposed Restatement of a Rule G–37
Interpretive Notice
September 2, 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 19, 2011, the Municipal
Securities Rulemaking Board (‘‘Board’’
or ‘‘MSRB’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) 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.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
MSRB included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. The Board has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
The MSRB is filing with the SEC a
proposed rule change consisting of (i)
Proposed MSRB Rule G–42 (on political
contributions and prohibitions on
municipal advisory activities); (ii)
proposed amendments that would make
conforming changes to MSRB Rules G–
8 (on books and records), G–9 (on
preservation of records), and G–37 (on
political contributions and prohibitions
on municipal securities business); (iii)
proposed Form G–37/G–42 and Form
G–37x/G–42x; and (iv) a proposed
restatement of a Rule G–37 interpretive
notice issued by the MSRB in 1997
(‘‘Rule G–37 Interpretive Notice’’).3
The MSRB requests that, if approved
by the Commission, the proposed rule
change be made effective six months
after the date on which the Commission
first approves rules defining the term
‘‘municipal advisor’’ under the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Interpretation of Prohibition on Municipal
Securities Business Pursuant to Rule G–37
(February 21, 1997), reprinted in MSRB Rule Book.
2 17
93 15
U.S.C. 78s(b)(2).
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Exchange Act or such later date as the
Commission approves the proposed rule
change; provided, however, that the
MSRB requests that no contribution
made prior to the effective date of
proposed Rule G–42 would result in a
ban pursuant to proposed Rule G–
42(b)(i); 4 and, provided that any ban on
municipal securities business under
Rule G–37(b)(i) in existence prior to the
effective date of proposed Rule G–42
would continue until it otherwise
would have terminated under Rule G–
37(b)(i), as in effect prior to the effective
date of proposed Rule G–42.
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.
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1. Purpose
The Dodd-Frank Wall Street Reform
and Consumer Protection Act (‘‘DoddFrank Act’’) 5 authorized the MSRB to
establish a comprehensive body of
regulation for municipal advisors and
provided that municipal advisors to
municipal entities have a Federal
fiduciary duty.6 The Dodd-Frank Act
required the MSRB to adopt rules for
municipal advisors that, in addition to
implementing the Federal fiduciary
duty, are designed to prevent fraudulent
and manipulative acts and practices and
to promote just and equitable principles
of trade.7 It also expanded the mission
4 As described in more detail below, under
proposed Rule G–42(b)(i) certain contributions
could result in a ban on municipal advisory
business for compensation, a ban on solicitations of
third-party business for compensation, and a ban on
the receipt of compensation for the solicitation of
third-party business.
5 Public Law No. 111–203, 124 Stat. 1376 (2010).
6 See 15B(c)(1) of the Exchange Act.
7 See Section 15B(b)(2)(C) of the Exchange Act.
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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.
Municipal advisors that seek to
influence the award of business by
government officials by making or
soliciting political contributions to
those officials distort and undermine
the fairness of the process by which
government business is awarded. These
practices can harm municipal entities
and their citizens by resulting in inferior
services and higher fees, as well as
contributing to the violation of the
public trust of elected officials that
might allow political contributions to
influence their decisions regarding
public contracting.
Similarly, Rule G–37 was adopted by
the MSRB in 1994 due to concerns
about the opportunity for abuses and the
problems associated with political
contributions by dealers in connection
with the award of municipal securities
business.9 When it filed proposed Rule
G–37 with the Commission,10 the MSRB
stated that it believed that there had
been numerous instances in which
dealers had been awarded municipal
securities business because of their
political contributions. Even when such
improprieties had not occurred, the
MSRB believed that political
contributions created a potential
conflict of interest for issuers, or at the
very least the appearance of a conflict,
when dealers made contributions to
officials responsible for, or capable of
influencing the outcome of, the award of
municipal securities business and then
were awarded business by issuers
associated with such officials. The
MSRB said:
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The problems associated with political
contributions undermine investor confidence
in the municipal securities market, which is
crucial to the long-term health of the market,
both in terms of liquidity and capital-raising
ability * * *. The payment of such
contributions to obtain business creates
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 Municipal securities business generally consists
of negotiated underwritings, private placements,
and serving as remarketing agent or financial
advisor on a new issue of municipal securities. See
Rule G–37(g)(vii).
10 See File No. SR–MSRB–94–2 (January 12,
1994); ‘‘Political Contributions and Prohibitions on
Municipal Securities Business: Proposed Rule G–
37,’’ MSRB Reports, Vol. 14, No. 1 (January 1994).
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artificial barriers to those dealers not willing
or able to make such payments, thereby
harming investors and the public interest by
stifling competition and increasing market
costs associated with doing municipal
securities business. Accordingly, * * *
regulatory action is necessary to protect
investors and maintain the integrity of the
market.
Proposed New MSRB Rule G–42
Proposed Rule G–42 concerns
political contributions made by all
municipal advisors, both those that are
dealers and those that are not. Like Rule
G–37, the proposed rule would not ban
political contributions. Instead,
proposed Rule G–42 would:
• Prohibit a municipal advisor from
engaging in ‘‘municipal advisory
business’’ with a municipal entity for
compensation for a period of time
beginning on the date of a non-de
minimis 11 political contribution to an
‘‘official of the municipal entity’’ by the
municipal advisor, any of its municipal
advisor professionals (‘‘MAPs’’), or a
political action committee controlled by
the municipal advisor or a MAP, and
ending two years after all municipal
advisory business with the municipal
entity has been terminated; 12
• Prohibit a municipal advisor from
soliciting third-party business 13 from a
municipal entity for compensation, or
receiving compensation for the
solicitation of third-party business from
a municipal entity, for two years after a
non-de minimis political contribution to
an ‘‘official of the municipal entity;’’ 14
• Prohibit municipal advisors and
MAPs from soliciting contributions, or
coordinating contributions, to officials
of municipal entities with which the
municipal advisor is engaging or
seeking to engage in municipal advisory
11 Proposed Rule G–42(g)(ii) would provide in
pertinent part: The term ‘‘de minimis,’’ when used
in connection with contributions made by a
municipal advisor professional or a non-MAP
executive officer, refers to contributions made
* * * to officials of a municipal entity for whom
the municipal advisor professional or non-MAP
executive officer was entitled to vote at the time of
the contribution and which contributions, in total,
were not in excess of $250 to each official of such
municipal entity, per election.
12 See proposed Rule G–42(b)(i).
13 Proposed Rule G–42(g)(xiv) would provide
that: ‘‘third-party business’’ means an engagement
by a municipal entity of a broker, dealer, municipal
securities dealer, or municipal advisor (other than
the municipal advisor that is soliciting the
municipal entity) that does not control, is not
controlled by, or is not under common control with,
the person soliciting such third-party business for
or in connection with municipal financial products
or the issuance of municipal securities, or of an
investment adviser (as defined in section 202(a)(11)
of the Investment Advisers Act of 1940) to provide
investment advisory services to or on behalf of a
municipal entity.
14 See proposed Rule G–42(b)(i).
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55977
business or from which the municipal
advisor is soliciting third-party
business; 15
• Prohibit municipal advisors and
MAPs from soliciting payments, or
coordinating payments, to political
parties of states or localities with which
the municipal advisor is engaging in, or
seeking to engage in, municipal
advisory business or from which the
municipal advisor is soliciting thirdparty business; 16
• Prohibit municipal advisors and
MAPs from committing indirect
violations of proposed Rule G–42; 17
• Require quarterly disclosures to the
MSRB of certain contributions and
related information; 18 and
• Permit certain exemptions from the
ban on business for compensation,
either by the SEC, upon application,19
or automatically.20
Proposed Amendments to Existing
MSRB Rules
MSRB Rule G–37. The proposed
amendments to Rule G–37 would
remove any references to ‘‘financial
advisory and consulting services,’’
because those activities would be
covered by proposed Rule G–42. The
definitions of ‘‘solicit,’’ ‘‘affiliated
company,’’ and ‘‘affiliated person of the
broker, dealer, or municipal securities
dealer’’ would be conformed to those in
proposed Rule G–42. The reference in
Rule G–37(b)(1)(B) to ‘‘any municipal
finance professional associated with
such broker, dealer or municipal
securities dealer’’ has been changed to
‘‘any municipal finance professional of
such broker, dealer, or municipal
securities dealer,’’ because, by
definition, all municipal finance
professionals are associated persons of
brokers, dealers, or municipal securities
dealers. Clarifications to Rule G–37
would provide that, in order for certain
contributions not to result in a ban on
municipal securities business or
required reporting to the MSRB, they
must be made to officials of issuers for
whom the municipal finance
professionals may vote at the time of the
contribution. References to Forms G–37
and G–37x would be changed to Forms
G–37/G–42 and G–37x/G–42x, which
would be the combined ‘‘macroforms’’
15 See
proposed Rule G–42(c)(i).
proposed Rule G–42(c)(ii). An exception
from this prohibition would be provided for certain
supervisors and executives of municipal advisors
that are only municipal advisors because they
provide advice to municipal entities or obligated
persons and do not solicit any third-party business
from municipal entities.
17 See proposed Rule G–42(d).
18 See proposed Rule G–42(e).
19 See proposed Rule G–42(h).
20 See proposed Rule G–42(i).
16 See
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used by both dealers and municipal
advisors to make reports to the MSRB
under Rule G–37(e) and proposed Rule
G–42(e), respectively. Such forms would
be required to be submitted
electronically.
MSRB Rules G–8 and G–9. Proposed
Rule G–42 would necessitate
amendments to Rule G–8 (on books and
records) and Rule G–9 (on preservation
of records). The proposed amendments
to Rule G–8 would require municipal
advisors to create and maintain records
necessary for the enforcement of the
proposed rule, including, but not
limited to, political contributions and
payments; lists of MAPs and non-MAP
executive officers; the states in which
the municipal advisor is engaging or is
seeking to engage in municipal advisory
business with municipal entities or
soliciting third-party business; a list of
municipal entities with which the
municipal advisor has engaged in
municipal advisory business and the
type of municipal advisory business; a
list of the third-party business awarded;
and Forms G–37/G–42 and G–37x/G–
42x. The proposed amendments to Rule
G–9 generally would require municipal
advisors to preserve records required to
be made pursuant to the proposed
amendments to Rule G–8 for six years.
The proposed amendments to Rules G–
8 and G–9 would subject municipal
advisors to recordkeeping and record
retention requirements related to
proposed Rule G–42 that are
substantially similar to those to which
dealers are already subject under Rule
G–37. The provisions of Rule G–8 and
G–9 concerning Rule G–37
recordkeeping and preservation would
change references to Forms G–37 and
37x to Forms G–37/G–42 and G–37x/G–
42x. References to receipts of mailing
the forms would also be removed,
because the forms would only be
submitted electronically.
Restated Rule G–37 Interpretive Notice
The Rule G–37 Interpretive Notice
was drafted before municipal advisors
to municipal entities were subject to a
Federal fiduciary duty and includes
language providing guidance on the
application of the ban on municipal
securities business in circumstances
where a non-de minimis contribution
occurs during the course of an existing
financial advisory relationship.
Proposed Rule G–42 is inconsistent with
the Rule G–37 Interpretive Notice,
which would permit financial advisors
to complete certain financial advisory
engagements while continuing to
receive compensation. Accordingly, the
MSRB is proposing to restate the Rule
G–37 Interpretive Notice to remove
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references to financial advisory services,
which would instead be covered by
proposed Rule G–42. A conforming
change would also reference
contributions made to officials of issuers
to whom municipal finance
professionals could vote at the time of
the contribution.
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 15(b)(2) of the
Exchange Act because it would help to
prevent municipal advisors from
seeking to influence the award of
business by government officials by
making or soliciting political
contributions to those officials, which
contributions distort and undermine the
fairness of the process by which
government business is awarded. The
proposed rule change would help
protect municipal entities and help to
perfect the mechanism of a free and
open market in municipal securities.
Just as pay to play activities by some
dealers had the potential to undermine
the integrity of the municipal securities
market and were addressed by Rule G–
37, pay to play activities by some
municipal advisors could similarly
damage the public’s confidence in the
municipal marketplace. The proposed
amendments to Rules G–8 and G–9
would assist in the enforcement of Rule
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Sfmt 4703
G–42. The proposed amendments to
Rule G–37 would make conforming
changes. The new Forms G–37/G–42
and G–37x/G–42x would eliminate the
need for duplicative filings for dealers
that engage in both municipal securities
business and municipal advisory
activities. The proposed restatement of
the Rule G–37 Interpretive Notice would
remove provisions that would be
otherwise inconsistent with proposed
Rule G–42.
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
would affect all municipal advisors, it
would be a necessary regulatory burden
because it would hamper practices that
can harm municipal entities and their
citizens by resulting in inferior services
and higher fees to investors and the
public, as well as contributing to the
violation of the public trust of elected
officials that might allow political
contributions to influence their
decisions regarding public contracting.
While the proposed rule change might
burden some small municipal advisors,
any such burden would be 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 would impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act, since the
proposed amendments to Rule G–37, the
associated amendments to Rule G–8,
and the proposed restatement of the
Rule G–37 Interpretive Notice would
apply equally to all dealers and
proposed Rule G–42 and the associated
amendments to Rules G–8 and G–9
would apply equally to all municipal
advisors. Proposed Forms G–37/G–42
and G–37x/G–42x would apply equally
to all dealers and municipal advisors.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
On January 14, 2011, the MSRB
requested comment on a draft of the
proposed rule change (‘‘draft Rule G–
42’’).21 The MSRB received comment
letters from (1) Acacia Financial Group,
21 See
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Exhibit 2.
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Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices
Inc.; (2) the American Bankers
Association; (3) AGFS; (4) BMO Capital
Markets GKST Inc. (‘‘BMO’’); (5) Mr. W.
Hardy Callcott; (6) Mr. Robert Fisher; (7)
G.L. Hicks Financial LLC; (8) H.J.
Umbaugh & Associates; (9) the National
Association of Independent Public
Finance Advisors; (10) Repex & Co.,
Inc.; (11) the Securities Industry and
Financial Markets Association; (12) the
State of Texas (Texas Comptroller of
Public Accounts); (13) the State of Texas
(Office of Attorney General); (14) T.
Rowe Price; (15) The PFM Group; and
(16) WM Financial Strategies.22 The
comments are summarized by topic as
follows:
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Harmonization of Draft Rule G–42 and
MSRB Rule G–37 with the Securities
and Exchange Commission Investment
Adviser Act Rule 206(4)–5 (the ‘‘SEC
Pay to Play Rule’’)
Acacia Financial Group, Inc. (‘‘Acacia
Financial’’), the American Bankers
Association (‘‘ABA’’), Mr. W. Hardy
Callcott (‘‘Mr. Callcott’’), the Securities
Industry and Financial Markets
Association (‘‘SIFMA’’), and T. Rowe
Price called for draft Rule G–42 and, in
some cases Rule G–37, to be consistent
with the SEC pay to play rule and for
conforming changes to Rule G–37,
arguing that such consistency is
necessary because many municipal
advisors will be subject to both the SEC
rules and the MSRB rules. Specifically,
the ABA said that, ‘‘imposing two
overlapping but inconsistent sets of
rules on the same conduct would be
inconsistent with the spirit of President
Obama’s January 18, 2011 Executive
Order, ‘‘Improving Regulation and
Regulatory Review,’’ which provides, in
part: ‘‘Our regulatory system * * *
must identify and use the best, most
innovative and least burdensome tools
for achieving regulatory ends.’’
Definition of ‘‘De Minimis’’ Political
Contribution
Comment: Each of these commenters
said that the MSRB should harmonize
draft Rule G–42 and Rule G–37 with the
SEC pay to play rule by defining a ‘‘de
minimis’’ political contribution as one
not exceeding $350 per election for an
issuer official for whom a municipal
advisor professional (‘‘MAP’’) may vote
at the time of the contribution and $150
per election for other issuer officials.
The ABA said that the Rule G–37
definition of de minimis political
contribution has not been amended
since the rule’s adoption in 1994 and
that the SEC, ‘‘which has most recently
reviewed the current economic and
22 See
Exhibit 2.
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55979
political environment in the context of
its deliberations on its adviser rule,
determined that increased thresholds
were warranted to account for inflation
since 1994.’’
MSRB Response: The MSRB has
determined to apply the current Rule G–
37 ‘‘de minimis’’ political contribution
limit to municipal advisors under
proposed Rule G–42. Even though the
Board is sensitive to differing
regulations on the same topic, the Board
is very concerned that allowing
contributions of $150 per election to
officials for whom municipal advisors
cannot vote (as permitted by the SEC
rule) is likely to result in the bundling
of political contributions by large
municipal advisor firms, despite the
prohibition on such activity under
proposed Rule G–42(c)(i). The Board has
similar concerns about making a
comparable amendment to Rule G–37.
The MSRB has also clarified that, in
order for a contribution or payment to
be considered de minimis, it must be
made to an official of a municipal entity
or a bond ballot campaign the MAP or
non-MAP executive officer could vote
for at the time of the contribution, or to
a political party of a state or political
subdivision in which the MAP or a nonMAP executive officer could vote at the
time of the contribution. Comparable
clarifying changes have been made to
Rule G–37. This clarification is
consistent with the way in which Rule
G–37 has previously been interpreted.
hiring an otherwise qualified candidate
because of his or her legal and
legitimate political contributions.’’
MSRB Response: The look-back
period for individuals who solicit
municipal advisory business or thirdparty business would be two years,
which is the same as the look-back
period for solicitors in the SEC pay to
play rule. Under both rules, employers
would need to adopt means designed to
elicit information about contributions
made by prospective employees during
the two years preceding their
employment. Unlike the SEC pay to
play rule, proposed Rule G–42 would
include within the definition of MAP
those associated persons of a municipal
advisor who are engaged in municipal
advisory business with a municipal
entity. The MSRB believes that these
individuals have the greatest interest in
obtaining municipal advisory business
and, therefore, their political
contributions present the most
significant potential for abuse. The lookback period for those individuals would
also be two years, which is the same as
the look-back period under Rule G–37
for those individuals who are primarily
engaged in municipal securities
business. The two-year look-back
provision of Rule G–37 for most new
employees has worked well over the
many years it has been in effect, and the
MSRB has determined not to change it
for either Rule G–37 or proposed Rule
G–42.
Look-Back Provision
Other
Comment: Acacia Financial also
requested that the provisions of draft
Rule G–42 related to who is subject to
the rule and the contribution recipients
be made the same as those of the SEC
pay to play rule.
MSRB Response: Unlike the SEC pay
to play rule, proposed Rule G–42 would
include within the definition of MAP all
those associated persons of a municipal
advisor who are engaged in municipal
advisory business with a municipal
entity. This provision is consistent with
how the term ‘‘municipal finance
professional’’ (‘‘MFP’’) is defined under
current Rule G–37. As said above, the
MSRB believes that these individuals
have the greatest interest in obtaining
municipal advisory business and,
therefore, their political contributions
present the most significant potential for
abuse. Therefore, the MSRB has
determined not to change this aspect of
proposed Rule G–42. As to the
recipients of political contributions,
proposed Rule G–42 pertains to
contributions made to certain officials of
municipal entities, while the SEC pay to
play rule pertains to contributions made
Comment: The ABA also suggested
that the MSRB conform the look-back
provision of draft Rule G–42 to the SEC
pay to play rule, which provides that, in
the case of employees who do not solicit
investment advisory business, a twoyear ‘‘time out’’ from compensation for
investment advisory services will be
triggered by non-de minimis political
contributions made by new ‘‘covered
associates’’ within the six months prior
to their employment. A two-year lookback provision covers employees who
do solicit investment advisory business.
The ABA said that the draft Rule G–42
look-back provisions generally 23 would
trigger a ban on business for
compensation if an employee had made
a contribution within two years before
becoming an MAP. The ABA also said
that such a restriction, ‘‘would require
municipal advisor employers to rely on
the accurate disclosures of new hires
and may preclude an employer from
23 A six-month look-back provision applies to
individuals who are only MAPs because they
supervise the municipal advisory activities of other
MAPs.
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to certain officials of government
entities. The definition of ‘‘official of a
municipal entity’’ in proposed Rule G–
42 is based both on the statutory
definition of ‘‘municipal entity’’ and on
the definition of ‘‘official of an issuer’’
in Rule G–37. The definitions of the
contribution recipients in proposed
Rule G–42 and the SEC pay to play rule
are effectively the same. The MSRB
perceives no administrative burden
associated with any slight differences
and has determined not to make any
changes.
Harmonization of Draft Rule G–42 with
Rule G–37
Comment: SIFMA said that the MSRB
should also harmonize draft Rule G–42
with Rule G–37 by:
(1) Allowing dealer municipal
advisors to report their non-de minimis
political contributions and municipal
advisory activities either on Form G–42
or on a ‘‘macroform’’ Form G–37/G–
42; 24
(2) Narrowing the definition of
‘‘supervisors’’ that are MAPs by limiting
it to those individuals who supervise
the municipal advisory activities of
others and not including those
individuals who supervise other
activities of MAPs;
(3) Requiring reporting of solicitations
only if they are successful; 25
(4) Requiring reporting of municipal
advisory business only in the quarter in
which it is obtained; and
(5) Using a ‘‘primarily engaged in
municipal advisory business’’ standard,
rather than an ‘‘engaged in municipal
advisory business’’ standard in the
definition of MAP.26 Alternatively,
SIFMA said that the MSRB should
clarify that only ‘‘advice’’ within the
meaning of the statute is covered.
SIFMA also recommended that the
MSRB adopt a de minimis exception to
the definition of ‘‘municipal advisor
professional.’’
MSRB Response: (1) The MSRB agrees
with SIFMA’s comment on the use of a
‘‘macroform’’ (Form G–37/G–42) and
has revised proposed Rule G–42(e)
accordingly.
(2) The MSRB agrees with SIFMA’s
comment on the types of supervisors
that should be considered MAPs and
has revised proposed Rule G–
42(g)(iv)(D) accordingly.
(3) The MSRB agrees with SIFMA’s
comment on the reporting of
solicitations and has amended proposed
24 See
also comments of BMO.
also comments of BMO.
26 Proposed Rule G–42(g)(iv)(A) includes within
the definition of MAP ‘‘any associated person
engaged in municipal advisory business with a
municipal entity.’’
25 See
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Rule G–42(e)(i)(C)(2) to require the
reporting of a list of the third-party
business awarded during the calendar
quarter by state, rather than all
solicitations.
(4) As to the required reporting of
municipal advisory business engaged in
during a calendar quarter, the wording
of proposed Rule G–42(e)(i)(C)(1) would
not differ from the wording of Rule G–
37(e)(i)(C). The instructions for Form G–
37 (pp. 14–15) clarify that reporting of
financial advisory business must occur
two times: First, when a financial
advisory engagement is entered into and
second, when a transaction that is the
subject of the engagement closes. The
instructions for Form G–37/G–42 would
contain similar instructions.
(5) SIFMA’s proposal that the MSRB
use a ‘‘primarily engaged in municipal
advisory business’’ standard in the
definition of MAP would create a
loophole by allowing individuals who
are only occasionally financial advisors
to escape the coverage of both Rule G–
37 and proposed Rule G–42. The use of
a ‘‘primarily engaged’’ standard in Rule
G–37 was appropriate because Rule G–
37(g)(iv)(A) defines as MFPs those
associated persons who are ‘‘primarily
engaged in municipal securities
representative activities, as defined in
Rule G–3(a)(i).’’ The term ‘‘municipal
securities representative activities’’
includes a number of activities, such as
sales and trading, that do not involve
contact with officials of issuers. Had the
MSRB not used a ‘‘primarily engaged’’
standard in Rule G–37, a broker’s
occasional sales activities could have
subjected the broker to Rule G–37, even
if the broker had no contact whatsoever
with issuer officials. Under proposed
Rule G–42, a person could be a MAP
when engaged in municipal advisory
business, which is defined only with
reference to activities that involve
contact with issuer officials. In this
respect, proposed Rule G–42 is
distinguishable from Rule G–37 and this
difference in the definition of MAP and
MFP is appropriate. Therefore, the
MSRB has not made this change. For the
same reasons, the MSRB does not
consider it appropriate to adopt a de
minimis exception to the definition of
MAP. The MSRB also notes that
SIFMA’s arguments on the definitions of
‘‘advice’’ are more appropriately
directed to the SEC.
Ban on Receipt of Compensation
Comment: The ABA said that the
MSRB should prohibit only
compensation for new municipal
advisory services, consistent with Rule
G–37. The ABA also said that the
prohibitions of draft Rule G–42 should
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only apply to the municipal advisor and
those employees of the municipal
advisor that are actually engaged in the
solicitation or provision of municipal
advisory business and not to those
individuals who are only MAPs as a
result of their supervisory or
management activities.
MSRB Response: Proposed Rule G–
42’s ban on business for compensation
follows the structure of the SEC pay to
play rule, as recommended previously
by the ABA. The MSRB considers a
mere ban on future municipal advisory
business to be inadequate and believes
that such ban also should apply to
existing engagements. Supervisors of
MAPs who are either engaged in
municipal advisory business or solicit
business also have a significant interest
in whether such business is obtained.
Particularly given that the MSRB has
determined to narrow the types of
supervisors who would be considered
MAPs, the MSRB considers it
appropriate for their contributions to
have the potential to trigger a ban on
business for compensation.
Comment: SIFMA said that the twoyear ban on receipt of compensation for
municipal advisory business should run
from the date of the non-de minimis
contribution and end two years later,
rather than ending two years after all
municipal advisory business with the
municipal entity has been terminated.
SIFMA also said that solicitors should
be able to receive compensation for
solicitations completed before the
making of a non-de minimis
contribution.
MSRB Response: The MSRB does not
agree with SIFMA’s comment regarding
a flat two-year ban and has determined
not to revise the proposed rule. Making
SIFMA’s suggested change would
permit municipal advisors to remain in
place with the understanding that they
would receive their compensation at the
end of two years. Many municipal
advisory engagements concern
transactions that might not close for at
least two years, with payment
contingent on the transaction closing, so
SIFMA’s suggested change would mean
that the ban would have little practical
effect in many cases. Furthermore, the
MSRB does not agree with SIFMA’s
proposal concerning the receipt of
compensation for solicitations already
successfully completed at the time of a
non-de minimis contribution. Under the
SEC pay to play rule, an investment
adviser may not compensate an
intermediary that is an investment
adviser if the intermediary has made a
non-de minimis contribution within two
years. The SEC rule does not distinguish
between solicitations that have already
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been completed and new solicitations.
SIFMA has presented no argument as to
why broker-dealer intermediaries and
investment adviser intermediaries
should be treated differently.
Comment: H. J. Umbaugh &
Associates (‘‘Umbaugh’’) supported a
longer ban, recommending that the term
of the ban should be identical to the
term of the related office to which the
non-de minimis political contribution
relates, which could be as long as four
years.
MSRB Response: While the MSRB is
sensitive to the concern expressed by
Umbaugh about the continuing
influence of political contributions, it
has determined that certain boundaries
on the consequences of a non-de
minimis political contribution must be
established in view of First Amendment
concerns. The two-year ban in proposed
Rule G–42 is based on Rule G–37, which
has survived constitutional challenge.27
Comment: The National Association
of Independent Public Finance Advisors
(‘‘NAIPFA’’) said that draft Rule G–42
and Rule G–37 should both provide that
non-de minimis political contributions
to an official of a municipal entity by
non-MAP and non-MFP executive
officers, respectively, should trigger a
two-year ban on their respective
business because the ‘‘allowance of such
contributions provides large firms an
opportunity to make significant
‘indirect’ contributions that directly
benefit the municipal business of such
firms.’’
MSRB Response: As is the case with
Rule G–37, proposed Rule G–42 is
narrowly tailored to address the
potential for quid pro quo behavior in
the selection of businesses performing
key municipal services, while at the
same time recognizing the First
Amendment rights of citizens to support
candidates for public office. While nonde minimis contributions by non-MFP
executive officers (in the case of Rule G–
37) and non-MAP executive officers (in
the case of proposed Rule G–42) will not
necessarily trigger a ban on business,
they must be reported to the MSRB. If
they represent an attempt to circumvent
the prescriptions of either rule, they
may trigger a ban on business under
either Rule G–37(d) or proposed Rule
G–42(d), respectively.
27 Blount v. SEC, 61 F.3d 938 (DC Cir. 1995), cert.
denied, 517 U.S. 1119 (1996). In Blount, the court
determined that Rule G–37 was constitutional
under a strict scrutiny analysis by finding that the
rule was narrowly tailored to serve a compelling
government interest. The court found the SEC’s
interests in protecting investors from fraud and
protecting underwriters from unfair, corrupt
practices to be compelling.
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Recordkeeping and Reporting
Requirements
Comment: NAIPFA supported the
draft changes to Rules G–8 and G–9
related to the recordkeeping provisions
of draft Rule G–42, as well as mandatory
electronic reporting to the MSRB.
However, some commenters said that
certain of the reporting and
recordkeeping provisions of the rule
would be difficult and expensive to
manage. The ABA said that the
reporting and recordkeeping provisions
of the draft rule were overly broad and
would yield little benefit in return,
particularly the provision that requires
reporting of all solicitations, whether
successful or not. The ABA also stated
that the MSRB and the SEC would force
market participants to adopt
unnecessarily complex and burdensome
compliance systems. BMO objected to
the need to file separate Forms G–37
and G–42.
MSRB Response: As previously said,
the MSRB has determined to require
reporting of a list of the third-party
business awarded during the calendar
quarter by state, rather than all
solicitations. The MSRB has also
determined to allow reporting of
required information under proposed
Rule G–42 on a combined ‘‘macroform’’
(Form G–37/G–42). The MSRB does not
believe that the recordkeeping and
reporting requirements of the proposed
rule change would be complex or
burdensome. Dealers are already subject
to the same requirements. The MSRB
believes that the proposed rule change
is a necessary regulatory burden that
will assist in the enforcement of the
proposed rule. Any potential burden
would be outweighed by the need to
protect municipal entities and their
constituents.
Comment: Mr. Robert Fisher (‘‘Mr.
Fisher’’) said that draft Rule G–42
should provide an exemption from
reporting for municipal advisors that do
not make political contributions and
whose MAPs and PACs do not make
political contributions. However, Mr.
Fisher suggested that such an exemption
would have to incorporate an
‘‘aggressive’’ look-back provision in
order to capture any contribution that
could disqualify the municipal advisor
from engaging in a municipal advisory
activity under the rule.
MSRB Response: While the MSRB is
sensitive to the concerns expressed by
Mr. Fisher, it has determined that, in
order to ensure effective enforcement of
the rule, all municipal advisors should
be required to file Form G–37/G–42 as
long as they are engaged in municipal
advisory business or the solicitation of
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55981
third-party business. Political
contributions made in one quarter do
not necessarily result in municipal
advisory business in the same quarter.
Sometimes municipal advisory business
may be obtained based on an
understanding that a non-de minimis
political contribution will be made in a
subsequent quarter. Requiring the
reporting of municipal advisory
business only after a non-de minimis
political contribution has been made by
a MAP would not provide enforcement
officials with the information they need
to enforce compliance with the rule.
Reporting of municipal advisory
business need only be made in the
calendar quarter in which the
engagement has commenced and in the
calendar quarter in which a transaction
closes.
Comment: Repex & Co., Inc.
(‘‘Repex’’) said that ‘‘[i]f any forms are
to be filed they should be filed only by
those firms that do business with those
municipalities, state pensions etc.’’ and
that ‘‘[t]he little firms are suffocating.’’
MSRB Response: Only municipal
advisors engaged in municipal advisory
business with municipal entities or that
solicit third-party business from
municipal entities would be subject to
the reporting requirements of proposed
Rule G–42(e). A municipal advisor that
is only engaged in municipal advisory
activities with an obligated person need
not file reports with the MSRB.
Scope of Draft Rule G–42.
Comment: Some commenters said that
pending SEC rulemaking concerning the
definition of ‘‘municipal advisor’’
should be completed before the MSRB
filed proposed Rule G–42 with the SEC
and that an additional MSRB comment
period might be warranted. For
example, the Attorney General of the
State of Texas said such [SEC]
rulemaking, ‘‘ * * * is likely to have a
significant impact on the substance,
interpretation and enforcement of MSRB
rules’’ and requested the opportunity to
provide comments as necessary pending
the outcome of the SEC’s rulemaking
process.28 SIFMA said that the MSRB
should use a two-stage rulemaking
process and move forward with
rulemaking on those municipal advisors
that are clearly covered by the statute
and delay rulemaking on those who are
only municipal advisors within the
expansive definition of the term
proposed by the SEC.
MSRB Response: The MSRB is
sensitive to the concerns expressed by
these commenters and has requested
28 See also State of Texas/Comptroller of Public
Accounts.
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that the proposed rule change be made
effective six months after the SEC has
adopted a final rule defining the term
‘‘municipal advisor.’’ Contributions
made prior to the effective date would
not result in a ban under proposed Rule
G–42(b), provided that any ban under
Rule G–37(b)(i) in existence prior to the
effective date of proposed Rule G–42
would continue until it otherwise
would have terminated under Rule G–
37(b)(i) as in effect prior to the effective
date of proposed Rule G–42.
Comment: SIFMA said that the
definition of ‘‘municipal advisor’’ in the
Exchange Act does not cover private
placement agents that solicit municipal
entities to make investments in private
equity funds, because such solicitations
are not the ‘‘solicitation of investment
advisory services.’’ Therefore, SIFMA
said that the MSRB does not have
jurisdiction to write rules for such
private placement agents, including
draft Rule G–42.
However, SIFMA said that the SEC
pay to play rule for investment advisers
prohibits investment advisers from
paying intermediaries that solicit
governmental entities on their behalf
after September 13, 2011, unless they
are subject to a pay to play rule at least
as stringent as the SEC rule. Therefore,
SIFMA said that the MSRB should work
with the SEC to help ensure that such
private placement agents may continue
to be compensated after September 13,
2011, by adopting an interim final rule
for such private placement agents,
which would apply pending resolution
of whether such private placement
agents are municipal advisors or
pending the adoption by FINRA of a pay
to play rule for such private placement
agents. SIFMA also previously
commented to the SEC that private
placement agents should be given the
option to comply with a FINRA pay to
play rule.
MSRB Response: The September 13,
2011 date referred to by SIFMA has
been revised to June 13, 2012. The
MSRB has jurisdiction to write rules
concerning municipal advisors.
Proposed Rule G–42 contains provisions
that would apply to such private
placements if they are determined by
the SEC to be municipal advisors. It is
the goal of the MSRB to have proposed
Rule G–42 effective before June 13,
2012.
Comment: T. Rowe Price said that
draft Rule G–42’s coverage of
solicitations on behalf of affiliated
investment advisers is premature,
because the SEC has not yet resolved
whether to treat such affiliates as
‘‘covered associates’’ of the investment
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adviser and, therefore, not subject to the
ban on payments to intermediaries.
MSRB Response: The MSRB has
revised the definition of ‘‘third-party
business’’ so that it does not apply to
solicitations of business on behalf of
affiliated firms.
First Amendment Considerations
Comments: Several commenters
raised First Amendment concerns
regarding draft Rule G–42. SIFMA
argued that a number of the provisions
of draft Rule G–42 to which it objected
could violate the First Amendment: (1)
The $250 de minimis political
contribution definition; (2) requiring
reporting of all solicitations, whether or
not successful; and (3) the definition of
‘‘supervisor.’’ Its rationale differed
depending upon the provision.
Although the $250 limit in Rule G–37
was upheld by the D.C. Circuit in the
Blount case, SIFMA argued that it is
inconsistent with Supreme Court cases
decided after Blount. SIFMA also stated
that the MSRB could no longer rely on
the Blount case to sustain the $250
limit, although SIFMA stopped short of
arguing that Rule G–37 is
unconstitutional.
SIFMA referred to statements by the
SEC when it adopted its pay to play
rule, noting that the SEC pointed to
inflation as the reason for using $350,
rather than the $250 it originally
proposed. It noted that the SEC also said
that the $150 limit for contributions to
issuer officials for whom the investment
adviser could not vote was justified
because non-residents might have
legitimate interests in those elections,
such as a resident of a metropolitan
area’s interests in the city in which the
person worked. The required reporting
of all solicitations to the MSRB,
regardless of whether they are
successful, was characterized by SIFMA
as impinging upon commercial speech.
SIFMA also argued that the provisions
of draft Rule G–42 that would prohibit
MAPs from soliciting others to make
political contributions and prohibit
indirect violations of the rule are
sufficient to prevent abuse of the
proposed $150 limit.
Mr. Callcott said that, in order for
draft Rule G–42 to survive a
constitutional challenge, the MSRB
would have to: (1) Adopt the SEC pay
to play rule definition of de minimis
political contribution; (2) allow
contributions to political parties as long
as such contributions are not earmarked
for certain issuer officials; and (3) clarify
that independent expenditures in
support of issuer officials are permitted
under draft Rule G–42. He argued that,
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without such conforming changes, Rule
G–37 would be at risk as well.
BMO expressed First Amendment
concerns related to the reporting
requirements of draft Rule G–42. BMO
said, ‘‘Since we are dealing with first
amendment considerations, we urge the
MSRB to adopt the least intrusive
program which will elicit relevant
information.’’
MSRB Response: The MSRB considers
SIFMA’s and Mr. Callcott’s references to
recent Supreme Court decisions to be
misplaced, because those cases
addressed substantially different facts.
First, unlike the Vermont statute
considered by the Court in Randall v.
Sorrell,29 proposed Rule G–42 would
not apply to a group of individuals that
is large enough for their contributions to
influence the results of elections in any
state. Therefore, the Court’s concern that
limitations on political contributions
would make it difficult for challengers
to be elected is not applicable. Second,
in Citizens United v. FEC,30 the
Supreme Court distinguished
restrictions on ‘‘independent
expenditures’’ from restrictions on
‘‘direct contributions’’ and left
restrictions on direct contributions
untouched while striking down a
restriction on independent expenditures
as unconstitutional.31
As stated above, the MSRB is
concerned that defining the term ‘‘de
minimis’’ as including contributions by
municipal advisor professionals to
issuer officials for whom they cannot
vote will lead to the bundling of
political contributions. Additionally,
the change made by the MSRB to the
types of supervisors who would be
considered municipal advisor
professionals has more narrowly
tailored the proposed rule to those
individuals who are most likely to
benefit from business awarded as a
result of political contributions.
The MSRB notes that, contrary to Mr.
Callcott’s reading, proposed Rule G–
42(c)(ii) would not prohibit payments to
political parties. Instead, it would
prohibit the solicitation of such
payments from others. The MSRB also
does not agree with Mr. Callcott that the
definition of ‘‘contribution’’ in Rule G–
37 and proposed Rule G–42 precludes
the making of independent expenditures
in support of issuer officials in violation
of Citizens United.
Comment: SIFMA also said that the
MSRB should clarify that recordkeeping
29 548
U.S. 230, 247 (2006).
S. Ct. 876 (2010).
31 The MSRB notes that proposed Rule G–42
would not restrict political campaign contributions.
Rather, it would limit certain business activities as
a result of such contributions.
30 130
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requirements of draft Rule G–42 are not
retroactive. It said that only
engagements obtained after the rule’s
operative date should be required to be
reported.
MSRB Response: The recordkeeping
provisions of proposed Rule G–42
would not become effective until the
rest of the proposed rule change
becomes effective and would not be
retroactive.
Bond Ballot Campaign Contributions
Comments: Some commenters said
that draft Rule G–42 should prohibit
certain contributions to bond ballot
campaigns by underwriters and
municipal advisors. AGFS expressed
support for draft Rule G–42 32 but said
that bond ballot contributions by
underwriters and municipal advisors,
‘‘distort the democratic process’’ and
that ‘‘[m]unicipal advisors violate their
fiduciary duty when they encourage,
and participate with, their public entity
clients and officials of the clients in
actions that are undemocratic at best
and illegal at worst.’’
NAIPFA said, ‘‘All too often, we see
funds and/or campaign services being
contributed to bond campaigns by
underwriters [and] financial advisors
* * * who end up providing services
for the bond transaction work once the
election is successful.’’ NAIPFA
recommended that draft Rule G–42
should broaden the standards of ethical
behavior to include a ban on municipal
advisory business in the event of
abusive bond ballot contributions. WM
Financial Strategies also said that ‘‘bond
ballot campaign contributions, when
made outside of an individual’s voting
jurisdiction, are a form of [pay]-to-play
that taint the integrity of the municipal
market.’’
MSRB Response: The MSRB does not
believe that a ban on business as a result
of non-de minimis contributions to bond
ballot campaigns is warranted at this
time. As the MSRB said when it filed
with the SEC a comparable amendment
to Rule G–37 requiring the reporting of
such contributions, ‘‘The MSRB
believes, * * * that the proposed
amendments would create a uniform
disclosure regime to track and make
available to public scrutiny bond ballot
campaign contributions by dealers in
the municipal securities market, thereby
increasing available information to
municipal securities market participants
and the general public. The MSRB does
not believe that a ban on municipal
securities business as a result of a
contribution to a bond ballot campaign
32 G.L.
Hicks Financial LLC also expressed
support for draft Rule G–42.
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is warranted at this time but notes that
the disclosures provided for under the
proposed rule change will assist in
determining, in the future, whether it
would be appropriate to consider
further action in this area.’’ 33 The
MSRB notes that contributions made to
bond ballot initiatives for which a
municipal advisor professional cannot
vote are not considered de minimis for
purposes of the reporting requirements
of Rule G–42(e).
Miscellaneous Comments
Transition Expenses.
Comment: Umbaugh said that draft
Rule G–42 is not clear as to the types of
transition expenses that might be
considered contributions in violation of
the rule.
MSRB Response: When it requested
comment on draft Rule G–42, the MSRB
said that it expected to propose
interpretations of draft Rule G–42
similar to those applicable to Rule G–37
and that remains the MSRB’s intent,
subject to SEC approval. On November
29, 2001, the MSRB issued an
interpretation of Rule G–37 concerning
‘‘Activities by Dealers and Municipal
Finance Professionals During Transition
Periods for Elected Issuer Officials.’’
Municipal advisors may look to that
interpretation for guidance under
proposed Rule G–42.
Definition of ‘‘Seeking to Engage’’.
Comment: The PFM Group (‘‘PFM’’)
requested that the MSRB clarify when a
municipal advisor will be considered to
be ‘‘seeking to engage’’ in municipal
advisory business. It suggested that draft
Rule G–42(c)(i) and (ii) not apply to any
activity occurring more than six months
after the advisor’s latest contact with the
municipal entity looking toward an
engagement or, in the case of an RFP
response, between the time that the
municipal entity has contracted with
another party and the municipal
advisor’s next contact with the
municipal entity.
MSRB Response: As under Rule G–37,
whether a municipal advisor is seeking
to engage in municipal advisory
business is a facts and circumstances
analysis, and the MSRB does not
consider a bright line test appropriate.
Payments to Political Parties.
Comment: PFM requested
clarification that the prohibitions on
payments to political parties would only
apply to the political party organization
at the level of government with which
the municipal advisor is engaged in
business or is seeking to engage in
business.
33 See Securities Exchange Act Release No. 61381
(January 20, 2010); File No. SR–MSRB–2009–18
(December 4, 2010).
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Sfmt 4703
55983
MSRB Response: Proposed Rule G–
42(c)(ii) would not prohibit payments to
political parties. It would prohibit the
solicitation of such payments from
others. As with Rule G–37, this
prohibition under proposed Rule G–42
would apply to solicitations of
payments to all political party
organizations, state and local, operating
within the jurisdiction in which the
municipal advisor is engaging or
seeking to engage in municipal advisory
business or in which the municipal
advisor is soliciting third-party
business.
Definition of ‘‘Payment.’’
Comment: PFM suggested that the
definition of ‘‘payment’’ be modified to
include the concept of an amount in
excess of the fair value of goods or
services provided by the political party
to make it clear that commercial
transactions with a political party are
not prohibited.
MSRB Response: As explained above,
proposed Rule G–42 does not prohibit
payments to political parties.
Contributions by MAPs to Their Own
Campaigns.
Comment: Umbaugh requested
clarification that a non-de minimis
contribution by a MAP of money,
property, or services to his or her own
election campaign would not trigger a
ban on business for compensation with
the government to which the MAP is
elected for a two-year period.
MSRB Response: When it requested
comment on draft Rule G–42, the MSRB
said that it expected to propose
interpretations of Rule G–42 similar to
those applicable to Rule G–37 and that
remains the MSRB’s intent, subject to
SEC approval. Q&A II. 10 issued under
Rule G–37 provides that an MFP who is
an incumbent or candidate for office is
not limited to contributing the de
minimis amount to his or her own
campaign and that such contributions
by the candidate or incumbent will not
trigger a ban on business. Municipal
advisors may look to that Q&A, and
other Rule G–37 Qs&As, for guidance
under proposed Rule G–42.
Rule G–38.
Comment: In its request for comment
on draft Rule G–42, the MSRB asked
whether Rule G–38 (on solicitation of
municipal securities business) should
be revised or eliminated now that firms
and individuals that solicit municipal
securities business on behalf of dealers
are regulated as municipal advisors.
Both T. Rowe Price and PFM said that
Rule G–38 should not be eliminated.
PFM also noted other issues related to
third-party business should Rule G–38
be eliminated.
E:\FR\FM\09SEN1.SGM
09SEN1
55984
Federal Register / Vol. 76, No. 175 / Friday, September 9, 2011 / Notices
MSRB Response: The MSRB has
determined not to propose that Rule G–
38 be revised or eliminated at this time.
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 (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.
mstockstill on DSK4VPTVN1PROD with 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. An investment adviser subject to
rule 206(4)–5 under the Investment
Advisers Act of 1940 (the ‘‘Advisers
Act’’) is prohibited from providing or
agreeing to provide, directly or
indirectly, payment to any third party to
solicit a government entity for
investment advisory services on behalf
of such investment adviser unless that
third party is a ‘‘regulated person’’
under the rule.34 A regulated person
may include a registered municipal
advisor subject to pay to play rules that
the Commission, by order, finds
‘‘impose substantially equivalent or
more stringent restrictions on municipal
advisors than [the Advisers Act rule]
imposes on investment advisers and
* * * are consistent with the objectives
of [the Advisers Act rule].’’35 We note
that proposed rule G–42 differs from the
Advisers Act pay to play rule in certain
respects, and we request comment on
the effect of those differences on the
finding the Advisers Act rule requires.36
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.
34 See
17 CFR 275.206(4)–5(a)(2)(i)(A).
provision will be codified at 17 CFR
275.206(4)–5(f)(9)(iii) (effective September 19,
2011). See Investment Advisers Act Release No. IA–
3221 (June 22, 2011), 76 FR 42950 (July 19, 2011).
36 See, e.g., proposed rule G–42(b), G–42(c)(ii), G–
42(g)(iv) and G–42(g)(v).
35 This
VerDate Mar<15>2010
16:58 Sep 08, 2011
Jkt 223001
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml ); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–MSRB–2011–12 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65259; File No. SR–ICC–
2011–01]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Notice of Filing of
Proposed Rule Change To Add Rules
Related to the Clearing of Emerging
Markets Sovereigns
September 2, 2011.
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–2011–12. 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–2011–12 and should
be submitted on or before September 30,
2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–23046 Filed 9–8–11; 8:45 am]
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
30, 2011, ICE Clear Credit LLC (‘‘ICC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared primarily by ICC.
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 purpose of the proposed rule
change is to adopt new rules that will
provide the basis for ICC to clear
additional credit default swap (‘‘CDS’’)
contracts. Specifically, ICC is proposing
to amend Chapter 26 of its rules to add
Sections 26D and 26E to provide for the
clearance of Emerging Markets Standard
Sovereign CDS (‘‘Standard Emerging
Sovereign Single Names’’ or ‘‘SES
Contracts’’).
As discussed in more detail in Item
II(A) below, Section 26D (Standard
Emerging Sovereign Single Names)
provides for the definitions and certain
specific contract terms for cleared SES
Contracts. Section 26E (CDS
Restructuring Rules) provides the rules
applicable to SES Contracts in the event
of a restructuring credit event.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, ICC
included statements concerning the
purpose of and basis for the proposed
rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. ICC has prepared
summaries, set forth in sections (A), (B),
BILLING CODE 8011–01–P
1 15
37 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00118
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 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55976-55984]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23046]
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SECURITIES AND EXCHANGE COMMISSION
[RELEASE NO. 34-65255; File No. SR-MSRB-2011-12]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed New Rule G-42, on Political
Contributions and Prohibitions on Municipal Advisory Activities;
Proposed Amendments to Rules G-8, on Books and Records, G-9, on
Preservation of Records, and G-37, on Political Contributions and
Prohibitions on Municipal Securities Business; Proposed Form G-37/G-42
and Form G-37x/G-42x; and a Proposed Restatement of a Rule G-37
Interpretive Notice
September 2, 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 19, 2011, the Municipal Securities
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') 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 is filing with the SEC a proposed rule change consisting
of (i) Proposed MSRB Rule G-42 (on political contributions and
prohibitions on municipal advisory activities); (ii) proposed
amendments that would make conforming changes to MSRB Rules G-8 (on
books and records), G-9 (on preservation of records), and G-37 (on
political contributions and prohibitions on municipal securities
business); (iii) proposed Form G-37/G-42 and Form G-37x/G-42x; and (iv)
a proposed restatement of a Rule G-37 interpretive notice issued by the
MSRB in 1997 (``Rule G-37 Interpretive Notice'').\3\
---------------------------------------------------------------------------
\3\ Interpretation of Prohibition on Municipal Securities
Business Pursuant to Rule G-37 (February 21, 1997), reprinted in
MSRB Rule Book.
---------------------------------------------------------------------------
The MSRB requests that, if approved by the Commission, the proposed
rule change be made effective six months after the date on which the
Commission first approves rules defining the term ``municipal advisor''
under the Exchange Act or such later date as the Commission approves
the proposed rule change; provided, however, that the MSRB requests
that no contribution made prior to the effective date of proposed Rule
G-42 would result in a ban pursuant to proposed Rule G-42(b)(i); \4\
and, provided that any ban on municipal securities business under Rule
G-37(b)(i) in existence prior to the effective date of proposed Rule G-
42 would continue until it otherwise would have terminated under Rule
G-37(b)(i), as in effect prior to the effective date of proposed Rule
G-42.
---------------------------------------------------------------------------
\4\ As described in more detail below, under proposed Rule G-
42(b)(i) certain contributions could result in a ban on municipal
advisory business for compensation, a ban on solicitations of third-
party business for compensation, and a ban on the receipt of
compensation for the solicitation of third-party business.
---------------------------------------------------------------------------
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 Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Board 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 Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') \5\ authorized the MSRB to establish a
comprehensive body of regulation for municipal advisors and provided
that municipal advisors to municipal entities have a Federal fiduciary
duty.\6\ The Dodd-Frank Act required the MSRB to adopt rules for
municipal advisors that, in addition to implementing the Federal
fiduciary duty, are designed to prevent fraudulent and manipulative
acts and practices and to promote just and equitable principles of
trade.\7\ It also expanded the mission
[[Page 55977]]
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.
---------------------------------------------------------------------------
\5\ Public Law No. 111-203, 124 Stat. 1376 (2010).
\6\ See 15B(c)(1) 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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Municipal advisors that seek to influence the award of business by
government officials by making or soliciting political contributions to
those officials distort and undermine the fairness of the process by
which government business is awarded. These practices can harm
municipal entities and their citizens by resulting in inferior services
and higher fees, as well as contributing to the violation of the public
trust of elected officials that might allow political contributions to
influence their decisions regarding public contracting.
Similarly, Rule G-37 was adopted by the MSRB in 1994 due to
concerns about the opportunity for abuses and the problems associated
with political contributions by dealers in connection with the award of
municipal securities business.\9\ When it filed proposed Rule G-37 with
the Commission,\10\ the MSRB stated that it believed that there had
been numerous instances in which dealers had been awarded municipal
securities business because of their political contributions. Even when
such improprieties had not occurred, the MSRB believed that political
contributions created a potential conflict of interest for issuers, or
at the very least the appearance of a conflict, when dealers made
contributions to officials responsible for, or capable of influencing
the outcome of, the award of municipal securities business and then
were awarded business by issuers associated with such officials. The
MSRB said:
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\9\ Municipal securities business generally consists of
negotiated underwritings, private placements, and serving as
remarketing agent or financial advisor on a new issue of municipal
securities. See Rule G-37(g)(vii).
\10\ See File No. SR-MSRB-94-2 (January 12, 1994); ``Political
Contributions and Prohibitions on Municipal Securities Business:
Proposed Rule G-37,'' MSRB Reports, Vol. 14, No. 1 (January 1994).
The problems associated with political contributions undermine
investor confidence in the municipal securities market, which is
crucial to the long-term health of the market, both in terms of
liquidity and capital-raising ability * * *. The payment of such
contributions to obtain business creates artificial barriers to
those dealers not willing or able to make such payments, thereby
harming investors and the public interest by stifling competition
and increasing market costs associated with doing municipal
securities business. Accordingly, * * * regulatory action is
necessary to protect investors and maintain the integrity of the
---------------------------------------------------------------------------
market.
Proposed New MSRB Rule G-42
Proposed Rule G-42 concerns political contributions made by all
municipal advisors, both those that are dealers and those that are not.
Like Rule G-37, the proposed rule would not ban political
contributions. Instead, proposed Rule G-42 would:
Prohibit a municipal advisor from engaging in ``municipal
advisory business'' with a municipal entity for compensation for a
period of time beginning on the date of a non-de minimis \11\ political
contribution to an ``official of the municipal entity'' by the
municipal advisor, any of its municipal advisor professionals
(``MAPs''), or a political action committee controlled by the municipal
advisor or a MAP, and ending two years after all municipal advisory
business with the municipal entity has been terminated; \12\
---------------------------------------------------------------------------
\11\ Proposed Rule G-42(g)(ii) would provide in pertinent part:
The term ``de minimis,'' when used in connection with contributions
made by a municipal advisor professional or a non-MAP executive
officer, refers to contributions made * * * to officials of a
municipal entity for whom the municipal advisor professional or non-
MAP executive officer was entitled to vote at the time of the
contribution and which contributions, in total, were not in excess
of $250 to each official of such municipal entity, per election.
\12\ See proposed Rule G-42(b)(i).
---------------------------------------------------------------------------
Prohibit a municipal advisor from soliciting third-party
business \13\ from a municipal entity for compensation, or receiving
compensation for the solicitation of third-party business from a
municipal entity, for two years after a non-de minimis political
contribution to an ``official of the municipal entity;'' \14\
---------------------------------------------------------------------------
\13\ Proposed Rule G-42(g)(xiv) would provide that: ``third-
party business'' means an engagement by a municipal entity of a
broker, dealer, municipal securities dealer, or municipal advisor
(other than the municipal advisor that is soliciting the municipal
entity) that does not control, is not controlled by, or is not under
common control with, the person soliciting such third-party business
for or in connection with municipal financial products or the
issuance of municipal securities, or of an investment adviser (as
defined in section 202(a)(11) of the Investment Advisers Act of
1940) to provide investment advisory services to or on behalf of a
municipal entity.
\14\ See proposed Rule G-42(b)(i).
---------------------------------------------------------------------------
Prohibit municipal advisors and MAPs from soliciting
contributions, or coordinating contributions, to officials of municipal
entities with which the municipal advisor is engaging or seeking to
engage in municipal advisory business or from which the municipal
advisor is soliciting third-party business; \15\
---------------------------------------------------------------------------
\15\ See proposed Rule G-42(c)(i).
---------------------------------------------------------------------------
Prohibit municipal advisors and MAPs from soliciting
payments, or coordinating payments, to political parties of states or
localities with which the municipal advisor is engaging in, or seeking
to engage in, municipal advisory business or from which the municipal
advisor is soliciting third-party business; \16\
---------------------------------------------------------------------------
\16\ See proposed Rule G-42(c)(ii). An exception from this
prohibition would be provided for certain supervisors and executives
of municipal advisors that are only municipal advisors because they
provide advice to municipal entities or obligated persons and do not
solicit any third-party business from municipal entities.
---------------------------------------------------------------------------
Prohibit municipal advisors and MAPs from committing
indirect violations of proposed Rule G-42; \17\
---------------------------------------------------------------------------
\17\ See proposed Rule G-42(d).
---------------------------------------------------------------------------
Require quarterly disclosures to the MSRB of certain
contributions and related information; \18\ and
---------------------------------------------------------------------------
\18\ See proposed Rule G-42(e).
---------------------------------------------------------------------------
Permit certain exemptions from the ban on business for
compensation, either by the SEC, upon application,\19\ or
automatically.\20\
---------------------------------------------------------------------------
\19\ See proposed Rule G-42(h).
\20\ See proposed Rule G-42(i).
---------------------------------------------------------------------------
Proposed Amendments to Existing MSRB Rules
MSRB Rule G-37. The proposed amendments to Rule G-37 would remove
any references to ``financial advisory and consulting services,''
because those activities would be covered by proposed Rule G-42. The
definitions of ``solicit,'' ``affiliated company,'' and ``affiliated
person of the broker, dealer, or municipal securities dealer'' would be
conformed to those in proposed Rule G-42. The reference in Rule G-
37(b)(1)(B) to ``any municipal finance professional associated with
such broker, dealer or municipal securities dealer'' has been changed
to ``any municipal finance professional of such broker, dealer, or
municipal securities dealer,'' because, by definition, all municipal
finance professionals are associated persons of brokers, dealers, or
municipal securities dealers. Clarifications to Rule G-37 would provide
that, in order for certain contributions not to result in a ban on
municipal securities business or required reporting to the MSRB, they
must be made to officials of issuers for whom the municipal finance
professionals may vote at the time of the contribution. References to
Forms G-37 and G-37x would be changed to Forms G-37/G-42 and G-37x/G-
42x, which would be the combined ``macroforms''
[[Page 55978]]
used by both dealers and municipal advisors to make reports to the MSRB
under Rule G-37(e) and proposed Rule G-42(e), respectively. Such forms
would be required to be submitted electronically.
MSRB Rules G-8 and G-9. Proposed Rule G-42 would necessitate
amendments to Rule G-8 (on books and records) and Rule G-9 (on
preservation of records). The proposed amendments to Rule G-8 would
require municipal advisors to create and maintain records necessary for
the enforcement of the proposed rule, including, but not limited to,
political contributions and payments; lists of MAPs and non-MAP
executive officers; the states in which the municipal advisor is
engaging or is seeking to engage in municipal advisory business with
municipal entities or soliciting third-party business; a list of
municipal entities with which the municipal advisor has engaged in
municipal advisory business and the type of municipal advisory
business; a list of the third-party business awarded; and Forms G-37/G-
42 and G-37x/G-42x. The proposed amendments to Rule G-9 generally would
require municipal advisors to preserve records required to be made
pursuant to the proposed amendments to Rule G-8 for six years. The
proposed amendments to Rules G-8 and G-9 would subject municipal
advisors to recordkeeping and record retention requirements related to
proposed Rule G-42 that are substantially similar to those to which
dealers are already subject under Rule G-37. The provisions of Rule G-8
and G-9 concerning Rule G-37 recordkeeping and preservation would
change references to Forms G-37 and 37x to Forms G-37/G-42 and G-37x/G-
42x. References to receipts of mailing the forms would also be removed,
because the forms would only be submitted electronically.
Restated Rule G-37 Interpretive Notice
The Rule G-37 Interpretive Notice was drafted before municipal
advisors to municipal entities were subject to a Federal fiduciary duty
and includes language providing guidance on the application of the ban
on municipal securities business in circumstances where a non-de
minimis contribution occurs during the course of an existing financial
advisory relationship. Proposed Rule G-42 is inconsistent with the Rule
G-37 Interpretive Notice, which would permit financial advisors to
complete certain financial advisory engagements while continuing to
receive compensation. Accordingly, the MSRB is proposing to restate the
Rule G-37 Interpretive Notice to remove references to financial
advisory services, which would instead be covered by proposed Rule G-
42. A conforming change would also reference contributions made to
officials of issuers to whom municipal finance professionals could vote
at the time of the contribution.
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 15(b)(2) of the
Exchange Act because it would help to prevent municipal advisors from
seeking to influence the award of business by government officials by
making or soliciting political contributions to those officials, which
contributions distort and undermine the fairness of the process by
which government business is awarded. The proposed rule change would
help protect municipal entities and help to perfect the mechanism of a
free and open market in municipal securities. Just as pay to play
activities by some dealers had the potential to undermine the integrity
of the municipal securities market and were addressed by Rule G-37, pay
to play activities by some municipal advisors could similarly damage
the public's confidence in the municipal marketplace. The proposed
amendments to Rules G-8 and G-9 would assist in the enforcement of Rule
G-42. The proposed amendments to Rule G-37 would make conforming
changes. The new Forms G-37/G-42 and G-37x/G-42x would eliminate the
need for duplicative filings for dealers that engage in both municipal
securities business and municipal advisory activities. The proposed
restatement of the Rule G-37 Interpretive Notice would remove
provisions that would be otherwise inconsistent with proposed Rule G-
42.
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 would affect all municipal advisors,
it would be a necessary regulatory burden because it would hamper
practices that can harm municipal entities and their citizens by
resulting in inferior services and higher fees to investors and the
public, as well as contributing to the violation of the public trust of
elected officials that might allow political contributions to influence
their decisions regarding public contracting. While the proposed rule
change might burden some small municipal advisors, any such burden
would be 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 would
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act, since the proposed
amendments to Rule G-37, the associated amendments to Rule G-8, and the
proposed restatement of the Rule G-37 Interpretive Notice would apply
equally to all dealers and proposed Rule G-42 and the associated
amendments to Rules G-8 and G-9 would apply equally to all municipal
advisors. Proposed Forms G-37/G-42 and G-37x/G-42x would apply equally
to all dealers and municipal advisors.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
On January 14, 2011, the MSRB requested comment on a draft of the
proposed rule change (``draft Rule G-42'').\21\ The MSRB received
comment letters from (1) Acacia Financial Group,
[[Page 55979]]
Inc.; (2) the American Bankers Association; (3) AGFS; (4) BMO Capital
Markets GKST Inc. (``BMO''); (5) Mr. W. Hardy Callcott; (6) Mr. Robert
Fisher; (7) G.L. Hicks Financial LLC; (8) H.J. Umbaugh & Associates;
(9) the National Association of Independent Public Finance Advisors;
(10) Repex & Co., Inc.; (11) the Securities Industry and Financial
Markets Association; (12) the State of Texas (Texas Comptroller of
Public Accounts); (13) the State of Texas (Office of Attorney General);
(14) T. Rowe Price; (15) The PFM Group; and (16) WM Financial
Strategies.\22\ The comments are summarized by topic as follows:
---------------------------------------------------------------------------
\21\ See Exhibit 2.
\22\ See Exhibit 2.
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Harmonization of Draft Rule G-42 and MSRB Rule G-37 with the Securities
and Exchange Commission Investment Adviser Act Rule 206(4)-5 (the ``SEC
Pay to Play Rule'')
Acacia Financial Group, Inc. (``Acacia Financial''), the American
Bankers Association (``ABA''), Mr. W. Hardy Callcott (``Mr.
Callcott''), the Securities Industry and Financial Markets Association
(``SIFMA''), and T. Rowe Price called for draft Rule G-42 and, in some
cases Rule G-37, to be consistent with the SEC pay to play rule and for
conforming changes to Rule G-37, arguing that such consistency is
necessary because many municipal advisors will be subject to both the
SEC rules and the MSRB rules. Specifically, the ABA said that,
``imposing two overlapping but inconsistent sets of rules on the same
conduct would be inconsistent with the spirit of President Obama's
January 18, 2011 Executive Order, ``Improving Regulation and Regulatory
Review,'' which provides, in part: ``Our regulatory system * * * must
identify and use the best, most innovative and least burdensome tools
for achieving regulatory ends.''
Definition of ``De Minimis'' Political Contribution
Comment: Each of these commenters said that the MSRB should
harmonize draft Rule G-42 and Rule G-37 with the SEC pay to play rule
by defining a ``de minimis'' political contribution as one not
exceeding $350 per election for an issuer official for whom a municipal
advisor professional (``MAP'') may vote at the time of the contribution
and $150 per election for other issuer officials. The ABA said that the
Rule G-37 definition of de minimis political contribution has not been
amended since the rule's adoption in 1994 and that the SEC, ``which has
most recently reviewed the current economic and political environment
in the context of its deliberations on its adviser rule, determined
that increased thresholds were warranted to account for inflation since
1994.''
MSRB Response: The MSRB has determined to apply the current Rule G-
37 ``de minimis'' political contribution limit to municipal advisors
under proposed Rule G-42. Even though the Board is sensitive to
differing regulations on the same topic, the Board is very concerned
that allowing contributions of $150 per election to officials for whom
municipal advisors cannot vote (as permitted by the SEC rule) is likely
to result in the bundling of political contributions by large municipal
advisor firms, despite the prohibition on such activity under proposed
Rule G-42(c)(i). The Board has similar concerns about making a
comparable amendment to Rule G-37. The MSRB has also clarified that, in
order for a contribution or payment to be considered de minimis, it
must be made to an official of a municipal entity or a bond ballot
campaign the MAP or non-MAP executive officer could vote for at the
time of the contribution, or to a political party of a state or
political subdivision in which the MAP or a non-MAP executive officer
could vote at the time of the contribution. Comparable clarifying
changes have been made to Rule G-37. This clarification is consistent
with the way in which Rule G-37 has previously been interpreted.
Look-Back Provision
Comment: The ABA also suggested that the MSRB conform the look-back
provision of draft Rule G-42 to the SEC pay to play rule, which
provides that, in the case of employees who do not solicit investment
advisory business, a two-year ``time out'' from compensation for
investment advisory services will be triggered by non-de minimis
political contributions made by new ``covered associates'' within the
six months prior to their employment. A two-year look-back provision
covers employees who do solicit investment advisory business. The ABA
said that the draft Rule G-42 look-back provisions generally \23\ would
trigger a ban on business for compensation if an employee had made a
contribution within two years before becoming an MAP. The ABA also said
that such a restriction, ``would require municipal advisor employers to
rely on the accurate disclosures of new hires and may preclude an
employer from hiring an otherwise qualified candidate because of his or
her legal and legitimate political contributions.''
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\23\ A six-month look-back provision applies to individuals who
are only MAPs because they supervise the municipal advisory
activities of other MAPs.
---------------------------------------------------------------------------
MSRB Response: The look-back period for individuals who solicit
municipal advisory business or third-party business would be two years,
which is the same as the look-back period for solicitors in the SEC pay
to play rule. Under both rules, employers would need to adopt means
designed to elicit information about contributions made by prospective
employees during the two years preceding their employment. Unlike the
SEC pay to play rule, proposed Rule G-42 would include within the
definition of MAP those associated persons of a municipal advisor who
are engaged in municipal advisory business with a municipal entity. The
MSRB believes that these individuals have the greatest interest in
obtaining municipal advisory business and, therefore, their political
contributions present the most significant potential for abuse. The
look-back period for those individuals would also be two years, which
is the same as the look-back period under Rule G-37 for those
individuals who are primarily engaged in municipal securities business.
The two-year look-back provision of Rule G-37 for most new employees
has worked well over the many years it has been in effect, and the MSRB
has determined not to change it for either Rule G-37 or proposed Rule
G-42.
Other
Comment: Acacia Financial also requested that the provisions of
draft Rule G-42 related to who is subject to the rule and the
contribution recipients be made the same as those of the SEC pay to
play rule.
MSRB Response: Unlike the SEC pay to play rule, proposed Rule G-42
would include within the definition of MAP all those associated persons
of a municipal advisor who are engaged in municipal advisory business
with a municipal entity. This provision is consistent with how the term
``municipal finance professional'' (``MFP'') is defined under current
Rule G-37. As said above, the MSRB believes that these individuals have
the greatest interest in obtaining municipal advisory business and,
therefore, their political contributions present the most significant
potential for abuse. Therefore, the MSRB has determined not to change
this aspect of proposed Rule G-42. As to the recipients of political
contributions, proposed Rule G-42 pertains to contributions made to
certain officials of municipal entities, while the SEC pay to play rule
pertains to contributions made
[[Page 55980]]
to certain officials of government entities. The definition of
``official of a municipal entity'' in proposed Rule G-42 is based both
on the statutory definition of ``municipal entity'' and on the
definition of ``official of an issuer'' in Rule G-37. The definitions
of the contribution recipients in proposed Rule G-42 and the SEC pay to
play rule are effectively the same. The MSRB perceives no
administrative burden associated with any slight differences and has
determined not to make any changes.
Harmonization of Draft Rule G-42 with Rule G-37
Comment: SIFMA said that the MSRB should also harmonize draft Rule
G-42 with Rule G-37 by:
(1) Allowing dealer municipal advisors to report their non-de
minimis political contributions and municipal advisory activities
either on Form G-42 or on a ``macroform'' Form G-37/G-42; \24\
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\24\ See also comments of BMO.
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(2) Narrowing the definition of ``supervisors'' that are MAPs by
limiting it to those individuals who supervise the municipal advisory
activities of others and not including those individuals who supervise
other activities of MAPs;
(3) Requiring reporting of solicitations only if they are
successful; \25\
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\25\ See also comments of BMO.
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(4) Requiring reporting of municipal advisory business only in the
quarter in which it is obtained; and
(5) Using a ``primarily engaged in municipal advisory business''
standard, rather than an ``engaged in municipal advisory business''
standard in the definition of MAP.\26\ Alternatively, SIFMA said that
the MSRB should clarify that only ``advice'' within the meaning of the
statute is covered. SIFMA also recommended that the MSRB adopt a de
minimis exception to the definition of ``municipal advisor
professional.''
---------------------------------------------------------------------------
\26\ Proposed Rule G-42(g)(iv)(A) includes within the definition
of MAP ``any associated person engaged in municipal advisory
business with a municipal entity.''
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MSRB Response: (1) The MSRB agrees with SIFMA's comment on the use
of a ``macroform'' (Form G-37/G-42) and has revised proposed Rule G-
42(e) accordingly.
(2) The MSRB agrees with SIFMA's comment on the types of
supervisors that should be considered MAPs and has revised proposed
Rule G-42(g)(iv)(D) accordingly.
(3) The MSRB agrees with SIFMA's comment on the reporting of
solicitations and has amended proposed Rule G-42(e)(i)(C)(2) to require
the reporting of a list of the third-party business awarded during the
calendar quarter by state, rather than all solicitations.
(4) As to the required reporting of municipal advisory business
engaged in during a calendar quarter, the wording of proposed Rule G-
42(e)(i)(C)(1) would not differ from the wording of Rule G-37(e)(i)(C).
The instructions for Form G-37 (pp. 14-15) clarify that reporting of
financial advisory business must occur two times: First, when a
financial advisory engagement is entered into and second, when a
transaction that is the subject of the engagement closes. The
instructions for Form G-37/G-42 would contain similar instructions.
(5) SIFMA's proposal that the MSRB use a ``primarily engaged in
municipal advisory business'' standard in the definition of MAP would
create a loophole by allowing individuals who are only occasionally
financial advisors to escape the coverage of both Rule G-37 and
proposed Rule G-42. The use of a ``primarily engaged'' standard in Rule
G-37 was appropriate because Rule G-37(g)(iv)(A) defines as MFPs those
associated persons who are ``primarily engaged in municipal securities
representative activities, as defined in Rule G-3(a)(i).'' The term
``municipal securities representative activities'' includes a number of
activities, such as sales and trading, that do not involve contact with
officials of issuers. Had the MSRB not used a ``primarily engaged''
standard in Rule G-37, a broker's occasional sales activities could
have subjected the broker to Rule G-37, even if the broker had no
contact whatsoever with issuer officials. Under proposed Rule G-42, a
person could be a MAP when engaged in municipal advisory business,
which is defined only with reference to activities that involve contact
with issuer officials. In this respect, proposed Rule G-42 is
distinguishable from Rule G-37 and this difference in the definition of
MAP and MFP is appropriate. Therefore, the MSRB has not made this
change. For the same reasons, the MSRB does not consider it appropriate
to adopt a de minimis exception to the definition of MAP. The MSRB also
notes that SIFMA's arguments on the definitions of ``advice'' are more
appropriately directed to the SEC.
Ban on Receipt of Compensation
Comment: The ABA said that the MSRB should prohibit only
compensation for new municipal advisory services, consistent with Rule
G-37. The ABA also said that the prohibitions of draft Rule G-42 should
only apply to the municipal advisor and those employees of the
municipal advisor that are actually engaged in the solicitation or
provision of municipal advisory business and not to those individuals
who are only MAPs as a result of their supervisory or management
activities.
MSRB Response: Proposed Rule G-42's ban on business for
compensation follows the structure of the SEC pay to play rule, as
recommended previously by the ABA. The MSRB considers a mere ban on
future municipal advisory business to be inadequate and believes that
such ban also should apply to existing engagements. Supervisors of MAPs
who are either engaged in municipal advisory business or solicit
business also have a significant interest in whether such business is
obtained. Particularly given that the MSRB has determined to narrow the
types of supervisors who would be considered MAPs, the MSRB considers
it appropriate for their contributions to have the potential to trigger
a ban on business for compensation.
Comment: SIFMA said that the two-year ban on receipt of
compensation for municipal advisory business should run from the date
of the non-de minimis contribution and end two years later, rather than
ending two years after all municipal advisory business with the
municipal entity has been terminated. SIFMA also said that solicitors
should be able to receive compensation for solicitations completed
before the making of a non-de minimis contribution.
MSRB Response: The MSRB does not agree with SIFMA's comment
regarding a flat two-year ban and has determined not to revise the
proposed rule. Making SIFMA's suggested change would permit municipal
advisors to remain in place with the understanding that they would
receive their compensation at the end of two years. Many municipal
advisory engagements concern transactions that might not close for at
least two years, with payment contingent on the transaction closing, so
SIFMA's suggested change would mean that the ban would have little
practical effect in many cases. Furthermore, the MSRB does not agree
with SIFMA's proposal concerning the receipt of compensation for
solicitations already successfully completed at the time of a non-de
minimis contribution. Under the SEC pay to play rule, an investment
adviser may not compensate an intermediary that is an investment
adviser if the intermediary has made a non-de minimis contribution
within two years. The SEC rule does not distinguish between
solicitations that have already
[[Page 55981]]
been completed and new solicitations. SIFMA has presented no argument
as to why broker-dealer intermediaries and investment adviser
intermediaries should be treated differently.
Comment: H. J. Umbaugh & Associates (``Umbaugh'') supported a
longer ban, recommending that the term of the ban should be identical
to the term of the related office to which the non-de minimis political
contribution relates, which could be as long as four years.
MSRB Response: While the MSRB is sensitive to the concern expressed
by Umbaugh about the continuing influence of political contributions,
it has determined that certain boundaries on the consequences of a non-
de minimis political contribution must be established in view of First
Amendment concerns. The two-year ban in proposed Rule G-42 is based on
Rule G-37, which has survived constitutional challenge.\27\
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\27\ Blount v. SEC, 61 F.3d 938 (DC Cir. 1995), cert. denied,
517 U.S. 1119 (1996). In Blount, the court determined that Rule G-37
was constitutional under a strict scrutiny analysis by finding that
the rule was narrowly tailored to serve a compelling government
interest. The court found the SEC's interests in protecting
investors from fraud and protecting underwriters from unfair,
corrupt practices to be compelling.
---------------------------------------------------------------------------
Comment: The National Association of Independent Public Finance
Advisors (``NAIPFA'') said that draft Rule G-42 and Rule G-37 should
both provide that non-de minimis political contributions to an official
of a municipal entity by non-MAP and non-MFP executive officers,
respectively, should trigger a two-year ban on their respective
business because the ``allowance of such contributions provides large
firms an opportunity to make significant `indirect' contributions that
directly benefit the municipal business of such firms.''
MSRB Response: As is the case with Rule G-37, proposed Rule G-42 is
narrowly tailored to address the potential for quid pro quo behavior in
the selection of businesses performing key municipal services, while at
the same time recognizing the First Amendment rights of citizens to
support candidates for public office. While non-de minimis
contributions by non-MFP executive officers (in the case of Rule G-37)
and non-MAP executive officers (in the case of proposed Rule G-42) will
not necessarily trigger a ban on business, they must be reported to the
MSRB. If they represent an attempt to circumvent the prescriptions of
either rule, they may trigger a ban on business under either Rule G-
37(d) or proposed Rule G-42(d), respectively.
Recordkeeping and Reporting Requirements
Comment: NAIPFA supported the draft changes to Rules G-8 and G-9
related to the recordkeeping provisions of draft Rule G-42, as well as
mandatory electronic reporting to the MSRB. However, some commenters
said that certain of the reporting and recordkeeping provisions of the
rule would be difficult and expensive to manage. The ABA said that the
reporting and recordkeeping provisions of the draft rule were overly
broad and would yield little benefit in return, particularly the
provision that requires reporting of all solicitations, whether
successful or not. The ABA also stated that the MSRB and the SEC would
force market participants to adopt unnecessarily complex and burdensome
compliance systems. BMO objected to the need to file separate Forms G-
37 and G-42.
MSRB Response: As previously said, the MSRB has determined to
require reporting of a list of the third-party business awarded during
the calendar quarter by state, rather than all solicitations. The MSRB
has also determined to allow reporting of required information under
proposed Rule G-42 on a combined ``macroform'' (Form G-37/G-42). The
MSRB does not believe that the recordkeeping and reporting requirements
of the proposed rule change would be complex or burdensome. Dealers are
already subject to the same requirements. The MSRB believes that the
proposed rule change is a necessary regulatory burden that will assist
in the enforcement of the proposed rule. Any potential burden would be
outweighed by the need to protect municipal entities and their
constituents.
Comment: Mr. Robert Fisher (``Mr. Fisher'') said that draft Rule G-
42 should provide an exemption from reporting for municipal advisors
that do not make political contributions and whose MAPs and PACs do not
make political contributions. However, Mr. Fisher suggested that such
an exemption would have to incorporate an ``aggressive'' look-back
provision in order to capture any contribution that could disqualify
the municipal advisor from engaging in a municipal advisory activity
under the rule.
MSRB Response: While the MSRB is sensitive to the concerns
expressed by Mr. Fisher, it has determined that, in order to ensure
effective enforcement of the rule, all municipal advisors should be
required to file Form G-37/G-42 as long as they are engaged in
municipal advisory business or the solicitation of third-party
business. Political contributions made in one quarter do not
necessarily result in municipal advisory business in the same quarter.
Sometimes municipal advisory business may be obtained based on an
understanding that a non-de minimis political contribution will be made
in a subsequent quarter. Requiring the reporting of municipal advisory
business only after a non-de minimis political contribution has been
made by a MAP would not provide enforcement officials with the
information they need to enforce compliance with the rule. Reporting of
municipal advisory business need only be made in the calendar quarter
in which the engagement has commenced and in the calendar quarter in
which a transaction closes.
Comment: Repex & Co., Inc. (``Repex'') said that ``[i]f any forms
are to be filed they should be filed only by those firms that do
business with those municipalities, state pensions etc.'' and that
``[t]he little firms are suffocating.''
MSRB Response: Only municipal advisors engaged in municipal
advisory business with municipal entities or that solicit third-party
business from municipal entities would be subject to the reporting
requirements of proposed Rule G-42(e). A municipal advisor that is only
engaged in municipal advisory activities with an obligated person need
not file reports with the MSRB.
Scope of Draft Rule G-42.
Comment: Some commenters said that pending SEC rulemaking
concerning the definition of ``municipal advisor'' should be completed
before the MSRB filed proposed Rule G-42 with the SEC and that an
additional MSRB comment period might be warranted. For example, the
Attorney General of the State of Texas said such [SEC] rulemaking, `` *
* * is likely to have a significant impact on the substance,
interpretation and enforcement of MSRB rules'' and requested the
opportunity to provide comments as necessary pending the outcome of the
SEC's rulemaking process.\28\ SIFMA said that the MSRB should use a
two-stage rulemaking process and move forward with rulemaking on those
municipal advisors that are clearly covered by the statute and delay
rulemaking on those who are only municipal advisors within the
expansive definition of the term proposed by the SEC.
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\28\ See also State of Texas/Comptroller of Public Accounts.
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MSRB Response: The MSRB is sensitive to the concerns expressed by
these commenters and has requested
[[Page 55982]]
that the proposed rule change be made effective six months after the
SEC has adopted a final rule defining the term ``municipal advisor.''
Contributions made prior to the effective date would not result in a
ban under proposed Rule G-42(b), provided that any ban under Rule G-
37(b)(i) in existence prior to the effective date of proposed Rule G-42
would continue until it otherwise would have terminated under Rule G-
37(b)(i) as in effect prior to the effective date of proposed Rule G-
42.
Comment: SIFMA said that the definition of ``municipal advisor'' in
the Exchange Act does not cover private placement agents that solicit
municipal entities to make investments in private equity funds, because
such solicitations are not the ``solicitation of investment advisory
services.'' Therefore, SIFMA said that the MSRB does not have
jurisdiction to write rules for such private placement agents,
including draft Rule G-42.
However, SIFMA said that the SEC pay to play rule for investment
advisers prohibits investment advisers from paying intermediaries that
solicit governmental entities on their behalf after September 13, 2011,
unless they are subject to a pay to play rule at least as stringent as
the SEC rule. Therefore, SIFMA said that the MSRB should work with the
SEC to help ensure that such private placement agents may continue to
be compensated after September 13, 2011, by adopting an interim final
rule for such private placement agents, which would apply pending
resolution of whether such private placement agents are municipal
advisors or pending the adoption by FINRA of a pay to play rule for
such private placement agents. SIFMA also previously commented to the
SEC that private placement agents should be given the option to comply
with a FINRA pay to play rule.
MSRB Response: The September 13, 2011 date referred to by SIFMA has
been revised to June 13, 2012. The MSRB has jurisdiction to write rules
concerning municipal advisors. Proposed Rule G-42 contains provisions
that would apply to such private placements if they are determined by
the SEC to be municipal advisors. It is the goal of the MSRB to have
proposed Rule G-42 effective before June 13, 2012.
Comment: T. Rowe Price said that draft Rule G-42's coverage of
solicitations on behalf of affiliated investment advisers is premature,
because the SEC has not yet resolved whether to treat such affiliates
as ``covered associates'' of the investment adviser and, therefore, not
subject to the ban on payments to intermediaries.
MSRB Response: The MSRB has revised the definition of ``third-party
business'' so that it does not apply to solicitations of business on
behalf of affiliated firms.
First Amendment Considerations
Comments: Several commenters raised First Amendment concerns
regarding draft Rule G-42. SIFMA argued that a number of the provisions
of draft Rule G-42 to which it objected could violate the First
Amendment: (1) The $250 de minimis political contribution definition;
(2) requiring reporting of all solicitations, whether or not
successful; and (3) the definition of ``supervisor.'' Its rationale
differed depending upon the provision. Although the $250 limit in Rule
G-37 was upheld by the D.C. Circuit in the Blount case, SIFMA argued
that it is inconsistent with Supreme Court cases decided after Blount.
SIFMA also stated that the MSRB could no longer rely on the Blount case
to sustain the $250 limit, although SIFMA stopped short of arguing that
Rule G-37 is unconstitutional.
SIFMA referred to statements by the SEC when it adopted its pay to
play rule, noting that the SEC pointed to inflation as the reason for
using $350, rather than the $250 it originally proposed. It noted that
the SEC also said that the $150 limit for contributions to issuer
officials for whom the investment adviser could not vote was justified
because non-residents might have legitimate interests in those
elections, such as a resident of a metropolitan area's interests in the
city in which the person worked. The required reporting of all
solicitations to the MSRB, regardless of whether they are successful,
was characterized by SIFMA as impinging upon commercial speech. SIFMA
also argued that the provisions of draft Rule G-42 that would prohibit
MAPs from soliciting others to make political contributions and
prohibit indirect violations of the rule are sufficient to prevent
abuse of the proposed $150 limit.
Mr. Callcott said that, in order for draft Rule G-42 to survive a
constitutional challenge, the MSRB would have to: (1) Adopt the SEC pay
to play rule definition of de minimis political contribution; (2) allow
contributions to political parties as long as such contributions are
not earmarked for certain issuer officials; and (3) clarify that
independent expenditures in support of issuer officials are permitted
under draft Rule G-42. He argued that, without such conforming changes,
Rule G-37 would be at risk as well.
BMO expressed First Amendment concerns related to the reporting
requirements of draft Rule G-42. BMO said, ``Since we are dealing with
first amendment considerations, we urge the MSRB to adopt the least
intrusive program which will elicit relevant information.''
MSRB Response: The MSRB considers SIFMA's and Mr. Callcott's
references to recent Supreme Court decisions to be misplaced, because
those cases addressed substantially different facts. First, unlike the
Vermont statute considered by the Court in Randall v. Sorrell,\29\
proposed Rule G-42 would not apply to a group of individuals that is
large enough for their contributions to influence the results of
elections in any state. Therefore, the Court's concern that limitations
on political contributions would make it difficult for challengers to
be elected is not applicable. Second, in Citizens United v. FEC,\30\
the Supreme Court distinguished restrictions on ``independent
expenditures'' from restrictions on ``direct contributions'' and left
restrictions on direct contributions untouched while striking down a
restriction on independent expenditures as unconstitutional.\31\
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\29\ 548 U.S. 230, 247 (2006).
\30\ 130 S. Ct. 876 (2010).
\31\ The MSRB notes that proposed Rule G-42 would not restrict
political campaign contributions. Rather, it would limit certain
business activities as a result of such contributions.
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As stated above, the MSRB is concerned that defining the term ``de
minimis'' as including contributions by municipal advisor professionals
to issuer officials for whom they cannot vote will lead to the bundling
of political contributions. Additionally, the change made by the MSRB
to the types of supervisors who would be considered municipal advisor
professionals has more narrowly tailored the proposed rule to those
individuals who are most likely to benefit from business awarded as a
result of political contributions.
The MSRB notes that, contrary to Mr. Callcott's reading, proposed
Rule G-42(c)(ii) would not prohibit payments to political parties.
Instead, it would prohibit the solicitation of such payments from
others. The MSRB also does not agree with Mr. Callcott that the
definition of ``contribution'' in Rule G-37 and proposed Rule G-42
precludes the making of independent expenditures in support of issuer
officials in violation of Citizens United.
Comment: SIFMA also said that the MSRB should clarify that
recordkeeping
[[Page 55983]]
requirements of draft Rule G-42 are not retroactive. It said that only
engagements obtained after the rule's operative date should be required
to be reported.
MSRB Response: The recordkeeping provisions of proposed Rule G-42
would not become effective until the rest of the proposed rule change
becomes effective and would not be retroactive.
Bond Ballot Campaign Contributions
Comments: Some commenters said that draft Rule G-42 should prohibit
certain contributions to bond ballot campaigns by underwriters and
municipal advisors. AGFS expressed support for draft Rule G-42 \32\ but
said that bond ballot contributions by underwriters and municipal
advisors, ``distort the democratic process'' and that ``[m]unicipal
advisors violate their fiduciary duty when they encourage, and
participate with, their public entity clients and officials of the
clients in actions that are undemocratic at best and illegal at
worst.''
---------------------------------------------------------------------------
\32\ G.L. Hicks Financial LLC also expressed support for draft
Rule G-42.
---------------------------------------------------------------------------
NAIPFA said, ``All too often, we see funds and/or campaign services
being contributed to bond campaigns by underwriters [and] financial
advisors * * * who end up providing services for the bond transaction
work once the election is successful.'' NAIPFA recommended that draft
Rule G-42 should broaden the standards of ethical behavior to include a
ban on municipal advisory business in the event of abusive bond ballot
contributions. WM Financial Strategies also said that ``bond ballot
campaign contributions, when made outside of an individual's voting
jurisdiction, are a form of [pay]-to-play that taint the integrity of
the municipal market.''
MSRB Response: The MSRB does not believe that a ban on business as
a result of non-de minimis contributions to bond ballot campaigns is
warranted at this time. As the MSRB said when it filed with the SEC a
comparable amendment to Rule G-37 requiring the reporting of such
contributions, ``The MSRB believes, * * * that the proposed amendments
would create a uniform disclosure regime to track and make available to
public scrutiny bond ballot campaign contributions by dealers in the
municipal securities market, thereby increasing available information
to municipal securities market participants and the general public. The
MSRB does not believe that a ban on municipal securities business as a
result of a contribution to a bond ballot campaign is warranted at this
time but notes that the disclosures provided for under the proposed
rule change will assist in determining, in the future, whether it would
be appropriate to consider further action in this area.'' \33\ The MSRB
notes that contributions made to bond ballot initiatives for which a
municipal advisor professional cannot vote are not considered de
minimis for purposes of the reporting requirements of Rule G-42(e).
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\33\ See Securities Exchange Act Release No. 61381 (January 20,
2010); File No. SR-MSRB-2009-18 (December 4, 2010).
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Miscellaneous Comments
Transition Expenses.
Comment: Umbaugh said that draft Rule G-42 is not clear as to the
types of transition expenses that might be considered contributions in
violation of the rule.
MSRB Response: When it requested comment on draft Rule G-42, the
MSRB said that it expected to propose interpretations of draft Rule G-
42 similar to those applicable to Rule G-37 and that remains the MSRB's
intent, subject to SEC approval. On November 29, 2001, the MSRB issued
an interpretation of Rule G-37 concerning ``Activities by Dealers and
Municipal Finance Professionals During Transition Periods for Elected
Issuer Officials.'' Municipal advisors may look to that interpretation
for guidance under proposed Rule G-42.
Definition of ``Seeking to Engage''.
Comment: The PFM Group (``PFM'') requested that the MSRB clarify
when a municipal advisor will be considered to be ``seeking to engage''
in municipal advisory business. It suggested that draft Rule G-42(c)(i)
and (ii) not apply to any activity occurring more than six months after
the advisor's latest contact with the municipal entity looking toward
an engagement or, in the case of an RFP response, between the time that
the municipal entity has contracted with another party and the
municipal advisor's next contact with the municipal entity.
MSRB Response: As under Rule G-37, whether a municipal advisor is
seeking to engage in municipal advisory business is a facts and
circumstances analysis, and the MSRB does not consider a bright line
test appropriate.
Payments to Political Parties.
Comment: PFM requested clarification that the prohibitions on
payments to political parties would only apply to the political party
organization at the level of government with which the municipal
advisor is engaged in business or is seeking to engage in business.
MSRB Response: Proposed Rule G-42(c)(ii) would not prohibit
payments to political parties. It would prohibit the solicitation of
such payments from others. As with Rule G-37, this prohibition under
proposed Rule G-42 would apply to solicitations of payments to all
political party organizations, state and local, operating within the
jurisdiction in which the municipal advisor is engaging or seeking to
engage in municipal advisory business or in which the municipal advisor
is soliciting third-party business.
Definition of ``Payment.''
Comment: PFM suggested that the definition of ``payment'' be
modified to include the concept of an amount in excess of the fair
value of goods or services provided by the political party to make it
clear that commercial transactions with a political party are not
prohibited.
MSRB Response: As explained above, proposed Rule G-42 does not
prohibit payments to political parties.
Contributions by MAPs to Their Own Campaigns.
Comment: Umbaugh requested clarification that a non-de minimis
contribution by a MAP of money, property, or services to his or her own
election campaign would not trigger a ban on business for compensation
with the government to which the MAP is elected for a two-year period.
MSRB Response: When it requested comment on draft Rule G-42, the
MSRB said that it expected to propose interpretations of Rule G-42
similar to those applicable to Rule G-37 and that remains the MSRB's
intent, subject to SEC approval. Q&A II. 10 issued under Rule G-37
provides that an MFP who is an incumbent or candidate for office is not
limited to contributing the de minimis amount to his or her own
campaign and that such contributions by the candidate or incumbent will
not trigger a ban on business. Municipal advisors may look to that Q&A,
and other Rule G-37 Qs&As, for guidance under proposed Rule G-42.
Rule G-38.
Comment: In its request for comment on draft Rule G-42, the MSRB
asked whether Rule G-38 (on solicitation of municipal securities
business) should be revised or eliminated now that firms and
individuals that solicit municipal securities business on behalf of
dealers are regulated as municipal advisors. Both T. Rowe Price and PFM
said that Rule G-38 should not be eliminated. PFM also noted other
issues related to third-party business should Rule G-38 be eliminated.
[[Page 55984]]
MSRB Response: The MSRB has determined not to propose that Rule G-
38 be revised or eliminated at this time.
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 (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.
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. An investment adviser
subject to rule 206(4)-5 under the Investment Advisers Act of 1940 (the
``Advisers Act'') is prohibited from providing or agreeing to provide,
directly or indirectly, payment to any third party to solicit a
government entity for investment advisory services on behalf of such
investment adviser unless that third party is a ``regulated person''
under the rule.\34\ A regulated person may include a registered
municipal advisor subject to pay to play rules that the Commission, by
order, finds ``impose substantially equivalent or more stringent
restrictions on municipal advisors than [the Advisers Act rule] imposes
on investment advisers and * * * are consistent with the objectives of
[the Advisers Act rule].''\35\ We note that proposed rule G-42 differs
from the Advisers Act pay to play rule in certain respects, and we
request comment on the effect of those differences on the finding the
Advisers Act rule requires.\36\ 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:
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\34\ See 17 CFR 275.206(4)-5(a)(2)(i)(A).
\35\ This provision will be codified at 17 CFR 275.206(4)-
5(f)(9)(iii) (effective September 19, 2011). See Investment Advisers
Act Release No. IA-3221 (June 22, 2011), 76 FR 42950 (July 19,
2011).
\36\ See, e.g., proposed rule G-42(b), G-42(c)(ii), G-42(g)(iv)
and G-42(g)(v).
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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-2011-12 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-2011-12. 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 po
