Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change Consisting of Proposed Amendments to Rule G-20, on Gifts, Gratuities and Non-Cash Compensation, and Rule G-8, on Books and Records To Be Made by Brokers, Dealers, Municipal Securities Dealers, and Municipal Advisors, and the Deletion of Prior Interpretive Guidance, 70271-70276 [2015-28806]
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Federal Register / Vol. 80, No. 219 / Friday, November 13, 2015 / Notices
is common in content and content
distribution industries such as software,
where developing new software
typically requires a large initial
investment (and continuing large
investments to upgrade the software),
but once the software is developed, the
incremental cost of providing that
software to an additional user is
typically small, or even zero (e.g., if the
software can be downloaded over the
internet after being purchased).19 In
NASDAQ’s case, it is costly to build and
maintain a trading platform, but the
incremental cost of trading each
additional share on an existing platform,
or distributing an additional instance of
data, is very low. Market information
and executions are each produced
jointly (in the sense that the activities of
trading and placing orders are the
source of the information that is
distributed) and are each subject to
significant scale economies. In such
cases, marginal cost pricing is not
feasible because if all sales were priced
at the margin, NASDAQ would be
unable to defray its platform costs of
providing the joint products. Similarly,
data products cannot make use of TRF
trade reports without the raw material of
the trade reports themselves, and
therefore necessitate the costs of
operating, regulating,20 and maintaining
a trade reporting system, costs that must
be covered through the fees charged for
use of the facility and sales of associated
data.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
jstallworth on DSK7TPTVN1PROD with NOTICES
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A)(ii) of
the Act,21 the Exchange has designated
this proposal as establishing or changing
a due, fee, or other charge imposed on
any person, whether or not the person
is a member of the self-regulatory
organization, which renders the
proposed rule change effective upon
filing.
At any time within 60 days of the
filing of the proposed rule change, the
19 See William J. Baumol and Daniel G. Swanson,
‘‘The New Economy and Ubiquitous Competitive
Price Discrimination: Identifying Defensible Criteria
of Market Power,’’ Antitrust Law Journal, Vol. 70,
No. 3 (2003).
20 It should be noted that the costs of operating
the FINRA/NASDAQ TRF borne by NASDAQ
include regulatory charges paid by NASDAQ to
FINRA.
21 15 U.S.C. 78s(b)(3)(A)(ii).
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70271
information that you wish to make
available publicly.
All submissions should refer to File
Number SR–NASDAQ–2015–131 and
should be submitted on or before
December 4, 2015.
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Robert W. Errett,
Deputy Secretary.
IV. Solicitation of Comments
[FR Doc. 2015–28808 Filed 11–12–15; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2015–131 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2015–131. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml).
Copies of the submission, all
subsequent amendments, all written
statements with respect to the proposed
rule change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76381; File No. SR–MSRB–
2015–09]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Order Granting Approval of a
Proposed Rule Change Consisting of
Proposed Amendments to Rule G–20,
on Gifts, Gratuities and Non-Cash
Compensation, and Rule G–8, on
Books and Records To Be Made by
Brokers, Dealers, Municipal Securities
Dealers, and Municipal Advisors, and
the Deletion of Prior Interpretive
Guidance
November 6, 2015.
I. Introduction
On September 2, 2015, the Municipal
Securities Rulemaking Board (the
‘‘MSRB’’ or ‘‘Board’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
consisting of proposed amendments to
MSRB Rule G–20 on gifts, gratuities and
non-cash compensation, proposed
amendments to MSRB Rule G–8, on
books and records to be made by
brokers, dealers, municipal securities
dealers, and municipal advisors, and the
deletion of prior interpretive guidance
that would be codified by proposed
amended Rule G–20 (the ‘‘proposed rule
change’’).
The proposed rule change was
published for comment in the Federal
Register on September 22, 2015.3 The
Commission received three comment
letters on the proposed rule change.4 On
22 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 75932
(September 16, 2015), 80 FR 57240 (September 22,
2015) (the ‘‘Notice’’).
4 See Letters from Tamara K. Salmon, Senior
Associate Counsel, Investment Company Institute
1 15
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November 2, 2015, the MSRB submitted
a response to these comments.5 This
order approves the proposed rule
change.
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II. Description of the Proposed Rule
Change
Existing Rule G–20 is designed, in
part, to minimize the conflicts of
interest that arise when a dealer
attempts to induce organizations active
in the municipal securities market to
engage in business with such dealers by
means of personal gifts or gratuities
given to employees of such
organizations.6 According to the MSRB,
the proposed rule change addresses
improprieties and conflicts that may
arise when municipal advisors and/or
their associated persons 7 give gifts or
gratuities to employees who may
influence the award of municipal
advisory business.8 In summary, the
MSRB has proposed amendments to
Rule G–20 that would:
• Extend the relevant existing
provisions of Rule G–20 to municipal
advisors and their associated persons
and to gifts given in relation to
municipal advisory activities;
• Consolidate and codify interpretive
guidance, including interpretive
guidance published by the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) and adopted by the MSRB
and delete prior interpretive guidance
that would be codified by proposed
amended Rule G–20;
• Add a new provision prohibiting a
regulated entity from seeking or
obtaining reimbursement of certain
entertainment expenses from the
proceeds of an offering of municipal
securities; and
• Make several revisions that are
designed to assist brokers, dealers, and
municipal securities dealers (‘‘dealers’’)
and municipal advisors (dealers,
together with municipal advisors,
(‘‘ICI’’), dated September 25, 2015 (‘‘ICI Letter’’);
Leslie M. Norwood, Managing Director and
Associate General Counsel, Securities Industry and
Financial Markets Association (‘‘SIFMA’’), dated
October 13, 2015 (‘‘SIFMA Letter’’); and Terri
Heaton, President, National Association of
Municipal Advisors (‘‘NAMA’’), dated October 16,
2015 (‘‘NAMA Letter’’).
5 See Letter from Michael L. Post, General
Counsel—Regulatory Affairs, MSRB, dated
November 2, 2015 (‘‘MSRB Response Letter’’).
6 See MSRB Notice 2004–17 (June 15, 2004).
7 MSRB Rule D–11 defines ‘‘associated persons’’
as follows: Unless the context otherwise requires or
a rule of the Board otherwise specifically provides,
the terms ‘‘broker,’’ ‘‘dealer,’’ ‘‘municipal securities
broker,’’ ‘‘municipal securities dealer,’’ ‘‘bank
dealer,’’ and ‘‘municipal advisor’’ shall refer to and
include their respective associated persons. Unless
otherwise specified, persons whose functions are
solely clerical or ministerial shall not be considered
associated persons for purposes of the Board’s rules.
8 See supra note 3 at 57240–41.
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‘‘regulated entities’’) and their
associated persons with their
understanding of and compliance with
Rule G–20.
In summary, the MSRB has proposed
amendments to Rule G–8 that would:
• Extend to municipal advisors the
recordkeeping requirements related to
Rule G–20 that currently apply to
dealers; and
• Amend the rule language contained
in Rule G–8(a)(xvii)(A), (B), and (C)
applicable to dealers to reflect the
revisions to proposed amended Rule G–
20.
Extension of Rule G–20 to Municipal
Advisors and Municipal Advisory
Activities
The MSRB has proposed to extend to
municipal advisors and their associated
persons: (i) The general dealer
prohibition of gifts or gratuities in
excess of $100 per person per year in
relation to the municipal securities
activities of the recipient’s employer
(the ‘‘$100 limit’’); (ii) the exclusions
contained in the existing rule from that
general prohibition (including certain
consolidations and the codifications of
prior interpretive guidance) and the
addition of bereavement gifts to those
exclusions; and (iii) the existing
exclusion relating to contracts of
employment or compensation for
services. Proposed section (g) of Rule G–
20, on non-cash compensation in
connection with primary offerings, is
not being extended to municipal
advisors or to associated persons
thereof.
(i) General Prohibition of Gifts or
Gratuities in Excess of $100 per Year
The MSRB has proposed section (c) of
Rule G–20 which extends to a
municipal advisor and its associated
persons the provision that currently
prohibits a dealer and its associated
persons, in certain circumstances, from
giving directly or indirectly any thing or
service of value, including gratuities
(‘‘gifts’’), in excess of $100 per year to
a person (other than an employee of the
dealer). The prohibited payments or
services by a regulated entity or
associated persons would be those
provided in relation to the municipal
securities activities or municipal
advisory activities of the employer of
the recipient (other than an employee of
the regulated entity).
(ii) Exclusions From the $100 Limit
The MSRB has proposed section (d) of
Rule G–20 which extends to a
municipal advisor and its associated
persons the provision that excludes
certain gifts from the $100 limit of
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proposed section (c) as long as the
conditions articulated by proposed
section (d) and the relevant subsection,
as applicable, are met. Section (d) states
that gifts, in order to be excluded from
the $100 limit, must not give rise to any
apparent or actual material conflict of
interest.
Proposed section (d) of Rule G–20
includes subsections (d)(i) through
(d)(iv) and (d)(vi) which consolidate and
codify interpretive guidance that the
MSRB provided in MSRB Notice 2007–
06 (the ‘‘2007 MSRB Gifts Notice’’).9
The 2007 MSRB Gifts Notice’s
interpretive guidance also included
FINRA guidance that the MSRB had
adopted by reference.10 Further,
proposed subsection (d)(v) would codify
FINRA interpretive guidance relating to
bereavement gifts that the MSRB
previously had not adopted.11
The MSRB has proposed subsection
(d)(i) of Rule G–20 which extends to a
municipal advisor and its associated
persons the current exclusion of a gift of
meals or tickets to theatrical, sporting,
and other entertainment given by a
dealer or its associated persons from the
$100 limit if they are a ‘‘normal
business dealing.’’ Such exclusion is
subject to the limitations as described in
proposed subsection (d)(i).
Proposed subsections (d)(ii) through
(iv) establish three categories of gifts
that were previously excluded from the
$100 limit under the category of
‘‘reminder advertising’’ in the rule
language regarding ‘‘normal business
dealings’’ in existing section (b) of Rule
G–20. The MSRB has proposed to delete
the concept of ‘‘reminder advertising’’
from the ‘‘normal business dealings’’
exclusion under current paragraph (b).
This amendment would clarify the types
of gifts in the nature of reminder
advertising that would be excluded from
the $100 limit. These changes conform
draft amended paragraph (d) with
current FINRA interpretive guidance
that the MSRB has stated applies to Rule
G–20.12 These three categories are:
• Gifts commemorative of a business
transaction, such as a desk ornament or
9 See Dealer Payments in Connection with the
Municipal Issuance Process, MSRB Notice 2007–06
(Jan. 29, 2007).
10 See 2007 MSRB Gifts Notice (reminding dealers
of the application of Rule G–20 and Rule G–17 in
connection with certain payments made and
expenses reimbursed during the municipal bond
issuance process, and stating that the National
Association of Securities Dealers, Inc.’s (‘‘NASD’’)
guidance provided in NASD Notice to Members 06–
69 (Dec. 2006) to assist dealers in complying with
NASD Rule 3060 applies as well to comparable
provisions of Rule G–20).
11 See supra note 3 at 57242.
12 Id. at 57241.
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Federal Register / Vol. 80, No. 219 / Friday, November 13, 2015 / Notices
Lucite tombstone (proposed subsection
(d)(ii));
• de minimis gifts, such as pens and
notepads (proposed subsection (d)(iii));
and
• promotional gifts of nominal value
that bear an entity’s corporate or other
business logo and that are substantially
below the $100 limit (proposed
subsection (d)(iv)).
Proposed subsection (d)(v) of Rule G–
20 excludes bereavement gifts which are
reasonable and customary for the
circumstances from the $100 limit.
According to the MSRB, proposed
subsection (d)(v) of Rule G–20 codifies
FINRA interpretive guidance currently
applicable to dealers relating to
bereavement gifts that the MSRB
previously had not adopted.13
Finally, the MSRB has proposed
subsection (d)(vi) of Rule G–20 which
excludes personal gifts given upon the
occurrence of infrequent life events,
such as a wedding gift or a
congratulatory gift for the birth of a
child. According to the MSRB, this
proposed subsection consolidates and
codifies the FINRA personal gift
guidance currently applicable to
dealers.14
The ‘‘frequency’’ and ‘‘extensiveness’’
limitations applicable to proposed
subsection (d)(i) of Rule G–20 would not
apply to proposed subsections (d)(ii)
through (vi). The MSRB has proposed to
modify those limitations to better reflect
the characteristics of the gifts described
in proposed subsections (d)(ii) through
(vi).15 According to the MSRB, gifts
described in those subsections in the
proposed rule change are by their nature
given infrequently and/or are of such
nominal value that retaining the
requirement that such gifts be ‘‘not so
frequent or extensive’’ would be
unnecessarily duplicative of the
description of these gifts and could
result in confusion.16
To assist regulated entities with their
understanding of the exclusions
described and with their compliance
with the rule, the MSRB has provided
guidance in the Supplementary
Material. Paragraph .03 of the
Supplementary Material provides
guidance regarding promotional gifts
and ‘‘other business logos’’ including
what would constitute an ‘‘other
business logo.’’ Paragraph .04 of the
Supplementary Material provides
guidance regarding personal gifts
including factors that should be
considered when determining whether a
13 Id.
at 57242.
gift is given in connection with the
municipal securities or municipal
advisory services of the employer of the
recipient.
(iii) Exclusion for Compensation Paid as
a Result of Contracts of Employment or
Compensation for Services
The MSRB has proposed section (f)
which extends to municipal advisors
the exclusion from the $100 limit in
existing Rule G–20(c) for contracts of
employment with or compensation for
services that are rendered pursuant to a
prior written agreement meeting certain
content requirements. The MSRB has
stated that proposed section (f) would
clarify that the exclusion applies only to
the compensation paid as a result of
certain employment contracts, and does
not apply to the existence or creation of
employment contracts. The MSRB
further stated that proposed section (f)
is only a clarification and would not
alter the requirements currently
applicable to dealers.17
Consolidation and Codification of
MSRB and FINRA Interpretive Guidance
As discussed, the MSRB has proposed
to consolidate and codify existing
FINRA interpretive guidance previously
adopted by the MSRB and incorporate
additional relevant FINRA interpretive
guidance that has not previously been
adopted by the MSRB in both Rule G–
20 text and the Supplementary Material.
While FINRA’s interpretive guidance
regarding bereavement gifts was not
formerly adopted by the MSRB, the
MSRB believes that this guidance will
be appropriate for regulated entities as
it is consistent with the purpose and
scope of proposed amended Rule G–20.
Further, the MSRB stated its belief that
the consolidation and codification of the
applicable interpretive guidance will
promote compliance with the rule and
create efficiencies for regulated entities
and regulatory enforcement agencies.18
In addition to the interpretive
guidance discussed above, proposed
paragraphs .01, .02, and .05 of the
Supplementary Material would provide
guidance relating to the valuation and
the aggregation of gifts and to the
applicability of state laws. Proposed
paragraph .01 of the Supplementary
Material would state that a gift’s value
should be determined generally
according to the higher of its cost or
market value. Proposed paragraph .02 of
the Supplementary Material would state
that regulated entities must aggregate all
gifts that are subject to the $100 limit
given by the regulated entity and each
associated person of the regulated entity
to a particular recipient over the course
of a year however ‘‘year’’ is selected to
be defined by the regulated entity.
Proposed paragraphs .01 and .02 reflect
existing FINRA interpretive guidance
regarding the aggregation of gifts for
purposes of its gift rules, which the
MSRB has previously adopted.
Proposed paragraph .05 of the
Supplementary Material would remind
regulated entities that, in addition to all
the requirements of proposed amended
Rule G–20, regulated entities may also
be subject to other duties, restrictions,
or obligations under state or other laws
and that proposed amended Rule G–20
would not supersede any more
restrictive provisions of state or other
laws applicable to regulated entities or
their associated persons.
Prohibition of Reimbursement for
Entertainment Expenses
The MSRB has also proposed section
(e) of Rule G–20 which provides that a
regulated entity is prohibited from
requesting or obtaining reimbursement
for certain entertainment expenses from
the proceeds of a municipal securities
offering. The MSRB stated its belief that
this provision would address a matter
highlighted by a recent FINRA
enforcement action. Proposed section (e)
provides that an entertainment expense
excludes ‘‘ordinary and reasonable
expenses for meals hosted by the
regulated entity and directly related to
the offering for which the regulated
entity was retained.’’ The MSRB has
stated that proposed section (e) is
intended to allow the continuation of
the generally accepted market practice
of a regulated entity advancing normal
travel costs to personnel of a municipal
entity or obligated person for business
travel related to a municipal securities
issuance and obtaining reimbursement
for such costs.19
Additional Proposed Amendments to
Rule G–20
In addition to the previously
discussed proposed amendments to
Rule G–20, the MSRB proposed several
amendments which it believes will
assist readers with their understanding
of and compliance with Rule G–20.20
These proposed amendments include (i)
a revised rule title, (ii) a new provision
stating the rule’s purpose, and (iii) a reordering of existing provisions and
additional defined terms.
14 Id.
15 Id.
17 Id.
19 Id.
16 Id.
18 Id.
20 Id.
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Recordkeeping Requirements
The MSRB has proposed amendments
to Rule G–8 which extend to municipal
advisors the recordkeeping
requirements related to Rule G–20 that
currently apply to dealers. Municipal
advisor recordkeeping requirements
would be identical to the recordkeeping
requirements to which dealers would be
subject in proposed amended Rule G–
8(a)(xvii)(A) and (B).
The MSRB has proposed to amend the
language contained in Rule G–
8(a)(xvii)(A), (B), and (C) applicable to
dealers, to reflect the revisions to
proposed amended Rule G–20. Proposed
amended paragraph (a)(xvii)(A)
provides that a separate record of any
gift or gratuity subject to the general
limitation of proposed amended Rule
G–20(c) must be made and kept by
dealers (emphasis added to amended
rule text). Paragraph (a)(xvii)(B) would
be amended to clarify that dealers must
make and keep records of all agreements
referred to in proposed amended Rule
G–20(f) and records of all compensation
paid as a result of those agreements
(emphasis added to proposed amended
rule text). The proposed amendments
would also track the reordering of
sections in proposed amended Rule G–
20 and provide greater specificity as to
the records that a dealer must maintain
by referencing the terms used in
proposed amended Rule G–20.
The proposed rule change would
extend the provisions of existing Rule
G–8 to require that municipal advisors
as well as dealers make and keep
records of: gifts given that are subject to
the $100 limit; and all agreements
referred to in proposed section (f) (on
compensation for services) and records
of compensation paid as a result of
those agreements.
jstallworth on DSK7TPTVN1PROD with NOTICES
Implementation Date
The MSRB requested that the
proposed rule change be approved with
an implementation date six months after
the Commission approval date for all
changes.
III. Summary of Comments Received
and the MSRB’s Response
As noted previously, the Commission
received three comment letters on the
proposed rule change.21 The
commenters generally support the
proposed rule change.22 However, some
commenters asked for further
clarification and provided suggestions
to the proposed rule change.23 In
response to an earlier request for
21 See
supra note 4.
22 Id.
23 Id.
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comment by the MSRB on the draft
amendments to Rules G–20 and G–8,24
the MSRB received eight comment
letters and responded to the comments
in the Notice. In the MSRB Response
Letter, the MSRB incorporated by
reference its response to comments
made in the Notice noting that the three
comments received on the proposed
rule change were the same or
substantially similar to the comments
made in response to the MSRB Request
for Comment.25 The MSRB believes the
proposed rule change is appropriately
tailored and responded to the
commenters as discussed below.
A. Application of Proposed Amended
Rule G–20(c) to Certain Recipients
NAMA commented that under the
MSRB’s proposed Rule G–20, the $100
limit would seem not to apply to gifts
given to employees or officials of
municipal entities or obligated persons
because such persons, for the most part,
do not engage in ‘‘municipal advisory
activities.’’ 26 NAMA noted that the
MSRB indicated in the Notice that prior
interpretive guidance made clear issuer
personnel are considered to engage in
‘‘municipal securities activities’’ and
requested that the MSRB codify this
guidance in Rule G–20.27 The MSRB
responded to NAMA stating that the
language of both existing Rule G–20 and
proposed amended Rule G–20 applies to
gifts given in relation to this broad term
‘‘municipal securities activities.’’ 28
NAMA also commented that many
municipal official and governing board
members are not employees of
municipal entities or obligated persons,
and therefore it appears that G–20 does
not apply to gifts given to non-employee
officials of municipal entities and
obligated persons.29 The MSRB
responded by stating that it believes for
purposes of existing and proposed
amended Rule G–20, elected and
appointed officials are considered
employees of the governmental entity
on behalf of which they act as agent or
representative.30
B. Changing the Amount of the $100
Limit
In its comments, NAMA proposed
that the $100 limit be raised to $250 per
24 Request for Comment on Draft Amendments to
MSRB Rule G–20, on Gifts, Gratuities and Non-Cash
Compensation, to Extend its Provisions to
Municipal Advisors, MSRB Notice 2014–18 (Oct.
23, 2014) (‘‘MSRB Request for Comment’’).
25 See supra note 5.
26 See NAMA Letter.
27 Id.
28 See supra notes 5 and 24.
29 See NAMA Letter.
30 See supra notes 5 and 24.
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person per year which would aid in
limiting conflicts of interest and also
align Rule G–20 with MSRB Rule G–
37.31 NAMA stated that in Rule G–37
the MSRB determined that the
contribution level of $250 was sufficient
to address the needs of individuals
seeking to give political contributions
while not allowing those contributions
to be so excessive as to allow the
contributor to gain undue influence.32
NAMA proposed that supplementary
material be added to state, in effect, that
occasional gifts of meals or tickets to
theatrical, sporting, and other
entertainments that are hosted by the
regulated entity would be presumed to
be so extensive as to raise a question of
propriety if they exceed $250 in any
year in conjunction with any gifts
provided under Rule G–20(c).33 NAMA
asserted that because the purposes of
Rule G–20 and Rule G–37 both are
meant to limit a dealer’s or a municipal
advisor’s ability to gain undue influence
through the giving of gifts or
contributions that the rules should be
written similarly.34
The MSRB responded to NAMA by
stating that Rule G–37 is designed to
address potential political corruption
that may result from pay-to-play
practices,35 and as such, is tailored in
light of First Amendment concerns.
Existing Rule G–20 is designed to
address commercial bribery by
minimizing the conflicts of interest that
arise when a dealer attempts to induce
organizations active in the municipal
securities market to engage in business
with such dealer by means of gifts or
gratuities given to employees of such
organizations.36 The MSRB stated that
Rules G–37 and G–20 address
substantially different regulatory needs
in different legal contexts, and therefore
the dollar amounts are likewise
justifiably different.37
C. ‘‘Normal Business Dealings’’
NAMA commented that proposed
amended Rule G–20(d), which sets forth
the exclusions from the $100 limit,
leaves open opportunities for abuse.38
NAMA expressed specific concern
regarding proposed subsection (d)(i),
which would, under certain
circumstances, exclude from the $100
limit the giving of occasional meals or
tickets to theatrical, sporting or
31 See
NAMA Letter.
32 Id.
33 Id.
34 Id.
35 See
supra notes 5 and 24.
36 Id.
37 Id.
38 See
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entertainment events.39 In NAMA’s
view, regulated entities would be able to
engage in otherwise impermissible gift
giving under the guise of ‘‘normal
business dealings,’’ and such gift giving
likely would result in the improper
influence that Rule G–20 was designed
to curtail.40 NAMA suggested modifying
the amended rule to impose an
aggregate limit of $250 on all gifts given
as part of ‘‘normal business dealings’’
and gifts and gratuities given under
proposed subsection (c) believing the
aggregate limit would be consistent with
the dollar threshold used in MSRB Rule
G–37.41
The MSRB responded that in order to
curtail any abuse of the exception to the
$100 limit, proposed amended Rule G–
20 places conditions on the excluded
gifts, including those that fall under
‘‘normal business dealings.’’ 42 All of the
gifts described in proposed section (d)
would be excluded only if they do not
‘‘give rise to any apparent or actual
material conflict of interest,’’ and, under
proposed section (d)(i), ‘‘normal
business dealing’’ gifts would be
excluded only if they are not ‘‘so
frequent or so extensive as to raise any
question of propriety.’’ 43 The MSRB
further stated that dealers and
municipal advisors are subject to the
fundamental fair-dealing obligations of
MSRB Rule G–17.44 The MSRB stated
that Rule G–17 likely addresses at least
some of the concerns raised by NAMA
by prohibiting regulated entities from
characterizing excessive or lavish
expenses for the personal benefit of
issuer personnel as an expense of the
issue, as such behavior could possibly
constitute a deceptive, dishonest or
unfair practice.45
D. Incorporation of Applicable FINRA
Interpretive Guidance
jstallworth on DSK7TPTVN1PROD with NOTICES
ICI commented that the MSRB should
incorporate the relevant portions of
certain NASD guidance regarding the
value of promotional items into Rule G–
20.46 ICI also encouraged the MSRB to
do so in order to ease the compliance
burden on regulated entities as well as
make clear that the monetary limits in
Rule G–20 do not apply to ‘‘customary
Lucite tombstones, plaques or other
similar solely decorative items
commemorating a business transaction,
even when such items have a cost of
more than $100.’’ 47
In response to ICI, the MSRB stated
that such interpretive guidance
published by NASD has been
incorporated into proposed amended
Rule G–20.48 The MSRB also stated that
proposed Rule G–20(d)(ii) provides that
the general $100 limitation does not
apply to ‘‘[g]ifts that are solely
decorative items commemorating a
business transaction, such as a
customary plaque or desk ornament
(e.g., Lucite tombstone).’’ 49 The MSRB
noted that this description does not
contain a monetary limit, and therefore
the provision fully addresses ICI’s
comment.50
E. Recordkeeping Requirements
NAMA commented that a regulated
entity should be required to maintain
records for gifts that are subject to either
the normal business dealing exclusion
under proposed amended Rule G–20(c)
or Rule G–20(d)(i).51 NAMA noted that
gifts that constitute normal business
dealings under proposed amended Rule
G–20(d)(i) require recordkeeping to
comply with certain requirements of the
Internal Revenue Service and of various
municipalities.52 Therefore, according
to NAMA, imposing a recordkeeping
requirement would not be an entirely
new burden, would provide protection
against pay-to-play activities and would
provide a means to determine whether
such gifts give rise to questions of
impropriety or conflicts of interest.53
NAMA also commented that to allow for
meaningful enforcement the MSRB
should require a regulated entity to keep
records of any personal gifts given
pursuant to proposed amended Rule G–
20(d)(iv) that were paid for, directly or
indirectly, by the regulated entity.54
The MSRB responded to NAMA
stating that it believes that the
recordkeeping requirements of Rule G–
8(h) that relate to Rule G–20 should be
limited to items that are subject to the
$100 limit so as to continue to align
recordkeeping under Rule G–20 with
existing FINRA recordkeeping
requirements for dealers.55 The MSRB
further stated that significant safeguards
are already in place, including Rules G–
27, G–44, and G–17, which weigh
against imposing the additional
recordkeeping burdens on regulated
47 Id.
39 Id.
48 See
40 Id.
49 Id.
41 Id.
50 Id.
42 See
supra notes 5 and 24.
51 See
entities.56 The MSRB further noted that
it reminded dealers in its 2007 MSRB
Gifts Notice on Rule G–20 that they
must have supervisory policies and
procedures in place under Rule G–27
that are reasonably designed to prevent
and detect violations of Rule G–20 (and
of other applicable securities laws).57
The MSRB also stated that recently
adopted Rule G–44, on supervision and
compliance obligations of municipal
advisors, imposes similar supervisory
requirements on municipal advisors.58
Finally, the MSRB notes that they
reminded dealers in 2007 in particular
contexts that the making of payments
that might not otherwise be subject to
Rule G–20 could constitute separate
violations of Rule G–17, which
currently applies to municipal advisors
and dealers.59
SIFMA commented that it objects to
the requirement that brokers, dealers
and municipal securities dealers keep
records related to Rule G–20 for a period
of six years because municipal advisors
only need to retain them for five years.60
The MSRB responded to SIFMA stating
that this topic is addressed in MSRB
Rule G–9 which was not included as
part of the proposed rule change and
therefore no revision to the proposed
rule change is necessary.61
V. Discussion and Commission Findings
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to the MSRB. In particular,
the proposed rule change is consistent
with Sections 15B(b)(2) and 15B(b)(2)(C)
of the Act. Section 15B(b)(2) of the Act
provides that the MSRB shall propose
and adopt rules to effect the purposes of
that 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 entity or obligated persons
undertaken by brokers, dealers,
municipal securities dealers, and
municipal advisors.62 Section
15B(b)(2)(C) of the Act requires that the
MSRB’s rules shall be designed to
supra note 5.
56 Id.
57 Id.
58 Id.
NAMA Letter.
43 Id.
52 Id.
59 Id.
44 Id.
53 Id.
60 See
45 Id.
54 Id.
61 See
46 See
ICI Letter.
VerDate Sep<11>2014
15:03 Nov 12, 2015
55 See
Jkt 238001
PO 00000
supra notes 5 and 24.
Frm 00092
Fmt 4703
Sfmt 4703
70275
SIFMA Letter.
supra note 5.
62 15 U.S.C. 78o–4(b)(2).
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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.’’ 63
The proposed rule change would help
prevent fraudulent and manipulative
acts and practices, promote just and
equitable principles of trade and protect
investors, municipal entities, obligated
persons, and the public interest by
reducing, or at least exposing, the
potential for conflicts of interests in
municipal advisory activities by
extending the policies embodied in
existing Rule G–20 to municipal
advisors and their associated persons
and establishing a common standard for
all regulated entities that operate in the
municipal securities market. The
proposed rule change would help
ensure that engagements of municipal
advisors, as well as engagements of
dealers, are awarded on the basis of
merit and not as a result of gifts made
to employees controlling the award of
such business. In addition, by
prohibiting the reimbursement of
entertainment expenses from the
proceeds of a municipal securities
issuance, the proposed rule change will
provide regulated entities with clear
notice and guidance regarding MSRB
regulation of such matters. Further,
codifying certain applicable MSRB
interpretive guidance and adopting and
codifying certain FINRA interpretive
guidance will increase awareness of
such guidance by regulated entities and
in turn improve compliance and help
prevent inadvertent violations of Rule
G–20.
In addition, the proposed
amendments to Rule G–8 will assist in
the enforcement of Rule G–20 by
extending the relevant existing
recordkeeping requirements of Rule G–
8 that currently are applicable to dealers
to municipal advisors. Regulated
entities will be required to create and
maintain records in a consistent manner
which the Commission believes will
allow organizations that examine
regulated entities to more precisely
monitor and promote compliance with
the proposed rule change. Increased
compliance with the proposed rule
change would likely reduce the
frequency and magnitude of conflicts of
interests that could potentially result in
harm to investors, municipal entities, or
obligated persons, or undermine the
public’s confidence in the municipal
securities market.
The Commission finds that the
proposed rule change is consistent with
Section 15B(b)(2)(L)(iv) of the Act, in
that it does 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.64 While the proposed rule change
would affect all municipal advisors,
including small municipal advisors, the
Commission believes the proposed rule
change is a necessary and appropriate
regulatory burden in order to limit
practices that could harm investors,
municipal entities and obligated
persons. The proposed rule change will
likely reduce the frequency and severity
of violations of the public trust by
elected officials and others involved in
the issuance of municipal securities that
might otherwise have their decisions
regarding the award of municipal
advisory business influenced by the
gifts given by regulated entities and
their associated persons. Further,
codifying certain interpretive guidance
will help minimize compliance costs
which will benefit all regulated entities,
including small municipal advisors.
While the proposed rule change would
burden some small municipal advisors,
the Commission believes that such
burden is outweighed by the need to
maintain the integrity of the municipal
securities market and to preserve
investor and public confidence in the
municipal securities market, including
the bond issuance process.
In addition, the Commission finds
that the proposed rule change is
consistent with Section 15B(b)(2)(G) of
the Act which provides that the MSRB’s
rules shall prescribe records to be made
and kept by municipal securities
brokers, municipal securities dealers,
and municipal advisors and the periods
for which such records shall be
preserved.65 The proposed rule change
would extend the provisions of existing
Rule G–8 to require that municipal
advisors as well as dealers make and
keep records related to Rule G–20 as
amended by the proposed rule change.
In approving the proposed rule
change, the Commission has considered
U.S.C. 78o–4(b)(2)(L)(iv).
65 15 U.S.C. 78o–4(b)(2)(G).
U.S.C. 78o–4(b)(2)(C).
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V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,67 that the
proposed rule change (SR–MSRB–2015–
09) be, and hereby is, approved.
For the Commission, pursuant to delegated
authority.68
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–28806 Filed 11–12–15; 8:45 am]
BILLING CODE 8011–01–P
66 15
64 15
63 15
the proposed rule’s impact on
efficiency, competition and capital
formation.66 The Commission believes
the proposed rule change will help
promote competition. By extending the
relevant current restrictions embodied
in existing MSRB Rule G–20 to
municipal advisors and their municipal
advisory activities, the proposed rule
change will promote merit-based and
price-based competition for municipal
advisory services and limit the selection
or retention of a municipal advisor
based on the receipt of gifts. A market
where regulated entities compete on the
basis of price and quality of services is
more likely to provide a level playing
field for existing regulated entities
within which to operate and also
encourages the entry of new providers.
By extending the policies embodied in
existing MSRB Rule G–20 to municipal
advisors and their municipal advisory
activities, the proposed rule change will
also establish common standards for
dealers and municipal advisors that
operate in the same municipal securities
market. The Commission also believes
that by codifying certain interpretive
guidance, the proposed rule change will
clarify the obligations of dealers and
municipal advisors and ease compliance
burdens. The Commission believes that
the effect of the proposed rule is
beneficial and the proposed changes
will help maintain the integrity of the
municipal securities market and
preserve investor and public
confidence.
As noted above, the Commission
received three comment letters on the
filing. The Commission believes that the
MSRB through its responses has
addressed commenters concerns. For
the reasons noted above, including
those discussed in the MSRB Response
Letter, the Commission believes that the
proposed rule change is consistent with
the Act.
PO 00000
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U.S.C. 78c(f).
U.S.C. 78s(b)(2).
68 17 CFR 200.30–3(a)(12).
67 15
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]]>Agencies
[Federal Register Volume 80, Number 219 (Friday, November 13, 2015)]
[Notices]
[Pages 70271-70276]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28806]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76381; File No. SR-MSRB-2015-09]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change Consisting of
Proposed Amendments to Rule G-20, on Gifts, Gratuities and Non-Cash
Compensation, and Rule G-8, on Books and Records To Be Made by Brokers,
Dealers, Municipal Securities Dealers, and Municipal Advisors, and the
Deletion of Prior Interpretive Guidance
November 6, 2015.
I. Introduction
On September 2, 2015, the Municipal Securities Rulemaking Board
(the ``MSRB'' or ``Board'') filed with the Securities and Exchange
Commission (``Commission'') pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change consisting of proposed amendments
to MSRB Rule G-20 on gifts, gratuities and non-cash compensation,
proposed amendments to MSRB Rule G-8, on books and records to be made
by brokers, dealers, municipal securities dealers, and municipal
advisors, and the deletion of prior interpretive guidance that would be
codified by proposed amended Rule G-20 (the ``proposed rule change'').
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in the Federal
Register on September 22, 2015.\3\ The Commission received three
comment letters on the proposed rule change.\4\ On
[[Page 70272]]
November 2, 2015, the MSRB submitted a response to these comments.\5\
This order approves the proposed rule change.
---------------------------------------------------------------------------
\3\ Securities Exchange Act Release No. 75932 (September 16,
2015), 80 FR 57240 (September 22, 2015) (the ``Notice'').
\4\ See Letters from Tamara K. Salmon, Senior Associate Counsel,
Investment Company Institute (``ICI''), dated September 25, 2015
(``ICI Letter''); Leslie M. Norwood, Managing Director and Associate
General Counsel, Securities Industry and Financial Markets
Association (``SIFMA''), dated October 13, 2015 (``SIFMA Letter'');
and Terri Heaton, President, National Association of Municipal
Advisors (``NAMA''), dated October 16, 2015 (``NAMA Letter'').
\5\ See Letter from Michael L. Post, General Counsel--Regulatory
Affairs, MSRB, dated November 2, 2015 (``MSRB Response Letter'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
Existing Rule G-20 is designed, in part, to minimize the conflicts
of interest that arise when a dealer attempts to induce organizations
active in the municipal securities market to engage in business with
such dealers by means of personal gifts or gratuities given to
employees of such organizations.\6\ According to the MSRB, the proposed
rule change addresses improprieties and conflicts that may arise when
municipal advisors and/or their associated persons \7\ give gifts or
gratuities to employees who may influence the award of municipal
advisory business.\8\ In summary, the MSRB has proposed amendments to
Rule G-20 that would:
---------------------------------------------------------------------------
\6\ See MSRB Notice 2004-17 (June 15, 2004).
\7\ MSRB Rule D-11 defines ``associated persons'' as follows:
Unless the context otherwise requires or a rule of the Board
otherwise specifically provides, the terms ``broker,'' ``dealer,''
``municipal securities broker,'' ``municipal securities dealer,''
``bank dealer,'' and ``municipal advisor'' shall refer to and
include their respective associated persons. Unless otherwise
specified, persons whose functions are solely clerical or
ministerial shall not be considered associated persons for purposes
of the Board's rules.
\8\ See supra note 3 at 57240-41.
---------------------------------------------------------------------------
Extend the relevant existing provisions of Rule G-20 to
municipal advisors and their associated persons and to gifts given in
relation to municipal advisory activities;
Consolidate and codify interpretive guidance, including
interpretive guidance published by the Financial Industry Regulatory
Authority, Inc. (``FINRA'') and adopted by the MSRB and delete prior
interpretive guidance that would be codified by proposed amended Rule
G-20;
Add a new provision prohibiting a regulated entity from
seeking or obtaining reimbursement of certain entertainment expenses
from the proceeds of an offering of municipal securities; and
Make several revisions that are designed to assist
brokers, dealers, and municipal securities dealers (``dealers'') and
municipal advisors (dealers, together with municipal advisors,
``regulated entities'') and their associated persons with their
understanding of and compliance with Rule G-20.
In summary, the MSRB has proposed amendments to Rule G-8 that
would:
Extend to municipal advisors the recordkeeping
requirements related to Rule G-20 that currently apply to dealers; and
Amend the rule language contained in Rule G-8(a)(xvii)(A),
(B), and (C) applicable to dealers to reflect the revisions to proposed
amended Rule G-20.
Extension of Rule G-20 to Municipal Advisors and Municipal Advisory
Activities
The MSRB has proposed to extend to municipal advisors and their
associated persons: (i) The general dealer prohibition of gifts or
gratuities in excess of $100 per person per year in relation to the
municipal securities activities of the recipient's employer (the ``$100
limit''); (ii) the exclusions contained in the existing rule from that
general prohibition (including certain consolidations and the
codifications of prior interpretive guidance) and the addition of
bereavement gifts to those exclusions; and (iii) the existing exclusion
relating to contracts of employment or compensation for services.
Proposed section (g) of Rule G-20, on non-cash compensation in
connection with primary offerings, is not being extended to municipal
advisors or to associated persons thereof.
(i) General Prohibition of Gifts or Gratuities in Excess of $100 per
Year
The MSRB has proposed section (c) of Rule G-20 which extends to a
municipal advisor and its associated persons the provision that
currently prohibits a dealer and its associated persons, in certain
circumstances, from giving directly or indirectly any thing or service
of value, including gratuities (``gifts''), in excess of $100 per year
to a person (other than an employee of the dealer). The prohibited
payments or services by a regulated entity or associated persons would
be those provided in relation to the municipal securities activities or
municipal advisory activities of the employer of the recipient (other
than an employee of the regulated entity).
(ii) Exclusions From the $100 Limit
The MSRB has proposed section (d) of Rule G-20 which extends to a
municipal advisor and its associated persons the provision that
excludes certain gifts from the $100 limit of proposed section (c) as
long as the conditions articulated by proposed section (d) and the
relevant subsection, as applicable, are met. Section (d) states that
gifts, in order to be excluded from the $100 limit, must not give rise
to any apparent or actual material conflict of interest.
Proposed section (d) of Rule G-20 includes subsections (d)(i)
through (d)(iv) and (d)(vi) which consolidate and codify interpretive
guidance that the MSRB provided in MSRB Notice 2007-06 (the ``2007 MSRB
Gifts Notice'').\9\ The 2007 MSRB Gifts Notice's interpretive guidance
also included FINRA guidance that the MSRB had adopted by
reference.\10\ Further, proposed subsection (d)(v) would codify FINRA
interpretive guidance relating to bereavement gifts that the MSRB
previously had not adopted.\11\
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\9\ See Dealer Payments in Connection with the Municipal
Issuance Process, MSRB Notice 2007-06 (Jan. 29, 2007).
\10\ See 2007 MSRB Gifts Notice (reminding dealers of the
application of Rule G-20 and Rule G-17 in connection with certain
payments made and expenses reimbursed during the municipal bond
issuance process, and stating that the National Association of
Securities Dealers, Inc.'s (``NASD'') guidance provided in NASD
Notice to Members 06-69 (Dec. 2006) to assist dealers in complying
with NASD Rule 3060 applies as well to comparable provisions of Rule
G-20).
\11\ See supra note 3 at 57242.
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The MSRB has proposed subsection (d)(i) of Rule G-20 which extends
to a municipal advisor and its associated persons the current exclusion
of a gift of meals or tickets to theatrical, sporting, and other
entertainment given by a dealer or its associated persons from the $100
limit if they are a ``normal business dealing.'' Such exclusion is
subject to the limitations as described in proposed subsection (d)(i).
Proposed subsections (d)(ii) through (iv) establish three
categories of gifts that were previously excluded from the $100 limit
under the category of ``reminder advertising'' in the rule language
regarding ``normal business dealings'' in existing section (b) of Rule
G-20. The MSRB has proposed to delete the concept of ``reminder
advertising'' from the ``normal business dealings'' exclusion under
current paragraph (b). This amendment would clarify the types of gifts
in the nature of reminder advertising that would be excluded from the
$100 limit. These changes conform draft amended paragraph (d) with
current FINRA interpretive guidance that the MSRB has stated applies to
Rule G-20.\12\ These three categories are:
---------------------------------------------------------------------------
\12\ Id. at 57241.
---------------------------------------------------------------------------
Gifts commemorative of a business transaction, such as a
desk ornament or
[[Page 70273]]
Lucite tombstone (proposed subsection (d)(ii));
de minimis gifts, such as pens and notepads (proposed
subsection (d)(iii)); and
promotional gifts of nominal value that bear an entity's
corporate or other business logo and that are substantially below the
$100 limit (proposed subsection (d)(iv)).
Proposed subsection (d)(v) of Rule G-20 excludes bereavement gifts
which are reasonable and customary for the circumstances from the $100
limit. According to the MSRB, proposed subsection (d)(v) of Rule G-20
codifies FINRA interpretive guidance currently applicable to dealers
relating to bereavement gifts that the MSRB previously had not
adopted.\13\
---------------------------------------------------------------------------
\13\ Id. at 57242.
---------------------------------------------------------------------------
Finally, the MSRB has proposed subsection (d)(vi) of Rule G-20
which excludes personal gifts given upon the occurrence of infrequent
life events, such as a wedding gift or a congratulatory gift for the
birth of a child. According to the MSRB, this proposed subsection
consolidates and codifies the FINRA personal gift guidance currently
applicable to dealers.\14\
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\14\ Id.
---------------------------------------------------------------------------
The ``frequency'' and ``extensiveness'' limitations applicable to
proposed subsection (d)(i) of Rule G-20 would not apply to proposed
subsections (d)(ii) through (vi). The MSRB has proposed to modify those
limitations to better reflect the characteristics of the gifts
described in proposed subsections (d)(ii) through (vi).\15\ According
to the MSRB, gifts described in those subsections in the proposed rule
change are by their nature given infrequently and/or are of such
nominal value that retaining the requirement that such gifts be ``not
so frequent or extensive'' would be unnecessarily duplicative of the
description of these gifts and could result in confusion.\16\
---------------------------------------------------------------------------
\15\ Id.
\16\ Id.
---------------------------------------------------------------------------
To assist regulated entities with their understanding of the
exclusions described and with their compliance with the rule, the MSRB
has provided guidance in the Supplementary Material. Paragraph .03 of
the Supplementary Material provides guidance regarding promotional
gifts and ``other business logos'' including what would constitute an
``other business logo.'' Paragraph .04 of the Supplementary Material
provides guidance regarding personal gifts including factors that
should be considered when determining whether a gift is given in
connection with the municipal securities or municipal advisory services
of the employer of the recipient.
(iii) Exclusion for Compensation Paid as a Result of Contracts of
Employment or Compensation for Services
The MSRB has proposed section (f) which extends to municipal
advisors the exclusion from the $100 limit in existing Rule G-20(c) for
contracts of employment with or compensation for services that are
rendered pursuant to a prior written agreement meeting certain content
requirements. The MSRB has stated that proposed section (f) would
clarify that the exclusion applies only to the compensation paid as a
result of certain employment contracts, and does not apply to the
existence or creation of employment contracts. The MSRB further stated
that proposed section (f) is only a clarification and would not alter
the requirements currently applicable to dealers.\17\
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\17\ Id.
---------------------------------------------------------------------------
Consolidation and Codification of MSRB and FINRA Interpretive Guidance
As discussed, the MSRB has proposed to consolidate and codify
existing FINRA interpretive guidance previously adopted by the MSRB and
incorporate additional relevant FINRA interpretive guidance that has
not previously been adopted by the MSRB in both Rule G-20 text and the
Supplementary Material. While FINRA's interpretive guidance regarding
bereavement gifts was not formerly adopted by the MSRB, the MSRB
believes that this guidance will be appropriate for regulated entities
as it is consistent with the purpose and scope of proposed amended Rule
G-20. Further, the MSRB stated its belief that the consolidation and
codification of the applicable interpretive guidance will promote
compliance with the rule and create efficiencies for regulated entities
and regulatory enforcement agencies.\18\
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
In addition to the interpretive guidance discussed above, proposed
paragraphs .01, .02, and .05 of the Supplementary Material would
provide guidance relating to the valuation and the aggregation of gifts
and to the applicability of state laws. Proposed paragraph .01 of the
Supplementary Material would state that a gift's value should be
determined generally according to the higher of its cost or market
value. Proposed paragraph .02 of the Supplementary Material would state
that regulated entities must aggregate all gifts that are subject to
the $100 limit given by the regulated entity and each associated person
of the regulated entity to a particular recipient over the course of a
year however ``year'' is selected to be defined by the regulated
entity. Proposed paragraphs .01 and .02 reflect existing FINRA
interpretive guidance regarding the aggregation of gifts for purposes
of its gift rules, which the MSRB has previously adopted.
Proposed paragraph .05 of the Supplementary Material would remind
regulated entities that, in addition to all the requirements of
proposed amended Rule G-20, regulated entities may also be subject to
other duties, restrictions, or obligations under state or other laws
and that proposed amended Rule G-20 would not supersede any more
restrictive provisions of state or other laws applicable to regulated
entities or their associated persons.
Prohibition of Reimbursement for Entertainment Expenses
The MSRB has also proposed section (e) of Rule G-20 which provides
that a regulated entity is prohibited from requesting or obtaining
reimbursement for certain entertainment expenses from the proceeds of a
municipal securities offering. The MSRB stated its belief that this
provision would address a matter highlighted by a recent FINRA
enforcement action. Proposed section (e) provides that an entertainment
expense excludes ``ordinary and reasonable expenses for meals hosted by
the regulated entity and directly related to the offering for which the
regulated entity was retained.'' The MSRB has stated that proposed
section (e) is intended to allow the continuation of the generally
accepted market practice of a regulated entity advancing normal travel
costs to personnel of a municipal entity or obligated person for
business travel related to a municipal securities issuance and
obtaining reimbursement for such costs.\19\
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\19\ Id.
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Additional Proposed Amendments to Rule G-20
In addition to the previously discussed proposed amendments to Rule
G-20, the MSRB proposed several amendments which it believes will
assist readers with their understanding of and compliance with Rule G-
20.\20\ These proposed amendments include (i) a revised rule title,
(ii) a new provision stating the rule's purpose, and (iii) a re-
ordering of existing provisions and additional defined terms.
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\20\ Id.
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[[Page 70274]]
Recordkeeping Requirements
The MSRB has proposed amendments to Rule G-8 which extend to
municipal advisors the recordkeeping requirements related to Rule G-20
that currently apply to dealers. Municipal advisor recordkeeping
requirements would be identical to the recordkeeping requirements to
which dealers would be subject in proposed amended Rule G-8(a)(xvii)(A)
and (B).
The MSRB has proposed to amend the language contained in Rule G-
8(a)(xvii)(A), (B), and (C) applicable to dealers, to reflect the
revisions to proposed amended Rule G-20. Proposed amended paragraph
(a)(xvii)(A) provides that a separate record of any gift or gratuity
subject to the general limitation of proposed amended Rule G-20(c) must
be made and kept by dealers (emphasis added to amended rule text).
Paragraph (a)(xvii)(B) would be amended to clarify that dealers must
make and keep records of all agreements referred to in proposed amended
Rule G-20(f) and records of all compensation paid as a result of those
agreements (emphasis added to proposed amended rule text). The proposed
amendments would also track the reordering of sections in proposed
amended Rule G-20 and provide greater specificity as to the records
that a dealer must maintain by referencing the terms used in proposed
amended Rule G-20.
The proposed rule change would extend the provisions of existing
Rule G-8 to require that municipal advisors as well as dealers make and
keep records of: gifts given that are subject to the $100 limit; and
all agreements referred to in proposed section (f) (on compensation for
services) and records of compensation paid as a result of those
agreements.
Implementation Date
The MSRB requested that the proposed rule change be approved with
an implementation date six months after the Commission approval date
for all changes.
III. Summary of Comments Received and the MSRB's Response
As noted previously, the Commission received three comment letters
on the proposed rule change.\21\ The commenters generally support the
proposed rule change.\22\ However, some commenters asked for further
clarification and provided suggestions to the proposed rule change.\23\
In response to an earlier request for comment by the MSRB on the draft
amendments to Rules G-20 and G-8,\24\ the MSRB received eight comment
letters and responded to the comments in the Notice. In the MSRB
Response Letter, the MSRB incorporated by reference its response to
comments made in the Notice noting that the three comments received on
the proposed rule change were the same or substantially similar to the
comments made in response to the MSRB Request for Comment.\25\ The MSRB
believes the proposed rule change is appropriately tailored and
responded to the commenters as discussed below.
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\21\ See supra note 4.
\22\ Id.
\23\ Id.
\24\ Request for Comment on Draft Amendments to MSRB Rule G-20,
on Gifts, Gratuities and Non-Cash Compensation, to Extend its
Provisions to Municipal Advisors, MSRB Notice 2014-18 (Oct. 23,
2014) (``MSRB Request for Comment'').
\25\ See supra note 5.
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A. Application of Proposed Amended Rule G-20(c) to Certain Recipients
NAMA commented that under the MSRB's proposed Rule G-20, the $100
limit would seem not to apply to gifts given to employees or officials
of municipal entities or obligated persons because such persons, for
the most part, do not engage in ``municipal advisory activities.'' \26\
NAMA noted that the MSRB indicated in the Notice that prior
interpretive guidance made clear issuer personnel are considered to
engage in ``municipal securities activities'' and requested that the
MSRB codify this guidance in Rule G-20.\27\ The MSRB responded to NAMA
stating that the language of both existing Rule G-20 and proposed
amended Rule G-20 applies to gifts given in relation to this broad term
``municipal securities activities.'' \28\
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\26\ See NAMA Letter.
\27\ Id.
\28\ See supra notes 5 and 24.
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NAMA also commented that many municipal official and governing
board members are not employees of municipal entities or obligated
persons, and therefore it appears that G-20 does not apply to gifts
given to non-employee officials of municipal entities and obligated
persons.\29\ The MSRB responded by stating that it believes for
purposes of existing and proposed amended Rule G-20, elected and
appointed officials are considered employees of the governmental entity
on behalf of which they act as agent or representative.\30\
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\29\ See NAMA Letter.
\30\ See supra notes 5 and 24.
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B. Changing the Amount of the $100 Limit
In its comments, NAMA proposed that the $100 limit be raised to
$250 per person per year which would aid in limiting conflicts of
interest and also align Rule G-20 with MSRB Rule G-37.\31\ NAMA stated
that in Rule G-37 the MSRB determined that the contribution level of
$250 was sufficient to address the needs of individuals seeking to give
political contributions while not allowing those contributions to be so
excessive as to allow the contributor to gain undue influence.\32\ NAMA
proposed that supplementary material be added to state, in effect, that
occasional gifts of meals or tickets to theatrical, sporting, and other
entertainments that are hosted by the regulated entity would be
presumed to be so extensive as to raise a question of propriety if they
exceed $250 in any year in conjunction with any gifts provided under
Rule G-20(c).\33\ NAMA asserted that because the purposes of Rule G-20
and Rule G-37 both are meant to limit a dealer's or a municipal
advisor's ability to gain undue influence through the giving of gifts
or contributions that the rules should be written similarly.\34\
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\31\ See NAMA Letter.
\32\ Id.
\33\ Id.
\34\ Id.
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The MSRB responded to NAMA by stating that Rule G-37 is designed to
address potential political corruption that may result from pay-to-play
practices,\35\ and as such, is tailored in light of First Amendment
concerns. Existing Rule G-20 is designed to address commercial bribery
by minimizing the conflicts of interest that arise when a dealer
attempts to induce organizations active in the municipal securities
market to engage in business with such dealer by means of gifts or
gratuities given to employees of such organizations.\36\ The MSRB
stated that Rules G-37 and G-20 address substantially different
regulatory needs in different legal contexts, and therefore the dollar
amounts are likewise justifiably different.\37\
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\35\ See supra notes 5 and 24.
\36\ Id.
\37\ Id.
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C. ``Normal Business Dealings''
NAMA commented that proposed amended Rule G-20(d), which sets forth
the exclusions from the $100 limit, leaves open opportunities for
abuse.\38\ NAMA expressed specific concern regarding proposed
subsection (d)(i), which would, under certain circumstances, exclude
from the $100 limit the giving of occasional meals or tickets to
theatrical, sporting or
[[Page 70275]]
entertainment events.\39\ In NAMA's view, regulated entities would be
able to engage in otherwise impermissible gift giving under the guise
of ``normal business dealings,'' and such gift giving likely would
result in the improper influence that Rule G-20 was designed to
curtail.\40\ NAMA suggested modifying the amended rule to impose an
aggregate limit of $250 on all gifts given as part of ``normal business
dealings'' and gifts and gratuities given under proposed subsection (c)
believing the aggregate limit would be consistent with the dollar
threshold used in MSRB Rule G-37.\41\
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\38\ See NAMA Letter.
\39\ Id.
\40\ Id.
\41\ Id.
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The MSRB responded that in order to curtail any abuse of the
exception to the $100 limit, proposed amended Rule G-20 places
conditions on the excluded gifts, including those that fall under
``normal business dealings.'' \42\ All of the gifts described in
proposed section (d) would be excluded only if they do not ``give rise
to any apparent or actual material conflict of interest,'' and, under
proposed section (d)(i), ``normal business dealing'' gifts would be
excluded only if they are not ``so frequent or so extensive as to raise
any question of propriety.'' \43\ The MSRB further stated that dealers
and municipal advisors are subject to the fundamental fair-dealing
obligations of MSRB Rule G-17.\44\ The MSRB stated that Rule G-17
likely addresses at least some of the concerns raised by NAMA by
prohibiting regulated entities from characterizing excessive or lavish
expenses for the personal benefit of issuer personnel as an expense of
the issue, as such behavior could possibly constitute a deceptive,
dishonest or unfair practice.\45\
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\42\ See supra notes 5 and 24.
\43\ Id.
\44\ Id.
\45\ Id.
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D. Incorporation of Applicable FINRA Interpretive Guidance
ICI commented that the MSRB should incorporate the relevant
portions of certain NASD guidance regarding the value of promotional
items into Rule G-20.\46\ ICI also encouraged the MSRB to do so in
order to ease the compliance burden on regulated entities as well as
make clear that the monetary limits in Rule G-20 do not apply to
``customary Lucite tombstones, plaques or other similar solely
decorative items commemorating a business transaction, even when such
items have a cost of more than $100.'' \47\
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\46\ See ICI Letter.
\47\ Id.
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In response to ICI, the MSRB stated that such interpretive guidance
published by NASD has been incorporated into proposed amended Rule G-
20.\48\ The MSRB also stated that proposed Rule G-20(d)(ii) provides
that the general $100 limitation does not apply to ``[g]ifts that are
solely decorative items commemorating a business transaction, such as a
customary plaque or desk ornament (e.g., Lucite tombstone).'' \49\ The
MSRB noted that this description does not contain a monetary limit, and
therefore the provision fully addresses ICI's comment.\50\
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\48\ See supra note 5.
\49\ Id.
\50\ Id.
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E. Recordkeeping Requirements
NAMA commented that a regulated entity should be required to
maintain records for gifts that are subject to either the normal
business dealing exclusion under proposed amended Rule G-20(c) or Rule
G-20(d)(i).\51\ NAMA noted that gifts that constitute normal business
dealings under proposed amended Rule G-20(d)(i) require recordkeeping
to comply with certain requirements of the Internal Revenue Service and
of various municipalities.\52\ Therefore, according to NAMA, imposing a
recordkeeping requirement would not be an entirely new burden, would
provide protection against pay-to-play activities and would provide a
means to determine whether such gifts give rise to questions of
impropriety or conflicts of interest.\53\ NAMA also commented that to
allow for meaningful enforcement the MSRB should require a regulated
entity to keep records of any personal gifts given pursuant to proposed
amended Rule G-20(d)(iv) that were paid for, directly or indirectly, by
the regulated entity.\54\
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\51\ See NAMA Letter.
\52\ Id.
\53\ Id.
\54\ Id.
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The MSRB responded to NAMA stating that it believes that the
recordkeeping requirements of Rule G-8(h) that relate to Rule G-20
should be limited to items that are subject to the $100 limit so as to
continue to align recordkeeping under Rule G-20 with existing FINRA
recordkeeping requirements for dealers.\55\ The MSRB further stated
that significant safeguards are already in place, including Rules G-27,
G-44, and G-17, which weigh against imposing the additional
recordkeeping burdens on regulated entities.\56\ The MSRB further noted
that it reminded dealers in its 2007 MSRB Gifts Notice on Rule G-20
that they must have supervisory policies and procedures in place under
Rule G-27 that are reasonably designed to prevent and detect violations
of Rule G-20 (and of other applicable securities laws).\57\ The MSRB
also stated that recently adopted Rule G-44, on supervision and
compliance obligations of municipal advisors, imposes similar
supervisory requirements on municipal advisors.\58\ Finally, the MSRB
notes that they reminded dealers in 2007 in particular contexts that
the making of payments that might not otherwise be subject to Rule G-20
could constitute separate violations of Rule G-17, which currently
applies to municipal advisors and dealers.\59\
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\55\ See supra notes 5 and 24.
\56\ Id.
\57\ Id.
\58\ Id.
\59\ Id.
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SIFMA commented that it objects to the requirement that brokers,
dealers and municipal securities dealers keep records related to Rule
G-20 for a period of six years because municipal advisors only need to
retain them for five years.\60\ The MSRB responded to SIFMA stating
that this topic is addressed in MSRB Rule G-9 which was not included as
part of the proposed rule change and therefore no revision to the
proposed rule change is necessary.\61\
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\60\ See SIFMA Letter.
\61\ See supra note 5.
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V. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the MSRB. In particular, the proposed rule
change is consistent with Sections 15B(b)(2) and 15B(b)(2)(C) of the
Act. Section 15B(b)(2) of the Act provides that the MSRB shall propose
and adopt rules to effect the purposes of that 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 entity or obligated persons undertaken by
brokers, dealers, municipal securities dealers, and municipal
advisors.\62\ Section 15B(b)(2)(C) of the Act requires that the MSRB's
rules shall be designed to
[[Page 70276]]
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.'' \63\
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\62\ 15 U.S.C. 78o-4(b)(2).
\63\ 15 U.S.C. 78o-4(b)(2)(C).
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The proposed rule change would help prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade and protect investors, municipal entities, obligated persons,
and the public interest by reducing, or at least exposing, the
potential for conflicts of interests in municipal advisory activities
by extending the policies embodied in existing Rule G-20 to municipal
advisors and their associated persons and establishing a common
standard for all regulated entities that operate in the municipal
securities market. The proposed rule change would help ensure that
engagements of municipal advisors, as well as engagements of dealers,
are awarded on the basis of merit and not as a result of gifts made to
employees controlling the award of such business. In addition, by
prohibiting the reimbursement of entertainment expenses from the
proceeds of a municipal securities issuance, the proposed rule change
will provide regulated entities with clear notice and guidance
regarding MSRB regulation of such matters. Further, codifying certain
applicable MSRB interpretive guidance and adopting and codifying
certain FINRA interpretive guidance will increase awareness of such
guidance by regulated entities and in turn improve compliance and help
prevent inadvertent violations of Rule G-20.
In addition, the proposed amendments to Rule G-8 will assist in the
enforcement of Rule G-20 by extending the relevant existing
recordkeeping requirements of Rule G-8 that currently are applicable to
dealers to municipal advisors. Regulated entities will be required to
create and maintain records in a consistent manner which the Commission
believes will allow organizations that examine regulated entities to
more precisely monitor and promote compliance with the proposed rule
change. Increased compliance with the proposed rule change would likely
reduce the frequency and magnitude of conflicts of interests that could
potentially result in harm to investors, municipal entities, or
obligated persons, or undermine the public's confidence in the
municipal securities market.
The Commission finds that the proposed rule change is consistent
with Section 15B(b)(2)(L)(iv) of the Act, in that it does 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.\64\ While the proposed
rule change would affect all municipal advisors, including small
municipal advisors, the Commission believes the proposed rule change is
a necessary and appropriate regulatory burden in order to limit
practices that could harm investors, municipal entities and obligated
persons. The proposed rule change will likely reduce the frequency and
severity of violations of the public trust by elected officials and
others involved in the issuance of municipal securities that might
otherwise have their decisions regarding the award of municipal
advisory business influenced by the gifts given by regulated entities
and their associated persons. Further, codifying certain interpretive
guidance will help minimize compliance costs which will benefit all
regulated entities, including small municipal advisors. While the
proposed rule change would burden some small municipal advisors, the
Commission believes that such burden is outweighed by the need to
maintain the integrity of the municipal securities market and to
preserve investor and public confidence in the municipal securities
market, including the bond issuance process.
---------------------------------------------------------------------------
\64\ 15 U.S.C. 78o-4(b)(2)(L)(iv).
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In addition, the Commission finds that the proposed rule change is
consistent with Section 15B(b)(2)(G) of the Act which provides that the
MSRB's rules shall prescribe records to be made and kept by municipal
securities brokers, municipal securities dealers, and municipal
advisors and the periods for which such records shall be preserved.\65\
The proposed rule change would extend the provisions of existing Rule
G-8 to require that municipal advisors as well as dealers make and keep
records related to Rule G-20 as amended by the proposed rule change.
---------------------------------------------------------------------------
\65\ 15 U.S.C. 78o-4(b)(2)(G).
---------------------------------------------------------------------------
In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation.\66\ The Commission believes the proposed rule change
will help promote competition. By extending the relevant current
restrictions embodied in existing MSRB Rule G-20 to municipal advisors
and their municipal advisory activities, the proposed rule change will
promote merit-based and price-based competition for municipal advisory
services and limit the selection or retention of a municipal advisor
based on the receipt of gifts. A market where regulated entities
compete on the basis of price and quality of services is more likely to
provide a level playing field for existing regulated entities within
which to operate and also encourages the entry of new providers. By
extending the policies embodied in existing MSRB Rule G-20 to municipal
advisors and their municipal advisory activities, the proposed rule
change will also establish common standards for dealers and municipal
advisors that operate in the same municipal securities market. The
Commission also believes that by codifying certain interpretive
guidance, the proposed rule change will clarify the obligations of
dealers and municipal advisors and ease compliance burdens. The
Commission believes that the effect of the proposed rule is beneficial
and the proposed changes will help maintain the integrity of the
municipal securities market and preserve investor and public
confidence.
---------------------------------------------------------------------------
\66\ 15 U.S.C. 78c(f).
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As noted above, the Commission received three comment letters on
the filing. The Commission believes that the MSRB through its responses
has addressed commenters concerns. For the reasons noted above,
including those discussed in the MSRB Response Letter, the Commission
believes that the proposed rule change is consistent with the Act.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\67\ that the proposed rule change (SR-MSRB-2015-09) be, and hereby
is, approved.
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\67\ 15 U.S.C. 78s(b)(2).
For the Commission, pursuant to delegated authority.\68\
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\68\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-28806 Filed 11-12-15; 8:45 am]
BILLING CODE 8011-01-P
