In 1999, the Municipal Securities Rulemaking Board (MSRB) published a notice on the application of Rule G-37, on political contributions and prohibitions on municipal securities business, to Presidential campaigns of issuer officials.[1]  In general, the notice described a 1995 interpretive letter[2] in which the Board noted that Rule G-37 is applicable to contributions given to an official of an issuer[3] who seeks election to federal office, such as the Presidency.  The Board also explained that the only exception to Rule G-37’s absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals.  Specifically, contributions by such persons to an official of an issuer would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election.  In the example of an issuer official running for President, any municipal finance professional in the country can contribute the de minimis amount to the official’s Presidential campaign without causing a ban on municipal securities business with that issuer.  Finally, the Board noted that a Presidential candidate who has accepted public funding for the general election is prohibited under federal law from accepting any contributions to further his or her general election campaign.  In these circumstances, federal law allows individuals to contribute to the candidate’s compliance fund, which uses the contributions solely for legal and accounting services to ensure compliance with federal law and not for campaign activities.  Thus, any municipal finance professional in the country can contribute the de minimis amount to an issuer official’s compliance fund without causing a ban on municipal securities business with that issuer.  This would apply if the issuer official runs for President or Vice President.

The MSRB wishes to remind dealers that these concepts also apply to an issuer official who campaigns for any federal office.  For example, any municipal finance professional residing in a state in which an issuer official is campaigning for a state-wide federal office may contribute the de minimis amount to the official’s campaign without causing a ban on municipal securities business with that issuer.  The MSRB does not opine whether any particular individual is or is not an issuer official. 

The MSRB also wishes to remind dealers to be aware of the Rule G-37 issues involving indirect rule violations and contributions to non-dealer associated political action committees and payments to political parties, which issues have been the subjects of previous notices and interpretive Questions and Answers.[4]

[1] See Application of Rule G-37 to Presidential Campaigns of Issuer Officials reprinted in MSRB Rule Book (January 1, 2008) at 246-247.  The notice is also available from the MSRB Rules/Interpretive Notices section of the MSRB’s website at www.msrb.org.

[2] See MSRB Interpretation of May 31, 1995, reprinted in MSRB Rule Book (January 1, 2008) at 251-253.  The letter is also available from the MSRB Rules/Interpretive Letters section of the MSRB’s website at www.msrb.org.

[3] The term “official of an issuer” is defined in Rule G-37(g)(vi) as any person (including any election committee for such person) who was, at the time of the contribution, an incumbent, candidate or successful candidate: (A) for elective office of the issuer which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer; or (B) for any elective office of a state or of any political subdivision, which office has authority to appoint any person who is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by an issuer.

[4] See Notice Concerning Indirect Rule Violations: Rules G-37 and G-38, reprinted in MSRB Rule Book (January 1, 2008) at 248-249; Rule G-37 Questions and Answers Nos.  III.4 and III.5 regarding contributions to a non-dealer associated PAC and payments to a state or local political party, reprinted in MSRB Rule Book (January 1, 2008) at 240; and Rule G-37 Question and Answer No. III.7 regarding supervisory procedures relating to indirect contributions, reprinted in MSRB Rule Book (January 1, 2008) at 240-241.  The notice and Questions and Answers are also available on the MSRB’s website at www.msrb.org.

As a result of the unprecedented number of “failed  auctions” [1] in municipal Auction Rate Securities (“ARS”) that have occurred this year, many dealers have announced plans to offer to purchase customer positions in municipal ARS at a stated price, typically par (“ARS Buybacks”). These ARS Buyback programs predominantly have occurred pursuant to settlement agreements with state attorneys general. The MSRB has received questions from dealers whether ARS Buybacks must be reported to the MSRB Real-Time Transaction Reporting System (RTRS) and, if so, whether the M9c0 “away from market - other reason” special condition indicator must be included on such trade reports.

MSRB Rule G-14, on transaction reporting, requires all purchase-sale transactions in municipal securities to be reported to RTRS. Transactions in ARS must be reported to RTRS and trade reports of ARS Buybacks must be reported to RTRS without the M9c0 special condition indicator. The primary reason a trade report would be required to include the M9c0 special condition indicator is that the trade report contains information that could be misleading to users of price transparency reports.[2] The MSRB does not believe that trade reports of ARS Buybacks would provide misleading information relating to the market value of ARS because the price at which ARS Buybacks are executed has been publicly announced. Therefore, trade reports of ARS Buybacks as well as of other purchases of ARS from holders at current market prices must be reported without the M9c0 special condition indicator.[3]

[1] A “failed auction” is not an event of default by the issuer, it only relates to the auction process not being able to determine a clearing rate and not permitting investors attempting to sell their securities from being able to do so.

[2] RTRS serves the dual purposes of price transparency and market surveillance. Transactions reported with the M9c0 special condition indicator are entered into the surveillance database but suppressed from price dissemination. The MSRB has identified three specific situations in which the M9c0 special condition indicator is required to be included on trade reports. See Notice of Interpretation of Rule G-14: “Reporting of Transactions in Certain Special Trading Situations: Rule G-14,” dated January 2, 2008.

[3] Users of the MSRB’s price transparency reports produced from RTRS should be aware that ARS Buybacks may result in a higher than normal volume of trade reports in ARS and should not use this volume as an indication that the market for ARS has fully recovered from the unprecedented number of failed auctions that have occurred in 2008. Further, the prices at which ARS Buybacks are executed may not reflect the actual market value for the security.

The Municipal Securities Rulemaking Board is concerned that the recent increase in demand for liquidity facilities in the municipal securities market due to the downgrade of the monoline insurers and the conversion of auction rate securities programs may result in certain activities that could violate federal bank tying and underpricing of credit prohibitions.  The MSRB wishes to remind dealers of these prohibitions as well as the fact that any broker, dealer or municipal securities dealer (dealer) that aids and abets a violation of federal bank tying or underpricing of credit prohibitions also would violate Rule G-17 on fair dealing.

The MSRB encourages all interested parties to provide information concerning any arrangement in which the provision of liquidity facilities may have been illegally tied to investment banking services.  Such information may be provided to the appropriate bank regulatory authority or, if provided to the MSRB, the MSRB will forward it to the  appropriate bank regulatory authority.  In addition, the MSRB cautions that any dealer that aids or abets a violation of bank tying or the underpricing of credit prohibitions also would violate Rule G-17.  A dealer would be deemed to have aided and abetted a violation of the bank tying prohibition or underpricing of credit if it knew or had reason to know that the purchase of investment banking services had been tied to the provision and/or pricing of a liquidity facility by an affiliated bank in violation of the federal banking laws.

Bond insurance companies recently have been subject to increased attention in the municipal securities market as a result of credit rating agency downgrades and ongoing credit agency reviews. Because of these recent events and the prominence of bond insurance in the municipal securities market, the MSRB is publishing this notice to review some of the investor protection rules applicable to brokers, dealers and municipal securities dealers (“dealers”) effecting transactions in insured municipal securities.

RULE G-17 AND TIME OF TRADE DISCLOSURE TO CUSTOMERS

One of the most important MSRB investor protection rules is Rule G-17, which requires dealers to deal fairly with all persons and prohibits deceptive, dishonest, or unfair  practices.  A long-standing interpretation of Rule G-17 is that a dealer transacting with a customer [1] must ensure that the customer is informed of all material facts concerning the  transaction, including a complete description of the security.[2]  Disclosure of material facts to a customer under Rule G-17 may be made orally or in writing, but must be made at or prior to the time of trade. In general, a fact is considered “material” if there is a substantial likelihood that its disclosure would have been considered significant by a reasonable investor.[3]  As applied to customer transactions in insured municipal securities, the disclosures required under Rule G-17 include a description of the securities and identification of any bond insurance as well as material facts that relate to the credit rating of the issue. The disclosures required under Rule G-17 also may include material facts about the credit enhancement applicable to the issue.

March 2002 Notice

In a March 2002 Interpretative Notice, the MSRB provided specific guidance on the disclosure requirements of Rule G-17.[4] The March 2002 Notice clarified that, in addition to the requirement to disclose material facts about a transaction of which the dealer is specifically aware, the dealer is responsible for disclosing any material fact that has been made available through sources such as the NRMSIR system,[5] the Municipal Securities Information Library^® (MSIL^®) system,[6] RTRS,[7] rating agency reports and other sources of information relating to the municipal securities transaction generally used by dealers that effect transactions in the type of municipal securities at issue (collectively, “established industry sources”).[8]  The inclusion of “rating agency reports” within the list of “established industry sources” of information makes clear the Board’s view that information about the rating of a bond, or information  from the rating agency about potential rating actions with respect to a bond, may be material information about the transaction. It follows that, where the issue’s credit rating is based in whole or in part on bond insurance, the credit rating of the insurance company, or information from the rating agency about potential rating actions with respect to the bond insurance company, may be material information about the transaction.

In addition to the actual credit rating of a municipal issue, “underlying” credit ratings are assigned by  rating agencies to some municipal securities issues. An underlying credit rating is assigned to reflect the credit quality of an issue independent of credit enhancements such as bond insurance. The underlying rating (or the lack of an underlying rating)[9] may be relevant to a transaction when the credit rating of the bond insurer is downgraded or is the subject of information from the rating agency about a potential rating action with respect to the insurance company. In order to ensure all required disclosures are made under Rule G-17, a dealer must take into consideration information on underlying credit ratings that is available in established industry sources (or information otherwise known to the dealer) and must incorporate such information when determining the material facts to be disclosed about the transaction.

April 2002 Notice on Sophisticated Municipal Market Professionals

In a notice dated April 30, 2002, the MSRB provided additional guidance on Rule G-17 and other customer protection rules as they apply to transactions with a special class of institutional customers known  as “Sophisticated Municipal Market Professionals” (“SMMPs”).[10] The April 2002 Notice provides a definition of SMMP, which includes critical elements such as the customer’s financial sophistication and access to established industry sources for municipal securities information. When a dealer has reasonable grounds for concluding that the institutional customer is an SMMP as defined in the April 2002 Notice, the institutional customer necessarily is already aware, or capable of making itself aware of, material facts found in the established industry sources. In addition, the customer in such cases is able to independently understand the significance of such material facts.

The April 2002 Notice provides that a dealer’s Rule G-17 obligation to affirmatively disclose material facts available from established industry sources is qualified to some extent in certain kinds of SMMP transactions. Specifically, when effecting nonrecommended, secondary market transactions, a dealer is not required to provide an SMMP with affirmative disclosure of the material facts that already exist in established industry sources. This differs from the general Rule G-17 requirement of disclosure, discussed above, and therefore may be relevant to dealers trading with SMMPs in insured municipal securities.

RULE G-19 AND SUITABILITY DETERMINATIONS

In addition to the customer disclosure obligations relating to bond insurance and credit ratings, dealers also should be aware of how suitability requirements of MSRB Rule G-19 relate to transactions in insured bonds that are recommended to customers. Rule G-19 provides that a dealer must consider the nature of the security as well as the customer’s financial status, tax status and investment objectives when making recommendations to customers.  The dealer must have reasonable grounds for believing that the recommendation is suitable, based upon information available about the security and the facts disclosed by or otherwise known about the customer.[11] Facts relating to the credit rating of a bond insurer may affect suitability determinations, particularly for customers that have conveyed to the dealer investment objectives relating to credit quality of investments. For example, if a customer has expressed the desire to purchase only “triple A” rated securities, recommendations to the customer should take into account information from rating agencies, including information about potential rating actions that may affect the future “triple A” status of the issue.[12]

RULE G-30 AND FAIR PRICING REQUIREMENTS

Another important investor protection provision within MSRB rules is Rule G-30 on prices and commissions. Rule G-30 requires that, for principal transactions with customers, the dealer must ensure that the price of each transaction is fair and reasonable, taking into account all relevant factors. Dealers should consider the effect of ratings on the value of the securities involved in customer transactions, and should specifically consider the effect of information from rating agencies, both with respect to actual or potential changes in the underlying rating of a security and with respect to actual or potential changes in the rating of any bond insurance applicable to the security.

RULE G-15(a) AND CONFIRMATION DISCLOSURE

The content of information required to be included on customer confirmations of municipal securities transactions is set forth in MSRB Rule G-15(a). For securities with additional credit backing, such as bond insurance, the rule requires the confirmation to state “the name of any company or other person in addition to the issuer obligated, directly or indirectly, with respect to debt service.”[13]  Rule G-15(a) does not generally require that credit agency ratings be included on customer confirmations. However, if credit ratings are given on the confirmation, the ratings must be correct.

CONCLUSION

Meeting the disclosure requirements of Rule G-17 requires attention to the facts and circumstances of individual transactions as well as attention to the specific securities and customers that are involved in those transactions. In light of recent events affecting credit ratings of bond insurance companies, dealers may wish to review both the March 2002 Notice on Rule G-17 disclosure requirements and the April 2002 Notice on SMMP transactions to ensure compliance with the rule in the changing environment for bond insurance companies. In addition, dealers may wish to review how transactions in insured securities are being recommended, priced and confirmed to customers to ensure compliance with other MSRB investor protection rules.

[1] The word “customer,” as used in this notice, follows the definition in MSRB Rule D-9, which states that a “customer” is any person other than a broker, dealer, or municipal securities dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new issue of its securities.

[2] See, e.g., Notice Concerning Disclosure of Call Information to Customers of Municipal Securities (March 4, 1986), MSRB Manual (CCH) para. 3591.

[3]  Se e, e.g., Basic v. Levinson, 485 U.S. 224 (1988).

[4] Interpretive Notice Regarding Rule G-17, on Disclosure of Material Facts, MSRB Notice (March 20, 2002) (hereinafter “March 2002 Notice”).

[6] The MSIL^® system collects and makes available to the marketplace official statements and advance refunding documents submitted under MSRB Rule G-36, on the delivery of official statements, as well as certain secondary market material event disclosures provided by issuers under SEC Rule 15c2-12. Municipal Securities Information Library^® and MSIL^® are registered trademarks of the MSRB.

[7] The MSRB’s Real-Time Transaction Reporting System (“RTRS”) collects and makes available to the marketplace information regarding inter-dealer and dealer-customer transactions in municipal securities.

[8] See March 2002 Notice (emphasis added).

[9] The lack of a rating for a municipal issue does not necessarily imply that the credit quality of such an issue is inferior, but is information that should be taken into account when accessing material facts about a transaction in the security.

[10] Notice Regarding the Application of MSRB Rules to Transactions with Sophisticated Municipal Market Professionals (April 30, 2002) (hereinafter “April 2002 Notice”). [This notice was revised effective July 9, 2012.]

[11] As with Rule G-17, the MSRB has provided specific qualifications with respect to how a dealer fulfills its suitability duties when making recommendations to SMMPs. These are described in the April 2002 Notice on SMMPs, discussed above.

[12] To assure that a dealer effecting a recommended transaction with a non-SMMP customer has the information needed about the customer to make its suitability determination, Rule G-19 requires the dealer to make reasonable efforts to obtain information concerning the customer’s financial status, tax status and investment objectives, as well as any other information reasonable and necessary in making the recommendation. The obligations arising under Rule G-19 in connection with a recommended transaction require a meaningful analysis, taking into consideration the information obtained about the customer and the security, which establishes the reasonable grounds for believing that the recommendation is suitable. Such suitability determinations should be based on the appropriately weighted factors that are relevant in any particular set of facts and circumstances, which factors may vary from transaction to transaction.  See Reminder of Customer Protection Obligations In Connection With Sales of Municipal Securities, MSRB Notice 2007-17 (May 30, 2007).

[13] The rule provides that, if there is more than one such obligor, the statement “multiple obligors” may be shown.  If a security is unrated by a nationally recognized statistical rating organization, Rule G-15(a) requires dealers to disclose the fact that the security is unrated.

The MSRB Real-Time Transaction Reporting System (RTRS) serves the dual purposes of price transparency and market surveillance.  Because a comprehensive database of transactions is needed for the surveillance function of RTRS, MSRB Rule G-14, on transaction reporting, with limited exceptions, requires dealers to report all of their purchase-sale transactions to RTRS within fifteen minutes.  All reported transactions are entered into the RTRS surveillance database used by market regulators and enforcement agencies. However, the special nature of some transactions effects their value for price transparency and the ability of dealers to meet the fifteen minute reporting deadline. To address these issues, RTRS was designed so that a dealer can code a specific transaction report with a “special condition indicator” to designate the transaction as being subject to a special condition.[1]

TRANSACTIONS EXECUTED WITH SPECIAL PRICING CONDITIONS

Three trading scenarios recently have generated questions from dealers and users of the MSRB price transparency products.  Each of the three trading scenarios described below represents situations where the transaction executed is not a typical arms-length transaction negotiated in the secondary market and thus may be a misleading indicator of the market value of a security.  To clarify transaction reporting requirements and to prevent publication of a potentially misleading price, dealers are required to report these transactions with the M9c0 special condition indicator.[2] Transactions reported with this special condition indicator are entered into the surveillance database but suppressed from price dissemination to ensure that transparency products do not include prices that might be confusing or misleading.

Customer Repurchase Agreement Transactions

Some dealers have programs allowing customers to finance municipal securities positions with repurchase agreements (“repos”). Typically, a bona fide repo consists of two transactions whereby a dealer will sell securities to a customer and agree to repurchase the securities on a future date at a pre-determined price that will produce an agreed-upon rate of return. Both the sale and purchase transactions resulting from a customer repo do not represent typical arms-length transactions negotiated in the secondary market and are therefore required to be reported with the M9c0 special condition indicator.

UIT-Related Transactions

Dealers sponsoring Unit Investment Trusts (“UIT”) or similar programs sometimes purchase securities through several transactions and deposit such securities into an “accumulation” account. After the accumulation account contains the necessary securities for the UIT, the dealer transfers the securities from the accumulation account into the UIT. Purchases of securities for an accumulation account are presumably done at market value and are required to be reported normally. The transfer of securities out of the accumulation account and into the UIT, however, does not represent a typical arms-length transaction negotiated in the secondary market. Dealers are required to report the subsequent transfer of securities from the accumulation account to the UIT with the M9c0 special condition indicator.

TOB Program-Related Transactions

Dealers sponsoring tender option bond programs (“TOB Programs”) for customers sometimes transfer securities previously sold to a customer into a derivative trust from which derivative products are created. If the customer sells the securities held in the derivative trust, the trust is liquidated and the securities are reconstituted from the derivative products and transferred back to the customer. The transfer of securities into the derivative trust and the transfer of securities back to the customer upon liquidation of the trust do not represent typical arms-length transactions negotiated in the secondary market. Such transactions are required to be reported using the M9c0 special condition indicator.[3]

INTER-DEALER TRANSACTIONS REPORTED “LATE”

Inter-dealer transaction reporting is accomplished by both the purchasing and selling dealers submitting the trade to the Depository Trust and Clearing Corporation’s (DTCC) automated comparison system (RTTM) following DTCC’s procedures. RTTM forwards information about the transaction to RTRS.  The inter-dealer trade processing situations described below are the subject of dealer questions and currently result in dealers being charged with “late” reporting or reporting of a trade date and time that differs from the date and time of trade execution.  To allow dealers to report these types of transactions without receiving a late error and to allow enforcement agencies to identify these trades as reported under special circumstances, the MSRB has added two new special condition indicators.[4] New special condition indicator Mc40 is used to identify certain inter-dealer transactions that are ineligible for comparison on trade date, and new special condition indicator Mc50 is used to identify resubmissions of certain uncompared inter-dealer transactions that have been cancelled by RTTM. Described below are the procedures for reporting transactions arising in three inter-dealer transaction reporting scenarios using the new special condition indicators.

Inter-Dealer Ineligible on Trade Date

Certain inter-dealer transactions are not able to be submitted to RTTM on trade date or with the accurate trade date either because all information necessary for comparison is not available or because the trade date is not a “valid” trade date in RTTM. The two inter-dealer trading scenarios described below are required to be reported using the new Mc40 special condition indicator.

VRDO Ineligible on Trade Date

On occasion, inter-dealer secondary market transactions are effected in variable rate demand obligations (VRDOs) in which the interest rate reset date occurs between trade date and the time of settlement. Since dealers in this scenario cannot calculate accrued interest or final money on trade date, they cannot process the trade through RTTM until the interest rate reset has occurred. To report such transactions, both dealers that are party to the transaction are required to report the transaction by the end of the day that the interest rate reset occurs, including the trade date and time that the original trade was executed. Both dealers are required to include the new Mc40 special condition indicator that causes RTRS not to score either dealer late. Transactions reported using this procedure are disseminated without a special condition indicator and the trade reports reflect the original trade date and time.

Invalid RTTM Trade Dates

Dealers sometimes execute inter-dealer transactions on weekends and on certain holidays that are not valid RTTM trade dates. Such trades cannot be reported to RTRS using the actual trade date if they occur on a weekend or holiday. To accomplish automated comparison and transaction reporting of such transactions, dealers are required to submit these inter-dealer transactions to RTTM no later than fifteen minutes after the start of the next RTRS Business Day and to include a trade date and time that represents the next earliest “valid” values that can be submitted.[5] Dealers also are required to include the new Mc40 special condition indicator that allows RTRS to identify these transactions so that enforcement agencies can be alerted to the fact that the trade reports were made under special circumstances using a special trade date and time. RTRS disseminates these trade reports without a special condition indicator and the trade report includes the trade date and time reflecting the next earliest “valid” values that can be submitted.[6]

Resubmission of an RTTM Cancel

A dealer may submit an inter-dealer trade to RTTM and find that the contra-party fails to report its side of the trade.  Such “uncompared” trades are not disseminated by RTRS on price transparency products.  After two days, RTTM removes the uncompared trade report from its system and the dealer originally submitting the trade must resubmit the transaction in a second attempt to obtain a comparison with its contra-party, which currently results in RTRS scoring the resubmitted trade report “late.”

The dealer that originally submitted information to RTTM is required to resubmit identical information about the transaction in the second attempt to compare and report the trade by the end of the day after RTTM cancels the trade. The resubmitting dealer also is required to include the new Mc50 special condition indicator that causes RTRS to not score the resubmitting dealer late. The indicator may only be used by a dealer resubmitting the exact same trade information for the same trade.[7] For example, the contra-party that failed to submit its side to the trade accurately, thus preventing comparison of the transaction, is not allowed to use the indicator. RTRS disseminates trade reports made under this procedure without a special condition indicator once RTTM compares the trade and the trade report reflects the original trade date and time.

[1] See Specifications for Real-Time Reporting of Municipal Securities Transactions Section 4.3.2.

[2] In addition to the special trading situations identified in this notice, the M9c0 special condition indicator, “away from market – other reason,” is required to be included on a trade report if the transaction price differs substantially from the market price for multiple reasons or for a reason not covered by another special condition indicator.

[3] In some cases, the transfer of securities into the derivative trust and the transfer of securities back to the customer upon liquidation of the trust do not represent purchase-sale transactions due to the terms of the trust agreement.  MSRB rules on transaction reporting do not require a dealer to report a transfer of securities to RTRS that is not a purchase-sale transaction in municipal securities.

[4] See MSRB Notice 2007-25 (August 13, 2007).

[5] The MSRB previously provided an example of a trade date and time that would be included on a trade report using this procedure.  See “Reporting of Inter-Dealer Transactions That Occur Outside of RTRS Business Day Hours or on Invalid RTTM Trade Dates,” MSRB Notice 2007-12 (March 23, 2007).

[6] Using this procedure will result in transactions reported with a trade date and time that differs from what is recorded in a dealer’s books and records.  Dealers are reminded that books and records are required to reflect the date and time of trade execution.

[7] The resubmitting dealer would not be required to resubmit the same reference number or preparation time on the resubmitted transaction; however, other information about the transaction, such as price, quantity, trade date and time, would be required to be identical to information included in the original trade submission.

Municipal finance professional: supervisor.  This is in response to your inquiry seeking guidance regarding the possible classification as a municipal finance professional under rule G-37 of a Taxable Department Head at your firm. You stated that the Taxable Department Head is the direct supervisor of a Branch Manager and this Branch Manager manages a sales representative who has solicited municipal securities business from an issuer. You state that it is clear that the Branch Manager and the sales representative are both municipal finance professionals. However, you further state that the Taxable Department Head has delegated all Public Finance/Municipal oversight responsibilities to the Public Finance Department Head for the Taxable Department Head's personnel. You ask whether, under these circumstances, the Taxable Department Head would be considered a municipal finance professional under rule G-37 as a result of his or her supervisory position.

The term "municipal finance professional" is defined in rule G-37(g)(iv). Clauses (C) and (D) of the definition set forth the basis for considering an associated person of a dealer to be a municipal finance professional as a result of his or her supervisory position. Clause (C) includes any associated person who is both (i) either a municipal securities principal or municipal securities sales principal and (ii) a supervisor of any associated person either primarily engaged in municipal securities representative activities or who solicits municipal securities business (referred to herein as a "primary municipal securities supervisor"). Clause (D) includes any associated person who is a supervisor of a primary municipal securities supervisor up through and including (in the case of a non-bank dealer) the Chief Executive Officer or similarly situation official (referred to herein as a "secondary municipal securities supervisor").

Unlike in the case of a primary municipal securities supervisor, a secondary municipal securities supervisor is not required to be a municipal securities principal or municipal securities sales principal. The status of a secondary municipal securities supervisor as a municipal finance professional is not conditioned on the areas in which such supervisor has responsibility over a primary municipal securities supervisor, so long as such secondary municipal securities supervisor retains some degree of supervisory responsibility (whether or not relating to municipal securities activities) over the primary municipal securities supervisor.  MSRB interpretation of November 23, 1999.

Financial advisory relationship: private placements. This is in response to your letter in which you seek clarification on certain matters related to rules G-23, on activities of financial advisors, and G-37, on political contributions and prohibitions on municipal securities business.

You ask when it is "necessary in the process of commencing preliminary work with a potential financial advisory client to enter into a formal written financial advisory contract." Rule G-23(c) states that "[e]ach financial advisory relationship shall be evidenced by a writing entered into prior to, upon or promptly after the inception of the financial advisory relationship (or promptly after the creation or selection of the issuer if the issuer does not exist or has not been determined at the time the relationship commences)." Rule G-23(b) states that "...a financial advisory relationship shall be deemed to exist when a broker, dealer or municipal securities dealer renders or enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such issue or issues, for a fee or other compensation or in expectation of such compensation for the rendering of such services."

You ask whether you are to advise the Board by means of reporting on Form G-37/G-38 or by any other means when you commence work on subsequent financing transactions with an issuer with which your firm has an ongoing financial advisory contract. The Instructions for Completing and Filing Form G-37/G-38 provide a guideline to use in determining when to report financial advisory services on Form G-37/G-38.[1] Pursuant to these Instructions, dealers should indicate financial advisory services when an agreement is reached to provide the services. In addition, the Instructions note that dealers also should indicate financial advisory services during a reporting period when the settlement date for a new issue on which the dealer acted as financial advisor occurred during such period. There are no other requirements for reporting financial advisory services to the Board.

Finally, you ask whether rules G-23 or G-37 contain requirements concerning private placement activities. The term "municipal securities business" is defined in rule G-37 to include "the offer or sale of a primary offering of municipal securities on behalf of any issuer ( e.g. , private placement)..." The Instructions for Completing and Filing Form G-37/G-38 provide that private placements should be indicated at least by the settlement date if within the reporting period.

With respect to rule G-23, section (d) of the rule states that no dealer that has a financial advisory relationship with respect to a new issue of municipal securities shall acquire as principal either alone or as a participant in a syndicate or other similar account formed for the purpose of purchasing, directly or indirectly, from the issuer all or any portion of such issue, or act as agent for the issuer in arranging the placement of such issue, unless various actions are taken.[2] In addition, rule G-23(g) states that each dealer subject to the provisions of sections (d), (e) or (f) of rule G-23 shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9, on preservation of records. Finally, rule G-23(h) states that, if a dealer acquires new issue municipal securities or participates in a syndicate or other account that acquires new issue municipal securities in accordance with section (d) of rule G-23, such dealer shall disclose the existence of the financial advisory relationship in writing to each customer who purchases such securities from such dealer, at or before the completion of the transaction with the customer. MSRB interpretation of October 5, 1999.

[1] I have enclosed a copy of the Instructions for Completing and Filing Form G-37/G-38 as contained in the MSRB Rule Book. The instructions are also contained on the Board's web site (www.msrb.org) under the link for rule G-37.

[2] These actions are: (i) if such issue is to be sold by the issuer on a negotiated basis, (A) the financial advisory relationship with respect to such issue has been terminated in writing and at or after such termination the issuer has expressly consented in writing to such acquisition or participation, as principal or agent, in the purchase of the securities on a negotiated basis; (B) the dealer has expressly disclosed in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing to the dealer receipt of such disclosure; and (C) the dealer has expressly disclosed in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation referred to in section (c) of rule G-23, and the issuer has expressly acknowledged in writing to the dealer receipt of such disclosure; or (ii) if such issue is to be sold by the issuer at competitive bid, the issuer has expressly consented in writing prior to the bid to such acquisition or participation.

Solicitation of contributions.  This is in response to your letter in which you summarize your understanding of our telephone conversation relating to section (c) of rule G-37, on political contributions and prohibitions on municipal securities business. As I noted during our conversation, the Board’s rules, including rule G-37, apply solely to brokers, dealers and municipal securities dealers (“dealers”). The Board’s rulemaking authority, granted under Section 15B of the Securities Exchange Act of 1934, does not extend to issuers of municipal securities. Thus, rule G-37 does not impose any obligations upon issuers or officials of issuers. Although the Board appreciates your interest in not placing dealers and their associated persons in a position to violate their obligations under the rule, it is ultimately the responsibility of such dealers and associated persons, in consultation with appropriate compliance personnel, to ensure compliance with Board rules.

As you know, rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business. The Board has previously stated that this provision would:

prohibit a dealer and any municipal finance professional from soliciting . . . any other person or entity, to make contributions to an official of an issuer with which the dealer engages or is seeking to engage in municipal securities business or to coordinate (i.e., bundle) contributions. . .[*] [M]unicipal finance professionals may volunteer their personal services in other ways to political campaigns.[1]

You had sought guidance regarding what activities would be covered by this provision of the rule. As you noted in your letter, I had indicated that the term “solicit” is not explicitly defined for purposes of section (c) of the rule. I had stated that whether a particular activity can be characterized as a solicitation of a contribution for purposes of section (c) is dependent upon the facts and circumstances surrounding such activity. I had noted, however, that the rule does not prohibit or restrict municipal finance professionals from engaging in personal volunteer work, unless such work constituted solicitation or bundling of contributions for an official of an issuer with which the municipal finance professional’s dealer is engaging or seeking to engage in municipal securities business[2] Municipal finance professionals are therefore free to, among other things, solicit votes or other assistance for such an issuer official so long as the solicitation does not constitute a solicitation or coordination of contributions for the official. [3]

Whether a municipal finance professional is permitted by section (c) of the rule to indicate to third parties that someone is a “great candidate” or to provide a list of third parties for the candidate to call would be dependent upon all the facts and circumstances surrounding such action. The facts and circumstances that may be relevant for this purpose may include, among any number of other factors, whether the municipal finance professional has made an explicit or implicit reference to campaign contributions in his or her conversations with third parties whom the candidate may contact and whether the candidate contacts such third parties seeking campaign contributions. However, the totality of the facts and circumstances surrounding any particular activity must be considered in determining whether such activity may constitute a solicitation of contributions for purposes of section (c) of the rule. Therefore, the Board cannot prescribe an exhaustive list of precautions that would assure that no violation of this section would occur as a result of such activity.  MSRB interpretation of May 21, 1999.
__________

[1] MSRB Reports, Vol. 14, No. 3 (June 1994) at 5. See Securities Exchange Act Release No. 33868 (April 7, 1994), 59 FR 17621 (April 13, 1994). See also Questions and Answers Concerning Political Contributions and Prohibitions on Municipal Securities Business: Rule G-37, May 24, 1994, reprinted in MSRB Rule Book; MSRB Interpretation of November 7, 1994, reprinted in MSRB Rule Book; MSRB Interpretation of May 31, 1995, reprinted in MSRB Rule Book. Furthermore, the Board stated in its filing of the rule with the Securities and Exchange Commission that the rule’s “anti-solicitation and anti-bundling proscriptions are intended to prohibit covered parties from: (i) soliciting others, including spouses and family members, to make contributions to issuer officials; and (ii) coordinating, or soliciting others to coordinate, contributions to issuer officials in order to influence the awarding of municipal securities business.” SEC File No. SR-MSRB-94-2.

[2] See Question and Answer No. 24, May 24, 1994, reprinted in MSRB Rule Book; Question and Answer No. 3, August 18, 1994, reprinted in MSRB Rule Book. In addition, if the municipal finance professional used dealer resources or incurred expenses that could be considered contributions in the course of undertaking such volunteer work, the ban on municipal securities business under section (b) of the rule could be triggered.

[3] In upholding the constitutionality of rule G-37, the United States Court of Appeals for the District of Columbia Circuit observed that “municipal finance professionals are not in any way restricted from engaging in the vast majority of political activities, including making direct expenditures for the expression of their views, giving speeches, soliciting votes, writing books, or appearing at fundraising events.” Blount v. SEC, 61 F.3d 938, 948 (D.C. Cir. 1995), cert. denied, 116 S. Ct. 1351 (1996). However, the Board has stated that hosting or paying to attend a fundraising event may constitute a contribution subject to section (b) of the rule. See Questions and Answers Nos. 24 and 29, May 24, 1994, reprinted in MSRB Rule Book.

[*][sentence deleted to reflect current rule provisions.]

Amendment Filed to Proposed Rule Change on Rule G-15(d)(ii) on Automated Confirmation/Acknowledgement

On April 16, 1999, the Board filed with the Securities and Exchange Commission ("Commission") an amendment to its proposed rule change on Board rule G-15(d)(ii) on automated confirmation/acknowledgment of customer transactions.¹ The proposed rule change was initially filed with the Commission on April 1, 1998.² If approved by the Commission, it would allow dealers to comply with rule G-15 (d)(ii) by using the services of "qualified vendors" for confirmation/acknowledgment of Delivery Versus Payment/Receipt Versus Payment (DVP/RVP) customer transactions. Currently, without the proposed rule change, only clearing agencies that are registered with the Commission may be used to obtain the required confirmation/acknowledgment.

The amendment is comprised of two minor changes to the language of the proposed rule change. These modifications were requested by the Commission to make the Board’s proposed rule change more consistent with similar proposed rule changes on the same subject that have been filed with the Commission by other Self-Regulatory Organizations. One change concerns proposed subparagraph G-15(d)(ii)(B)(2)(C), which requires that, in order to maintain status as a qualified vendor, the vendor must file certain Auditor’s Reports annually with the Commission staff. The original requirement states that to remain qualified the vendor must obtain a statement from the Commission staff that the Commission staff does not object to the Auditor’s Report. The amendment states that the Auditor’s Report must be one "which is not deemed unacceptable" by the Commission staff.

The second language change relates to subparagraph G-15(d)(ii)(B)(2)(B), which contains the requirement that a Qualified Vendor certify that its confirmation/acknowledgement system meets certain qualifications. The amendment clarifies that this certification is to be made to the customers of the Qualified Vendor and removes the previous requirement that the certification be done annually.

April 20, 1999

Text of Proposed Rule Change (as amended)³

G-15. Confirmation, Clearance and Settlement of Transactions with Customers

(a) - (c) No change

(d) Delivery/Receipt vs. Payment Transactions.

        (i) No change.

        (ii) Requirement for Confirmation/Acknowledgment.

(A) Use of Registered Clearing Agency or Qualified Vendor. Except as provided in this paragraph (ii) of rule G-15(d), no broker, dealer or municipal securities dealer shall effect a customer transaction for settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) basis unless the facilities of a Cclearing Aagency registered with the Securities and Exchange Commission (registered clearing agency) or Qualified Vendor are used for automated confirmation and acknowledgment of the transaction. Each broker, dealer and municipal securities dealer executing a customer transaction on a DVP/RVP basis shall: (A) ensure that the customer has the capability, either directly or through its clearing agent, to acknowledge transactions in an automated confirmation/acknowledgment system operated by a registered Cclearing Aagency or Qualified Vendor; (B) submit or cause to be submitted to a registered Cclearing Aagency or Qualified Vendor all information and instructions required by the registered Cclearing Aagency or Qualified Vendor for the production of a confirmation that can be acknowledged by the customer or the customer’s clearing agent; and (C) submit such transaction information to the automated confirmation/acknowledgment system on the date of execution of such transaction; provided that a transaction that is not eligible for automated confirmation and acknowledgment through the facilities of a registered Cclearing Aagency shall not be subject to this paragraph (ii).

(B) Definitions for Rule G-15(d)(ii).

(C) Disqualification of Vendor. A broker, dealer or municipal securities dealer using a Qualified Vendor that ceases to be qualified under the definition in rule G-15(d)(ii)(B)(2) shall not be deemed in violation of this rule G-15(d)(ii) if it ceases using such vendor promptly upon receiving notice that the vendor is no longer qualified.

(iii) No change

ENDNOTES

1. File No. SR-MSRB-98-6, Amendment No. 1.

2. See Securities Exchange Act No. 39833 (April 6, 1998).

3. Underlining indicates additions; strikethrough denotes deletions.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

In response to numerous calls on this subject, the Board wishes to reiterate its position on the application of rule G-37, on political contributions and prohibitions on municipal securities business, to Presidential campaigns of issuer officials. The Board directs persons interested in contributing to an issuer official's Presidential campaign to the MSRB Interpretation of May 31, 1995 (the “1995 Interpretive Letter”).[1]

Rule G-37, among other things, prohibits a broker, dealer or municipal securities dealer (“dealer”) from engaging in municipal securities business with an issuer within two years after any contribution to an official of an issuer made by the dealer; any municipal finance professional associated with the dealer; or any political action committee controlled by the dealer or any municipal finance professional. In the 1995 Interpretive Letter, the Board noted that rule G-37 is applicable to contributions given to officials of issuers who seek election to federal office, such as the Presidency. The Board also explained that the only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals.[2] Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. In the example of an issuer official running for President, any municipal finance professional in the country can contribute the de minimis amount to the official's Presidential campaign without causing a ban on municipal securities business with that issuer.

The Board previously has stated that, if an issuer official is involved in a primary election prior to the general election, a municipal finance professional who is entitled to vote for such official may contribute up to $250 for the primary election and $250 for the general election to each such official.[3] In the context of a Presidential campaign, the Board notes that the $250 de minimis amount applies to the entire primary process, up through and including the national party convention. While rule G-37 allows a municipal finance professional to then contribute another $250 to the party candidate's general election campaign fund, the Board understands that a Presidential candidate who has accepted public funding for the general election is prohibited under federal law from accepting any contributions to further his or her general election campaign.

Finally, the Board also notes that rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contributions, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business.

[1] The 1995 Interpretive Letter is reprinted in MSRB Rule Book (January 1, 1999) at 201-203. It also is available from the MSRB Rules/Interpretive Letters section of the Board's Web site at www.msrb.org.

[2] The term “municipal finance professional” is a defined term in rule G-37(g)(iv). The Board wishes to remind dealers that the term is broader than persons directly involved in municipal securities activities and may include certain supervisors, including in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer, and in the case of a bank dealer, the officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. It also may include members of the dealer's executive or management committee or similarly situated officials. See Question and Answer number 2 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports , Vol. 14, No. 3 (June 1994) at 13; Question and Answer number 3 dated September 9, 1997, reprinted in MSRB Rule Book (January 1, 1999) at 199. The Questions and Answers also are available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.

[3] See Question and Answer number 10 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports , Vol. 14, No. 3 (June 1994) at 13. The Question and Answer also is available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.