SEC Approves Amendments to Rule G-37(c), Concerning Solicitation and Coordination of Payments to Political Parties, and Question and Answer Guidance on Supervisory Procedures Related to Rule G-37(d), on Indirect Violations
On September 22, 2005 the Securities and Exchange Commission (the “SEC”) approved the Municipal Securities Rulemaking Board’s (the “MSRB”) amendment to Rule G-37(c), concerning solicitation and coordination of payments to political parties, and Question and Answer (“Q&A”) guidance on supervisory procedures related to Rule G-37(d), on indirect violations.[1] The amendments and Q&A guidance became effective on September 22, 2005.
SUMMARY OF RULE G-37(c) AMENDMENT
Rule G-37(c) prohibits a dealer and its municipal finance professionals (“MFPs”) from soliciting any person or political action committee (“PAC”) to make or coordinate contributions to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business. The amendments also prohibit the dealer and certain MFPs[2] from soliciting any person or PAC to make or coordinate a payment to a political party of a state or locality where the dealer is engaging or is seeking to engage in municipal securities business.[3] The amendments define any “person”[4] to include any affiliated entity of the dealer. This clarification is intended to alert dealers and MFPs that influencing the disbursement decisions of affiliated entities or PACs may constitute a direct violation of Rule G-37(c), as amended, if the dealer or MFP solicits the affiliated entity or PAC to make or coordinate contributions to an official of an issuer or a political party of a state or locality where the dealer is engaging or is seeking to engage in municipal securities business. Accordingly, in order to ensure compliance with Rule G-37(c), dealers should consider the adequacy of their information barriers with affiliated entities, or PACs controlled by affiliated entities, to ensure that the affiliated entities’ contributions, payments, or PAC disbursement decisions are neither influenced by the dealer or its MFPs, nor communicated to its MFPs.
SUMMARY OF QUESTIONS AND ANSWERS
The Q&A guidance provides that, in order to ensure compliance with Rule G-27(c) as it relates to payments to political parties or PACs and Rule G-37(d), each dealer must adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that neither the dealer nor its MFPs are using payments to political parties and non-dealer controlled PACs to contribute indirectly to an official of an issuer.[5] The Q&A guidance also explicitly states that contributing to “housekeeping”, “conference” or “overhead” type accounts is not a safe harbor and does not alleviate the dealer’s supervisory obligation to conduct this due diligence.
The Qs&As seek to provide dealers with more guidance as they develop procedures to ensure compliance with both the language and the spirit of Rule G-37. The Qs&As emphasize the necessity for adequate supervisory procedures to ensure compliance with Rule G-37(d) not only with respect to payments to political parties, but also with respect to contributions to and disbursements by dealer-affiliated (but not controlled) PACs. The Board reminds dealers that a failure to implement satisfactory written procedures to ensure compliance with Rule G-37(d) could subject the dealer to enforcement actions by the appropriate regulatory authorities.
For a more detailed discussion of the amendments, as well as to view the text of the amendments and Qs&As, please see MSRB Notice 2005-36 (June 21, 2005), available at www.msrb.org. Questions regarding this notice, amended Rule G-37(c) and the Qs&As may be directed to
September 26, 2005
[1] Exchange Act Release No. 52496 (September 22, 2005).
[2] The amendment limits MFPs who would be prohibited from soliciting or coordinating political party payments to those persons who are directly involved in the dealer’s municipal securities business. The language provides that only MFPs who are primarily engaged in municipal representative activities, solicitors of municipal securities business, or direct supervisors of MFPs that are “solicitors” or “primarily engaged” are prohibited from soliciting political party payments. The Board limited those MFPs covered by the proposed amendments to those directly involved in the municipal securities business of the dealer; recognizing that other MFPs more distant from the day-to-day operations of the dealer’s municipal securities business may have other reasons to solicit or coordinate payments to political parties (i.e., reasons related to other business activities of the dealer).
[3] The MSRB notes that, depending upon the facts and circumstances, an MFP’s solicitation of a contribution to an issuer with which the dealer is engaging or is seeking to engage in municipal securities business or the solicitation of a political party payment to a political party of a state or locality where the dealer is engaging or is seeking to engage in municipal securities business, may also constitute a violation of Rule G-37(d), on indirect violations.
[4] “Person” is defined in the Securities Exchange Act of 1934 (the “Act”), § 3(9) to mean “a natural person, company, government, or political subdivision, agency, or instrumentality of a government.” Unless the context otherwise specifically requires, the terms used in MSRB rules have the meanings set forth in the Act. See MSRB Rule D-1.
[5] In addition, pursuant to MSRB Rule G-8(a)(xx), on records concerning compliance with Rule G-27, each dealer must maintain and keep current the records required under Rules G-27(c) and G-27 (d).
