(Volume 16, Number 3) SEPTEMBER 1996
Route To: Manager, Muni Department Underwriting Trading Sales Public Finance Compliance
Amendments Filed The Board has filed amendments to rules G-37, on political contributions and prohibitions on municipal securities business, and G-8, on books and records.
Questions about the amendments may be directed to Ronald W. Smith, Legal Associate.
On August 6, 1996, the Board filed with the Securities and Exchange Commission (SEC or Commission) amendments to rules G-37 and G-8 to: (i) amend the definition of "municipal finance professional;" (ii) amend the definition of "executive officer;" (iii) clarify the definition of "official of an issuer;" (iv) clarify the definition of "municipal securities business;" and (v) require the retention of Forms G-37/G-38 and the records of sending the forms.[1]
Definition of "Municipal Finance Professional" Rule G-37(g)(iv) defines the term "municipal finance professional" as:
(A) any associated person primarily engaged in municipal securities representative activities, as defined in rule G-3(a)(i);
(B) any associated person who solicits municipal securities business, as defined in paragraph (vii);
(C) any associated person who is both (i) a municipal securities principal or a municipal securities sales principal and (ii) a supervisor of any person described in subparagraphs (A) or (B);
(D) any associated person who is a supervisor of any person described in subparagraph (C) up through and including, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer or similarly situated official 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, as required pursuant to rule G-1(a); or
(E) any associated person who is a member of the broker, dealer or municipal securities dealer (or in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1) executive or management committee or similarly situated officials, if any.
The activities described in subparagraphs (A) and (B) which would cause someone to become a municipal finance professional are directly the result of the individual's actions (e.g., primarily engaged in underwriting, trading or sales of municipal securities, or soliciting municipal securities business). The activities described in subparagraph (C) relate to the supervision of anyone described in subparagraphs (A) and (B), and the activities described in subparagraph (D) relate to the supervision of anyone described in subparagraph (C). Thus, for someone to meet the definition of municipal finance professional pursuant to subparagraphs (A) through (D), individuals would have to be directly involved in municipal securities activities or supervisors of such persons.
Subparagraph (E) states that an associated person who is a member of the dealer executive or management committee or similarly situated official is a municipal finance professional. This provision is the only part of the definition of municipal finance professional that is not dependent upon the municipal securities activities of the person or the supervision of persons engaging in municipal securities activities. This provision was added to the rule because of the belief that issuer officials may seek out dealers' senior executives for contributions if municipal finance professionals ceased making contributions. The Statement of Initiative by Dealers regarding Political Contributions also included executive or management committee members within its voluntary prohibition on political contributions.[2]
The Board understands that there are certain dealers that occasionally engage in municipal securities sales transactions but do not engage in municipal securities business as defined in rule G-37(g)(vii). As a result, the only individuals who meet the definition of municipal finance professional within these firms are executive or management committee members. Because such dealers do not engage in municipal securities business, the ban on business based on political contributions is irrelevant to them. However, such dealers are required to record and report the contributions and payments of these municipal finance professionals. The Board believes that there is no useful purpose served in requiring dealers to record and report the political contributions of executive or management committee members if they are the only individuals in a firm meeting the definition of municipal finance professional. The proposed amendments revise the definition of municipal finance professional in rule G-37(g)(iv)(E) to exempt executive or management committee members from the definition of municipal finance professional (and thus the applicable recording and reporting requirements) if these are the only individuals within a firm who would meet the definition as described in subparagraphs (A) through (E).[3]
Definition of "Executive Officer" Rule G-37(g)(v) defines "executive officer" as:
an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional, as defined in paragraph (iv) of this section (g).
Contributions and payments by executive officers are subject to the recordkeeping and reporting provisions of rule G-37. Contributions by executive officers do not result in a ban on business; however, paragraph (d) of rule G-37 prohibits dealers from using executive officers (as well as any other person or entity) as conduits for making contributions to officials of issuers. The Board determined to apply the recordkeeping and reporting requirements to contributions by executive officers to ensure that these individuals are not being used to circumvent the rule.
As in the situation described above involving executive or management committee members, if a dealer has no one meeting the definition of municipal finance professional, the dealer is still required to record and report the contributions of executive officers. The Board believes that this serves no useful purpose because the dealer currently is not engaging in municipal securities business. The proposed amendments revise the definition of executive officer in rule G-37(g)(v) to provide that, if no associated person of the dealer meets the definition of municipal finance professional, the dealer shall be deemed to have no executive officers (and thus the recording and reporting requirements for executive officers are not applicable).[4]
In both situations involving municipal finance professionals and executive officers described above, if the dealer later does engage in municipal securities business, then the dealer will have to record the contributions and payments made by any municipal finance professionals, as well as executive officers, for the previous two calendar years to determine whether it is banned from any municipal securities business.[5]
Definition of "Official of an Issuer" When the Board adopted rule G-37, the term "official of such issuer" or "official of an issuer" was initially defined as any incumbent, candidate or successful candidate for elective office of the issuer, which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a dealer for municipal securities business. The definition was intended to include any state or local official or candidate (or successful candidate) who has influence over the awarding of municipal securities business, including certain state-wide executive or legislative officials.
After adoption of the rule, the Board became concerned that, because the definition focused on "an elective office of the issuer," it did not clearly include certain other officials. For example, a state may have certain issuing authorities whose boards of directors are appointed by the governor. Although the governor is an official with influence over the awarding of municipal securities business, the governor, in this illustration, is not an incumbent or candidate for "elective office of the issuer" (i.e., the state authority). Thus, a contribution to the governor would not prohibit a dealer from engaging in business with the state authority. The Board intended to include the governor as an official of the issuer in such circumstances and, therefore, determined to amend the definition to clarify its intent.[6]
Accordingly, rule G-37(g)(vi) currently defines the term "official of such issuer" or "official of an issuer" 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 official(s) of an issuer, as defined in subparagraph (A), above.
Recently, it came to the Board's attention that the revised definition does not clearly address situations in which an elected official may appoint someone to an issuer position. Subparagraph (B) in rule G-37(g)(vi) refers to the definition of official of an issuer as defined in subparagraph (A), but, subparagraph (A) refers only to an elective office and not an appointed office. The proposed amendments revise the definition of "official of such issuer" and "official of an issuer" to clarify that the definition includes "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." Such amendment removes the incorrect reference to an elective office for those who are appointed by an elected official.
Definition of "Municipal Securities Business" Rule G-37(g)(vii) defines the term "municipal securities business" as:
(A) the purchase of a primary offering (as defined in rule A-13(d)) of municipal securities from the issuer on other than a competitive bid basis (i.e., negotiated underwriting); or
(B) the offer or sale of a primary offering of municipal securities on behalf of any issuer (i.e., private placement); or
(C) the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities on other than a competitive bid basis; or
(D) the provision of remarketing agent services to or on behalf of an issuer with respect to a primary offering of municipal securities on other than a competitive bid basis.
Under rule G-37, dealers could be subject to a ban on business with an issuer if certain contributions are made to officials of that issuer. The ban on business provision applies to municipal securities business awarded on a negotiated basis; the rule does not prohibit dealers from engaging in business awarded on a competitive basis.
Some dealers have noted that it is not clear in subparagraph (C) of rule G-37(g)(vii) whether, for financial advisory services, the rule is referring to the selection of a financial advisor on other than a competitive bid basis or whether the rule is referring to financial advisory services provided only on negotiated deals. The proposed amendments revise rule G-37(g)(vii)(C) to make clear that the definition of "municipal securities business" includes financial advisory services when the dealer is chosen as financial advisor on a negotiated basis. It is irrelevant whether the financial advisory services provided by the dealer are with respect to a negotiated or competitive issue. A similar change has been made to rule G-37(g)(vii)(D) to clarify that the definition of "municipal securities business" includes remarketing agent services when the dealer is chosen as remarketing agent on a negotiated basis.
Recordkeeping Rule G-37(e) requires dealers to submit Forms G-37/G-38 to the Board by certified or registered mail or some other equally prompt means that provides a record of sending. While rule G-8(a)(xvi), on books and records, requires dealers to keep records of all of the information reported on Form G-37/G-38, it also requires dealers to keep records of additional information (e.g., a listing of the names, titles, city/county and state of residence of all municipal finance professionals). The Board believes it would be helpful to the enforcement agencies for rule G-8(a)(xvi) to require dealers to keep copies of the Forms G-37/G-38 submitted to the Board so that these forms can be easily retrieved for review. The Board also believes it would be helpful to the enforcement agencies in reviewing the timely submission of the forms to require dealers to keep the certified or registered mail record or other record of sending the forms to the Board.[7] The proposed amendments to rule G-8(a)(xvi) require that dealers keep copies of the forms submitted and the records of sending.
August 6, 1996
Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business (a) - (f) No change. (g) Definitions. (i) - (iii) No change. (iv) The term "municipal finance professional" means: (A) - (D) No change. (E) any associated person who is a member of the broker, dealer or municipal securities dealer (or in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1) executive or management committee or similarly situated officials, if any *; provided, however, that, if the only associated persons meeting the definition of municipal finance professional are those described in this subparagraph (E), the broker, dealer or municipal securities dealer shall be deemed to have no municipal finance professionals.* Each person designated by the broker, dealer or municipal securities dealer as a municipal finance professional pursuant to rule G-8(a)(xvi) is deemed to be a municipal finance professional. Each person designated a municipal finance professional shall retain this designation for two years after the last activity or position which gave rise to the designation. (v) The term "executive officer" means an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional, as defined in paragraph (iv) of this section (g)*; provided, however, that, if no associated person of the broker, dealer or municipal securities dealer meets the definition of municipal finance professional, the broker, dealer or municipal securities dealer shall be deemed to have no executive officers.* Each person listed by the broker, dealer or municipal securities dealer as an executive officer pursuant to rule G-8(a)(xvi) is deemed to be an executive officer. (vi) The term "official of such issuer" or "official of an issuer" means 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 {official(s) of an issuer, as defined in subparagraph (A), above} *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.* (vii) The term "municipal securities business" means: (A) - (B) No change. (C) the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities *in which the dealer was chosen to provide such services* on other than a competitive bid basis; or (D) the provision of remarketing agent services to or on behalf of an issuer with respect to a primary offering of municipal securities *in which the dealer was chosen to provide such services* on other than a competitive bid basis. (viii) No change. (h) - (i) No change.
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers (a) Description of Books and Records to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer: (i) - (xv) No change. (xvi) Records concerning Political Contributions and Prohibitions on Municipal Securities Business Pursuant to Rule G-37. Records reflecting: (A) - (G) No change. (H) *Dealers shall maintain copies of the Forms G-37/G-38 submitted to the Board along with the certified or registered mail receipt or other record of sending such forms to the Board.* (H) renamed (I) (I) renamed (J) (xvii) - (xviii) No change. (b) - (f) No change.
[1] File No. SR-MSRB-96-7. Comments sent to the Commission should refer to the file number.
[2] In October 1993, at the urging of SEC Chairman Levitt, a number of dealers agreed to a Statement of Initiative to support the principle that political contributions which are intended to influence the awarding of municipal securities business should be prohibited.
[3] Rule G-37(g)(iv) states that each person designated by the dealer as a municipal finance professional is deemed to be a municipal finance professional and that each person so designated will retain this designation for two years after the last activity or position which gave rise to the designation. Upon approval of the amendments by the SEC, dealers may remove individuals subject to the new rule language from their lists of designated municipal finance professionals and do not have to record and report their contributions.
[4] Upon approval of the amendments by the SEC, dealers may remove individuals subject to the new rule language from their lists of executive officers and do not have to record and report their contributions.
[5] Of course, any dealer who has municipal finance professionals, even if the dealer currently is not engaging in municipal securities business, must record and report the contributions and payments of municipal finance professionals and executive officers.
[6] The Board filed the amendment to rule G-37 with the SEC on May 24, 1994, and it became effective on June 3, 1994. See SEC Release No. 34-34160.
[7] Rule G-9, on preservation of records, requires dealers to retain the G-8(a)(xvi) records concerning political contributions and prohibitions on municipal securities business pursuant to rule G-37 for a six year period.
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