SEC Approves A Policy That Delegates Authority To The NASD Staff And The NASD Fixed Income Committee To Review Member Requests For Exemptions From MSRB Rule G-37(b)
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Executive Summary
On October 20, 1995, the Securities and Exchange Commission (SEC) approved a statement of policy that establishes internal NASD® procedures delegating to the NASD staff and the NASD Fixed Income Committee the authority to review requests by members for exemptions from the business prohibition requirement in Municipal Securities Rulemaking Board (MSRB) Rule G-37(b).
The statement of policy is an NASD internal procedure and will not be in the NASD Manual. A footnote referencing this Notice will be placed by the heading of the Code of Procedure. The full text of the statement of policy, which became effective October 20, 1995, follows the discussion below.
Background
The SEC approved MSRB Rule G-37 on April 7, 1994.1 MSRB Rule G-37(b) prohibits any broker, dealer, or municipal securities dealer from engaging in municipal securities business with any issuer within two years after any contribution to an official of that issuer made by that broker, dealer, or municipal securities dealer, or any political action committee controlled by that broker, dealer, or municipal securities dealer. The two-year prohibition is not triggered by contributions by a municipal finance professional to issuer officials for whom that municipal finance professional was entitled to vote if such contribution does not exceed $250 per official per election.
Subsequently, on June 3, 1994, the SEC granted accelerated approval to an amendment to MSRB Rule G-372 to provide a procedure for a broker, dealer, or municipal securities dealer to seek exemptive relief from the business prohibition language under MSRB Rule G-37(b) if the broker, dealer, or municipal securities dealer discovers that a prohibited political contribution was made. Pursuant to Release 34-34160, subsection (i) to MSRB Rule G-37 permits the NASD to exempt, conditionally or unconditionally, an NASD member that is prohibited from engaging in municipal securities business with an issuer pursuant to subsection (b) of MSRB Rule G-37. MSRB Rule G-37(i)(ii) provides that the NASD shall consider, among other factors, whether such exemption is consistent with the public interest, the protection of investors and the purposes of this Rule. MSRB Rule G-37(i)(ii) sets forth further criteria for granting the exemption by requiring that the MSRB member have in place procedures designed to ensure compliance with the Rule, had no actual knowledge of the contribution(s), and has taken other remedial measures as may be appropriate.
Release No. 34-3160 states that the MSRB believes that exemptions from MSRB Rule G-37 should be granted only if a disgruntled employee contributes to an issuer official to injure the member or if an employee makes a number of small contributions during an election cycle (e.g., four years), which, when consolidated, amount to slightly over the $250 de minimis exemption (such as contributions totaling $255). It also states that the MSRB would expect that the exemption not be routinely requested by dealers and that exemptions would be granted by the NASD only in limited circumstances. To implement a procedure for reviewing requests for NASD member exemptions anticipated under MSRB Rule G-37, the NASD has adopted a Policy that establishes an NASD internal procedure to review and grant or deny exemptions from MSRB Rule G-37.
Members are advised to retain this Notice for future reference. The policy is an NASD internal procedure and will not be in the NASD Manual. A footnote referencing this Notice will be placed by the heading of the Code of Procedure.
Description Of NASD Policy
Initial Review
The NASD Board of Governors (Board) has delegated authority to John E. Pinto, Executive Vice President, NASD Regulation Business Line, to authorize a member of the staff to conduct an initial review of requests of NASD members for exemptions pursuant to Section (1) of MSRB Rule G-37. The staff authorized to review exemption requests will issue a written decision to the member that will set forth the decision and that the member may request a review of the staff decision by the Fixed Income Committee within 15 calendar days of the date of the decision.
Appellate Review
The Board has delegated authority to the Fixed Income Committee, or a subcommittee thereof, to review the appeal of a member from a decision of the staff with respect to the member's request for an exemption from MSRB Rule G-37. The Fixed Income Committee, or a subcommittee thereof, is required to issue a written decision to the member setting forth the decision. Unless a matter is called for discretionary review by the Board, the decision of the Fixed Income Committee, or a subcommittee thereof, will constitute final NASD action.
Written Record Required
The review conducted by the staff of the Regulation Business Line and the Fixed Income Committee, or a subcommittee thereof, of a member's request for exemption will be on the written record, including any submissions made by the member in support of its request for exemption.
Board Review
The decision of the Fixed Income Committee, or a subcommittee thereof, may be reviewed by the Board solely upon the request of one or more Governors. Such review, which may be undertaken solely at the discretion of the Board, will be in accordance with any future resolutions of the Board governing the review of the Fixed Income Committee decisions. In reviewing any decision of the Fixed Income Committee, the Board may affirm, modify, or reverse the decisions of Fixed Income Committee or remand the matter to the Fixed Income Committee with appropriate instructions. In the event of discretionary review by the Board, the decision of the Board constitutes final NASD action.
Summary Of MSRB Rule G-373
To help members comply with MSRB Rule G-37, the NASD is providing the following exact text from the MSRB Reports outlining the substantive requirements of MSRB Rule G-37 and related MSRB Rules, except for MSRB Rule G-37(i) discussed above.
In general, rule G-37 (i) prohibits brokers, dealers and municipal securities dealers ("dealers") from engaging in municipal securities business with issuers if certain political contributions have been made to officials of such issuers; and (ii) requires dealers to record and disclose certain political contributions, as well as other information, to allow public scrutiny of political contributions and the municipal securities business of a dealer. The rule is divided into eight sections, which are lettered (a) - (h).
Section (a) sets forth the general purpose and intent of the rule.
Section (b) is the business prohibition section which prohibits dealers from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by the dealer, any municipal finance professional and any political action committee (PAC) controlled by the dealer or any municipal finance professional. This paragraph also sets forth a de minimis exemption such that a dealer would not be subject to the prohibition on business if the only contributions made were by municipal finance professionals who were entitled to vote for the officials to whom they contributed, provided that such contributions by each municipal finance professional did not exceed $250 per official per election.
Section (c) is the anti-solicitation provision which prohibits dealers and municipal finance professionals from soliciting any person or PAC to make contributions, or to coordinate (or bundle) contributions to an official of an issuer with which the dealer is engaging or seeking to engage in municipal securities business.
Section (d) prohibits dealers and municipal finance professionals from doing indirectly any act which the dealer or municipal finance professional is prohibited from doing directly, pursuant to sections (b) and (c) of the rule.
Section (e) is the reporting provision which requires dealers to submit to the Board certain summary information on their municipal securities business and contributions to issuer officials and political parties, by the dealer, municipal finance professionals, PACs controlled by dealers and municipal finance professionals, and executive officers. Section (e) also provides that the reports must be submitted in accordance with rule G-37 filing procedures. These procedures require dealers to file two copies of Form G-37 within thirty (30) calendar days after the end of each calendar quarter (which filing dates correspond to January 31, April 30, July 31, and October 31).
Section (f) states that the Board will accept additional information that is voluntarily provided by dealers or others, so long as such information is submitted pursuant to the rule G-37 filing procedures.
Section (g) is the definitional section which defines the following terms:
(i) contribution; (ii) issuer; (iii) broker, dealer and municipal securities dealer; (iv) municipal finance professional; (v) executive officer; (vi) official of an issuer; and (vii) municipal securities business.
Section (h) provides that a prohibition on municipal securities business under section (b) arises only from contributions made on or after April 25, 1994.
In addition, Board rule G-8(a)(xvi) sets forth the specific recordkeeping requirements for rule G-37 which begin with contributions made and municipal securities business engaged in as of April 25, 1994. These requirements are designed to assist dealers in determining whether or not they may engage in business with a particular issuer. In addition to recording contributions to officials of issuers made by dealers, municipal finance professionals and PACs controlled by dealers and municipal finance professionals, rule G-8 requires dealers to record contributions made by executive officers and contributions made to political parties of states and political subdivisions. Dealers also are required to record the name, company, role and compensation arrangement of any person employed by the dealer to obtain or retain municipal business. Rule G-9(a)(viii), on record retention, requires dealers to retain the records made pursuant to rule G-8(a)(xvi) for at least six years.
Questions regarding this Notice may be directed to Walter Robertson, NASD Compliance Department, at (202) 728-8236. In addition, the MSRB has advised the NASD that members may call the MSRB about questions concerning MSRB Rule G-37.
1 Securities Exchange Act Release No. 33868 (April 7, 1994), 59 F.R. 17621 (April 13, 1994).
2 Securities Exchange Act Release No. 34160 (June 3, 1994), 59 FR 30376 (June 13, 1994) ("Release 34-34160").
3 MSRB Reports, June 14, Number 3 (June 1994) at 11. See also, MSRB Manual, General Rules, Rule G-37, MSRB Interpretations, Questions and Answers concerning Political Contributions and Prohibitions on Municipal Securities Business: Rule G-37.
Text Of New Rule
(Note: New text is underlined.)
Procedure of the Board of Governors For The Granting of Exemptions From MSRB Rule G-37