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48214 Federal Register / Vol. 70, No.

157 / Tuesday, August 16, 2005 / Notices

nationally recognized statistical rating the Designated Primary Market-Maker SECURITIES AND EXCHANGE
organization, as that term is used in (‘‘DPM’’), has submitted an opening COMMISSION
paragraphs (c)(2)(vi)(E), (F) and (H) of quote that complies with the legal width
rule 15c3–1 under the Securities quote requirements.4 The proposal [Release No. 34–52235; File No. SR–MSRB–
Exchange Act of 1934, as amended. Gulf would also change the method for 2005–12]
Power requests that it be permitted to determining the acceptable range the
issue a security that does not satisfy the opening price must be in before the Self-Regulatory Organizations;
foregoing condition if the requirements series may open to use the highest bid Municipal Securities Rulemaking
of rule 52(a)(i) and rule 52(a)(iii) of the and the lowest offer. The Exchange Board; Notice of Filing of Proposed
Act are met and the issue and sale of a submitted Amendment No. 1 on June Rule Change Concerning Solicitation
security have been expressly authorized 24, 2005.5 and Coordination of Payments to
by the Florida Public Service Political Parties and Question and
Commission. The proposed rule change was
Answer Guidance on Supervisory
The effective cost of money on the published for comment in the Federal
Procedures Related to Rule G–37(d) on
Preference Stock will not exceed Register on July 6, 2005.6 The
Indirect Violations
competitive market rates available at the Commission received no comments on
time of issuance for securities having the proposal. August 10, 2005.
the same or reasonably similar terms The Commission finds that the Pursuant to Section 19(b)(1) of the
and conditions issued by similar proposed rule change, as amended, is Securities Exchange Act of 1934
companies of reasonably comparative consistent with the requirements of the (‘‘Act’’),1 and Rule 19b–4 thereunder,2
credit quality. Act and the rules and regulations
The proceeds from the sales of any notice is hereby given that on June 27,
thereunder applicable to a national 2005, the Municipal Securities
series of Preference Stock may be used
to redeem or otherwise retire Gulf securities exchange7 and, in particular, Rulemaking Board (‘‘MSRB’’ or
Power’s outstanding debt or preferred the requirements of Section 6 of the ‘‘Board’’) filed with the Securities and
and preference stock if considered Act 8 and the rules and regulations Exchange Commission (‘‘SEC’’ or
advisable. In addition proceeds may be thereunder. The Commission ‘‘Commission’’) the proposed rule
used to pay a portion of its cash specifically finds that the proposed rule change as described in Items I, II, and
requirements to carry on its electric change is consistent with Section 6(b)(5) III below, which Items have been
utility business. of the Act 9 in that it is designed to prepared by the MSRB. The
promote just and equitable principles of Commission is publishing this notice to
For the Commission, by the Division of solicit comments on the proposed rule
Investment Management, pursuant to trade, to remove impediments and to
delegated authority. perfect the mechanism of a free and change from interested persons.
Margaret H. McFarland, open market and a national market I. Self-Regulatory Organization’s
Deputy Secretary. system, and, in general, to protect Statement of the Terms of Substance of
[FR Doc. E5–4423 Filed 8–15–05; 8:45 am] investors and the public interest. The the Proposed Rule Change
BILLING CODE 8010–01–P
Commission believes that the proposal
should help to ensure that all options The MSRB has filed with the SEC a
series are promptly opened on CBOE, proposed rule change consisting of an
SECURITIES AND EXCHANGE and may help to provide for a tighter amendment to Rule G–37(c), concerning
COMMISSION opening price range. solicitation and coordination of
It is therefore ordered, pursuant to payments to political parties, and Q&A
[Release No. 34–52234; File No. SR–CBOE– guidance on supervisory procedures
2005–40] Section 19(b)(2) of the Act,10 that the
related to Rule G–37(d), on indirect
proposed rule change (SR–CBOE–2005–
Self-Regulatory Organizations; violations. The text of the proposed rule
40), as amended, is approved.
Chicago Board Options Exchange, change is available on the MSRB’s Web
For the Commission, by the Division of site (http://www.msrb.org), at the
Incorporated; Order Approving a
Market Regulation, pursuant to delegated MSRB’s principal office, and at the
Proposed Rule Change and
authority.11 Commission’s Public Reference Room.
Amendment No. 1 Thereto Relating to
the Hybrid Opening System Margaret H. McFarland,
II. Self-Regulatory Organization’s
Deputy Secretary. Statement of the Purpose of, and
August 10, 2005. [FR Doc. E5–4424 Filed 8–15–05; 8:45 am]
On May 16, 2005, the Chicago Board Statutory Basis for, the Proposed Rule
Options Exchange, Incorporated BILLING CODE 8010–01–P Change
(‘‘CBOE’’ or ‘‘Exchange’’) filed with the In its filing with the Commission, the
4 Even though HOSS can open a series without a
Securities and Exchange Commission DPM’s quote, DPMs, as well as electronic DPMs, MSRB included statements concerning
(‘‘Commission’’), pursuant to Section remain obligated under CBOE rules to timely the purpose of and basis for the
19(b)(1) of the Securities Exchange Act submit opening quotes. proposed rule change and discussed any
of 1934 (‘‘Act’’) 1 and Rule 19b–4 5 Amendment No. 1 revised the rule text to reflect
comments it received on the proposed
thereunder,2 a proposed rule change to language recently approved in another filing.
6 See Securities Exchange Act Release No. 51938 rule change. The text of these statements
allow the Hybrid Opening System (June 29, 2005), 70 FR 39537. may be examined at the places specified
(‘‘HOSS’’) to open an option series as 7 In approving this proposed rule change, the in Item IV below. The MSRB has
long as any market participant,3 not just Commission notes that it has considered the prepared summaries, set forth in
proposed rule’s impact on efficiency, competition,
1 15 and capital formation. 15 U.S.C. 78c(f).
Sections A, B, and C below, of the most
U.S.C. 78s(b)(1).
2 17 8 15 U.S.C. 78f. significant aspects of such statements.
CFR 240.19b–4.
3 This includes a quote from a DPM, e-DPM, 9 15 U.S.C. 78f(b)(2).
10 15 U.S.C. 78s(b)(2). 1 15 U.S.C. 78s(b)(1).
market maker, or a remote market maker. See CBOE
Rule 6.45A. 11 17 CFR 200.30–3(a)(12). 22 17 CFR 240.19b–4.

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Federal Register / Vol. 70, No. 157 / Tuesday, August 16, 2005 / Notices 48215

A. Self-Regulatory Organization’s information barriers with affiliated that create the appearance of attempting
Statement of the Purpose of, and entities, or PACs controlled by affiliated to influence the awarding of municipal
Statutory Basis for, the Proposed Rule entities, to ensure that the affiliated securities business through an indirect
Change entities’ contributions, payments, or violation of Rule G–37. The MSRB also
PAC disbursement decisions are neither believes that the Q&A guidance will
1. Purpose
influenced by the dealer or its MFPs, facilitate dealer compliance with Rule
Rule G–37(c) prohibits a dealer and its nor communicated to its MFPs. G–27, on supervision, and Rule G–
municipal finance professionals The proposed Q&A guidance provides 37(d)’s prohibitions on indirect rule
(‘‘MFPs’’) from soliciting any person or that, in order to ensure compliance with violations.
political action committee (‘‘PAC’’) to Rule G–27(c) as it relates to payments to
make or coordinate contributions to an B. Self-Regulatory Organization’s
political parties or PACs and Rule G–
official of an issuer with which the Statement on Burden on Competition
37(d), each dealer must adopt, maintain
dealer is engaging or is seeking to and enforce written supervisory The MSRB does not believe that the
engage in municipal securities business. procedures reasonably designed to proposed rule change will result in any
The proposed amendments would also ensure that neither the dealer nor its burden on competition not necessary or
prohibit the dealer and certain MFPs3 MFPs are using payments to political appropriate in furtherance of the
from soliciting any person or PAC to parties and non-dealer controlled PACs purposes of the Act since it would apply
make or coordinate a payment to a to contribute indirectly to an official of equally to all dealers.
political party of a state or locality an issuer.6 The draft Q&A guidance also C. Self-Regulatory Organization’s
where the dealer is engaging or is explicitly states that contributing to Statement on Comments on the
seeking to engage in municipal ‘‘housekeeping’’, ‘‘conference’’ or Proposed Rule Change Received from
securities business.4 The proposed rule ‘‘overhead’’ type accounts is not a safe Members, Participants, or Others
amendments would specifically define harbor and does not alleviate the
any ‘‘person’’5 to include any affiliated dealer’s supervisory obligation to On February 15, 2005 the MSRB
entity of the dealer. This clarification is conduct this due diligence. published for industry comment draft
intended to alert dealers and MFPs that The Qs&As seek to provide dealers amendments to Rule G–37(c),
influencing the disbursement decisions with more guidance as they develop concerning solicitation and
of affiliated entities or PACs may procedures to ensure compliance with coordination of payments to political
constitute a direct violation of Rule G– both the language and the spirit of Rule parties, and draft Q&A guidance on
37(c), as amended, if the dealer or MFP G–37. The Qs&As emphasize the supervisory procedures related to Rule
solicits the affiliated entity or PAC to necessity for adequate supervisory G–37(d), on indirect violations (the
make or coordinate contributions to an procedures to ensure compliance with ‘‘Notice’’).8 The MSRB received seven
official of an issuer or a political party Rule G–37(d) not only with respect to comments on the Notice.9
of a state or locality where the dealer is payments to political parties, but also Of the seven commentators, one
engaging or is seeking to engage in with respect to contributions to and commentator, American Municipal,
municipal securities business. disbursements by dealer-affiliated (but supports the adoption of the
Accordingly, in order to ensure not controlled) PACs. The Board amendments to Rule G–37 and the
compliance with Rule G–37(c), dealers reminds dealers that a failure to proposed Qs&As because they will
should consider the adequacy of their implement satisfactory written strengthen the effectiveness of the rule
procedures to ensure compliance with in preventing improper political
3 The proposed amendment limits MFPs who
Rule G–37(d) could subject the dealer to contributions.10 One commentator,
would be prohibited from soliciting or coordinating Griffin, Kubik, believes that the existing
political party payments to those persons who are enforcement actions by the appropriate
directly involved in the dealer’s municipal regulatory authorities. structure of Rule G–37 is
securities business. The proposed language unconstitutional and complains about
provides that only MFPs who are primarily engaged 2. Statutory Basis the existing operation of Rule G–37.11
in municipal representative activities, solicitors of
municipal securities business, or direct supervisors The MSRB believes that the proposed
8 See MSRB Notice 2005–11 (February 15, 2005).
of MFPs that are ‘‘solicitors’’ or ‘‘primarily rule change is consistent with Section 9 The
engaged’’ are prohibited from soliciting political Board received comment letters from the
15B(b)(2)(C) of the Act,7 which provides following: Sarah A. Miller, General Counsel,
party payments. The MSRB limited those MFPs
covered by the proposed amendments to those
that the MSRB’s rules shall: ABASA Securities Association (‘‘ABASA’’) to
directly involved in the municipal securities be designed to prevent fraudulent and Carolyn Walsh, Senior Associate General Counsel,
business of the dealer; recognizing that other MFPs MSRB, dated April 11, 2005; J. Cooper Petagna, Jr.,
manipulative acts and practices, to promote President, American Municipal Securities, Inc.
more distant from the day-to-day operations of the just and equitable principles of trade, to
dealer’s municipal securities business may have (‘‘American Municipal’’) to Ms. Walsh, dated March
foster cooperation and coordination with 10, 2005; Robert E. Foran, Senior Managing
other reasons to solicit or coordinate payments to
political parties (i.e., reasons related to other persons engaged in regulating, clearing, Director, Bear Stearns & Co., Inc. (‘‘Bear Stearns’’)
business activities of the dealer). settling, processing information with respect to Ms. Walsh, dated March 31, 2005; Leslie M.
4 The MSRB notes that, depending upon the facts to, and facilitating transactions in municipal Norwood, Vice-President and Assistant General
and circumstances, an MFP’s solicitation of a securities, to remove impediments to and Counsel, Bond Market Association (‘‘BMA’’) to Ms.
contribution to an issuer with which the dealer is perfect the mechanism of a free and open Walsh, dated April 1, 2005; Robert J. Stracks,
engaging or is seeking to engage in municipal market in municipal securities, and, in Counsel, Griffin, Kubik, Stephens & Thompson, Inc.
securities business or the solicitation of a political general, to protect investors and the public (‘‘Griffin, Kubik’’) to Ms. Walsh, dated March 30,
party payment to a political party of a state or 2005; Marc E. Lackritz, President, Securities
interest. Industry Association (‘‘SIA’’) to Ms. Walsh, dated
locality where the dealer is engaging or is seeking
to engage in municipal securities business, may also The MSRB believes that the proposed April 5, 2005; and Terry L. Atkinson, Managing
constitute a violation of Rule G–37(d) on indirect Director, UBS Financial Services Inc. (‘‘UBS’’) to
rule change is consistent with the Act Ms. Walsh, dated April 1, 2005.
violations.
5 ‘‘Person’’ is defined in § 3(a)(9) of the Act, to
because it will help inhibit practices 10 American Municipal also suggests that

mean ‘‘a natural person, company, government, or consideration be given to having the rule applied
6 In addition, pursuant to MSRB Rule G–8(a)(xx), to all registered personnel and not just MFPs.
political subdivision, agency, or instrumentality of
a government.’’ Unless the context otherwise on records concerning compliance with Rule G–27, 11 This commentator complains that if an

specifically requires, the terms used in MSRB rules each dealer must maintain and keep current the associated person of a dealer introduces or solicits
have the meanings set forth in the Act. See MSRB records required under Rules G–27(c) and G–27(d). municipal securities business for the dealer while
Rule D–1. 7 15 U.S.C. 78o–4(b)(2)(C). Continued

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48216 Federal Register / Vol. 70, No. 157 / Tuesday, August 16, 2005 / Notices

Griffin, Kubik also suggests that The Draft Amendments to Rule G– proposed prohibition, it would be very
requiring full and immediate disclosure 37(c)(ii): The Prohibition on Soliciting difficult for enforcement agencies to
of dealer contributions by the recipient Contributions to State and Local Party detect such potential indirect violations
issuer official would be more effective Committees Should Be Symmetrical to because the parties solicited do not have
in policing this arena. the Contributions Ban to disclose the payments. Additionally,
Comments Received. BMA and UBS the arguably stricter prohibition can be
The remaining five commentators
assert that the Rule G–37(c) amendment justified because a violation of Rule G–
express support for the MSRB’s efforts 37(c) does not result in an automatic
to eliminate any vestiges of pay-to-play should be symmetrical to the
contributions ban because they do not ban on business.
in the municipal securities industry,
whether they are in the form of a direct believe it makes sense to impose a Vagueness of the Proposed Q&A
or indirect contribution to an issuer greater, absolute prohibition on Guidance Concerning Rule G–27, on
official. However, ABASA, BMA 12, SIA soliciting contributions than on making Supervision, and Rule G–37(d), on
and UBS assert that the Qs&As are contributions. BMA recommends that Indirect Violations
vague thus making it impossible for dealers and MFPs be permitted to solicit Comments Received. ABASA, BMA,
contributions to the same extent they SIA, and UBS request that the Qs&As be
broker-dealers to know exactly what
are allowed to make contributions. clarified because they do not present a
standard to apply. ABASA, BMA, SIA MSRB Response. The proposed rule
and UBS request that the MSRB clarify clear objective standard as to when
amendment is more limited than what party and PAC contributions should be
the proposed Qs&As as they relate to the comment letters portray. The
contributions to party committees and treated as indirect contributions to
comment letters state that the issuer candidates. BMA, SIA and UBS
PACs so that they establish clear amendment would completely prohibit also complain that the Qs&As represent
standards upon which the industry may MFPs from soliciting contributions to an expansion of Rule G–37. BMA
rely. BMA, SIA and UBS request that any state and local party committees suggests that if the MSRB’s intent is to
the MSRB expressly state that when, in fact, it only prohibits absolutely eliminate state and local
contributions made to national party solicitations by the dealer or certain party committee and PAC contributions,
committees and certain federal MFPs for contributions to a political it should come out with a clear
leadership PACs (controlled by party of a state or locality where the prohibition.
members of Congress) are permitted. dealer is engaging or is seeking to MSRB Response. The MSRB’s intent
BMA and UBS also request that the engage in municipal securities business. was not to eliminate all state and local
MSRB: (1) Acknowledge that the Thus, the proposed amendment is party committee and PAC contributions
proposed Qs&As reflect a new approach narrowly tailored to regulate only a or to specify which ones would not be
to Rule G–37’s prohibition on indirect dealer’s or certain MFP’s solicitation of indirect contributions to issuer officials.
contributions and not just a restatement other persons’ payments to political The MSRB recognizes that some
of the existing standard; (2) modify the parties when there can be a perception payments to political parties are made
prohibition on soliciting contributions that MFPs and dealers are soliciting for reasons that have no connection
to state or local parties so that broker- others to make payments to parties or with influencing the awarding of
dealers and MFPs would be permitted to PACs as an end-run around the rule and municipal securities business. The
solicit contributions to the same extent the rule’s disclosure requirements. MSRB’s decision to issue the proposed
Current Rule G–37(c) operates as an Q&A guidance was prompted by
they are able to make a contribution to
absolute prohibition on soliciting concern that dealers are not
them; and (3) clarify what is meant by
contributions for an official of an issuer implementing adequate supervisory
‘‘affiliated PAC’’ for purposes of erecting with which the dealer is engaging or procedures reasonably designed to
an informational barrier.13 ABASA also seeking to engage in municipal prevent indirect rule violations. The
states that the MSRB’s suggested securities business and is not MSRB also voiced its concern about the
information barrier concerning past and symmetrical with Rule G–37(b) because emergence of recent media and other
current municipal securities business is there is no de minimis exception in Rule reports that issuer agents have informed
unrealistic because much of the G–37(c). Moreover, because dealers’ and dealers and MFPs that, if they are
information is public. These specific MFPs’ payments to political parties do prohibited from contributing directly to
comments are discussed in detail below. not trigger the automatic ban on an issuer official’s campaign, they
business (unless there is an indirect should contribute to the affiliated
at the same time making political contributions to violation) there is no mechanism to party’s ‘‘housekeeping’’ account.
an official of a completely different local political correlate the party payment disclosure By voicing a concern that dealers who
body, the broker-dealer could face a G–37 scheme in Rule G–37 with the proposed make such payments to parties or PACs
compliance problem. In fact, assuming this was the prohibition on the solicitation and may be doing so in an effort to avoid the
first time the associated person solicited municipal
coordination of payments to political political contribution limitations
securities business for the dealer, the contribution
to an issuer official who is not the issuer official parties of states or localities where the embodied in Rule G–37, the MSRB was
solicited would not result in a ban on doing dealer is engaging or seeking to engage not expanding the reach of Rule G–37.
business with the introduced issuer. It would, in municipal securities business. The MSRB was, however, alerting
however, result in the associated person becoming The MSRB determined that allowing dealers to modern day political realities
a municipal finance professional of the dealer and dealers or certain MFPs to solicit other and practices that may prove—with
being subject to Rule G–37 from the date of the persons to make political party or PAC hindsight—to be problematic. The
solicitation activity forward.
12 Because the Bear Stearns comment letter
payments in states and localities where MSRB was also suggesting, though not
they are engaging or seeking to engage requiring, general supervisory
simply states that it supports the BMA letter, for the
purposes of this discussion Bear Stearns’ positions
in municipal securities business creates procedures designed to help ensure that
will not be separately identified. Rather, it should at least the appearance of attempting to the party or PAC payments do not result
be understood that positions attributed to BMA are influence the awarding of municipal in a violation of Rule G–37(d). Dealers
also supported by Bear Stearns. securities business through such are required to implement adequate
13 Griffin, Kubik also seeks this clarification. payments. Moreover, without the supervisory procedures, but the MSRB’s

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Federal Register / Vol. 70, No. 157 / Tuesday, August 16, 2005 / Notices 48217

suggestions about general approaches to Q&A guidance should be clarified with potential violations. If the dealer’s
conducting adequate due diligence are bright-line tests to identify the parties or procedures include making an inquiry
not meant to be either required PACs to which dealers and MFPs can about the reason for making the
procedures or a safe harbor. Ideally, an make payments without violating Rule payment 16 the dealer must then
adequate supervisory procedure will G–37(d), on indirect violations. In exercise its judgment as to whether the
prevent a Rule G–37(d) violation, but particular, the commentators object to facts and circumstances surrounding the
the existence of adequate supervisory the guidance that suggests that the payment indicate that the reason for
procedures may only protect the firm dealer identify the reason for making the making the contribution was to
from a resulting Rule G–27 violation payment to the party or PAC (the circumvent Rule G–37.
should a problem later occur. A ‘‘reasons test’’) without defining the
With regard to the ‘‘activity test’’
payment permitted by the dealer’s motivation(s) that should result in a
comments, the MSRB’s existing Q&A
supervisory procedures may still result contribution being classified as an
guidance on this issue already states
in a violation of Rule G–37(d) if it is indirect contribution to an issuer
official. BMA suggests that the reasons that dealers that make contributions to
later proven that the MFP in question organizations such as political parties or
contributed with the intent to test be clarified to only cover
contributions to party committees and PACs (as well as dealers that allow
circumvent the rule. Such instance, of
PACs that are controlled by, or where MFPs to make such payments) have a
course, could put the dealer in a good
the contribution is solicited by, an duty to make inquiries of such
position to seek a waiver of the resulting
issuer official. organizations in order to ascertain how
ban on business from the NASD.
The commentators also object to the the contributed funds will be used.17
Moreover, the proposed Qs&As do not
broaden the sphere of activity that is suggestion that dealers make inquiries Following this guidance, dealers should
prohibited by Rule G–37. A violation of to essentially ‘‘follow the money’’ to be able to develop adequate written
Rule G–37(d) still will only occur when reasonably ensure that the party or PAC supervisory procedures reasonably
the payment is made to other entities is not supporting one or a limited designed to ensure that payments to
‘‘as a means to circumvent the rule.’’ number of issuer officials (the ‘‘activity political parties or PACs are not being
Rule G–37(d), which prohibits anyone test’’) on the grounds that it is unclear. used to circumvent the requirements of
from ‘‘directly or indirectly, through or BMA asserts that the language is unclear Rule G–37. The MSRB does not believe
by any other person or means’’ doing because it could mean one of two it is useful to provide ‘‘safe harbors’’
what sections (b) and (c) prohibit has things: (1) If the party or PAC that concerning parties or PACs such that a
previously been challenged on the receives the contribution supports even dealer or MFP could make payments to
grounds that it is unconstitutionally one issuer official, then an indirect ban certain parties or PACs without
vague. The United States Court of is triggered; or (2) the dealer must investigating whether the payment is
Appeals in Blount v. SEC 14 rejected this determine that the party’s or PAC’s actually being made as a means to
challenge 10 years ago. In Blount, the expenditures on issuer officials circumvent the requirements of Rule G–
Court stated, constitute a large enough portion of its 37. Such ‘‘safe harbors’’ create the
total expenditures such that an indirect potential for loopholes in Rule G–37’s
Although the language of section (d)
ban is triggered. BMA and UBS ask the regulatory scheme as parties and PACs
itself is very broad, the SEC has
MSRB to revise its guidance to suggest tailor their solicitations for
interpreted it as requiring a showing of
a test based on objective criteria. UBS contributions to MSRB suggested
culpable intent, that is, a demonstration suggests that this objective criteria
that the conduct was undertaken ‘‘as a parameters.
include a ‘‘dilution standard’’ that
means to circumvent’’ the requirements However, the MSRB has determined
would need to include at least the
of (b) and (c). * * * The SEC states its to revise the guidance and remove some
following elements: (1) A threshold—
‘‘means to circumvent’’ qualification in of the specific due diligence suggestions
50%, 60% or 70%—of a party’s or
general terms. The qualification to focus on reminding dealers that each
PAC’s expenditures used for non-issuer
appears, therefore, to apply not only to dealer is required under Rule G–27, on
purposes that would be sufficient to
such items as contributions made by the supervision, to evaluate its own
overcome a presumption that the
broker’s or dealer’s family members or circumstances and develop written
committee supported one or a limited
employees, but also gifts by a broker to supervisory procedures reasonably
number of issuer officials, and (2) a time
a state or national party committee, period over which the party committee designed to ensure that the conduct of
made with the knowledge that some or PAC would be required to examine the municipal securities activities of the
part of the gift is likely to be transmitted when calculating the threshold dealer and its associated persons are in
to an official excluded by Rule G–37. In percentage. compliance with Rule G–37(d), on
short, according to the SEC, the rule MSRB Response. As discussed above, indirect violations. After evaluating its
restricts such gifts and contributions the proposed Q&A guidance does not own circumstances, a dealer could
only when they are intended as end- change the existing legal framework determine that adequate supervisory
runs around the direct contribution concerning the motivation that would procedures would include some of the
limitations.15 result in a contribution being classified commentators’ suggested due diligence
as an indirect contribution to an issuer procedures.
The Standards in the ‘‘Reasons Test’’
and ‘‘Activity Test’’ Need To Be official. An MFP or dealer could be
16 To the extent that dealers are concerned that
Clarified found (after the fact) to have violated
the act of inquiring about persons’ reasons for
Rule G–37(d) if payments to a party or making payments to PACs and political partiers
Comments Received. ABASA, BMA, PAC are intended as end-runs around may chill political speech, the procedure could
SIA and UBS assert that the proposed the direct contribution limitations. The require persons to give negative assurances that the
MSRB does not believe it is appropriate party or PAC payment is not being made as a means
14 Blount v. SEC, 61 F.3d 938, (D.C. Cir. 1995), to circumvent the requirements of Rule G–37.
to attempt to delineate specific reasons
rehearing and suggestion for rehearing en banc 17 See Rule G–37 Questions and Answers No. III.
denied (1995), certiorari denied by 517 U.S. 1119, that are permissible, and those that are 5, reprinted in MSRB Rule Book. See also Rule G–
116 S.Ct. 1351, 134 L.Ed.2d 520 (1996). not. What is important is that dealers 37 Questions and Answers Nos. III.3 and III.4,
15 Id. at 948. institute adequate procedures to identify reprinted in MSRB Rule Book.

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48218 Federal Register / Vol. 70, No. 157 / Tuesday, August 16, 2005 / Notices

National Party Committees and Federal any party or PAC are being made as a certain political parties currently are
Leadership PACs Should Be Expressly means to circumvent the provisions of engaging in fundraising practices which,
Permitted Rule G–37. according to these political parties, do not
invoke the application of rule G–37. For
Comments Received. BMA, SIA and The Existence of a ‘‘Safe-Harbor’’ for example, some of these entities currently are
UBS request that, while they believe Payments to ‘‘Housekeeping’’ or urging dealers to make payments to political
contributions to national party ‘‘Conference’’ Accounts parties earmarked for expenses other than
committees and federal leadership PACs political contributions (such as
Comments Received. The BMA and administrative expenses or voter registration
appear to be permitted under the due
UBS assert that the MSRB’s statements drives). Since these payments would not
diligence standards established by the
in the Notice are a departure from prior constitute ‘‘contributions’’ under the rule, the
proposed Qs&As, the MSRB should
statements because previously the recordkeeping and reporting provisions
expressly state that contributions made
MSRB recognized a ‘‘safe-harbor’’ that would not apply. The MSRB is concerned,
to a national party committee or federal based upon this information, that the same
expressly permitted contributions to
leadership PAC are permitted under the pay-to-play pressures that motivated the
‘‘conference accounts’’ of state and local
proposed Qs&As as long as (1) the MSRB to adopt rule G–37 may be emerging
party committees. ABASA also states
contribution was not solicited by an that the MSRB has with the draft in connection with the fundraising practices
issuer official, and (2) the party Qs&As, in effect, outlawed contributions
of certain political parties described above.21
committee or leadership PAC is not to housekeeping and similar accounts. In addition, in August 2003, when the
controlled by an issuer official. MSRB Response. The MSRB’s MSRB published a notice on indirect
MSRB Response. Essentially, the statements in the Notice about the status rule violations of Rule G–37, the MSRB
commentators are asking the MSRB to of ‘‘housekeeping’’ or ‘‘conference’’ type referenced the 1995 SEC Approval
create a safe harbor for certain national accounts were made to correct a Order and specifically stated that, ‘‘The
party committees and federal leadership misconception about these types of party payment disclosure requirements
PACs. The creation of such a safe harbor accounts. Although the MSRB never were intended to assist in severing any
would be a departure from the intended recognized such accounts as a safe- connection between payments to
reach of Rule G–37(d). As noted above, harbor, the MSRB learned that some political parties (even if earmarked for
the Court of Appeals in Blount expressly dealers might have believed that expenses other than political
recognized that Rule G–37(d) was payments to a ‘‘housekeeping’’ type contributions) and the awarding of
originally intended to prevent payments account could not result in an indirect municipal securities business.’’ 22
to both national and state parties used violation of Rule G–37. The SEC’s
as a ‘‘means to circumvent’’ Rule G–37. The Term Affiliated PAC Should Be
approval order of certain early Clarified
Moreover, although BMA, SIA and UBS amendments to Rule G–37 demonstrates
essentially assert that when a that the MSRB never intended for The BMA states that, while the
contribution is not solicited by an issuer dealers to treat payments to proposed Qs&As suggest that a broker-
official and the party leadership PAC is administrative accounts as a safe dealer establish an informational barrier
not controlled by an issuer official the harbor.20 between it and its affiliated PAC, the
national party committees and federal In 1995, the MSRB filed and the SEC MSRB does not clarify what it means by
leadership PACs can not be used as a approved amendments to Rule G–37’s the term ‘‘affiliated PAC.’’ The BMA
means to circumvent Rule G–37, such a disclosure requirements to require also states that the MSRB should clarify
position is inconsistent with public dealers to record and report all ‘‘affiliated PAC’’ to mean a PAC that is
perception.18 Additionally, the Supreme payments to parties by dealers, PACs, controlled by a wholly owned affiliate
Court’s recent decision in McConnell v. MFPs and executive officers regardless of the broker-dealer.
Federal Election Commission,19 of whether those payments constitute MSRB Response. The MSRB has
emphasized the potential for payments contributions. In the 1995 SEC Approval accepted the suggestion that the term
to a political party to have undue Order, the SEC reiterated that the party ‘‘affiliated PAC’’ should be defined in
influence on the actions of the elected payment disclosure requirements are the guidance and has revised the
officeholders belonging to the same intended to help ensure that dealers do guidance to provide that for the
party. McConnell upheld new federal not circumvent the prohibition on purposes of this guidance the term
statutory restrictions on soft money business in the rule by indirect ‘‘affiliated PAC’’ means a PAC
donations that were neither solicited by contributions to issuer officials through controlled by an affiliated entity of a
candidates nor used by the party to aid payments to political parties. The SEC dealer. An ‘‘affiliated entity’’ is an entity
specific candidates. Given public explained that the need for the language that controls, is controlled by or is
perception and the Supreme Court’s amendment was motivated by attempts under common control with the dealer.
pronouncements, the MSRB believes it by dealers and/or political parties to This use of the term ‘‘affiliated’’ is
is reasonable to require dealers to be assert that contributions to consistent with the use of the term in
responsible for having adequate administrative type accounts did not fall the MSRB’s proposed amendments to
supervisory procedures that obligate the within the rule’s regulatory ambit. In the Rule G–38(b)(ii), on consultants.23
dealer to exercise its judgment 1995 SEC Approval Order, the SEC
concerning whether contributions to Recommendations Concerning
states: Information Barriers
18 See e.g., Spina, Naples favors one underwriter Certain dealers and other industry Comments Received. ABASA states
GOP backer gets 80% of county bond business, even participants have notified the MSRB that
that the MSRB’s suggestion that dealers
at $500,000 higher cost, The Buffalo News, April 6,
2005 at p. A1 (suggesting that an MFP’s 20 See Securities Exchange Act Release No. 35446
establish an information barrier
contributions to a PAC run by House Majority (SEC Order Approving Proposed Rule Change by
21 Id.at 13498.
Leader Tom Delay were transferred to the the Municipal Securities Rulemaking Board
congressional campaign of a sitting issuer official Relating to Rule G–37 on Political Contributions 22 MSRB Notice 2003–32 (August 6, 2003) at pp.
that awarded 14 of 24 bond deals to firms that the and Prohibitions on Municipal Securities Business, 1–2 (emphasis added).
MFP was associated with). and Rule G–8, on Recordkeeping) (March 6, 1995), 23 See Securities Exchange Act Release No. 51561
19 McConnell v. Federal Election Commission, 60 FR 13496 (March 13, 1995) (‘‘1995 SEC Approval (April 15, 2005), 70 FR 20782 (April 21, 2005) (File
540 U.S. 93, 124 S.Ct. 619 (Dec. 10, 2003). Order’’). No. SR–MSRB–2005–04).

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Federal Register / Vol. 70, No. 157 / Tuesday, August 16, 2005 / Notices 48219

prohibiting sharing information about Internet Web site (http://www.sec.gov/ Orders’’). The proposal prohibits
prior negotiated municipal securities rules/sro.shtml). Copies of the members from trading for their own
business as well as current and planned submission, all subsequent account at prices that would satisfy a
solicitations between the dealer, its amendments, all written statements customer market order, unless the
MFPs and any affiliated PAC is with respect to the proposed rule member immediately thereafter executes
unrealistic because much of the change that are filed with the the customer market order. On February
information is public. Commission, and all written 16, 2005, NASD amended the proposed
MSRB Response. The MSRB has communications relating to the rule change.3 The proposed rule change,
revised the language relating to the proposed rule change between the as modified by Amendment No. 1, was
municipal securities business Commission and any person, other than published for comment in the Federal
information barrier to suggest that those that may be withheld from the Register on February 25, 2005.4 The
dealers prohibit the dealer and its MFPs public in accordance with the Commission received one comment
from directly providing or coordinating provisions of 5 U.S.C. 552, will be letter on the proposal.5 On August 3,
information about prior negotiated available for inspection and copying in 2005, NASD filed an amendment which
municipal securities business as well as the Commission’s Public Reference incorporated its response to comments.6
current and planned solicitations to any Room. Copies of such filing also will be This order approves the proposed rule
affiliated PAC. available for inspection and copying at change, as modified by Amendment No.
the MSRB’s offices. All comments 1, and provides notice of filing and
III. Date of Effectiveness of the received will be posted without change;
Proposed Rule Change and Timing for grants accelerated approval of
the Commission does not edit personal Amendment No. 2.7
Commission Action identifying information from
Within 35 days of the date of submissions. You should submit only II. Summary of Comments
publication of this notice in the Federal information that you wish to make The Commission received one
Register or within such longer period (i) available publicly. All submissions comment letter on the proposed rule
as the Commission may designate up to should refer to File Number SR–MSRB– change.8 The commenter stated that it
90 days of such date if it finds such 2005–12 and should be submitted on or generally supported the concept of
longer period to be appropriate and before September 6, 2005. market order protection but cited a
publishes its reasons for so finding or For the Commission, by the Division of number of concerns with the proposal.
(ii) as to which the self-regulatory Market Regulation, pursuant to delegated The following is a summary of the
organization consents, the Commission authority.24 concerns raised by the commenter.
will: Margaret H. McFarland, • The Rule Should Permit Additional
A. By order approve such proposed Deputy Secretary. Flexibility With Respect to the
rule change, or [FR Doc. E5–4425 Filed 8–15–05; 8:45 am] Requirement that Members Cross
B. Institute proceedings to determine Standing Customer Market Orders
BILLING CODE 8010–01–P
whether the proposed rule change The commenter stated that certain
should be disapproved. member firms’ systems are not able to
IV. Solicitation of Comments SECURITIES AND EXCHANGE execute agency crosses if the order
COMMISSION resides with the market maker, but the
Interested persons are invited to systems are able to proprietarily buy
submit written data, views, and [Release No. 34–52226; File No. SR–NASD–
2004–045] from the market seller and allocate to
arguments concerning the foregoing, the market buyer at the same price (i.e.
including whether the proposed rule effect a riskless principal transaction).9
Self-Regulatory Organizations;
change is consistent with the Act. Thus, the commenter recommended that
National Association of Securities
Comments may be submitted by any of the proposed rule change be amended to
Dealers, Inc.; Order Approving
the following methods: allow a member that holds a customer
Proposed Rule Change and
Electronic Comments Amendment No. 1 Thereto, and Notice market order that has not been
of Filing and Order Granting immediately executed ‘‘to execute such
• Use the Commission’s Internet
Accelerated Approval to Amendment order in any reasonable manner that
comment form (http://www.sec.gov/
No. 2 to the Proposed Rule Change, To meets the pricing requirements of the
rules/sro.shtml); or
• Send an e-mail to rule- Adopt NASD Rule 2111 to Prohibit
3 See Amendment No. 1.
comments@sec.gov. Please include Members From Trading Ahead of 4 See Securities Exchange Act Release No. 51230
File Number SR–MSRB–2005–12 on Customer Market Orders (February 18, 2005), 70 FR 9408.
the subject line. August 9, 2005.
5 See letter from Amal Aly, Vice President and

Associate General Counsel, and Ann Vlcek, Vice


Paper Comments I. Introduction President and Associate General Counsel, Securities
Industry Association (‘‘SIA’’) to Jonathan G. Katz,
• Send paper comments in triplicate to On March 12, 2004, the National Secretary, Commission, dated March 18, 2005 (‘‘SIA
Jonathan G. Katz, Secretary, Securities Association of Securities Dealers, Inc. Letter’’).
and Exchange Commission, Station (‘‘NASD’’) filed with the Securities and 6 See Amendment No. 2 modified the proposed

Place, 100 F Street, NE., Washington, Exchange Commission (‘‘Commission’’), rule text to state that a member could satisfy the
DC 20549–9303. proposal’s crossing requirement by
pursuant to section 19(b)(1) of the contemporaneously buying from the seller and
All submissions should refer to File Securities Exchange Act of 1934 selling to the buyer at the same price.
Number SR–MSRB–2005–12. This file (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a 7 The Commission recently approved a related

number should be included on the proposed rule change to adopt NASD proposal, SR–NASD–2004–089, that requires
subject line if e-mail is used. To help the members to provide price improvement to customer
Rule 2111 (‘‘Manning for Market limit orders under certain circumstances. See
Commission process and review your Securities Exchange Act Release No. 52210 (August
comments more efficiently, please use 24 17 CFR 200.30–3(a)(12). 4, 2005).
only one method. The Commission will 1 15 U.S.C. 78s(b)(1). 8 See footnote 5, supra.

post all comments on the Commission’s 2 17 CFR 240.19b–4. 9 See SIA Letter at 2.

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