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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 19b-4
Page 1 of 44
File No. SR - 2005
- 02
Amendment No.
Proposed Rule Change by Municipal Securities Rulemaking Board
Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
Initial
Amendment
Withdrawal
Section 19(b)(2)
Section 19(b)(3)(A)
Rule
Pilot
Extension of Time Period
for Commission Action
Exhibit 2 Sent As Paper Document
Date Expires
19b-4(f)(1)
19b-4(f)(4)
19b-4(f)(2)
19b-4(f)(5)
19b-4(f)(3)
19b-4(f)(6)
Exhibit 3 Sent As Paper Document
Description
Provide a brief description of the proposed rule change (limit 250 characters).
Proposed amendments to Rules G-20, on gifts and gratuities, and G-8, on recordkeeping.
Contact Information
Provide the name, telephone number and e-mail address of the person on the staff of the self-regulatory organization
prepared to respond to questions and comments on the proposed rule change.
First Name Jill
Last Name Finder
Title
Assistant General Counsel
E-mail
jfinder@msrb.org
Telephone
(703) 797-6600
Fax
(703) 797-6700
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
Municipal Securities Rulemaking Board
has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.
Date
01/13/2005
By
Ronald W. Smith
Corporate Secretary
(Name)
(Title)
NOTE: Clicking the button at right will digitally sign and lock
this form. A digital signature is as legally binding as a physical
signature, and once signed, this form cannot be changed.
Ronald W. Smith, rsmith@msrb.org
Section 19(b)(3)(B)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For complete Form 19b-4 instructions please refer to the EFFS website.
Form 19b-4 Information
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Exhibit 1 - Notice of Proposed Rule Change
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Exhibit 2 - Notices, Written Comments,
Transcripts, Other Communications
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The self-regulatory organization must provide all required information, presented in a
clear and comprehensible manner, to enable the public to provide meaningful
comment on the proposal and for the Commission to determine whether the
proposal is consistent with the Act and applicable rules and regulations under the Act.
The Notice section of this Form 19b-4 must comply with the guidelines for
publication in the Federal Register as well as any requirements for electronic filing
as published by the Commission (if applicable). The Office of the Federal Register
(OFR) offers guidance on Federal Register publication requirements in the Federal
Register Document Drafting Handbook, October 1998 Revision. For example, all
references to the federal securities laws must include the corresponding cite to the
United States Code in a footnote. All references to SEC rules must include the
corresponding cite to the Code of Federal Regulations in a footnote. All references
to Securities Exchange Act Releases must include the release number, release
date, Federal Register cite, Federal Register date, and corresponding file number
(e.g., SR-[SRO]-xx-xx). A material failure to comply with these guidelines will result in
the proposed rule change being deemed not properly filed. See also Rule 0-3 under
the Act (17 CFR 240.0-3)
Copies of notices, written comments, transcripts, other communications. If such
documents cannot be filed electronically in accordance with Instruction F, they shall
be filed in accordance with Instruction G.
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Exhibit 3 - Form, Report, or Questionnaire
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Copies of any form, report, or questionnaire that the self-regulatory organization
proposes to use to help implement or operate the proposed rule change, or that is
referred to by the proposed rule change.
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Exhibit 4 - Marked Copies
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Exhibit 5 - Proposed Rule Text
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The full text shall be marked, in any convenient manner, to indicate additions to and
deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit
the staff to identify immediately the changes made from the text of the rule with which
it has been working.
The self-regulatory organization may choose to attach as Exhibit 5 proposed
changes to rule text in place of providing it in Item I and which may otherwise be
more easily readable if provided separately from Form 19b-4. Exhibit 5 shall be
considered part of the proposed rule change.
If the self-regulatory organization is amending only part of the text of a lengthy
proposed rule change, it may, with the Commission's permission, file only those
portions of the text of the proposed rule change in which changes are being made if
the filing (i.e. partial amendment) is clearly understandable on its face. Such partial
amendment shall be clearly identified and marked to show deletions and additions.
Page 3 of 44
1.
Text of Proposed Rule Change
(a) The Municipal Securities Rulemaking Board (“MSRB” or “Board”) is hereby
filing with the Securities and Exchange Commission (“Commission” or “SEC”) proposed
amendments to Rule G-20, on gifts and gratuities, and Rule G-8, on recordkeeping, that
would more fully conform MSRB rules to NASD requirements relating to gifts,
gratuities, non-cash compensation and sales incentives in connection with municipal fund
securities and other primary offerings of municipal securities. The proposed rule change
is as follows: 1
Rule G-20 – Gifts, [and] Gratuities and Non-Cash Compensation.
(a) General Limitation on Value of Gifts and Gratuities. No broker, dealer or municipal
securities dealer shall, directly or indirectly, give or permit to be given any thing or
service of value, including gratuities, in excess of $100 per year to a person other than an
employee or partner of such broker, dealer or municipal securities dealer, if such
payments or services are in relation to the municipal securities activities of the employer
of the recipient of the payment or service. For purposes of this rule the term “employer”
shall include a principal for whom the recipient of a payment or service is acting as agent
or representative.
(b) Normal Business Dealings. Notwithstanding the foregoing, the provisions of section
(a) of this rule shall not be deemed to prohibit occasional gifts of meals or tickets to
theatrical, sporting, and other entertainments hosted by the broker, dealer or municipal
securities dealer; the sponsoring by the broker, dealer or municipal securities dealer of
legitimate business functions that are recognized by the Internal Revenue Service as
deductible business expenses; or gifts of reminder advertising; provided, that such gifts
shall not be so frequent or so [expensive] extensive as to raise [a suggestion of conduct
inconsistent with high standards of professional ethics in the municipal securities
industry] any question of propriety.
(c) No change.
(d) Non-Cash Compensation in Connection with Primary Offerings. In connection with
the sale and distribution of a primary offering of municipal securities, no broker, dealer or
municipal securities dealer, or any associated person thereof, shall directly or indirectly
accept or make payments or offers of payments of any non-cash compensation.
Notwithstanding the provisions of section (a) of this rule, the following non-cash
compensation arrangements are permitted:
(i) gifts that do not exceed $100 per individual per year and are not
preconditioned on achievement of a sales target;
1
Underlining indicates new language; [brackets] indicate deletions.
Page 4 of 44
(ii) occasional gifts of meals or tickets to theatrical, sporting, and other
entertainments; provided that such gifts are not so frequent or so extensive
as to raise any question of propriety and are not preconditioned on
achievement of a sales target;
(iii) payment or reimbursement by offerors in connection with meetings
held by an offeror or by a broker, dealer or municipal securities dealer for
the purpose of training or education of associated persons of a broker,
dealer or municipal securities dealer, provided that:
(A) associated persons obtain the prior approval of the
broker, dealer or municipal securities dealer to attend the
meeting and attendance is not preconditioned by the broker,
dealer or municipal securities dealer on achievement of a
sales target or any other incentives pursuant to a non-cash
compensation arrangement permitted by paragraph (d)(iv);
(B) the location is appropriate to the purpose of the
meeting, which shall mean an office of the offeror or the
broker, dealer or municipal securities dealer, a facility
located in the vicinity of such office, a regional location
with respect to regional meetings, or a location at which a
significant asset, if any, being financed or refinanced in the
primary offering is located;
(C) the payment or reimbursement is not applied to the
expenses of guests of the associated person; and
(D) the payment or reimbursement is not preconditioned by
the offeror on achievement of a sales target or any other
non-cash compensation arrangement permitted by
paragraph (d)(iv).
(iv) non-cash compensation arrangements between a broker, dealer or
municipal securities dealer and its associated persons, or a company that
controls the broker, dealer or municipal securities dealer and the
associated persons of the broker, dealer or municipal securities dealer,
provided that:
(A) the non-cash compensation arrangement is based on the
total production of associated persons with respect to all
municipal securities within respective product types
distributed by the broker, dealer or municipal securities
dealer;
Page 5 of 44
(B) the non-cash compensation arrangement requires that
the credit received for each municipal security within a
municipal security product type is equally weighted; and
(C) no entity that is not an associated person of the broker,
dealer or municipal securities dealer participates directly or
indirectly in the organization of a permissible non-cash
compensation arrangement.
(v) contributions by any person other than the broker, dealer or municipal
securities dealer to a non-cash compensation arrangement between a
broker, dealer or municipal securities dealer and its associated persons,
provided that the arrangement meets the criteria in paragraph (d)(iv).
(e) Definitions. For purposes of this rule, the following terms have the following
meanings:
(i)
The term “non-cash compensation” shall mean any form of
compensation received in connection with the sale and distribution
of municipal securities that is not cash compensation, including but
not limited to merchandise, gifts and prizes, travel expenses, meals
and lodging.
(ii)
The term “cash compensation” shall mean any discount,
concession, fee, service fee, commission, asset-based sales charge,
loan, override or cash employee benefit received in connection
with the sale and distribution of municipal securities.
(iii)
The term “offeror” shall mean, with respect to a primary offering
of municipal securities, the issuer, any adviser to the issuer
(including but not limited to the issuer’s financial adviser, bond or
other legal counsel, or investment or program manager in
connection with the primary offering), the underwriter of the
primary offering, or any person controlling, controlled by, or under
common control with any of the foregoing; provided, however,
that, with respect to a primary offering of municipal fund
securities, “offeror” shall also include any person considered an
“offeror” under NASD Rule 2710, NASD Rule 2820 or NASD
Rule 2830 in connection with any securities held as assets of or
underlying such municipal fund securities.
(iv)
The term “primary offering” shall mean a primary offering defined
in Securities Exchange Act Rule 15c2-12(f)(7).
Page 6 of 44
Rule G-8 – Books and Records to be Made by Brokers, Dealers and
Municipal Securities Dealers
(a)(i) – (xvi) No change.
(xvii) Records Concerning Compliance with Rule G-20. Each broker,
dealer and municipal securities dealer shall maintain:
(A) [(i)] a separate record of any gift or gratuity
referred to in Rule G-20(a); [and]
(B) [(ii)] all agreements referred to in Rule G-20(c)
and all compensation paid as a result of those agreements;
and[.]
(C) records of all non-cash compensation referred to
in Rule G-20(d). The records shall include the name of the
person or entity making the payment, the names of the
associated persons receiving the payments (if applicable),
and the nature (including the location of meetings described
in Rule G-20(d)(iii), if applicable) and value of non-cash
compensation received.
(xviii) – (xxii) No change.
(b)-(g) No change.
*
*
*
*
*
(b) Not applicable.
(c) Not applicable.
2.
Procedures of the Self-Regulatory Organization
The proposed rule change was adopted by the MSRB at its November 10-11,
2004 meeting. Questions concerning this filing may be directed to Jill C. Finder,
Assistant General Counsel, at (703) 797-6600.
3.
Self-Regulatory Organization’s Statement of the Purpose of, and Statutory
Basis for, the Proposed Rule Change
Page 7 of 44
(a) MSRB Rule G-20 prohibits dealers from directly or indirectly giving or
permitting to be given any thing or service of value in excess of $100 per year to any
person other than an employee or partner of the dealer in relation to the municipal
securities activities of the recipient’s employer. The rule provides certain exemptions
from the $100 annual limit for “normal business dealings,” including (i) occasional gifts
of meals or tickets to theatrical, sporting and other entertainment; (ii) sponsoring
legitimate business functions that are recognized by the IRS as deductible business
expenses; and (iii) gifts of reminder advertising. However, such gifts must not be so
frequent or excessive as to raise a suggestion of unethical conduct.
MSRB Rule G-20 currently does not mandate specific requirements with respect
to non-cash sales incentives, although the general fair practice principles of Rule G-17
apply. 2 The MSRB has interpreted Rule G-17 in the context of municipal fund securities
to provide that a dealer may violate the rule by engaging in marketing activities that
result in a customer being treated unfairly, or by engaging in any deceptive, dishonest or
unfair practice in connection with such marketing activities. 3 Further, depending on the
particular facts and circumstances, a dealer may violate Rule G-17 if it acts in a manner
that is reasonably likely to induce another dealer to violate the principles of Rule G-17 or
other MSRB customer protection rules. 4 In contrast, NASD Rules 2710(i), 2820(g)(4)
and 2830(l)(5) establish specific requirements with respect to the payment of non-cash
compensation in connection with offerings of corporate securities, variable contracts and
mutual funds.
The MSRB has determined that similar treatment across the securities markets is
appropriate and would facilitate dealer understanding of, and compliance with,
requirements relating to sales incentives and non-cash compensation. Thus, the proposed
amendments are intended to more fully conform Rule G-20 to NASD requirements
relating to gifts and gratuities, and to add new provisions governing non-cash
compensation and sales incentives in connection with municipal fund securities and other
primary offerings of municipal securities, based on NASD requirements for non-cash
2
Rule G-17 provides that “In the conduct of its municipal securities activities, each
broker, dealer and municipal securities dealer shall deal fairly with all persons and
shall not engage in any deceptive, dishonest, or unfair practice.”
3
MSRB Notice on “Application of Fair Practice and Advertising Rules to
Municipal Fund Securities,” May 14, 2002, reprinted in the MSRB Rule Book
(July 1, 2004) at page 151.
Municipal fund securities are municipal securities issued by an issuer that, but for
the application of Section 2(b) of the Investment Company Act of 1940, as
amended, would constitute an investment company within the meaning of that
Act. The most common forms of municipal fund securities sold by dealers consist
of interests in trusts established by states as qualified tuition programs under
Section 529 of the Internal Revenue Code (“529 college savings plans”), and
interests in local government investment pools.
4
Id.
Page 8 of 44
compensation and sales incentives. The proposed amendments would result in the
following changes to Rule G-20:
•
•
•
•
•
5
Modify the existing provision in Rule G-20 that permits occasional gifts of
meals or sports and entertainment tickets, and sponsorship of business
functions outside of the $100 per year limitation by requiring that dealer
personnel host (accompany) such meals, entertainment and business
functions in conformity with NASD gift rule limitations, and further
modify the language of the requirement to incorporate NASD language to
the effect that such occasional gifts must not call into question the dealer’s
ethical standards. 5
Clarify that NASD interpretations apply to comparable MSRB provisions,
unless the MSRB specifically provides otherwise.
Incorporate definitions of “non-cash compensation,” “cash compensation”
and “offeror” based on language in NASD Rules 2710, 2820 and 2830,
and expand the definition of offeror to include, with respect to securities
held as assets underlying municipal fund securities, any person considered
an offeror under relevant NASD rules.
Treat non-cash sales incentives relating to municipal fund securities and
other primary offerings of municipal securities (i.e., bonds and notes) in a
manner similar to NASD’s treatment of non-cash sales incentives relating
to mutual funds, variable contracts, and corporate debt and equity
offerings, including, among other things, permitting gifts that do not
exceed $100 per individual per year and are not preconditioned on
achievement of a sales target; and permitting the giving and receipt of
occasional gifts of meals or tickets to theatrical, sporting and other
entertainment, but only if such occasional gifts are not preconditioned on
achievement of a sales target.
Limit the circumstances under which dealers or offerors may pay or
reimburse costs of training or education, based on NASD rules, including
ensuring that attendance at, and payment for, such meetings is not
preconditioned on achievement of a sales target; reimbursement is not
applied to expenses of associated persons’ guests; and that such meetings
are held at appropriate locations. 6
The NASD language with respect to this exception from the $100 annual gift
limitation appears in an interpretive letter relating to NASD Rule 3060. See
interpretive letter, dated June 10, 1999, from R. Clark Hooper, Executive Vice
President, NASD, to Henry H. Hopkins, Director, and Sarah McCafferty, Vice
President, T. Rowe Price Investment Services, Inc.
The existing Rule G-20 language relating to “gifts of reminder advertising” is
retained in the proposed amendments without change even though such language
does not exist under NASD rules.
6
The proposed language in Rule G-20 that refers to “a location at which a
significant asset, if any, being financed or refinanced in the primary offering is
Page 9 of 44
•
•
Require that non-cash compensation arrangements include the total
production and equal weighting requirements under NASD rules, which
are designed to ensure that the arrangement does not favor sales of one
municipal security over another. 7
Amend the recordkeeping requirements in Rule G-8 to require that dealers
maintain a record of non-cash compensation received in connection with a
primary offering from the issuer or its advisers, the underwriter, or any of
their affiliates, as well as records regarding any internal sales incentive
program for municipal fund securities.
(b) The MSRB believes that the proposed rule change is consistent with Section
15B(b)(2)(C) of the Act, which provides that MSRB rules shall:
be designed to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market in municipal
securities, and, in general, to protect investors and the public interest.
The MSRB believes that the proposed rule change is consistent with these provisions in
that it would provide for consistent treatment across the securities markets regarding
gifts, gratuities, non-cash compensation and sales incentives, thereby facilitating dealer
understanding of, and compliance with, these requirements.
4.
Self-Regulatory Organization’s Statement on Burden on Competition
The MSRB does not believe the proposed rule change will impose any burden on
competition not necessary or appropriate in furtherance of the purposes of the Act.
5.
Self-Regulatory Organization’s Statement on Comments Received on the
Proposed Rule Change by Members, Participants, or Others
In June 2004, the MSRB requested comment on draft amendments to Rule G-20,
and the related recordkeeping provisions of Rule G-8, that would:
•
Treat non-cash sales incentives relating to municipal fund securities and other
primary offerings of municipal securities (i.e., bonds and notes) in a manner
located” is based on language included in draft amendments to NASD Rule 2710
proposed for comment by NASD in Notice to Members 04-07 (February 3, 2004)
(the “NASD Corporate Financing Proposal”).
7
These total production and equal weighting requirements currently are included in
NASD Rules 2820 and 2830, and are included in draft amendments to Rule 2710
proposed for comment in the NASD Corporate Financing Proposal.
Page 10 of 44
similar to NASD’s treatment of non-cash sales incentives relating to mutual
funds and corporate debt and equity offerings.
• Modify the existing provision in MSRB Rule G-20 that permits occasional gifts of
meals or sports and entertainment tickets, and sponsorship of business functions
outside of the $100 per year limitation by requiring that dealer personnel host
(accompany) such meals, entertainment and business functions.
• Amend the recordkeeping requirements in Rule G-8 to require that dealers
maintain a record of non-cash compensation received in connection with a
primary offering from the issuer or its advisers, the underwriter, or any of their
affiliates, as well as records regarding any internal sales incentive program for
municipal fund securities. 8
In response to the draft amendments, the MSRB received comment letters from
NASD, Investment Company Institute (“ICI”), Morgan Keegan, and Bernardi Securities.
Three of the commentators (NASD, ICI and Morgan Keegan) expressed general support
for the draft amendments, and one commentator (Bernardi Securities) opposed one aspect
of the draft amendments. Two of the commentators (NASD and ICI) suggested that the
MSRB make certain revisions, discussed below.
Discussion of Comments
The MSRB believes that a number of the commentators’ concerns and
suggestions have merit and, accordingly, revised the amendments to (1) incorporate
NASD rule language where possible; (2) clarify that NASD interpretations would apply
to comparable MSRB provisions, unless the MSRB specifically provides otherwise; and
(3) expand the definition of offeror to include, with respect to securities held as assets
underlying municipal fund securities, any person considered an offeror under relevant
NASD rules.
Consistency between NASD and MSRB Rules. NASD and ICI supported the
MSRB’s proposal to make Rule G-20 consistent with NASD’s rules. ICI stated that a
“uniform system of regulation between the MSRB and the NASD reduces the potential
that persons subject to both regimes will face conflicting regulatory requirements and
facilitates compliance efforts. Moreover, inasmuch as the NASD is charged with
inspecting securities firms for compliance with the rules of the MSRB, providing
uniformity between MSRB’s rules and those of the NASD . . . should facilitate the
NASD’s ability to conduct such inspections.” NASD suggested that the MSRB,
“whenever possible, use precisely the same language as Rule 2830, and clarify
that…[NASD’s] interpretation of that rule would similarly apply to the interpretation of
the Rule G-20 amendments.”
8
See “Request for Comments on Draft Amendments to Rules G-20 and G-8
Relating to Gifts, Gratuities and Non-Cash Compensation in Municipal Debt
Offerings and Sales of Municipal Fund Securities,” MSRB Notice 2004-17 (June
15, 2004), at www.msrb.org.
Page 11 of 44
The MSRB agrees that, whenever possible, incorporating identical language
between comparable provisions of MSRB and NASD rules would facilitate dealer
understanding of and compliance with such provisions, as well as facilitate the inspection
and enforcement thereof. The MSRB has, therefore, incorporated NASD language in the
proposed amendments to Rule G-20, including those provisions relating to the
requirement that dealers host meals, tickets to events and the like; technical language on
gifts that call into question the dealer’s ethical standards; non-cash compensation
arrangements, including payment or reimbursement for education and training meetings;
and the definitions of “non-cash compensation, “cash compensation,” and “offeror.”
NASD interpretations. NASD asked the MSRB to clarify whether NASD’s
interpretation of the exception for training and education meetings, as set forth in its
Summer 2000 Regulatory and Compliance Alert, would apply to the training and
education meeting exception in the draft amendments. 9 The MSRB agrees that this
interpretation should apply to the similar provisions of amended Rule G-20.
Moreover, the MSRB intends generally that the provisions of Rule G-20 be read
consistently with the analogous NASD provisions, unless the MSRB specifically
indicates otherwise. Thus, relevant NASD interpretations would be presumed to apply to
the comparable MSRB provision, subject to the MSRB’s right to make distinctions when
necessary and appropriate in the context of municipal fund securities and other primary
offerings of municipal securities.
Definition of “offeror.” NASD suggested that the draft definition of “offeror,”
which includes the issuer’s service providers in connection with the marketing and
maintenance of its municipal fund securities, also should include the investment adviser
to the underlying funds. Similarly, ICI recommended expanding the draft definition of
“offeror” to include the issuer of any investment product into which the assets of a
municipal fund security are invested, as well as any investment adviser, fund
administrator, underwriter, or affiliated person of such entities with respect to such
underlying investments. The MSRB agrees, and revised the proposed rule language to
reflect this change, with minor adjustments to more fully conform to municipal fund
securities and other primary offerings of municipal securities.
Applicability of basic gift limitation to municipal fund securities. ICI suggested
that the MSRB limit the provisions that would be applicable to municipal fund securities
to those set forth in draft subsection (d) of Rule G-20. ICI noted that the draft
amendments would result in there being two provisions governing “de minimis” gifts,
and two provisions governing gifts of meals or tickets. ICI stated that this is unnecessary
and will create confusion. It recommended that subsections (a) and (b) be revised to
exclude the offer and sale of municipal fund securities, and that such offers and sales be
subject solely to subsection (d). The MSRB does not agree with this suggestion; the two
provisions are intended to apply in different contexts. Rule G-20(a) applies to gifts and
gratuities in relation to the municipal securities activities of the employer of the recipient.
9
See NASD “Regulatory & Compliance Alert” (Summer 2000) at 13.
Page 12 of 44
Rule G-20(d) applies to non-cash compensation in connection with the sale and
distribution of a primary offering of municipal securities. The MSRB believes that both
provisions are important and both should apply to municipal fund securities as well as to
other primary offerings of municipal securities. The MSRB observes that dealers selling
mutual fund shares also are currently subject to both NASD Rule 3060 and NASD Rule
2830(l)(5).
Records of de minimis gifts. ICI recommended that the MSRB revise the draft
recordkeeping requirement in Rule G-8 regarding non-cash compensation to conform to
NASD Rule 2830, on investment company securities. ICI stated that the NASD rule does
not require dealers to keep records of de minimis gifts (i.e., those under $100 per year) or
occasional meals or tickets to theatrical and sporting events. ICI suggested that the
MSRB similarly exclude these items from the recordkeeping requirements of Rule G-8
“based on the conclusion that these de minimis items do not raise regulatory concerns
and, therefore, the burden of making and keeping such records would exceed any benefits
of requiring them.” ICI further noted that this revision would provide uniformity
between MSRB and NASD recordkeeping requirements. The MSRB does not agree with
this recommendation. The provisions in NASD Rule 3060, on influencing or rewarding
employees of others, require firms to keep a separate record of all payments or gratuities
in any amount. The MSRB believes that a recordkeeping requirement for de minimis
gifts is necessary for both the dealer and the appropriate regulatory agency to determine
whether a rule violation has occurred.
6.
Extension of Time Period for SEC Action
The MSRB declines to consent to an extension of the time period specified in
Section 19(b)(2) of the Act.
7.
Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for
Accelerated Effectiveness Pursuant to Section 19(b)(2)
Not applicable.
8.
Proposed Rule Change Based on Rules of Another Self-Regulatory
Organization or of the SEC
The proposed rule change is based in part on NASD Rules 2710, 2820, 2830 and
3060. The similarities and differences between the proposed rule change and these
NASD rules are described in Items 3(a) and 5 above.
9.
Exhibits
1. Federal Register Notice
2. Notice requesting comments on draft amendments to Rule G-20 and
comment letters
Page 13 of 44
EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-
; File No. SR-MSRB-2005-02)
SELF-REGULATORY ORGANIZATIONS
Proposed Rule Change by the Municipal Securities Rulemaking Board
Relating to Amendments to Rule G-20, on Gifts and Gratuities, and Rule G-8, on
Recordkeeping
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the “Act”) 1
and Rule 19b-4 thereunder, 2 notice is hereby given that on January 13, 2005 the
Municipal Securities Rulemaking Board (“MSRB” or “Board”) filed with the Securities
and Exchange Commission (“Commission” or “SEC”) the proposed rule change as
described in Items I, II, and III below, which Items have been prepared by the MSRB.
The Commission is publishing this notice to solicit comments on the proposed rule
change from interested persons.
I.
Self-Regulatory Organization’s Statement of the Terms of Substance of the
Proposed Rule Change
The MSRB is filing with the Commission a proposed rule change consisting of
amendments to Rule G-20, on gifts and gratuities, and the related recordkeeping
requirements of Rule G-8. The text of the proposed rule change is set forth below. New
language is underlined; deletions are in brackets.
Rule G-20 – Gifts, [and] Gratuities and Non-Cash Compensation.
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b-4.
Page 14 of 44
(a) General Limitation on Value of Gifts and Gratuities. No broker, dealer or municipal
securities dealer shall, directly or indirectly, give or permit to be given any thing or
service of value, including gratuities, in excess of $100 per year to a person other than an
employee or partner of such broker, dealer or municipal securities dealer, if such
payments or services are in relation to the municipal securities activities of the employer
of the recipient of the payment or service. For purposes of this rule the term “employer”
shall include a principal for whom the recipient of a payment or service is acting as agent
or representative.
(b) Normal Business Dealings. Notwithstanding the foregoing, the provisions of section
(a) of this rule shall not be deemed to prohibit occasional gifts of meals or tickets to
theatrical, sporting, and other entertainments hosted by the broker, dealer or municipal
securities dealer; the sponsoring by the broker, dealer or municipal securities dealer of
legitimate business functions that are recognized by the Internal Revenue Service as
deductible business expenses; or gifts of reminder advertising; provided, that such gifts
shall not be so frequent or so [expensive] extensive as to raise [a suggestion of conduct
inconsistent with high standards of professional ethics in the municipal securities
industry] any question of propriety.
(c) No change.
(d) Non-Cash Compensation in Connection with Primary Offerings. In connection with
the sale and distribution of a primary offering of municipal securities, no broker, dealer or
municipal securities dealer, or any associated person thereof, shall directly or indirectly
accept or make payments or offers of payments of any non-cash compensation.
Notwithstanding the provisions of section (a) of this rule, the following non-cash
compensation arrangements are permitted:
(i) gifts that do not exceed $100 per individual per year and are not
preconditioned on achievement of a sales target;
(ii) occasional gifts of meals or tickets to theatrical, sporting, and other
entertainments; provided that such gifts are not so frequent or so extensive
as to raise any question of propriety and are not preconditioned on
achievement of a sales target;
(iii) payment or reimbursement by offerors in connection with meetings
held by an offeror or by a broker, dealer or municipal securities dealer for
the purpose of training or education of associated persons of a broker,
dealer or municipal securities dealer, provided that:
(A) associated persons obtain the prior approval of the
broker, dealer or municipal securities dealer to attend the
meeting and attendance is not preconditioned by the broker,
dealer or municipal securities dealer on achievement of a
Page 15 of 44
sales target or any other incentives pursuant to a non-cash
compensation arrangement permitted by paragraph (d)(iv);
(B) the location is appropriate to the purpose of the
meeting, which shall mean an office of the offeror or the
broker, dealer or municipal securities dealer, a facility
located in the vicinity of such office, a regional location
with respect to regional meetings, or a location at which a
significant asset, if any, being financed or refinanced in the
primary offering is located;
(C) the payment or reimbursement is not applied to the
expenses of guests of the associated person; and
(D) the payment or reimbursement is not preconditioned by
the offeror on achievement of a sales target or any other
non-cash compensation arrangement permitted by
paragraph (d)(iv).
(iv) non-cash compensation arrangements between a broker, dealer or
municipal securities dealer and its associated persons, or a company that
controls the broker, dealer or municipal securities dealer and the
associated persons of the broker, dealer or municipal securities dealer,
provided that:
(A) the non-cash compensation arrangement is based on the
total production of associated persons with respect to all
municipal securities within respective product types
distributed by the broker, dealer or municipal securities
dealer;
(B) the non-cash compensation arrangement requires that
the credit received for each municipal security within a
municipal security product type is equally weighted; and
(C) no entity that is not an associated person of the broker,
dealer or municipal securities dealer participates directly or
indirectly in the organization of a permissible non-cash
compensation arrangement.
(v) contributions by any person other than the broker, dealer or municipal
securities dealer to a non-cash compensation arrangement between a
broker, dealer or municipal securities dealer and its associated persons,
provided that the arrangement meets the criteria in paragraph (d)(iv).
Page 16 of 44
(e) Definitions. For purposes of this rule, the following terms have the following
meanings:
(i)
The term “non-cash compensation” shall mean any form of
compensation received in connection with the sale and distribution
of municipal securities that is not cash compensation, including but
not limited to merchandise, gifts and prizes, travel expenses, meals
and lodging.
(ii)
The term “cash compensation” shall mean any discount,
concession, fee, service fee, commission, asset-based sales charge,
loan, override or cash employee benefit received in connection
with the sale and distribution of municipal securities.
(iii)
The term “offeror” shall mean, with respect to a primary offering
of municipal securities, the issuer, any adviser to the issuer
(including but not limited to the issuer’s financial adviser, bond or
other legal counsel, or investment or program manager in
connection with the primary offering), the underwriter of the
primary offering, or any person controlling, controlled by, or under
common control with any of the foregoing; provided, however,
that, with respect to a primary offering of municipal fund
securities, “offeror” shall also include any person considered an
“offeror” under NASD Rule 2710, NASD Rule 2820 or NASD
Rule 2830 in connection with any securities held as assets of or
underlying such municipal fund securities.
(iv)
The term “primary offering” shall mean a primary offering defined
in Securities Exchange Act Rule 15c2-12(f)(7).
Rule G-8 – Books and Records to be Made by Brokers, Dealers and
Municipal Securities Dealers
(a)(i) – (xvi) No change.
(xvii) Records Concerning Compliance with Rule G-20. Each broker,
dealer and municipal securities dealer shall maintain:
(A) [(i)] a separate record of any gift or gratuity referred to
in Rule G-20(a); [and]
(B) [(ii)] all agreements referred to in Rule G-20(c) and all
compensation paid as a result of those agreements; and[.]
Page 17 of 44
(C) records of all non-cash compensation referred to in
Rule G-20(d). The records shall include the name of the
person or entity making the payment, the names of the
associated persons receiving the payments (if applicable),
and the nature (including the location of meetings described
in Rule G-20(d)(iii), if applicable) and value of non-cash
compensation received.
(xviii) – (xxii) No change.
(b)-(g) No change.
*
II.
*
*
*
*
Self-Regulatory Organization’s Statement of the Purpose of, and Statutory
Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements concerning the
purpose of and basis for the proposed rule change and discussed any comments it
received on the proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The MSRB has prepared summaries, set forth in
Sections A, B and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization’s Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
MSRB Rule G-20 prohibits dealers from directly or indirectly giving or
permitting to be given any thing or service of value in excess of $100 per year to any
person other than an employee or partner of the dealer in relation to the municipal
securities activities of the recipient’s employer. The rule provides certain exemptions
from the $100 annual limit for “normal business dealings,” including (i) occasional gifts
of meals or tickets to theatrical, sporting and other entertainment; (ii) sponsoring
legitimate business functions that are recognized by the IRS as deductible business
Page 18 of 44
expenses; and (iii) gifts of reminder advertising. However, such gifts must not be so
frequent or excessive as to raise a suggestion of unethical conduct.
MSRB Rule G-20 currently does not mandate specific requirements with respect
to non-cash sales incentives, although the general fair practice principles of Rule G-17
apply. 3 The MSRB has interpreted Rule G-17 in the context of municipal fund securities
to provide that a dealer may violate the rule by engaging in marketing activities that
result in a customer being treated unfairly, or by engaging in any deceptive, dishonest or
unfair practice in connection with such marketing activities. 4 Further, depending on the
particular facts and circumstances, a dealer may violate Rule G-17 if it acts in a manner
that is reasonably likely to induce another dealer to violate the principles of Rule G-17 or
other MSRB customer protection rules. 5 In contrast, NASD Rules 2710(i), 2820(g)(4)
and 2830(l)(5) establish specific requirements with respect to the payment of non-cash
compensation in connection with offerings of corporate securities, variable contracts and
mutual funds.
3
Rule G-17 provides that “In the conduct of its municipal securities activities, each
broker, dealer and municipal securities dealer shall deal fairly with all persons and
shall not engage in any deceptive, dishonest, or unfair practice.”
4
MSRB Notice on “Application of Fair Practice and Advertising Rules to
Municipal Fund Securities,” May 14, 2002, reprinted in the MSRB Rule Book
(July 1, 2004) at page 151.
Municipal fund securities are municipal securities issued by an issuer that, but for
the application of Section 2(b) of the Investment Company Act of 1940, as
amended, would constitute an investment company within the meaning of that
Act. The most common forms of municipal fund securities sold by dealers consist
of interests in trusts established by states as qualified tuition programs under
Section 529 of the Internal Revenue Code (“529 college savings plans”), and
interests in local government investment pools.
5
Id.
Page 19 of 44
The MSRB has determined that similar treatment across the securities markets is
appropriate and would facilitate dealer understanding of, and compliance with,
requirements relating to sales incentives and non-cash compensation. Thus, the proposed
amendments are intended to more fully conform Rule G-20 to NASD requirements
relating to gifts and gratuities, and to add new provisions governing non-cash
compensation and sales incentives in connection with municipal fund securities and other
primary offerings of municipal securities, based on NASD requirements for non-cash
compensation and sales incentives. The proposed amendments would result in the
following changes to Rule G-20:
•
•
•
•
6
Modify the existing provision in Rule G-20 that permits occasional gifts of
meals or sports and entertainment tickets, and sponsorship of business
functions outside of the $100 per year limitation by requiring that dealer
personnel host (accompany) such meals, entertainment and business
functions in conformity with NASD gift rule limitations, and further
modify the language of the requirement to incorporate NASD language to
the effect that such occasional gifts must not call into question the dealer’s
ethical standards. 6
Clarify that NASD interpretations apply to comparable MSRB provisions,
unless the MSRB specifically provides otherwise.
Incorporate definitions of “non-cash compensation,” “cash compensation”
and “offeror” based on language in NASD Rules 2710, 2820 and 2830,
and expand the definition of offeror to include, with respect to securities
held as assets underlying municipal fund securities, any person considered
an offeror under relevant NASD rules.
Treat non-cash sales incentives relating to municipal fund securities and
other primary offerings of municipal securities (i.e., bonds and notes) in a
The NASD language with respect to this exception from the $100 annual gift
limitation appears in an interpretive letter relating to NASD Rule 3060. See
interpretive letter, dated June 10, 1999, from R. Clark Hooper, Executive Vice
President, NASD, to Henry H. Hopkins, Director, and Sarah McCafferty, Vice
President, T. Rowe Price Investment Services, Inc.
The existing Rule G-20 language relating to “gifts of reminder advertising” is
retained in the proposed amendments without change even though such language
does not exist under NASD rules.
Page 20 of 44
•
•
•
2.
manner similar to NASD’s treatment of non-cash sales incentives relating
to mutual funds, variable contracts, and corporate debt and equity
offerings, including, among other things, permitting gifts that do not
exceed $100 per individual per year and are not preconditioned on
achievement of a sales target; and permitting the giving and receipt of
occasional gifts of meals or tickets to theatrical, sporting and other
entertainment, but only if such occasional gifts are not preconditioned on
achievement of a sales target.
Limit the circumstances under which dealers or offerors may pay or
reimburse costs of training or education, based on NASD rules, including
ensuring that attendance at, and payment for, such meetings is not
preconditioned on achievement of a sales target; reimbursement is not
applied to expenses of associated persons’ guests; and that such meetings
are held at appropriate locations. 7
Require that non-cash compensation arrangements include the total
production and equal weighting requirements under NASD rules, which
are designed to ensure that the arrangement does not favor sales of one
municipal security over another. 8
Amend the recordkeeping requirements in Rule G-8 to require that dealers
maintain a record of non-cash compensation received in connection with a
primary offering from the issuer or its advisers, the underwriter, or any of
their affiliates, as well as records regarding any internal sales incentive
program for municipal fund securities.
Statutory Basis
The MSRB believes that the proposed rule change is consistent with Section
15B(b)(2)(C) of the Act, which provides that MSRB rules shall:
be designed to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing information with
respect to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market in municipal
securities, and, in general, to protect investors and the public interest.
7
The proposed language in Rule G-20 that refers to “a location at which a
significant asset, if any, being financed or refinanced in the primary offering is
located” is based on language included in draft amendments to NASD Rule 2710
proposed for comment by NASD in Notice to Members 04-07 (February 3, 2004)
(the “NASD Corporate Financing Proposal”).
8
These total production and equal weighting requirements currently are included in
NASD Rules 2820 and 2830, and are included in draft amendments to Rule 2710
proposed for comment in the NASD Corporate Financing Proposal.
Page 21 of 44
The MSRB believes that the proposed rule change is consistent with these provisions in
that it would provide for consistent treatment across the securities markets regarding
gifts, gratuities, non-cash compensation and sales incentives, thereby facilitating dealer
understanding of, and compliance with, these requirements.
B. Self-Regulatory Organization’s Statement on Burden on Competition
The MSRB does not believe that the proposed rule change will result in any
burden on competition not necessary or appropriate in furtherance of the purposes of the
Act.
C. Self-Regulatory Organization’s Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
In June 2004, the MSRB requested comment on draft amendments to Rule G-20,
and the related recordkeeping provisions of Rule G-8, that would:
•
Treat non-cash sales incentives relating to municipal fund securities and other
primary offerings of municipal securities (i.e., bonds and notes) in a manner
similar to NASD’s treatment of non-cash sales incentives relating to mutual
funds and corporate debt and equity offerings.
• Modify the existing provision in MSRB Rule G-20 that permits occasional gifts of
meals or sports and entertainment tickets, and sponsorship of business functions
outside of the $100 per year limitation by requiring that dealer personnel host
(accompany) such meals, entertainment and business functions.
• Amend the recordkeeping requirements in Rule G-8 to require that dealers
maintain a record of non-cash compensation received in connection with a
primary offering from the issuer or its advisers, the underwriter, or any of their
affiliates, as well as records regarding any internal sales incentive program for
municipal fund securities. 9
9
See “Request for Comments on Draft Amendments to Rules G-20 and G-8
Relating to Gifts, Gratuities and Non-Cash Compensation in Municipal Debt
Offerings and Sales of Municipal Fund Securities,” MSRB Notice 2004-17 (June
15, 2004), at www.msrb.org.
Page 22 of 44
In response to the draft amendments, the MSRB received comment letters from
NASD, The Investment Company Institute (“ICI”), Morgan Keegan, and Bernardi
Securities. Three of the commentators (NASD, ICI and Morgan Keegan) expressed
general support for the draft amendments, and one commentator (Bernardi Securities)
opposed one aspect of the draft amendments. Two of the commentators (NASD and ICI)
suggested that the MSRB make certain revisions, discussed below.
The MSRB believes that a number of the commentators’ concerns and
suggestions have merit and, accordingly, revised the amendments to (1) incorporate
NASD rule language where possible; (2) clarify that NASD interpretations would apply
to comparable MSRB provisions, unless the MSRB specifically provides otherwise; and
(3) expand the definition of offeror to include, with respect to securities held as assets
underlying municipal fund securities, any person considered an offeror under relevant
NASD rules.
Consistency between NASD and MSRB Rules. NASD and ICI supported the
MSRB’s proposal to make Rule G-20 consistent with NASD’s rules. ICI stated that a
“uniform system of regulation between the MSRB and the NASD reduces the potential
that persons subject to both regimes will face conflicting regulatory requirements and
facilitates compliance efforts. Moreover, inasmuch as the NASD is charged with
inspecting securities firms for compliance with the rules of the MSRB, providing
uniformity between MSRB’s rules and those of the NASD . . . should facilitate the
NASD’s ability to conduct such inspections.” NASD suggested that the MSRB,
“whenever possible, use precisely the same language as Rule 2830, and clarify
Page 23 of 44
that…[NASD’s] interpretation of that rule would similarly apply to the interpretation of
the Rule G-20 amendments.”
The MSRB agrees that, whenever possible, incorporating identical language
between comparable provisions of MSRB and NASD rules would facilitate dealer
understanding of and compliance with such provisions, as well as facilitate the inspection
and enforcement thereof. The MSRB has, therefore, incorporated NASD language in the
proposed amendments to Rule G-20, including those provisions relating to the
requirement that dealers host meals, tickets to events and the like; technical language on
gifts that call into question the dealer’s ethical standards; non-cash compensation
arrangements, including payment or reimbursement for education and training meetings;
and the definitions of “non-cash compensation, “cash compensation,” and “offeror.”
NASD interpretations. NASD asked the MSRB to clarify whether NASD’s
interpretation of the exception for training and education meetings, as set forth in its
Summer 2000 Regulatory and Compliance Alert, would apply to the training and
education meeting exception in the draft amendments. 10 The MSRB agrees that this
interpretation should apply to the similar provisions of amended Rule G-20.
Moreover, the MSRB intends generally that the provisions of Rule G-20 be read
consistently with the analogous NASD provisions, unless the MSRB specifically
indicates otherwise. Thus, relevant NASD interpretations would be presumed to apply to
the comparable MSRB provision, subject to the MSRB’s right to make distinctions when
10
See NASD “Regulatory & Compliance Alert” (Summer 2000) at 13.
Page 24 of 44
necessary and appropriate in the context of municipal fund securities and other primary
offerings of municipal securities.
Definition of “offeror.” NASD suggested that the draft definition of “offeror,”
which includes the issuer’s service providers in connection with the marketing and
maintenance of its municipal fund securities, also should include the investment adviser
to the underlying funds. Similarly, ICI recommended expanding the draft definition of
“offeror” to include the issuer of any investment product into which the assets of a
municipal fund security are invested, as well as any investment adviser, fund
administrator, underwriter, or affiliated person of such entities with respect to such
underlying investments. The MSRB agrees, and revised the proposed rule language to
reflect this change, with minor adjustments to more fully conform to municipal fund
securities and other primary offerings of municipal securities.
Applicability of basic gift limitation to municipal fund securities. ICI suggested
that the MSRB limit the provisions that would be applicable to municipal fund securities
to those set forth in draft subsection (d) of Rule G-20. ICI noted that the draft
amendments would result in there being two provisions governing “de minimis” gifts,
and two provisions governing gifts of meals or tickets. ICI stated that this is unnecessary
and will create confusion. It recommended that subsections (a) and (b) be revised to
exclude the offer and sale of municipal fund securities, and that such offers and sales be
subject solely to subsection (d). The MSRB does not agree with this suggestion; the two
provisions are intended to apply in different contexts. Rule G-20(a) applies to gifts and
gratuities in relation to the municipal securities activities of the employer of the recipient.
Page 25 of 44
Rule G-20(d) applies to non-cash compensation in connection with the sale and
distribution of a primary offering of municipal securities. The MSRB believes that both
provisions are important and both should apply to municipal fund securities as well as to
other primary offerings of municipal securities. The MSRB observes that dealers selling
mutual fund shares also are currently subject to both NASD Rule 3060 and NASD Rule
2830(l)(5).
Records of de minimis gifts. ICI recommended that the MSRB revise the draft
recordkeeping requirement in Rule G-8 regarding non-cash compensation to conform to
NASD Rule 2830, on investment company securities. ICI stated that the NASD rule does
not require dealers to keep records of de minimis gifts (i.e., those under $100 per year) or
occasional meals or tickets to theatrical and sporting events. ICI suggested that the
MSRB similarly exclude these items from the recordkeeping requirements of Rule G-8
“based on the conclusion that these de minimis items do not raise regulatory concerns
and, therefore, the burden of making and keeping such records would exceed any benefits
of requiring them.” ICI further noted that this revision would provide uniformity
between MSRB and NASD recordkeeping requirements. The MSRB does not agree with
this recommendation. The provisions in NASD Rule 3060, on influencing or rewarding
employees of others, require firms to keep a separate record of all payments or gratuities
in any amount. The MSRB believes that a recordkeeping requirement for de minimis
gifts is necessary for both the dealer and the appropriate regulatory agency to determine
whether a rule violation has occurred.
Page 26 of 44
III.
Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of publication of this notice in the Federal Register or within such
longer period (i) as the Commission may designate up to 90 days of such date if it finds
such longer period to be appropriate and publishes its reasons for so finding, or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule change should
be disapproved.
IV.
Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments
concerning the foregoing, including whether the proposed rule change is consistent with
the Act. Comments may be submitted by any of the following methods:
Electronic comments:
•
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml);
or
•
Send an e-mail to rule-comments@sec.gov. Please include File Number SRMSRB-2005-02 on the subject line.
Paper comments:
•
Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.
All submissions should refer to File Number SR-MSRB-2005-02. This file number
Page 27 of 44
should be included on the subject line if e-mail is used. To help the Commission process
and review your comments more efficiently, please use only one method. The
Commission will post all comments on the Commission’s Internet Web site
(http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rule change that are filed
with the Commission, and all written communications relating to the proposed rule
change between the Commission and any person, other than those that may be withheld
from the public in accordance with the provisions of 5 U.S.C. 552, will be available for
inspection and copying in the Commission’s Public Reference Room, 450 Fifth Street,
N.W., Washington, DC 20549. Copies of such filing also will be available for inspection
and copying at the principal office of the MSRB. All comments received will be posted
without change; the Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-MSRB-2005-02 and should be
submitted on or before [insert date 21 days from publication in the Federal Register].
For the Commission by the Division of Market Regulation, pursuant to delegated
authority. 11
Jonathan G. Katz
Secretary
11
17 CFR 200.30-3(a)(12).