
[Federal Register Volume 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55976-55984]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23046]


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SECURITIES AND EXCHANGE COMMISSION

[RELEASE NO. 34-65255; File No. SR-MSRB-2011-12]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed New Rule G-42, on Political 
Contributions and Prohibitions on Municipal Advisory Activities; 
Proposed Amendments to Rules G-8, on Books and Records, G-9, on 
Preservation of Records, and G-37, on Political Contributions and 
Prohibitions on Municipal Securities Business; Proposed Form G-37/G-42 
and Form G-37x/G-42x; and a Proposed Restatement of a Rule G-37 
Interpretive Notice

September 2, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``the Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on August 19, 2011, the Municipal Securities 
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the SEC a proposed rule change consisting 
of (i) Proposed MSRB Rule G-42 (on political contributions and 
prohibitions on municipal advisory activities); (ii) proposed 
amendments that would make conforming changes to MSRB Rules G-8 (on 
books and records), G-9 (on preservation of records), and G-37 (on 
political contributions and prohibitions on municipal securities 
business); (iii) proposed Form G-37/G-42 and Form G-37x/G-42x; and (iv) 
a proposed restatement of a Rule G-37 interpretive notice issued by the 
MSRB in 1997 (``Rule G-37 Interpretive Notice'').\3\
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    \3\ Interpretation of Prohibition on Municipal Securities 
Business Pursuant to Rule G-37 (February 21, 1997), reprinted in 
MSRB Rule Book.
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    The MSRB requests that, if approved by the Commission, the proposed 
rule change be made effective six months after the date on which the 
Commission first approves rules defining the term ``municipal advisor'' 
under the Exchange Act or such later date as the Commission approves 
the proposed rule change; provided, however, that the MSRB requests 
that no contribution made prior to the effective date of proposed Rule 
G-42 would result in a ban pursuant to proposed Rule G-42(b)(i); \4\ 
and, provided that any ban on municipal securities business under Rule 
G-37(b)(i) in existence prior to the effective date of proposed Rule G-
42 would continue until it otherwise would have terminated under Rule 
G-37(b)(i), as in effect prior to the effective date of proposed Rule 
G-42.
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    \4\ As described in more detail below, under proposed Rule G-
42(b)(i) certain contributions could result in a ban on municipal 
advisory business for compensation, a ban on solicitations of third-
party business for compensation, and a ban on the receipt of 
compensation for the solicitation of third-party business.
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    The text of the proposed rule change is available on the MSRB's Web 
site at http://www.msrb.org/Rules-and-Interpretations/SEC-Filings/2011-Filings.aspx, at the MSRB's principal office, and at the Commission's 
Public Reference Room.

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 Board 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
    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') \5\ authorized the MSRB to establish a 
comprehensive body of regulation for municipal advisors and provided 
that municipal advisors to municipal entities have a Federal fiduciary 
duty.\6\ The Dodd-Frank Act required the MSRB to adopt rules for 
municipal advisors that, in addition to implementing the Federal 
fiduciary duty, are designed to prevent fraudulent and manipulative 
acts and practices and to promote just and equitable principles of 
trade.\7\ It also expanded the mission

[[Page 55977]]

of the MSRB to include the protection of municipal entities \8\ and 
obligated persons, in addition to the protection of investors and the 
public interest.
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    \5\ Public Law No. 111-203, 124 Stat. 1376 (2010).
    \6\ See 15B(c)(1) of the Exchange Act.
    \7\ See Section 15B(b)(2)(C) of the Exchange Act.
    \8\ ``Municipal entity'' is defined in Section 15B(e)(8) of the 
Exchange Act as any State, political subdivision of a State, or 
municipal corporate instrumentality of a State, including--(A) Any 
agency, authority, or instrumentality of the State, political 
subdivision, or municipal corporate instrumentality; (B) any plan, 
program, or pool of assets sponsored or established by the State, 
political subdivision, or municipal corporate instrumentality or any 
agency, authority, or instrumentality thereof; and (C) any other 
issuer of municipal securities.
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    Municipal advisors that seek to influence the award of business by 
government officials by making or soliciting political contributions to 
those officials distort and undermine the fairness of the process by 
which government business is awarded. These practices can harm 
municipal entities and their citizens by resulting in inferior services 
and higher fees, as well as contributing to the violation of the public 
trust of elected officials that might allow political contributions to 
influence their decisions regarding public contracting.
    Similarly, Rule G-37 was adopted by the MSRB in 1994 due to 
concerns about the opportunity for abuses and the problems associated 
with political contributions by dealers in connection with the award of 
municipal securities business.\9\ When it filed proposed Rule G-37 with 
the Commission,\10\ the MSRB stated that it believed that there had 
been numerous instances in which dealers had been awarded municipal 
securities business because of their political contributions. Even when 
such improprieties had not occurred, the MSRB believed that political 
contributions created a potential conflict of interest for issuers, or 
at the very least the appearance of a conflict, when dealers made 
contributions to officials responsible for, or capable of influencing 
the outcome of, the award of municipal securities business and then 
were awarded business by issuers associated with such officials. The 
MSRB said:
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    \9\ Municipal securities business generally consists of 
negotiated underwritings, private placements, and serving as 
remarketing agent or financial advisor on a new issue of municipal 
securities. See Rule G-37(g)(vii).
    \10\ See File No. SR-MSRB-94-2 (January 12, 1994); ``Political 
Contributions and Prohibitions on Municipal Securities Business: 
Proposed Rule G-37,'' MSRB Reports, Vol. 14, No. 1 (January 1994).

    The problems associated with political contributions undermine 
investor confidence in the municipal securities market, which is 
crucial to the long-term health of the market, both in terms of 
liquidity and capital-raising ability * * *. The payment of such 
contributions to obtain business creates artificial barriers to 
those dealers not willing or able to make such payments, thereby 
harming investors and the public interest by stifling competition 
and increasing market costs associated with doing municipal 
securities business. Accordingly, * * * regulatory action is 
necessary to protect investors and maintain the integrity of the 
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market.

Proposed New MSRB Rule G-42

    Proposed Rule G-42 concerns political contributions made by all 
municipal advisors, both those that are dealers and those that are not. 
Like Rule G-37, the proposed rule would not ban political 
contributions. Instead, proposed Rule G-42 would:
     Prohibit a municipal advisor from engaging in ``municipal 
advisory business'' with a municipal entity for compensation for a 
period of time beginning on the date of a non-de minimis \11\ political 
contribution to an ``official of the municipal entity'' by the 
municipal advisor, any of its municipal advisor professionals 
(``MAPs''), or a political action committee controlled by the municipal 
advisor or a MAP, and ending two years after all municipal advisory 
business with the municipal entity has been terminated; \12\
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    \11\ Proposed Rule G-42(g)(ii) would provide in pertinent part: 
The term ``de minimis,'' when used in connection with contributions 
made by a municipal advisor professional or a non-MAP executive 
officer, refers to contributions made * * * to officials of a 
municipal entity for whom the municipal advisor professional or non-
MAP executive officer was entitled to vote at the time of the 
contribution and which contributions, in total, were not in excess 
of $250 to each official of such municipal entity, per election.
    \12\ See proposed Rule G-42(b)(i).
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     Prohibit a municipal advisor from soliciting third-party 
business \13\ from a municipal entity for compensation, or receiving 
compensation for the solicitation of third-party business from a 
municipal entity, for two years after a non-de minimis political 
contribution to an ``official of the municipal entity;'' \14\
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    \13\ Proposed Rule G-42(g)(xiv) would provide that: ``third-
party business'' means an engagement by a municipal entity of a 
broker, dealer, municipal securities dealer, or municipal advisor 
(other than the municipal advisor that is soliciting the municipal 
entity) that does not control, is not controlled by, or is not under 
common control with, the person soliciting such third-party business 
for or in connection with municipal financial products or the 
issuance of municipal securities, or of an investment adviser (as 
defined in section 202(a)(11) of the Investment Advisers Act of 
1940) to provide investment advisory services to or on behalf of a 
municipal entity.
    \14\ See proposed Rule G-42(b)(i).
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     Prohibit municipal advisors and MAPs from soliciting 
contributions, or coordinating contributions, to officials of municipal 
entities with which the municipal advisor is engaging or seeking to 
engage in municipal advisory business or from which the municipal 
advisor is soliciting third-party business; \15\
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    \15\ See proposed Rule G-42(c)(i).
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     Prohibit municipal advisors and MAPs from soliciting 
payments, or coordinating payments, to political parties of states or 
localities with which the municipal advisor is engaging in, or seeking 
to engage in, municipal advisory business or from which the municipal 
advisor is soliciting third-party business; \16\
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    \16\ See proposed Rule G-42(c)(ii). An exception from this 
prohibition would be provided for certain supervisors and executives 
of municipal advisors that are only municipal advisors because they 
provide advice to municipal entities or obligated persons and do not 
solicit any third-party business from municipal entities.
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     Prohibit municipal advisors and MAPs from committing 
indirect violations of proposed Rule G-42; \17\
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    \17\ See proposed Rule G-42(d).
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     Require quarterly disclosures to the MSRB of certain 
contributions and related information; \18\ and
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    \18\ See proposed Rule G-42(e).
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     Permit certain exemptions from the ban on business for 
compensation, either by the SEC, upon application,\19\ or 
automatically.\20\
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    \19\ See proposed Rule G-42(h).
    \20\ See proposed Rule G-42(i).
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Proposed Amendments to Existing MSRB Rules

    MSRB Rule G-37. The proposed amendments to Rule G-37 would remove 
any references to ``financial advisory and consulting services,'' 
because those activities would be covered by proposed Rule G-42. The 
definitions of ``solicit,'' ``affiliated company,'' and ``affiliated 
person of the broker, dealer, or municipal securities dealer'' would be 
conformed to those in proposed Rule G-42. The reference in Rule G-
37(b)(1)(B) to ``any municipal finance professional associated with 
such broker, dealer or municipal securities dealer'' has been changed 
to ``any municipal finance professional of such broker, dealer, or 
municipal securities dealer,'' because, by definition, all municipal 
finance professionals are associated persons of brokers, dealers, or 
municipal securities dealers. Clarifications to Rule G-37 would provide 
that, in order for certain contributions not to result in a ban on 
municipal securities business or required reporting to the MSRB, they 
must be made to officials of issuers for whom the municipal finance 
professionals may vote at the time of the contribution. References to 
Forms G-37 and G-37x would be changed to Forms G-37/G-42 and G-37x/G-
42x, which would be the combined ``macroforms''

[[Page 55978]]

used by both dealers and municipal advisors to make reports to the MSRB 
under Rule G-37(e) and proposed Rule G-42(e), respectively. Such forms 
would be required to be submitted electronically.
    MSRB Rules G-8 and G-9. Proposed Rule G-42 would necessitate 
amendments to Rule G-8 (on books and records) and Rule G-9 (on 
preservation of records). The proposed amendments to Rule G-8 would 
require municipal advisors to create and maintain records necessary for 
the enforcement of the proposed rule, including, but not limited to, 
political contributions and payments; lists of MAPs and non-MAP 
executive officers; the states in which the municipal advisor is 
engaging or is seeking to engage in municipal advisory business with 
municipal entities or soliciting third-party business; a list of 
municipal entities with which the municipal advisor has engaged in 
municipal advisory business and the type of municipal advisory 
business; a list of the third-party business awarded; and Forms G-37/G-
42 and G-37x/G-42x. The proposed amendments to Rule G-9 generally would 
require municipal advisors to preserve records required to be made 
pursuant to the proposed amendments to Rule G-8 for six years. The 
proposed amendments to Rules G-8 and G-9 would subject municipal 
advisors to recordkeeping and record retention requirements related to 
proposed Rule G-42 that are substantially similar to those to which 
dealers are already subject under Rule G-37. The provisions of Rule G-8 
and G-9 concerning Rule G-37 recordkeeping and preservation would 
change references to Forms G-37 and 37x to Forms G-37/G-42 and G-37x/G-
42x. References to receipts of mailing the forms would also be removed, 
because the forms would only be submitted electronically.

Restated Rule G-37 Interpretive Notice

    The Rule G-37 Interpretive Notice was drafted before municipal 
advisors to municipal entities were subject to a Federal fiduciary duty 
and includes language providing guidance on the application of the ban 
on municipal securities business in circumstances where a non-de 
minimis contribution occurs during the course of an existing financial 
advisory relationship. Proposed Rule G-42 is inconsistent with the Rule 
G-37 Interpretive Notice, which would permit financial advisors to 
complete certain financial advisory engagements while continuing to 
receive compensation. Accordingly, the MSRB is proposing to restate the 
Rule G-37 Interpretive Notice to remove references to financial 
advisory services, which would instead be covered by proposed Rule G-
42. A conforming change would also reference contributions made to 
officials of issuers to whom municipal finance professionals could vote 
at the time of the contribution.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2) of the Exchange Act, which provides that:

    The Board shall propose and adopt rules to effect the purposes 
of this title with respect to transactions in municipal securities 
effected by brokers, dealers, and municipal securities dealers and 
advice provided to or on behalf of municipal entities or obligated 
persons by brokers, dealers, municipal securities dealers, and 
municipal advisors with respect to municipal financial products, the 
issuance of municipal securities, and solicitations of municipal 
entities or obligated persons undertaken by brokers, dealers, 
municipal securities dealers, and municipal advisors.

    Section 15B(b)(2)(C) of the Exchange Act, provides that the rules 
of the MSRB 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 and 
municipal financial products, to remove impediments to and perfect 
the mechanism of a free and open market in municipal securities and 
municipal financial products, and, in general, to protect investors, 
municipal entities, obligated persons, and the public interest.

    The proposed rule change is consistent with Section 15(b)(2) of the 
Exchange Act because it would help to prevent municipal advisors from 
seeking to influence the award of business by government officials by 
making or soliciting political contributions to those officials, which 
contributions distort and undermine the fairness of the process by 
which government business is awarded. The proposed rule change would 
help protect municipal entities and help to perfect the mechanism of a 
free and open market in municipal securities. Just as pay to play 
activities by some dealers had the potential to undermine the integrity 
of the municipal securities market and were addressed by Rule G-37, pay 
to play activities by some municipal advisors could similarly damage 
the public's confidence in the municipal marketplace. The proposed 
amendments to Rules G-8 and G-9 would assist in the enforcement of Rule 
G-42. The proposed amendments to Rule G-37 would make conforming 
changes. The new Forms G-37/G-42 and G-37x/G-42x would eliminate the 
need for duplicative filings for dealers that engage in both municipal 
securities business and municipal advisory activities. The proposed 
restatement of the Rule G-37 Interpretive Notice would remove 
provisions that would be otherwise inconsistent with proposed Rule G-
42.
    Section 15B(b)(2)(L)(iv) of the Exchange Act requires that rules 
adopted by the Board:

    not impose a regulatory burden on small municipal advisors that 
is not necessary or appropriate in the public interest and for the 
protection of investors, municipal entities, and obligated persons, 
provided that there is robust protection of investors against fraud.

    While the proposed rule change would affect all municipal advisors, 
it would be a necessary regulatory burden because it would hamper 
practices that can harm municipal entities and their citizens by 
resulting in inferior services and higher fees to investors and the 
public, as well as contributing to the violation of the public trust of 
elected officials that might allow political contributions to influence 
their decisions regarding public contracting. While the proposed rule 
change might burden some small municipal advisors, any such burden 
would be outweighed by the need to protect their issuer clients.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act, since the proposed 
amendments to Rule G-37, the associated amendments to Rule G-8, and the 
proposed restatement of the Rule G-37 Interpretive Notice would apply 
equally to all dealers and proposed Rule G-42 and the associated 
amendments to Rules G-8 and G-9 would apply equally to all municipal 
advisors. Proposed Forms G-37/G-42 and G-37x/G-42x would apply equally 
to all dealers and municipal advisors.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    On January 14, 2011, the MSRB requested comment on a draft of the 
proposed rule change (``draft Rule G-42'').\21\ The MSRB received 
comment letters from (1) Acacia Financial Group,

[[Page 55979]]

Inc.; (2) the American Bankers Association; (3) AGFS; (4) BMO Capital 
Markets GKST Inc. (``BMO''); (5) Mr. W. Hardy Callcott; (6) Mr. Robert 
Fisher; (7) G.L. Hicks Financial LLC; (8) H.J. Umbaugh & Associates; 
(9) the National Association of Independent Public Finance Advisors; 
(10) Repex & Co., Inc.; (11) the Securities Industry and Financial 
Markets Association; (12) the State of Texas (Texas Comptroller of 
Public Accounts); (13) the State of Texas (Office of Attorney General); 
(14) T. Rowe Price; (15) The PFM Group; and (16) WM Financial 
Strategies.\22\ The comments are summarized by topic as follows:
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    \21\ See Exhibit 2.
    \22\ See Exhibit 2.
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Harmonization of Draft Rule G-42 and MSRB Rule G-37 with the Securities 
and Exchange Commission Investment Adviser Act Rule 206(4)-5 (the ``SEC 
Pay to Play Rule'')
    Acacia Financial Group, Inc. (``Acacia Financial''), the American 
Bankers Association (``ABA''), Mr. W. Hardy Callcott (``Mr. 
Callcott''), the Securities Industry and Financial Markets Association 
(``SIFMA''), and T. Rowe Price called for draft Rule G-42 and, in some 
cases Rule G-37, to be consistent with the SEC pay to play rule and for 
conforming changes to Rule G-37, arguing that such consistency is 
necessary because many municipal advisors will be subject to both the 
SEC rules and the MSRB rules. Specifically, the ABA said that, 
``imposing two overlapping but inconsistent sets of rules on the same 
conduct would be inconsistent with the spirit of President Obama's 
January 18, 2011 Executive Order, ``Improving Regulation and Regulatory 
Review,'' which provides, in part: ``Our regulatory system * * * must 
identify and use the best, most innovative and least burdensome tools 
for achieving regulatory ends.''
Definition of ``De Minimis'' Political Contribution
    Comment: Each of these commenters said that the MSRB should 
harmonize draft Rule G-42 and Rule G-37 with the SEC pay to play rule 
by defining a ``de minimis'' political contribution as one not 
exceeding $350 per election for an issuer official for whom a municipal 
advisor professional (``MAP'') may vote at the time of the contribution 
and $150 per election for other issuer officials. The ABA said that the 
Rule G-37 definition of de minimis political contribution has not been 
amended since the rule's adoption in 1994 and that the SEC, ``which has 
most recently reviewed the current economic and political environment 
in the context of its deliberations on its adviser rule, determined 
that increased thresholds were warranted to account for inflation since 
1994.''
    MSRB Response: The MSRB has determined to apply the current Rule G-
37 ``de minimis'' political contribution limit to municipal advisors 
under proposed Rule G-42. Even though the Board is sensitive to 
differing regulations on the same topic, the Board is very concerned 
that allowing contributions of $150 per election to officials for whom 
municipal advisors cannot vote (as permitted by the SEC rule) is likely 
to result in the bundling of political contributions by large municipal 
advisor firms, despite the prohibition on such activity under proposed 
Rule G-42(c)(i). The Board has similar concerns about making a 
comparable amendment to Rule G-37. The MSRB has also clarified that, in 
order for a contribution or payment to be considered de minimis, it 
must be made to an official of a municipal entity or a bond ballot 
campaign the MAP or non-MAP executive officer could vote for at the 
time of the contribution, or to a political party of a state or 
political subdivision in which the MAP or a non-MAP executive officer 
could vote at the time of the contribution. Comparable clarifying 
changes have been made to Rule G-37. This clarification is consistent 
with the way in which Rule G-37 has previously been interpreted.
Look-Back Provision
    Comment: The ABA also suggested that the MSRB conform the look-back 
provision of draft Rule G-42 to the SEC pay to play rule, which 
provides that, in the case of employees who do not solicit investment 
advisory business, a two-year ``time out'' from compensation for 
investment advisory services will be triggered by non-de minimis 
political contributions made by new ``covered associates'' within the 
six months prior to their employment. A two-year look-back provision 
covers employees who do solicit investment advisory business. The ABA 
said that the draft Rule G-42 look-back provisions generally \23\ would 
trigger a ban on business for compensation if an employee had made a 
contribution within two years before becoming an MAP. The ABA also said 
that such a restriction, ``would require municipal advisor employers to 
rely on the accurate disclosures of new hires and may preclude an 
employer from hiring an otherwise qualified candidate because of his or 
her legal and legitimate political contributions.''
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    \23\ A six-month look-back provision applies to individuals who 
are only MAPs because they supervise the municipal advisory 
activities of other MAPs.
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    MSRB Response: The look-back period for individuals who solicit 
municipal advisory business or third-party business would be two years, 
which is the same as the look-back period for solicitors in the SEC pay 
to play rule. Under both rules, employers would need to adopt means 
designed to elicit information about contributions made by prospective 
employees during the two years preceding their employment. Unlike the 
SEC pay to play rule, proposed Rule G-42 would include within the 
definition of MAP those associated persons of a municipal advisor who 
are engaged in municipal advisory business with a municipal entity. The 
MSRB believes that these individuals have the greatest interest in 
obtaining municipal advisory business and, therefore, their political 
contributions present the most significant potential for abuse. The 
look-back period for those individuals would also be two years, which 
is the same as the look-back period under Rule G-37 for those 
individuals who are primarily engaged in municipal securities business. 
The two-year look-back provision of Rule G-37 for most new employees 
has worked well over the many years it has been in effect, and the MSRB 
has determined not to change it for either Rule G-37 or proposed Rule 
G-42.
Other
    Comment: Acacia Financial also requested that the provisions of 
draft Rule G-42 related to who is subject to the rule and the 
contribution recipients be made the same as those of the SEC pay to 
play rule.
    MSRB Response: Unlike the SEC pay to play rule, proposed Rule G-42 
would include within the definition of MAP all those associated persons 
of a municipal advisor who are engaged in municipal advisory business 
with a municipal entity. This provision is consistent with how the term 
``municipal finance professional'' (``MFP'') is defined under current 
Rule G-37. As said above, the MSRB believes that these individuals have 
the greatest interest in obtaining municipal advisory business and, 
therefore, their political contributions present the most significant 
potential for abuse. Therefore, the MSRB has determined not to change 
this aspect of proposed Rule G-42. As to the recipients of political 
contributions, proposed Rule G-42 pertains to contributions made to 
certain officials of municipal entities, while the SEC pay to play rule 
pertains to contributions made

[[Page 55980]]

to certain officials of government entities. The definition of 
``official of a municipal entity'' in proposed Rule G-42 is based both 
on the statutory definition of ``municipal entity'' and on the 
definition of ``official of an issuer'' in Rule G-37. The definitions 
of the contribution recipients in proposed Rule G-42 and the SEC pay to 
play rule are effectively the same. The MSRB perceives no 
administrative burden associated with any slight differences and has 
determined not to make any changes.
Harmonization of Draft Rule G-42 with Rule G-37
    Comment: SIFMA said that the MSRB should also harmonize draft Rule 
G-42 with Rule G-37 by:
    (1) Allowing dealer municipal advisors to report their non-de 
minimis political contributions and municipal advisory activities 
either on Form G-42 or on a ``macroform'' Form G-37/G-42; \24\
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    \24\ See also comments of BMO.
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    (2) Narrowing the definition of ``supervisors'' that are MAPs by 
limiting it to those individuals who supervise the municipal advisory 
activities of others and not including those individuals who supervise 
other activities of MAPs;
    (3) Requiring reporting of solicitations only if they are 
successful; \25\
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    \25\ See also comments of BMO.
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    (4) Requiring reporting of municipal advisory business only in the 
quarter in which it is obtained; and
    (5) Using a ``primarily engaged in municipal advisory business'' 
standard, rather than an ``engaged in municipal advisory business'' 
standard in the definition of MAP.\26\ Alternatively, SIFMA said that 
the MSRB should clarify that only ``advice'' within the meaning of the 
statute is covered. SIFMA also recommended that the MSRB adopt a de 
minimis exception to the definition of ``municipal advisor 
professional.''
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    \26\ Proposed Rule G-42(g)(iv)(A) includes within the definition 
of MAP ``any associated person engaged in municipal advisory 
business with a municipal entity.''
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    MSRB Response: (1) The MSRB agrees with SIFMA's comment on the use 
of a ``macroform'' (Form G-37/G-42) and has revised proposed Rule G-
42(e) accordingly.
    (2) The MSRB agrees with SIFMA's comment on the types of 
supervisors that should be considered MAPs and has revised proposed 
Rule G-42(g)(iv)(D) accordingly.
    (3) The MSRB agrees with SIFMA's comment on the reporting of 
solicitations and has amended proposed Rule G-42(e)(i)(C)(2) to require 
the reporting of a list of the third-party business awarded during the 
calendar quarter by state, rather than all solicitations.
    (4) As to the required reporting of municipal advisory business 
engaged in during a calendar quarter, the wording of proposed Rule G-
42(e)(i)(C)(1) would not differ from the wording of Rule G-37(e)(i)(C). 
The instructions for Form G-37 (pp. 14-15) clarify that reporting of 
financial advisory business must occur two times: First, when a 
financial advisory engagement is entered into and second, when a 
transaction that is the subject of the engagement closes. The 
instructions for Form G-37/G-42 would contain similar instructions.
    (5) SIFMA's proposal that the MSRB use a ``primarily engaged in 
municipal advisory business'' standard in the definition of MAP would 
create a loophole by allowing individuals who are only occasionally 
financial advisors to escape the coverage of both Rule G-37 and 
proposed Rule G-42. The use of a ``primarily engaged'' standard in Rule 
G-37 was appropriate because Rule G-37(g)(iv)(A) defines as MFPs those 
associated persons who are ``primarily engaged in municipal securities 
representative activities, as defined in Rule G-3(a)(i).'' The term 
``municipal securities representative activities'' includes a number of 
activities, such as sales and trading, that do not involve contact with 
officials of issuers. Had the MSRB not used a ``primarily engaged'' 
standard in Rule G-37, a broker's occasional sales activities could 
have subjected the broker to Rule G-37, even if the broker had no 
contact whatsoever with issuer officials. Under proposed Rule G-42, a 
person could be a MAP when engaged in municipal advisory business, 
which is defined only with reference to activities that involve contact 
with issuer officials. In this respect, proposed Rule G-42 is 
distinguishable from Rule G-37 and this difference in the definition of 
MAP and MFP is appropriate. Therefore, the MSRB has not made this 
change. For the same reasons, the MSRB does not consider it appropriate 
to adopt a de minimis exception to the definition of MAP. The MSRB also 
notes that SIFMA's arguments on the definitions of ``advice'' are more 
appropriately directed to the SEC.
Ban on Receipt of Compensation
    Comment: The ABA said that the MSRB should prohibit only 
compensation for new municipal advisory services, consistent with Rule 
G-37. The ABA also said that the prohibitions of draft Rule G-42 should 
only apply to the municipal advisor and those employees of the 
municipal advisor that are actually engaged in the solicitation or 
provision of municipal advisory business and not to those individuals 
who are only MAPs as a result of their supervisory or management 
activities.
    MSRB Response: Proposed Rule G-42's ban on business for 
compensation follows the structure of the SEC pay to play rule, as 
recommended previously by the ABA. The MSRB considers a mere ban on 
future municipal advisory business to be inadequate and believes that 
such ban also should apply to existing engagements. Supervisors of MAPs 
who are either engaged in municipal advisory business or solicit 
business also have a significant interest in whether such business is 
obtained. Particularly given that the MSRB has determined to narrow the 
types of supervisors who would be considered MAPs, the MSRB considers 
it appropriate for their contributions to have the potential to trigger 
a ban on business for compensation.
    Comment: SIFMA said that the two-year ban on receipt of 
compensation for municipal advisory business should run from the date 
of the non-de minimis contribution and end two years later, rather than 
ending two years after all municipal advisory business with the 
municipal entity has been terminated. SIFMA also said that solicitors 
should be able to receive compensation for solicitations completed 
before the making of a non-de minimis contribution.
    MSRB Response: The MSRB does not agree with SIFMA's comment 
regarding a flat two-year ban and has determined not to revise the 
proposed rule. Making SIFMA's suggested change would permit municipal 
advisors to remain in place with the understanding that they would 
receive their compensation at the end of two years. Many municipal 
advisory engagements concern transactions that might not close for at 
least two years, with payment contingent on the transaction closing, so 
SIFMA's suggested change would mean that the ban would have little 
practical effect in many cases. Furthermore, the MSRB does not agree 
with SIFMA's proposal concerning the receipt of compensation for 
solicitations already successfully completed at the time of a non-de 
minimis contribution. Under the SEC pay to play rule, an investment 
adviser may not compensate an intermediary that is an investment 
adviser if the intermediary has made a non-de minimis contribution 
within two years. The SEC rule does not distinguish between 
solicitations that have already

[[Page 55981]]

been completed and new solicitations. SIFMA has presented no argument 
as to why broker-dealer intermediaries and investment adviser 
intermediaries should be treated differently.
    Comment: H. J. Umbaugh & Associates (``Umbaugh'') supported a 
longer ban, recommending that the term of the ban should be identical 
to the term of the related office to which the non-de minimis political 
contribution relates, which could be as long as four years.
    MSRB Response: While the MSRB is sensitive to the concern expressed 
by Umbaugh about the continuing influence of political contributions, 
it has determined that certain boundaries on the consequences of a non-
de minimis political contribution must be established in view of First 
Amendment concerns. The two-year ban in proposed Rule G-42 is based on 
Rule G-37, which has survived constitutional challenge.\27\
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    \27\ Blount v. SEC, 61 F.3d 938 (DC Cir. 1995), cert. denied, 
517 U.S. 1119 (1996). In Blount, the court determined that Rule G-37 
was constitutional under a strict scrutiny analysis by finding that 
the rule was narrowly tailored to serve a compelling government 
interest. The court found the SEC's interests in protecting 
investors from fraud and protecting underwriters from unfair, 
corrupt practices to be compelling.
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    Comment: The National Association of Independent Public Finance 
Advisors (``NAIPFA'') said that draft Rule G-42 and Rule G-37 should 
both provide that non-de minimis political contributions to an official 
of a municipal entity by non-MAP and non-MFP executive officers, 
respectively, should trigger a two-year ban on their respective 
business because the ``allowance of such contributions provides large 
firms an opportunity to make significant `indirect' contributions that 
directly benefit the municipal business of such firms.''
    MSRB Response: As is the case with Rule G-37, proposed Rule G-42 is 
narrowly tailored to address the potential for quid pro quo behavior in 
the selection of businesses performing key municipal services, while at 
the same time recognizing the First Amendment rights of citizens to 
support candidates for public office. While non-de minimis 
contributions by non-MFP executive officers (in the case of Rule G-37) 
and non-MAP executive officers (in the case of proposed Rule G-42) will 
not necessarily trigger a ban on business, they must be reported to the 
MSRB. If they represent an attempt to circumvent the prescriptions of 
either rule, they may trigger a ban on business under either Rule G-
37(d) or proposed Rule G-42(d), respectively.
Recordkeeping and Reporting Requirements
    Comment: NAIPFA supported the draft changes to Rules G-8 and G-9 
related to the recordkeeping provisions of draft Rule G-42, as well as 
mandatory electronic reporting to the MSRB. However, some commenters 
said that certain of the reporting and recordkeeping provisions of the 
rule would be difficult and expensive to manage. The ABA said that the 
reporting and recordkeeping provisions of the draft rule were overly 
broad and would yield little benefit in return, particularly the 
provision that requires reporting of all solicitations, whether 
successful or not. The ABA also stated that the MSRB and the SEC would 
force market participants to adopt unnecessarily complex and burdensome 
compliance systems. BMO objected to the need to file separate Forms G-
37 and G-42.
    MSRB Response: As previously said, the MSRB has determined to 
require reporting of a list of the third-party business awarded during 
the calendar quarter by state, rather than all solicitations. The MSRB 
has also determined to allow reporting of required information under 
proposed Rule G-42 on a combined ``macroform'' (Form G-37/G-42). The 
MSRB does not believe that the recordkeeping and reporting requirements 
of the proposed rule change would be complex or burdensome. Dealers are 
already subject to the same requirements. The MSRB believes that the 
proposed rule change is a necessary regulatory burden that will assist 
in the enforcement of the proposed rule. Any potential burden would be 
outweighed by the need to protect municipal entities and their 
constituents.
    Comment: Mr. Robert Fisher (``Mr. Fisher'') said that draft Rule G-
42 should provide an exemption from reporting for municipal advisors 
that do not make political contributions and whose MAPs and PACs do not 
make political contributions. However, Mr. Fisher suggested that such 
an exemption would have to incorporate an ``aggressive'' look-back 
provision in order to capture any contribution that could disqualify 
the municipal advisor from engaging in a municipal advisory activity 
under the rule.
    MSRB Response: While the MSRB is sensitive to the concerns 
expressed by Mr. Fisher, it has determined that, in order to ensure 
effective enforcement of the rule, all municipal advisors should be 
required to file Form G-37/G-42 as long as they are engaged in 
municipal advisory business or the solicitation of third-party 
business. Political contributions made in one quarter do not 
necessarily result in municipal advisory business in the same quarter. 
Sometimes municipal advisory business may be obtained based on an 
understanding that a non-de minimis political contribution will be made 
in a subsequent quarter. Requiring the reporting of municipal advisory 
business only after a non-de minimis political contribution has been 
made by a MAP would not provide enforcement officials with the 
information they need to enforce compliance with the rule. Reporting of 
municipal advisory business need only be made in the calendar quarter 
in which the engagement has commenced and in the calendar quarter in 
which a transaction closes.
    Comment: Repex & Co., Inc. (``Repex'') said that ``[i]f any forms 
are to be filed they should be filed only by those firms that do 
business with those municipalities, state pensions etc.'' and that 
``[t]he little firms are suffocating.''
    MSRB Response: Only municipal advisors engaged in municipal 
advisory business with municipal entities or that solicit third-party 
business from municipal entities would be subject to the reporting 
requirements of proposed Rule G-42(e). A municipal advisor that is only 
engaged in municipal advisory activities with an obligated person need 
not file reports with the MSRB.
Scope of Draft Rule G-42.
    Comment: Some commenters said that pending SEC rulemaking 
concerning the definition of ``municipal advisor'' should be completed 
before the MSRB filed proposed Rule G-42 with the SEC and that an 
additional MSRB comment period might be warranted. For example, the 
Attorney General of the State of Texas said such [SEC] rulemaking, `` * 
* * is likely to have a significant impact on the substance, 
interpretation and enforcement of MSRB rules'' and requested the 
opportunity to provide comments as necessary pending the outcome of the 
SEC's rulemaking process.\28\ SIFMA said that the MSRB should use a 
two-stage rulemaking process and move forward with rulemaking on those 
municipal advisors that are clearly covered by the statute and delay 
rulemaking on those who are only municipal advisors within the 
expansive definition of the term proposed by the SEC.
---------------------------------------------------------------------------

    \28\ See also State of Texas/Comptroller of Public Accounts.
---------------------------------------------------------------------------

    MSRB Response: The MSRB is sensitive to the concerns expressed by 
these commenters and has requested

[[Page 55982]]

that the proposed rule change be made effective six months after the 
SEC has adopted a final rule defining the term ``municipal advisor.'' 
Contributions made prior to the effective date would not result in a 
ban under proposed Rule G-42(b), provided that any ban under Rule G-
37(b)(i) in existence prior to the effective date of proposed Rule G-42 
would continue until it otherwise would have terminated under Rule G-
37(b)(i) as in effect prior to the effective date of proposed Rule G-
42.
    Comment: SIFMA said that the definition of ``municipal advisor'' in 
the Exchange Act does not cover private placement agents that solicit 
municipal entities to make investments in private equity funds, because 
such solicitations are not the ``solicitation of investment advisory 
services.'' Therefore, SIFMA said that the MSRB does not have 
jurisdiction to write rules for such private placement agents, 
including draft Rule G-42.
    However, SIFMA said that the SEC pay to play rule for investment 
advisers prohibits investment advisers from paying intermediaries that 
solicit governmental entities on their behalf after September 13, 2011, 
unless they are subject to a pay to play rule at least as stringent as 
the SEC rule. Therefore, SIFMA said that the MSRB should work with the 
SEC to help ensure that such private placement agents may continue to 
be compensated after September 13, 2011, by adopting an interim final 
rule for such private placement agents, which would apply pending 
resolution of whether such private placement agents are municipal 
advisors or pending the adoption by FINRA of a pay to play rule for 
such private placement agents. SIFMA also previously commented to the 
SEC that private placement agents should be given the option to comply 
with a FINRA pay to play rule.
    MSRB Response: The September 13, 2011 date referred to by SIFMA has 
been revised to June 13, 2012. The MSRB has jurisdiction to write rules 
concerning municipal advisors. Proposed Rule G-42 contains provisions 
that would apply to such private placements if they are determined by 
the SEC to be municipal advisors. It is the goal of the MSRB to have 
proposed Rule G-42 effective before June 13, 2012.
    Comment: T. Rowe Price said that draft Rule G-42's coverage of 
solicitations on behalf of affiliated investment advisers is premature, 
because the SEC has not yet resolved whether to treat such affiliates 
as ``covered associates'' of the investment adviser and, therefore, not 
subject to the ban on payments to intermediaries.
    MSRB Response: The MSRB has revised the definition of ``third-party 
business'' so that it does not apply to solicitations of business on 
behalf of affiliated firms.
First Amendment Considerations
    Comments: Several commenters raised First Amendment concerns 
regarding draft Rule G-42. SIFMA argued that a number of the provisions 
of draft Rule G-42 to which it objected could violate the First 
Amendment: (1) The $250 de minimis political contribution definition; 
(2) requiring reporting of all solicitations, whether or not 
successful; and (3) the definition of ``supervisor.'' Its rationale 
differed depending upon the provision. Although the $250 limit in Rule 
G-37 was upheld by the D.C. Circuit in the Blount case, SIFMA argued 
that it is inconsistent with Supreme Court cases decided after Blount. 
SIFMA also stated that the MSRB could no longer rely on the Blount case 
to sustain the $250 limit, although SIFMA stopped short of arguing that 
Rule G-37 is unconstitutional.
    SIFMA referred to statements by the SEC when it adopted its pay to 
play rule, noting that the SEC pointed to inflation as the reason for 
using $350, rather than the $250 it originally proposed. It noted that 
the SEC also said that the $150 limit for contributions to issuer 
officials for whom the investment adviser could not vote was justified 
because non-residents might have legitimate interests in those 
elections, such as a resident of a metropolitan area's interests in the 
city in which the person worked. The required reporting of all 
solicitations to the MSRB, regardless of whether they are successful, 
was characterized by SIFMA as impinging upon commercial speech. SIFMA 
also argued that the provisions of draft Rule G-42 that would prohibit 
MAPs from soliciting others to make political contributions and 
prohibit indirect violations of the rule are sufficient to prevent 
abuse of the proposed $150 limit.
    Mr. Callcott said that, in order for draft Rule G-42 to survive a 
constitutional challenge, the MSRB would have to: (1) Adopt the SEC pay 
to play rule definition of de minimis political contribution; (2) allow 
contributions to political parties as long as such contributions are 
not earmarked for certain issuer officials; and (3) clarify that 
independent expenditures in support of issuer officials are permitted 
under draft Rule G-42. He argued that, without such conforming changes, 
Rule G-37 would be at risk as well.
    BMO expressed First Amendment concerns related to the reporting 
requirements of draft Rule G-42. BMO said, ``Since we are dealing with 
first amendment considerations, we urge the MSRB to adopt the least 
intrusive program which will elicit relevant information.''
    MSRB Response: The MSRB considers SIFMA's and Mr. Callcott's 
references to recent Supreme Court decisions to be misplaced, because 
those cases addressed substantially different facts. First, unlike the 
Vermont statute considered by the Court in Randall v. Sorrell,\29\ 
proposed Rule G-42 would not apply to a group of individuals that is 
large enough for their contributions to influence the results of 
elections in any state. Therefore, the Court's concern that limitations 
on political contributions would make it difficult for challengers to 
be elected is not applicable. Second, in Citizens United v. FEC,\30\ 
the Supreme Court distinguished restrictions on ``independent 
expenditures'' from restrictions on ``direct contributions'' and left 
restrictions on direct contributions untouched while striking down a 
restriction on independent expenditures as unconstitutional.\31\
---------------------------------------------------------------------------

    \29\ 548 U.S. 230, 247 (2006).
    \30\ 130 S. Ct. 876 (2010).
    \31\ The MSRB notes that proposed Rule G-42 would not restrict 
political campaign contributions. Rather, it would limit certain 
business activities as a result of such contributions.
---------------------------------------------------------------------------

    As stated above, the MSRB is concerned that defining the term ``de 
minimis'' as including contributions by municipal advisor professionals 
to issuer officials for whom they cannot vote will lead to the bundling 
of political contributions. Additionally, the change made by the MSRB 
to the types of supervisors who would be considered municipal advisor 
professionals has more narrowly tailored the proposed rule to those 
individuals who are most likely to benefit from business awarded as a 
result of political contributions.
    The MSRB notes that, contrary to Mr. Callcott's reading, proposed 
Rule G-42(c)(ii) would not prohibit payments to political parties. 
Instead, it would prohibit the solicitation of such payments from 
others. The MSRB also does not agree with Mr. Callcott that the 
definition of ``contribution'' in Rule G-37 and proposed Rule G-42 
precludes the making of independent expenditures in support of issuer 
officials in violation of Citizens United.
    Comment: SIFMA also said that the MSRB should clarify that 
recordkeeping

[[Page 55983]]

requirements of draft Rule G-42 are not retroactive. It said that only 
engagements obtained after the rule's operative date should be required 
to be reported.
    MSRB Response: The recordkeeping provisions of proposed Rule G-42 
would not become effective until the rest of the proposed rule change 
becomes effective and would not be retroactive.
Bond Ballot Campaign Contributions
    Comments: Some commenters said that draft Rule G-42 should prohibit 
certain contributions to bond ballot campaigns by underwriters and 
municipal advisors. AGFS expressed support for draft Rule G-42 \32\ but 
said that bond ballot contributions by underwriters and municipal 
advisors, ``distort the democratic process'' and that ``[m]unicipal 
advisors violate their fiduciary duty when they encourage, and 
participate with, their public entity clients and officials of the 
clients in actions that are undemocratic at best and illegal at 
worst.''
---------------------------------------------------------------------------

    \32\ G.L. Hicks Financial LLC also expressed support for draft 
Rule G-42.
---------------------------------------------------------------------------

    NAIPFA said, ``All too often, we see funds and/or campaign services 
being contributed to bond campaigns by underwriters [and] financial 
advisors * * * who end up providing services for the bond transaction 
work once the election is successful.'' NAIPFA recommended that draft 
Rule G-42 should broaden the standards of ethical behavior to include a 
ban on municipal advisory business in the event of abusive bond ballot 
contributions. WM Financial Strategies also said that ``bond ballot 
campaign contributions, when made outside of an individual's voting 
jurisdiction, are a form of [pay]-to-play that taint the integrity of 
the municipal market.''
    MSRB Response: The MSRB does not believe that a ban on business as 
a result of non-de minimis contributions to bond ballot campaigns is 
warranted at this time. As the MSRB said when it filed with the SEC a 
comparable amendment to Rule G-37 requiring the reporting of such 
contributions, ``The MSRB believes, * * * that the proposed amendments 
would create a uniform disclosure regime to track and make available to 
public scrutiny bond ballot campaign contributions by dealers in the 
municipal securities market, thereby increasing available information 
to municipal securities market participants and the general public. The 
MSRB does not believe that a ban on municipal securities business as a 
result of a contribution to a bond ballot campaign is warranted at this 
time but notes that the disclosures provided for under the proposed 
rule change will assist in determining, in the future, whether it would 
be appropriate to consider further action in this area.'' \33\ The MSRB 
notes that contributions made to bond ballot initiatives for which a 
municipal advisor professional cannot vote are not considered de 
minimis for purposes of the reporting requirements of Rule G-42(e).
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Release No. 61381 (January 20, 
2010); File No. SR-MSRB-2009-18 (December 4, 2010).
---------------------------------------------------------------------------

Miscellaneous Comments
    Transition Expenses.
    Comment: Umbaugh said that draft Rule G-42 is not clear as to the 
types of transition expenses that might be considered contributions in 
violation of the rule.
    MSRB Response: When it requested comment on draft Rule G-42, the 
MSRB said that it expected to propose interpretations of draft Rule G-
42 similar to those applicable to Rule G-37 and that remains the MSRB's 
intent, subject to SEC approval. On November 29, 2001, the MSRB issued 
an interpretation of Rule G-37 concerning ``Activities by Dealers and 
Municipal Finance Professionals During Transition Periods for Elected 
Issuer Officials.'' Municipal advisors may look to that interpretation 
for guidance under proposed Rule G-42.
    Definition of ``Seeking to Engage''.
    Comment: The PFM Group (``PFM'') requested that the MSRB clarify 
when a municipal advisor will be considered to be ``seeking to engage'' 
in municipal advisory business. It suggested that draft Rule G-42(c)(i) 
and (ii) not apply to any activity occurring more than six months after 
the advisor's latest contact with the municipal entity looking toward 
an engagement or, in the case of an RFP response, between the time that 
the municipal entity has contracted with another party and the 
municipal advisor's next contact with the municipal entity.
    MSRB Response: As under Rule G-37, whether a municipal advisor is 
seeking to engage in municipal advisory business is a facts and 
circumstances analysis, and the MSRB does not consider a bright line 
test appropriate.
    Payments to Political Parties.
    Comment: PFM requested clarification that the prohibitions on 
payments to political parties would only apply to the political party 
organization at the level of government with which the municipal 
advisor is engaged in business or is seeking to engage in business.
    MSRB Response: Proposed Rule G-42(c)(ii) would not prohibit 
payments to political parties. It would prohibit the solicitation of 
such payments from others. As with Rule G-37, this prohibition under 
proposed Rule G-42 would apply to solicitations of payments to all 
political party organizations, state and local, operating within the 
jurisdiction in which the municipal advisor is engaging or seeking to 
engage in municipal advisory business or in which the municipal advisor 
is soliciting third-party business.
    Definition of ``Payment.''
    Comment: PFM suggested that the definition of ``payment'' be 
modified to include the concept of an amount in excess of the fair 
value of goods or services provided by the political party to make it 
clear that commercial transactions with a political party are not 
prohibited.
    MSRB Response: As explained above, proposed Rule G-42 does not 
prohibit payments to political parties.
    Contributions by MAPs to Their Own Campaigns.
    Comment: Umbaugh requested clarification that a non-de minimis 
contribution by a MAP of money, property, or services to his or her own 
election campaign would not trigger a ban on business for compensation 
with the government to which the MAP is elected for a two-year period.
    MSRB Response: When it requested comment on draft Rule G-42, the 
MSRB said that it expected to propose interpretations of Rule G-42 
similar to those applicable to Rule G-37 and that remains the MSRB's 
intent, subject to SEC approval. Q&A II. 10 issued under Rule G-37 
provides that an MFP who is an incumbent or candidate for office is not 
limited to contributing the de minimis amount to his or her own 
campaign and that such contributions by the candidate or incumbent will 
not trigger a ban on business. Municipal advisors may look to that Q&A, 
and other Rule G-37 Qs&As, for guidance under proposed Rule G-42.
    Rule G-38.
    Comment: In its request for comment on draft Rule G-42, the MSRB 
asked whether Rule G-38 (on solicitation of municipal securities 
business) should be revised or eliminated now that firms and 
individuals that solicit municipal securities business on behalf of 
dealers are regulated as municipal advisors. Both T. Rowe Price and PFM 
said that Rule G-38 should not be eliminated. PFM also noted other 
issues related to third-party business should Rule G-38 be eliminated.

[[Page 55984]]

    MSRB Response: The MSRB has determined not to propose that Rule G-
38 be revised or eliminated at this time.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date 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 or disapprove such 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 Exchange Act. An investment adviser 
subject to rule 206(4)-5 under the Investment Advisers Act of 1940 (the 
``Advisers Act'') is prohibited from providing or agreeing to provide, 
directly or indirectly, payment to any third party to solicit a 
government entity for investment advisory services on behalf of such 
investment adviser unless that third party is a ``regulated person'' 
under the rule.\34\ A regulated person may include a registered 
municipal advisor subject to pay to play rules that the Commission, by 
order, finds ``impose substantially equivalent or more stringent 
restrictions on municipal advisors than [the Advisers Act rule] imposes 
on investment advisers and * * * are consistent with the objectives of 
[the Advisers Act rule].''\35\ We note that proposed rule G-42 differs 
from the Advisers Act pay to play rule in certain respects, and we 
request comment on the effect of those differences on the finding the 
Advisers Act rule requires.\36\ Interested persons are also invited to 
submit views and arguments as to whether they can effectively comment 
on the proposed rule change prior to the date of final adoption of the 
Commission's permanent rules for the registration of municipal 
advisors. Comments may be submitted by any of the following methods:
---------------------------------------------------------------------------

    \34\ See 17 CFR 275.206(4)-5(a)(2)(i)(A).
    \35\ This provision will be codified at 17 CFR 275.206(4)-
5(f)(9)(iii) (effective September 19, 2011). See Investment Advisers 
Act Release No. IA-3221 (June 22, 2011), 76 FR 42950 (July 19, 
2011).
    \36\ See, e.g., proposed rule G-42(b), G-42(c)(ii), G-42(g)(iv) 
and G-42(g)(v).
---------------------------------------------------------------------------

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 SR-MSRB-2011-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number SR-MSRB-2011-12. This file 
number 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 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 Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE., Washington, 
DC 20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the MSRB's offices. 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-2011-12 and should be submitted on or before 
September 30, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
---------------------------------------------------------------------------

    \37\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23046 Filed 9-8-11; 8:45 am]
BILLING CODE 8011-01-P


