Editor's Note: The following is a reprint of the set of 40 questions and answer issued Tuesday by the Municipal Securities Rulemaking Board to help dealers understand and comply with the board's new political contributions rule G-37, which took effect April 25. The rule bars municipal dealers from doing business with state and local governments for two years after the dealer, its political action committee, or its bond professionals contribute to an officeholder who could influence the awarding of bond business. Employees, however, can give up to $250 to candidates running for office in the jurisdiction where they live. The board released the "Q and A" along with a set of proposed revisions to Rule G-37, including an amendment that would protect firms that make good faith efforts to comply with the rule from being penalized for isolated violations by employees. The revisions are being reviewed by the Securities and Exchange Commission.

Rule G-37

Questions & Answers Concerning Political

Contributions

and Prohibitions on Municipal Securities

Business

This notice outlines the provisions of rule G-37 concerning political contributions and prohibitions on municipal securities business. It also responds to a number of questions that have been raised by market participants regarding the rule's provisions. The Board is providing this information to assist dealers in complying with the rule. Rule G-37 applies to contributions made and municipal securities business engaged in on and after April 25, 1994.(1)

I. Overview of Rule G-37

In general, rule G-37 (i) prohibits brokers, dealers and municipal securities dealers ("dealers") from engaging in municipal securities business with issuers if certain political contributions have been made to officials of such issuers; and (ii) requires dealers to record and disclose certain political contributions, as well as other information, to allow public scrutiny of political contributions and the municipal securities business of a dealer. The rule is divided into eight sections, which are lettered (a) - (h).

Section (a) sets forth the general purpose and intent of the rule.

Section (b) is the business prohibition section which prohibits dealers from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by the dealer, any municipal finance professional and any political action committee (PAC) controlled by the dealer or any municipal finance professional. This paragraph also sets forth a de minimis exemption such that a dealer would not be subject to the prohibition on business if the only contributions made were by municipal finance professionals who were entitled to vote for the officials to whom they contributed, provided that such contributions by each municipal finance professional did not exceed $250 per official per election.

Section (c) is the anti-solicitation provision which prohibits dealers and municipal finance professionals from soliciting any person or PAC to make contributions, or to coordinate (or bundle) contributions to an official of an issuer with which the dealer is engaging or seeking to engage in municipal securities business.

Section (d) prohibits dealers and municipal finance professionals from doing indirectly any act which the dealer or municipal finance professional is prohibited from doing directly, pursuant to sections (b) and (c) of the rule.

Section (e) is the reporting provision which requires dealers to submit to the Board certain summary information on their municipal securities business and contributions to issuer officials and political parties, by the dealer, municipal finance professionals, PACs controlled by dealers and municipal finance professionals, and executive officers. Section (e) also provides that the reports must be submitted in accordance with rule G-37 filing procedures. These procedures require dealers to file two copies of Form G-37 within thirty (30) calendar days after the end of each calendar quarter (which filing dates correspond to January 31, April 30, July 31, and October 31.

Section (f) states that the Board will accept additional information that is voluntarily provided by dealers or others, so long as such information is submitted pursuant to the rule G-37 filing procedures.

Section (g) is the definitional section which defines the following terms: (i) contribution; (ii) issuer; (iii) broker, dealer and municipal securities dealer; (iv) municipal finance professional; (v) executive officer; (vi) official of an issuer; and (vii) municipal securities business.

Section (h) provides that a prohibition on municipal securities business under section (b) arises only from contributions made on or after April 25, 1994.

In addition, Board rule G-8(a)(xvi) sets forth specific recordkeeping requirements for rule G-37 which begin with contributions made and municipal securities business engaged in as of April 25, 1994. These requirements are designed to assist dealers in determining whether or not they may engage in business with a particular issuer. In addition to recording contributions to officials of issuers made by dealers, municipal finance professionals and PACs controlled by dealers and municipal finance professionals, rule G-8 requires dealers to record contributions made by executive officers and contributions made to political parties of states and political subdivisions. Dealers also are required to record the name, company, role and compensation arrangement of any person employed by the dealer to obtain or retain municipal business. Rule G-9(a)(viii), on record retention, requires dealers to retain the records made pursuant to rule G-8(a)(xvi) for at least six years.

Finally, the Board recently filed with the SEC amendments to rule G-37, which are described in the rule thing.(2)

II. Question and Answers(3)

Persons/Entities Subject to the Rule

1. Q: To whom does rule G-37 apply?

A: In general, rule G-37 applies to brokers, dealers and municipal securities dealers (collectively referred to as dealers), municipal finance professionals, and PACs controlled by the dealer or any municipal finance professional. In addition, the recordkeeping and disclosure provisions apply to executive officers of the dealer.

2. Q: Who is consulted a municipal finance professional?

A: To determine if a particular person is a municipal finance professional, first determine whether the person is an "associated person" of a dealer (other than a bank dealer) under Section 3(a)(18) of the Securities Exchange Act of 1934 (Act), or an associated person of a bank dealer under Section 3(a)(32) of the Act. Then determine whether the associated person fits within one of the four categories listed in the definition of municipal finance professional under rule G-37.

Under Section 3(a)(18) of the Act, "associated person of a broker or dealer" is defined as:

* Any partner, officer, director, or branch manager (or any person occupying a similar status or performing similar functions);

* Any person directly or indirectly controlling, controlled by, or under common control with the dealer;

* Or any employee of such broker or dealer, except those whose functions are solely clerical or ministerial.

Under Section 3(a)(32) of the Act, "person associated with a municipal securities dealer" when used with respect to a municipal securities dealer which is a bank or a division or department of a bank means:

* Any person directly engaged in the management, direction, supervision, or performance of any of the municipal securities dealer's activities with respect to municipal securities; and

* Any person directly or indirectly controlling such activities or controlled by the municipal securities dealer in connection with such activities.

Under rule G-37(g)(iv), a municipal finance professional is defined as:

1. Any associated person primarily engaged in municipal representative activities pursuant to rule G-3(a)(i) (such activities include underwriting, trading, sales, financial advisory and consultant services, research or investment advice on municipal securities, or any other activities which involve communication, directly indirectly, with public investors relating to the activities listed in this paragraph);

2. Any associated person who solicits "municipal securities business" as defined in rule G-37 (which includes negotiated underwriting activities, private placement activities, negotiated remarketing services, financial advisory and consultant services);

3. Direct supervisors of the associated persons described above, including (1) for dealers that are not bank dealers, the CEO or similarly situated official; and (2) for bank dealers, the officer or officers designated by the bank's board of directors as responsible for the day-to-day conduct of the bank's dealer activities.

4. For dealers other than bank dealers: any member of the executive or management committee, or similarly situated officials, if any. For bank dealers: any member of the executive or management committee of the separately identifiable department or division of the bank, as defined in rule G-1, if any.

Each person listed by the dealer as a municipal finance professional is deemed to be such for purposes of rule G-37. Remember that the prohibition on business applies to contributions made within the previous two years, beginning with contributions made on April 25, 1994.

3. Q: Does the definition of municipal finance professional include all registered representatives?

A: No. The definition of municipal finance professional includes, among others, any associated person primarily engaged in municipal representative activities pursuant to rule G-3(a)(i). These activities include underwriting, trading, sales, financial advisory and consultant services, research or investment advice on municipal securities, or any other activity which involve communication, directly or indirectly, with public investors relating to the activities listed in this paragraph.

4. Q: Does the definition of municipal finance professional include any associated person who solicits municipal securities business, even if this solicitation activity is a very small portion of the associated person's work?

A: Yes. Even if an associated person is not "primarily engaged in municipal representative activities," that associated person can be considered a municipal finance securities business, as defined in rule G-37 (such business includes negotiated underwriting activities, private placement activities, negotiated remarketing services, financial advisory and consultant services).

5. Q: Does the definition of municipal finance professional include anyone other than as associated person of the dealer, for example, consultants, lawyers or spouses of municipal finance professionals?

A: No. Municipal finance professionals must be associated persons of the dealer. Of course, if a dealer or a municipal finance professional seeks indirectly to make contributions to issuer officials through consultants, lawyers or spouses, such contributions would result in the dealer being prohibited from engaging in municipal securities business with the issuer for two years from the date of such contributions.

6: Q: What is a "dealer-controlled" PAC?

A: Each dealer must determine whether a PAC is dealer controlled. For dealers, other than bank dealers, one may assume that any PAC of the dealer would be considered a dealer-controlled PAC for purposes of rule G-37. For bank dealers, it will depend upon whether the dealer or anyone from the dealer department has the ability to direct or cause the direction of the management or the policies of the PAC.

7. Q: Who is an "executive officer?"

A: Pursuant to rule G-37(g)(v), an executive officer is defined as any associated person in charge of a principal business unit, division or function, or any other person who performs similar policy making functions for the dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional

Probihition on Engaging in Municipal

Securities Business

8. Q: What actions would cause a dealer to be prohibited from engaging in municipal securities business with an issuer?

A: Rule G-37(b) prohibits a dealer from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the dealer, (ii) any municipal finance professional associated with such dealer; or (iii) any PAC controlled by the dealer or any municipal finance professional.

9. Q: Is there an exception to this prohibition on engaging in municipal securities business?

A: There is one exception to rule G-37(b). The prohibition does not apply if the only contributions to officials of issuers are made by municipal finance professionals entitled to vote for such officials, and provided such contributions, in total, are not in excess of $250 by each such municipal finance professional to each official of such issuer, per election.

10. Q. If an issuer official is involved in a primary election prior to the general election, may a municipal finance professional who is entitled to vote for such official contribute $250 to the issuer official's primary as well as general election?

A: Yes, the municipal finance professional could contribute up to $250 to each such official (i.e., $250 per election).

11. Q: What is the municipal securities business that a dealer would be banned from engaging in with an issue if certain political contribution are made to officials of such issuers?

A: The term "municipal securities business" is defined in rule G-37(g)(vii) to encompass certain as negotiated underwriters (as as acting as negotiated underwriters (as managing underwriter or as syndicate member), financial advisors and consultants, placement agents, and negotiated remarketing agents. The rule does not prohibit a dealer from engaging in competitive underwritings or competitive remarketing services for the issuer.

12. Q: A dealer may discover that a "disgruntled" municipal finance professional made a contribution to an issuer official deliberately to prohibit the dealer from engaging in municipal securities business with the issuer. Is there a procedure in place whereby the dealer can seek an exemption from the prohibition on municipal securities business in such circumstances?

A: The Board recognizes that there may be limited circumstances in which a dealer should be able to request an exemption from the prohibition on business. This, the Board has filed with the SEC an amendment to rule G-37 that allows the National Association of Securities Dealers and the federal bank regulatory authorities (the Office of the Comptroller of the Currency, Federal Reserve Board and Federal Deposit Insurance Corporation), upon application by a dealer, to grant such exemption, conditionally or unconditionally, in certain circumstances. See the rule filing, SR-MSRB-94-5. for more information about this procedure.

13. Q: If a municipal finance professional also is an incumbent or candidate for political office in a municipality in which the municipal finance professional's employer (i.e., the dealer) conducts municipal securities business, must the dealer terminated the municipal finance professional or are there any restrictions on the kind of business a dealer can engage in with that issuer?

A: No. However, the dealer, any municipal finance professional and any PAC controlled by the dealer or municipal finance professional must ensure that the dealer does not engage in municipal securities business with the issuer if contributions (other than the de minimis contributions allowed under section (b)) are made to an official of the issuer. The municipal finance professional who is an incumbent or candidate for office is not limited to contributing the de minimis amount to his or her own campaign in such instances.

14. Q: A municipal finance professional was associated with dealer X at the time he made a contribution which resulted in the dealer being prohibited from engaging in municipal securities business with the issuer. Then, less than two years after making the contribution, the municipal finance professional becomes associated with dealer Y. Is dealer Y also subject to the prohibition on business?

A: Both dealer are subject to the prohibition for two years from the date the municipal finance professional made the contribution. Of course, dealer Y's prohibition on business only begins when the municipal finance professional becomes associated with that dealer.

15. Q: Prior to becoming associated with any dealer, a person makes a contributions to an issuer official. Less than two years after making the contributions, that person becomes a municipal finance professional. Would the hiring dealer be prohibited from engaging in municipal securities business with that issuer?

A: Yes. Rule G-37 attempts to sever any connection between the making of contributions and the awarding of municipal securities business by prohibiting the dealer from engaging in municipal securities business with the issuer for two years from the date the contributions was made. As noted above, the dealer's prohibition on business would begin when the municipal finance professional becomes associated with that dealer. Thus, if the individual was hired, for example, six months after making the contribution, then the dealer's prohibition on business would extend for one and one half years.

16. Q: A person is associated with a dealer in a non-municipal finance professional capacity, and makes a contribution to an issuer official. Less than two years after making the contribution, that person becomes a municipal finance professional. Would the dealer be prohibited from engaging in a negotiated underwriting with that issuer?

A: Yes, the dealer is subject to the prohibition for two years from the date the contribution was made.

17. Q: If an executive officer makes a contribution to an official of an issuer, is the dealer prohibited from engaging in municipal securities business with that issuer?

A: No. The prohibition section applies only to contributions made by the dealer, its municipal finance professionals, or any PAC controlled by the dealer or any of its municipal finance professionals. The definition of executive officer does not include any municipal finance professional. However, contributions by executive officers are subject to the reporting/disclosure provisions of the rule. In addition, pursuant to section (d), dealers are prohibited from using executive officers (as well as any other person or entity) as a conduit for making contributions to officials of issuers.

18. Q: How is the term "official of an issuer" defined in rule G-37

A: Rule G-37(g)(vi) defines the term "official of an issuer" as any incumbent, candidate or successful candidate for elective office of the issuer, which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a dealer for municipal securities business. The definition includes any issuer official or candidate (or successful candidate) in a position which has influence over the awarding of municipal securities business. Thus, contributions to certain state-wide executive or legislative officials would be included within the prohibition on engaging in municipal securities business.

19. Q: Would a dealer be prohibited from engaging in municipal securities business with a state agency, whose board members are appointed by the governor, if the dealer makes contributions to the governor?

A: The Board intended to prohibit a dealer from engaging in municipal securities business with this state agency in these circumstances. The Board recently filed with the SEC an amendment to rule G-37 to clarify the definition of "official of an issuer." See the rule filing, SP-MSRB-94-5, for more information about this amendment.

20. Q: How can a dealer determine whether an incumbent or candidate for a particular elective office will be able to award or influence the awarding of municipal securities business? For example, in many state, such influence is found in executive branch elected officials, not legislative branch officials.

A: The dealer must review the scope of authority of the particular office at issue, whether executive or legislative branch, not the individual, to determine whether influence over the awarding of municipal securities business is present.

21. Q: How is the term "contribution" defined in rule G-37?

A: The term "contribution" is defined in rule G-37(g)(i) to mean any gift, subscription, loan, advance, or deposit of money or anything of value made: (i) for the purpose of influencing any election for federal, state or local office; (ii) for payment of debt incurred in connection with any such election; or (iii) for transition or inaugural expenses incurred by the successful candidate for state or local office.

22. Q: Does rule G-37 encompass all contributions to candidates for federal office?

A: No. Rule G-37 encompasses, for federal offices, only those contributions to an officials of an issuer who is seeking election to a federal office.

23. Q: Are contributions to bond election committees supporting ballot measures for bonds and tax levies subject to the requirements of rule G-37?

A: No.

24. Q: Is a municipal finance professional prohibited from performing volunteer work on an issuer official's behalf?

A: Rule G-37 is not intended to prohibit or restrict municipal finance professionals from engaging in personal volunteer work. However, soliciting and bundling of contributions would invoke application of the rule. In addition, if the municipal finance professional uses the dealer's resources (e.g., a political position paper prepared by dealer personnel) or incurs expenses in the conduct of such volunteer work (e.g., hosting a reception), then the value of such resources or expenses would constitute a contribution. Personal expenses incurred by the municipal finance professional in the conduct of such volunteer work, which expenses are purely incidental to such work and unreimbursed by the dealer (e.g., cab fares and personal meals), would not constitute a contribution.

25. Q: Are contributions to issuer officials by municipal finance professional's spouses and household members covered by the rule?

A: No, unless these contributions are directed by the municipal finance professional, which is prohibited by section (d) of the rule.

26. Q: Are contributions to national, state or local political parties covered by the rule?

A: Any such contributions would not trigger the prohibition on business portion of the rule (section (b)) unless such entities are used as a conduit to indirectly contribute to an issuer official, which is prohibited by section (d) of the rule. However, contributions to state or local political parties must be recorded under rule G-8(a)(xvi) and disclosed in summary form under rule G-37(e), except for those contributions which meet the de minimis exemption.

27. Q: Are any payments made to issuer officials, other than political contributions, covered by the rule?

A: No. However, any other payments may be subject to rule G-20 on gifts and gratuities.

28. Q: Would a charitable donation to an organization made by a dealer at the request of an issuer official meet the definition of "contributions" in rule G-37?

A: No. Charitable donations are not considered political contributions for purposes of rule G-37 and therefore are not covered by the rule.

29. Q: May a dealer continue to engage in municipal securities business with an issuer if a municipal finance professional pays for and attends a fund-raising dinner for a candidate who is seeking election to a position as an official of such issuer?

A: A municipal finance professional who contributes funds in this instance would subject the dealer to a prohibition on municipal securities business with the issuer unless the municipal finance professional is entitled to vote for such candidate and any contributions do not exceed $250 to such candidate per election. In addition, any municipal finance professional who attends the dinner for the purpose of soliciting contributions by others for the issuer official would violate rule G-37's prohibition on soliciting contributions.

Recordkeeping

30. Q: Does a dealer have to collect information on political contributions for the two years prior to April 25, 1994?

A: No. Records do not have to be maintained for contributions made or municipal securities business engaged in prior to April 25, 1994.

31. Q: If a dealer has instituted an internal voluntary ban on political contributions, is the dealer still subject to the recordkeeping requirements?

A: Yes. The Board amended rules G-8 and G-9, on recordkeeping and record retention, respectively, to require each dealer to maintain records of certain information. This recordkeeping is designed to assist dealers in determining whether or not they may engage in business with a particular issuer, as well as to facilitate compliance with, and enforcement of, rule G-37.

32. Q: Rule G-8 requires dealer to record all issuers with which the dealer has engaged in municipal securities business. The term "issuer" includes the issuer of a separate security as defined in SEC Rule 3b-5(a) under the Act. In the context of industrial revenue bond issues, for example, the issuer of a separate security is a private corporation not a government entity. Must we record these "issuers"?

A: No, such private corporations, which are not an agency or instrumentality of a state or any political subdivision, need not be recorded.

Reporting

33. Q: What are the reporting requirement under rule G-37?

A: Each dealer is required to file two copies of Form G-37 within 30 calendar days after the end of each calendar quarter (i.e., by January 31, April 30, July 30 and October 31). The Board recently filed an amendment to rule G-37 with the SEC to require that the forms be submitted by certified or registered mail or some other equally prompt means that provides a record of sending. See the rule filing, SR-MSRB-94-5, for more information about this amendment.

34. Q: Under what circumstances must Form G-37 be filed with the Board?

A: Form G-37 must be filed with the Board if, during the reporting period, (i) political contributions were made by those entities and/or persons subject to rule G-37, and/or (ii) the dealer engaged in municipal securities business with an issuer, as defined in rule G-37(g)(vii). Rule G-37 attempts to sever any connection between the making of contributions and the awarding of municipal securities business. However, the making of contributions and the resulting awarding of municipal securities business may not come within a single reporting period. Thus, it is important that information on political contributions be disclosed even if no municipal securities business was engaged in during the reporting period. So too, it is important to disclose municipal securities business even if no political contributions were made during the reporting period. However, a dealer is not required to file Form G-37 if no political contributions were made and the dealer did not engage in municipal securities business during the reporting period.

35. Q: Does a dealer have to complete the section of Form G-37 concerning issuers with whom the dealer has engaged in municipal securities business if the only municipal securities related business engaged in during the reporting period was as a welling group member?

A: No. Rule G-37 does not define "municipal securities business" to include selling group member activities.

36. Q: Which contributions to officials of issuers and political parties of states and political subdivisions must be disclosed to the Board on Form G-37?

A: Those contributions which are required to be recorded pursuant to rule G-8(a)(xvi). These include (i) the contributions, direct or indirect, to officials of an issuer and to political parties of states and political subdivisions made by the dealer and each PAC controlled by the dealer (or controlled by any municipal finance professional of such dealer); (ii) the contributions, direct or indirect, to officials of an issuer made by each municipal finance professional and executive officer; however, such records need not reflect any contribution made by a municipal finance professional or executive officer to officials of an issuer for whom such person is entitled to vote if the contributions by each such person, in total, are not in excess of $250 to any official of an issuer, per election; and (ii) the contributions, direct or indirect, to political parties of states and political subdivisions made by all municipal finance professionals and executive officers, however, such records need not reflect those contributions made by any municipal finance professional or executive officer to a political party of a state or political subdivision in which such persons are entitled to vote if the contributions by each such person, in total, are not in excess of $250 per political party, per year.

37. Q: The disclosure of the compensation arrangement of any person employed by the dealer to obtain or retain municipal securities business must be included on Form G-37. Does this include disclosure of the compensation arrangements of municipal finance professionals?

A: No. The Board recently filed with the SEC an amendment to the rule to clarify this point. See the rule filing, SR-MSRB-94-5, for more information about this provision.

38. Q: May non-dealers (e.g., attorneys, independent financial advisors) voluntarily submit information on political contributions and other activities to the Board?

A: Yes, as long as the filing procedures are followed.

39. Q: Will the Forms G-37 submitted to the Board be available for public review?

A: Yes. One copy of each Form G-37 will be maintained at the Board's Public Access Facility in Alexandria, Virginia. These forms will be available to the public for review and photocopying. The Board will charge 20 cents per page plus sales tax, if applicable, for photocopying.

40. Q: Will the Board answer telephone inquiries as to whether a report has been filed?

A: Yes. The Board will maintain a database of reports filed by each dealer (as well as any other party voluntarily submitting information on political contributions), so that any member of the public may telephone the Board's offices to inquire whether a certain dealer (or other party) has submitted a report pursuant to rule G-37. In order to further enhance public access to this information, the Board will provide a list of companies that offer document retrieval and mailing services.

(1) The Securities and Exchange Commission ("SEC") approved rule G-37 on April 7, 1994. See Securities Exchange Act Release No. 33868 (April 7, 1994); 59 FR17621 (April 13, 1994). (2) SR-MSRB-94-5. (3). These questions and answers are divided into the following four general categories: Persons/Entities Subject to the Rule; Prohibition on Engaging in Municipal Securities Business; Recordkeeping; and Reporting.

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