WASHINGTON -- The Municipal Securities Rulemaking Board asked the SEC on Friday to approve several amendments to the board's "pay-to-play" rule that would both relax and tighten some of its provisions.

The proposed revisions to the board's Rule G-37, which governs political contributions, would exempt securities firms' retail sales staffs from the rule and narrow the number of supervisors of municipal finance professionals that are covered, according to the 13-page proposal that was filed with the Securities and Exchange Commission.

In a move aimed at heading off possible attempts to get around G37, the board proposed expanding the kinds of records that firms must keep and report to the MSRB about employee contributions to political parties.

The proposed amendments to Rule G-37, which took effect April 25, are expected to be published for comment in the Federal Register shortly.

Rule G-37 bars municipal dealers that make contributions to issuer clients from doing business for two years with those governments. The rule applies not only to municipal securities professionals, but those general registered representatives of firms who are primarily engaged in municipal securities activities.

The Public Securities Association warned the board in a seven-page letter last month that the rule could put firms' general sales forces in an "untenable position" and urged the board to exclude the employees from the measure, Salespeople often float in and out of selling municipal bonds; thus, it will be virtually impossible for compliance staffs, particularly at large firms, to determine from day to day who is a municipal finance professional, the group said.

There may be "limited instances" in which retail salespeople make contributions to influence the awarding of bond business, the board said in its draft rule package to the SEC. Nevertheless, the board is "persuaded," at this time, that including retail sales staff in the rule places a "compliance burden" on firms that does not outweigh the benefits, the 15 member board said.

The rule still covers people in the public finance department, as well as underwriters, traders, and institutional salespeople who are "primarily engaged in municipal securities representative activities," the draft notice said.

"If in the future, the board learns of problems in connection with retail salespersons making contributions to influence the awarding of municipal securities business, then it will reconsider" its move, the board's notice said. The board stressed that a retail person still could be designated a municipal finance professional if he or she solicits any municipal securities business.

The board proposed expanding Rule G-37's requirements governing contributions to political parties by requiring firms to report all payments to political parties.

"The board has been notified by dealers and other industry participants that certain political parties are engaging in fund-raising practices" that attempt to get around Rule G-37, the board said in its SEC filing. Political parties, for example, are urging dealers to earmark payments for parties' administrative expenses or voter registration drives, but not political contributions. As a result, under the current rule dealers do not have to report them to the MSRB, unlike political contributions.

If the MSRB finds that a contribution to a party was earmarked for a particular issuer official, then the dealer would violate the rule's restrictions on indirect contributions.

Warning that the same pay-to-play pressures that motivated the board to adopt Rule G-37 may be emerging in connection with fund-raising practices, the board on Friday proposed requiring dealers to record and disclose "all payments" to parties. That would include any "gift, subscription, loan, advance, or deposit of money or anything of value," the board said.

The board added, however, that it does not intend to restrict the personal volunteer work that municipal finance professionals do for parties.

The MSRB also proposed an amendment that would narrow the number of supervisors at firms that are covered by the rule.

The current rule covers municipal finance professionals and their direct supervisors up through and including the chief executive officer.

"Some dealers have expressed concern that the definition extends unnecessarily beyond the typical municipal department supervisors," the board said. "For example, if someone from the corporate department assists the municipal department by soliciting work from a municipal issuer, such a person becomes a municipal finance professional because of these activities."

"Under the rule, all direct corporate department supervisors of that individual also come under the definition of municipal finance professional," the board's proposal said. The board also proposed narrowing the number of supervisors covered by amending the definition of a municipal finance professional. Such a professional would be someone who is both "(i) a municipal securities principal or a municipal securities sales principal and (ii) a supervisor of any person primarily engaged in municipal securities representative activities or who solicits municipal securities business," the board said. The proposal noted that a retail salesperson's supervisor could be covered by the definition. Finally, the board proposed an amendment that would omit issuers of so-called separate securities from the definition of issuer under the rule. Dealers have complained that they have to do a "separate security" analysis to determine if a corporate obligor fits within the definition and then if any personnel dealing with such issuers could be considered municipal finance professionals, the MSRB said. The proposed revisions to Rule G37 are the second package of changes requested by the board. The SEC in June gave quick approval to a rule proposed by the board that would provide a "safe harbor" for firms that make good-faith efforts to comply with the rule from being penalized for isolated employee violations. The proposed amendments to the political contributions rule were filed as revisions adopted by the board to its gifts and gratuities Rule G-20, which took effect Friday.

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