WASHINGTON -- The Public Securities Association is warning the MSRB that its pay-to-play rule could put firms' general sales forces in an "untenable position" and wants the board to exclude such employees from the measure.

If the Municipal Securities Rulemaking Board cannot flatly exempt such employees, then it should amend the rule to allow firms to determine annually, rather than on a day-to-day basis, whether a general sales employee is covered by the rule.

PSA president Heather Ruth made the recommendations in a seven-page letter sent to Diane Klinke, general counsel of the MSRB. The board is scheduled to debate the association's request at a three-day quarterly meeting that begins today in Napa Valley, Calif.

Rule G-37, which took effect April 25, bars municipal dealers that make contributions to issuer clients from doing business for two years with those governments. The rule applies to contributions by a firm, a "municipal finance professional" of a firm, or any political action committee controlled by a firm.

The rule defines a "municipal finance professional" as one who is primarily engaged in municipal securities activities, any firm employee who solicits municipal business, any direct supervisor of those people, and any member of the executive or management committee of a firm.

But Ruth warned that because salespeople often float in and out of selling municipal bonds, it will be virtually impossible for compliance staffs to determine from day to day who is and who is not a municipal. finance professional, particularly among the industry's larger broker-dealers.

"It would be extraordinarily difficult [for compliance officials to continuously] monitor the level of municipal securities sales activity of their tens of thousands of account representatives -- and then to instruct and re-instruct each member of a sales force" as to whether they are covered by the rule, Ruth said.

Ruth said that whether a salesperson is primarily engaged in municipal activities should be determined on the basis of his or her job description, which means that firms would only have to review employees' activities periodically.

If, upon review, compliance officials conclude that all or substantially all of a salesperson's tasks are "solely dedicated" to selling municipal securities, then the representative should be covered by the rule, she said.

Using a so-called solely dedicated test would relieve firms of compliance steps requiring expensive systems design and development work, Ruth said. She said that if the MSRB wants the industry to go further and provide "numerical data" on the activities of each employee to show they are "solely dedicated," then a safe harbor is needed.

The safe harbor would permit firms to review employee activities annually. If the percentage of time that an employee spends doing municipals goes over a specific figure, then the person would be re-categorized as a municipal professional and would be covered by the rule.

Ruth said the rule needs to be revised because an account representative's "mix of business" varies depending on customers' needs and trends and perceptions in the financial markets. "It is possible that the major portion of an account representative's business in a particular month or quarter could involve the sale of municipal securities -- only to be followed by a month or quarter where economic conditions are perhaps more bullish and the major portion of the same account representative's trades might involve equities," Ruth said.

Her letter also requests a second revision in Rule G-37. The MSRB should exclude direct supervisors from the rule who are outside municipal securities departments under certain circumstances, she said.

The proposed revisions, if adopted by the MSRB, would be the second round of changes made by the board to Rule G-37 in response to concerns raised by the PSA. The Securities and Exchange Commission approved a set of revisions on June 7 that included a measure that protects firms that make good-faith efforts to comply with the rule from being penalized for isolated violations by employees.

Revisions to the rule would have to be cleared by the SEC. SoUrces signaled yesterday that SEC chairman Arthur Levitt Jr., who is a strong proponent of the MSRB's rule, would oppose a flat-out exemption for firms' sales forces from Rule G-37.

Meanwhile, the MSRB told a federal appeals court Monday that it should deny Alabama bond dealer William Blount's challenge to its rule because it is not a government agency and, therefore, its rules are not open to constitutional challenge.

The board made the argument in a 27-page brief filed with the U.S. Court of Appeals for the District of Columbia, which is considering Blount's April 26 constitutional challenge to the board's Rule G-37.

Board attorneys argued that the MSRB is a "private entity, recognized by Congress as having primary responsibility for the development of rules and ethical standards for the municipal securities industry. It is not a government agency or entity." The MSRB developed and. adopted Rule G-37 independent of the SEC so the rule cannot "properly be attributed to, or deemed to be a rule of, the SEC." The rule is not the product of governmental action, so it is not subject to constitutional review, board lawyers said.

The board said even if the court decided Rule G-37 is subject to constitutional review, Blount still does not have standing before the appeals panel. Blount has failed to show that he is a "person aggrieved" by the rule because he did not raise any concerns before the board or the SEC on the rule when it was proposed, MSRB lawyers charged.

The MSRB's brief is the third of four to be filed with the appeals panel. Blount is scheduled to file a brief replying to those filed by the SEC and MSRB already on Aug. 1. The appeals panel has set oral arguments in the case for Dec. 9, 1994.

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