WASHINGTON -- Securities and Exchange Commission member Richard Roberts said he supports amending the MSRB's gifts and gratuities rule to make it clear that dealers may make contributions to legitimate charities as long as they are not designed to win bond business.
"Many have expressed concern that the Municipal Securities Rulemaking Board's Rule G-20 prohibits legitimate civic or community charitable contributions in excess of $100 per year," Roberts said in a speech Wednesday to the broker-dealer regulation committee of the District of Columbia Bar.
"I hope that is not the case, but, if so, I would support a carefully crafted amendment to exempt such contributions," he said.
However, contributions, even if charitable, that are designed to acquire municipal securities business should not be excluded from the rule's coverage, Roberts said.
Roberts' comments came amid growing controversy and confusion over two rules issued recently by the MSRB that are designed to crack down on gift giving by dealers to issuer officials.
Neither rule, in fact, bars dealers from making charitable contributions to the issuers with whom they do business. Nevertheless, many dealers are steering clear of charitable gift giving.
For instance, the board's new Rule G-37, which took effect April 25, prohibits dealers and their municipal bond professionals from doing business with state and local governments for two years after making a campaign contribution. But in a recent document issued by the board that attempts to answer the 40 most frequently asked questions about the rule, the board flatly said: "Charitable donations are not considered political contributions for purposes of Rule G-37 and therefore are not covered by the rule."
In addition, the board is awaiting SEC approval of recent amendments aimed at tightening Rule G-20, which bars dealers from giving anything valued over $100 a year to issuers or anyone else with whom they do business. The rule would require dealers for the first time to keep records of the dinners, theater tickets, and other gifts they give issuers.
But the rule does not cover charitable giving, the MSRB said in January in the introduction to the proposed amendments. "The board has received information that some issuer officials solicit charitable and other contributions from dealers. Some dealers believe that, at certain times, they must make such contributions to be considered for business by the issuer.
"Currently, Rule G-20 would not cover such payments," the board said.
But market participants are moving cautiously. "I'm not giving anything," one market executive recently said in an interview with a Bond Buyer reporter. It is a "gray area," several market participants said.
"There's a debate raging," Roberts said in a telephone interview yesterday. "My own view is that if you look at the text of Rule G-20, a strong argument can be fashioned that charitable contributions would be covered.
"No rule is perfect," Roberts said. "And legitimate charitable contributions should not be covered by either Rule G-37 or G-20. But contributions, even if they are charitable, that are designed to acquire municipal business should be covered by Rule G-20. We may need to clarify that. Future amendments maybe necessary."
"We will be watching to see if this area is a problem," Christopher Taylor, executive director of the MSRB, said in a telephone interview yesterday. "Now, we do not believe that it is at a level that warrants our writing rules.
"There have been several instances, but not a widespread pattern that we are aware of. We'll worry about that when the time comes," Taylor said, noting that now that the board's political contributions rule is in effect, the board can focus in the near future on gifts and gratuities.
One industry participant said part of the problem is that dealers are having trouble keeping up with all the SEC and MSRB initiatives on contributions.
"There's a certain amount of confusion out there," said the source, who asked not to be identified. "You have the voluntary industry initiative on political contributions," he said, referring to an agreement signed by 55 firms in recent months aimed at curbing contributions.
"You have the MSRB's first Rule G-37 proposal," which was then completely revised and reissued, he said. On top of that, the MSRB recently proposed amendments to Rule G-37 and has called for revisions to Rule G-20, he said.
In other comments Wednesday, Roberts said that the rule's $100 limit refers to total gifts by a dealer and its professional employees to an issuer, not individual gifts. In addition, the proposed rule applies to direct and indirect gifts, he said.
If a consultant hired by a dealer gives a gift to an issuer at the request of the dealer, the value of the gift would be included in the $100 limitation, he said.
Besides requiring dealers to keep specific records of all gifts and gratuities to issuers, the proposed rule would require dealers to keep records of "all contracts of employment or agreement for compensation for services and all compensation paid as a result of those agreements."
Roberts predicted that the SEC will approve amendments proposed by the MSRB earlier this month that would protect firms that comply with Rule G-37 from being penalized for isolated violations by employees of which they have no prior knowledge.
"While one never knows for certain, I anticipate that the commission will approve these proposed amendments in the near future," Roberts said. "The proposed amendments appear to be fairly narrow, and, in the past, the commission has expressed support for a ~good faith exception' to Rule G-37. If approved, dealers would be allowed, under certain circumstances, to apply to the NASD or bank regulators for an exemption from the rule."