The Municipal Securities Rulemaking Board declined to amend its Rule G-37 on political contributions yesterday in the aftermath of a Securities and Exchange Commission decision that sided with a Louisiana-based securities firm and its president over another regulator in connection with one of the rule's terms.

In a seven-page letter to the SEC that was signed by MSRB executive director Lynnette Hotchkiss, the board said that it does not believe it is necessary to clarify the definition of "issuer official" in light of the commission's November opinion that partly reversed an enforcement action the NASD, now the Financial Industry Regulatory Authority, brought against New Orleans-based Sisung Securities Corp, and its president, Lawrence J. Sisung Jr five years ago. In its November ruling, the commission asked the board to consider amending the rule.

But Hotchkiss said that the current version of the rule is narrowly tailored in scope to minimize infringing on the constitutional rights of broker-dealers, particularly their first amendment protections of free speech. The rule bars a broker-dealer from engaging in negotiated muni securities business with an issuer for two years if it or any of its muni securities professionals make significant contributions to issuer officials who can influence the award of bond business.

"While giving due consideration to the Commission's request, there does not appear to be a countervailing benefit to expanding the definition of issuer official at this time," Hotchkiss wrote. "The board believes that any broadening of the rule's scope beyond that which is necessary to accomplish its purposes may jeopardize the 'precisely targeted' nature of Rule G-37, thereby calling into question its constitutionality," she added, quoting a 1995 appellate court ruling that upheld the rule.

To encompass a "Sisung-type fact pattern," the board would have to amend the definition of "issuer official" in a way that would effectively mean that any elected person may be deemed an issuer official if they merely have the ability to approve or disapprove a particular issue, which would be viewed as tantamount to actually selecting, or influencing the selection of, the underwriter or financial advisor, Hotchkiss wrote.

"Such a standard could vary widely from state to state, as well as at the local level," Hotchkiss wrote in a footnote. "For example, in some states the office of the attorney general reviews and approves contracts. Under any expanded definition, this would make the attorney general an issuer official in those jurisdictions, but not necessarily in others."

The MSRB letter stems from the SEC's ruling in November that found the Sisung firm and its president did not violate G-37 by soliciting and making political contributions from affiliated companies to members of the Louisiana State Bond Commission, and then underwriting bond issues for localities, because state bond commission members were not issuer officials with regard to the local governments. Though the state bond commission does not issue debt or select transaction participants for the local governments, a state law requires that it receive applications from the localities that wish to issue debt. The commission must either approve or disapprove the applications, or defer action for further discussion.

In its ruling, the SEC upheld the NASD's finding that the firm and its executive violated the record-keeping and reporting requirements under G-47, G-8 and G-9 by failing to record the political contributions and report them to the MSRB. NASD also fined the firm $10,000 and jointly fined the firm and Sisung another $10,000 for those violations. The SEC said in its ruling that the fines must be paid, while it encouraged the MSRB to consider amending the rule.

Thomas K. Potter3d, a lawyer with Burr & Forman LLP in Nashville who represented Sisung, said yesterday that the MSRB's letter vindicates some of Sisung's arguments that expanding Rule G-37 would be "constitutionally suspect," but that the SEC did not address in its ruling. Specifically, Sisung had argued that NASD had attempted to enforce the rule beyond its terms.

A spokesman for FINRA declined to comment yesterday, saying that the matter is between the MSRB and the SEC.

But a market participant who has closely followed the case was critical of the MSRB's decision not to expand the rule.

"It's only 100 feet of barbed wire to protect 1,000 feet of open range land," the source said. "You can run all over G-37 as it is, it's a crazy rule, and its surprising to hear the SEC has encouraged the MSRB to tighten it up but the MSRB says, 'No, we like it just the way it is.'"

The case dates back to 2003 when NASD's enforcement staff charged that the Sisung firm and its president triggered G-37's two-year ban on business by using two affiliated companies to funnel 14 campaign contributions, totaling $16,900, to members of the Louisiana State Bond Commission, then underwriting 21 local bond issues for almost $2.2 million in profits over about four years.

Sisung denied the charges, claiming that the affiliates - Sisung Investment Management Services Inc., a registered investment adviser, and United Properties Corp., a real estate and development company that merged into United Professionals Co. - were separate entities from the broker-dealer. It also argued that bond commission members were not issuer officials with regard to local governments.

Sisung said it had obtained advice from a bond lawyer and was told that, while it might run afoul of G-37 if it engaged in negotiated muni business with the state, it would not if it only underwrote bonds for localities and not state issuers.

In November 2004, an NASD hearing panel overturned most of the NASD enforcement staff's charges, saying there was no evidence that Sisung intended to engage in pay-to-play practices in violation of G-37. The panel, however, upheld the record-keeping an reporting charges. Both NASD and Sisung appealed the hearing panel's ruling, with Sisung fighting the record-keeping and reporting charges.

The NASD national adjudicatory council in September 2006 overturned the portion of the hearing's panel ruling against the NASD, affirming the original charges and ordering Sisung and its executive to pay a total of $60,000 in finds, as well as hearing and appeal costs. Sisung appealed that decision to the SEC.

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