[Federal Register Volume 60, Number 233 (Tuesday, December 5, 1995)]
[Notices]
[Pages 62274-62284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29513]



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[[Page 62275]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36522; File No. SR-MSRB-95-15]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Consultants

November 28, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on 
September 28, 1995,\1\ the Municipal Securities Rulemaking Board 
(MSRB'' or ``Board'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the MSRB. The Board 
has requested that the Commission delay the effective date of the 
proposed rule change until sixty (60) days after the Commission's 
approval thereof. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\ On November 15, 1995, the MSRB filed Amendment No. 1 with 
the Commission. Amendment No. 1 was a minor technical amendment, the 
text of which may be examined in the Commission's Public Reference 
Room, See Letter from Jill C. Finder, Assistant General Counsel, 
MSRB, to Ethan D. Corey, Senior Counsel, Division of Market 
Regulation, Commission, dated November 15, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Board proposes to amend rules G-8 \2\ and G-9,\3\ on 
recordkeeping and record retention, rule G-27,\4\ on political 
contributions and prohibitions on municipal securities business, and 
add a new rule G-38 regarding consultants. The Board also proposes to 
amend its Form G-37, and redesignate it as Form G-37/G-38.

    \2\ MSRB Manual, General Rules, G-8 (CCH) para. 3536.
    \3\ MSRB Manual, General Rules, G-9 (CCH) para. 3541.
    \4\ MSRB Manual, General Rules, G-37 (CCH) para. 3681.
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    Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in brackets.

Rule G-8. Books and Records To Be Made by Brokers, Dealers and 
Municipal Securities Dealers

    (a) Description of Books and Records Required to be Made.
* * * * *
    (xvi) Records Concerning Political Contributions and Prohibitions 
on Municipal Securities Business Pursuant to Rule G-37, Records 
reflecting: * * *
    (D) a listing of the issuers with which the broker, dealer or 
municipal securities dealer has engaged in municipal securities 
business, along with the type of municipal securities business engaged 
in, during the current year and separate listings for each of the 
previous two calendar years[. Where applicable, a listing of the name, 
company, role and compensation arrangement of any person employed by 
the broker, dealer or municipal securities dealer to obtain or detain 
municipal securities business with such issuers also shall be made]; * 
* *
    (xvii) Records Concerning Consultants Pursuant to Rule G-38. Each 
broker, dealer and municipal securities dealer shall maintain: (i) A 
listing of the name, company, role and compensation arrangement of each 
consultant; (ii) a copy of each Consultant Agreement referred to in 
rule G-38(b); (iii) a listing of the compensation paid in connection 
with each such Consultant Agreement; (iv) where applicable, a listing 
of the municipal securities business obtained or retained through the 
activities of each consultant; (v) a listing of issuers and a record of 
disclosures made to such issuers, pursuant to rule G-38(c), concerning 
each consultant used by the broker, dealer or municipal securities 
dealer to obtain or retain municipal securities business with each such 
issuer; and (vi) the date of termination of any consultant arrangement
* * * * *
    (f) Compliance with Rule 17a-3. Brokers, dealers and municipal 
securities dealers other than bank dealers which are in compliance with 
rule 17a-3 of the Commission will be deemed to be in compliance with 
the requirements of this rule, provided that the information required 
by subparagraph (a)(iv)(D) of this rule as it relates to uncompleted 
transactions involving customers; paragraph (a)(viii); paragraph 
(a)(xi); paragraph (a)(xii); paragraph (a)(xiii); paragraph (a)(xiv); 
paragraph (a)(xv); paragraph (a)(xvi); [and] paragraph (a)(xvii); and 
paragraph (a)(xviii) shall in any event be maintained.

Rule G-9. Preservation of Records

    (a) Records to be Preserved for Six Years. Every broker, dealer and 
municipal securities dealer shall preserve the following records for a 
period of not less than six years. * * *
    (x) the records required to be maintained pursuant to rule G-
8(a)(xviii).
* * * * *

Rule G-37. Political Contributions and Prohibitions on Municipal 
Securities Business

* * * * *
    (e)(i) Each broker, dealer or municipal securities dealer shall 
submit to the Board, by certified or registered mail, or some other 
equally prompt means that provides a record of sending, and the Board 
shall make public, reports on contributions to officials of issuers and 
on payments to political parties of states and political subdivisions 
that are required to be recorded pursuant to rule G-8(a)(xvi). Such 
reports shall include information concerning the amount of 
contributions to officials of issuers and payments to political parties 
of states and political subdivisions and an indication of the 
contributor category of each contribution or payment made by: * * *
    Such reports also shall include information on municipal securities 
business engaged in and certain other information specified in this 
section (e), as well as other identifying information as may be 
determined by the Board from time to time [in accordance with Board 
rule G-37 filing procedures].
    (ii) Two copies of the [R]reports referred to in paragraph (i) of 
this section (e) must be submitted to the Board on Form G-37/G-38 [in 
accordance with Board rule G-37 filing procedures, quarterly with due 
dates determined by the Board,] within thirty (30) calendar days after 
the end of each calendar quarter (these dates correspond to January 31, 
April 30, July 31 and October 31), and must include, in the prescribed 
format, by state, the following information on contributions to each 
official of an issuer and payments to each political party of a state 
or political subdivision made and municipal securities business engaged 
in during the reporting period: (A) name and title (including any city/
county/state or political subdivision) of each official of an issuer 
and political party receiving contributions or payments; (B) [total 
number and dollar amount of contributions or payments made by] 
contribution or payment amount made and the contributor category of the 
persons and entities described in paragraph (i) of this section (e); 
and (C) such other identifying information required by Form G-37/G-38. 
Such reports also must include a list of issuers with which the broker, 
dealer or municipal securities dealer has engaged in municipal 
securities business, along with the type of municipal securities 
business [and the name, company, role and compensation arrangement of 
any person, other than a municipal finance 

[[Page 62276]]
professional, employed by the broker, dealer or municipal securities 
dealer to obtain or retain municipal securities business with such 
issuers].
    (f) The Board will accept additional information related to 
contributions made to officials of issuers and payments to political 
parties of states and political subdivisions voluntarily submitted by 
brokers, dealers, or municipal securities dealers or others provided 
that such information is submitted in accordance with [Board rule G-37 
filing procedures] section (e) of this rule.
* * * * *
[Rule G-37 Filing Procedures. Each dealer is required to file two 
copies of Form G-37. Each dealer is required to file Form G-37 within 
thirty (30) calendar days after the end of each calendar quarter. 
(These dates correspond to January 31, April 30, July 31, and October 
31).]

Rule G-38. Consultants

    (a) Definitions.
    (i) The term ``consultant'' means any person used by a broker, 
dealer or municipal securities dealer to obtain or retain municipal 
securities business through direct or indirect communication by such 
person with an issuer on behalf of such broker, dealer or municipal 
securities dealer where the communication is undertaken by such person 
in exchange for, or with the understanding of receiving, payment from 
the broker, dealer or municipal securities dealer or any other person; 
provided, however, that the following persons shall not be considered 
consultants for purposes of this rule: (A) a municipal finance 
professional of the broker, dealer or municipal securities dealer; and 
(B) any person whose sole basis of compensation from the broker, dealer 
or municipal securities dealer is the actual provision of legal, 
accounting or engineering advice, services or assistance in connection 
with the municipal securities business that the broker, dealer or 
municipal securities dealer is seeking to obtain or retain.
    (ii) The term ``issuer'' shall have the same meaning as in rule G-
37(g)(ii).
    (iii) The term ``municipal finance professional'' shall have the 
same meaning as in rule G-37(g)(iv).
    (iv) The term ``municipal securities business'' shall have the same 
meaning as in rule G-37(g)(vii).
    (v) The term ``payment'' shall have the same meaning as in rule G-
37(g)(viii).
    (b) Written Agreement. Each broker, dealer or municipal securities 
dealer that uses a consultant shall evidence the consulting arrangement 
by a writing setting forth, at a minimum, the name, company, role and 
compensation arrangement of each such consultant (``Consultant 
Agreement''). Such Consultant Agreement must be entered into before the 
consultant engages in any direct or indirect communication with an 
issuer on behalf of the broker, dealer or municipal securities dealer.
    (c) Disclosure to Issuers. Each broker, dealer or municipal 
securities dealer shall submit in writing to each issuer with which the 
broker, dealer or municipal securities dealer is engaging or is seeking 
to engage in municipal securities business, information on consulting 
arrangements relating to such issuer, which information shall include 
the name, company, role and compensation arrangement of any consultant 
used, directly or indirectly, by the broker, dealer or municipal 
securities dealer to attempt to obtain or retain municipal securities 
business with each such issuer. Such information shall be submitted to 
the issuer prior to the selection of any broker, dealer or municipal 
securities dealer in connection with such municipal securities 
business.
    (d) Disclosure to Board. Each broker, dealer or municipal 
securities dealer shall submit to the Board by certified or registered 
mail, or some other equally prompt means that provides a record of 
sending, and the Board shall make public, reports of all consultants 
used by the broker, dealer or municipal securities dealer during each 
calendar quarter. Two copies of the reports must be submitted to the 
Board on Form G-37/G-38 within thirty (30) calendar days after the end 
of each calendar quarter (these dates correspond to January 31, April 
30, July 31, and October 31). Such reports shall include, for each 
consultant, in the prescribed format, the consultant's name, company, 
role and compensation arrangement. In addition, such reports shall 
indicate the dollar amount of payments made to each consultant during 
the report period and, if any such payments are related to the 
consultant's efforts on behalf of the broker, dealer or municipal 
securities dealer which resulted in particular municipal securities 
business, then that business and the related dollar amount of the 
payment must be separately identified.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Board included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Board has prepared summaries, set forth in Sections 
(A), (B), and (C) below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Over the last few years, the Board has been concerned about abuses 
associated with the awarding of municipal securities business. Rule G-
37, which became effective in April 1994, 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 the 
dealer, any municipal finance professional associated with the dealer, 
or any political action committee controlled by the dealer or any 
municipal finance professional.\5\ The rule also prohibits a dealer 
from doing anything indirectly which would result in a violation of the 
rule if done directly by the dealer. For example, a violation would 
result if a dealer engages in municipal securities business with an 
issuer after directing third parties (such as consultants) to make 
contributions to that issuer. In addition to recording and disclosing 
political contributions, rule G-37 currently requires dealers to record 
and disclose on Form G-37 those issuers with which the dealer has 
engaged in municipal securities business and, where applicable, the 
name, company, role and compensation arrangement of any person employed 
by the dealer to obtain or retain business with such issuers.

    \5\ Rule G-37(b) contains de minimis exception for certain 
contributions made by municipal finance professionals.
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    Rule G-20, on gifts and gratuities, prohibits dealers from, 
directly or indirectly, giving or permitting to be given any thing or 
service of value in excess of $100 per year to any person, other than 
an employee or partner of the dealer, in relation to the municipal 
securities activities of the person's employer. All gifts given by the 
dealer and its associated persons, or by consultants at the direction 
of the dealer, are used to compute the $100 limitation and this 
limitation applies to gifts and gratuities to customers, individuals 
associated with issuers, and employees of other dealers.\6\

    \6\ Rule G-20(b) exempts ``normal business dealings'' from the 
$100 annual limit. These payments are defined as occasional gifts of 
meals or tickets to theatrical, sporting, and other entertainments, 
as well as the sponsoring of legitimate business functions that are 
recognized by the IRS as deductible business expenses, and gifts of 
reminder advertising. However, the rule also provides that such 
gifts can not be so frequent or so expensive as to raise a 
suggestion of unethical conduct.

[[Page 62277]]

    The Board believes that rules G-37 and G-20, along with rule G-17, 
on fair dealing,\7\ set appropriate standards for dealer conduct in the 
municipal securities industry. However, the Board is concerned about 
dealers' increasing use of consultants to obtain or retain municipal 
securities business. While the Board believes that in many instances 
the use of consultants is appropriate, it also believes that, in a 
number of instances, the use of consultants may be in response to 
limitations placed on dealer activities by rule G-37 and rule G-20.\8\ 
While both of these rules prohibit dealers from doing indirectly what 
they are precluded from doing directly, indirect activities often are 
difficult to prove. The Board recognizes that vigorous enforcement of 
its rules, as well as the antifraud provisions of the federal 
securities laws, will be effective in uncovering improper conduct, as 
well as deterring further violations, in connection with municipal 
securities business. Notwithstanding such efforts, or the current rule 
G-37 requirement that dealers disclose certain information about 
consultant arrangements, the Board believes that additional information 
about such arrangements should be made available to issuers and the 
public. Currently, the limited amount of information regarding 
consulting arrangements and the role of consultants in helping dealers 
obtain or retain municipal securities business makes it difficult to 
determine the extent to which payments to consultants influence the 
issuer's selection process in connection with municipal securities 
business, as well as the extent to which such payments increase the 
cost of bringing municipal securities issues to market. The Board 
believes that disclosure of consulting arrangements (even those that 
would not result in any rule violations) is necessary. Furthermore, the 
Board believes that disclosure requirements regarding consultants 
should be embodied in a separate rule in order to highlight the 
importance of this information and to facilitate its disclosure to, and 
accessibility by, the municipal securities market and the public. 
Accordingly, the Board is proposing new rule G-38, on consultants. At 
this time, the board is not proposing any substantive restrictions on 
arrangements between dealers and consultants. If, at a later date, the 
Board learns of specific dealer practices regarding the use of 
consultants that it believes should be addressed, then the Board may 
proceed with additional rulemaking in this area.

    \7\ Rule G-17 provides that, in the conduct of its municipal 
securities business, each broker, dealer, and municipal securities 
dealer shall deal fairly with all persons and shall not engage in 
any deceptive, dishonest, or unfair practice.
    \8\ For example, the Commission has charged that kickbacks and 
conflicts of interest have occurred in connection with municipal 
securities offerings. In one instance, the Commission alleged that 
dealer personnel paid a large kickback to the issuer's financial 
advisor and inflated the underwriters' discount to fund the 
kickback. See SEC Litigation Release No. 14421 (February 23, 1995) 
regarding SEC v. Nicholas A. Rudi, Joseph C. Salema, Public Capital 
Advisors, Inc. (formerly known as Consolidated Financial Management, 
Inc.), George L. Tuttle, Jr. and Alexander S. Williams. In another 
instance, the SEC alleged that dealer personnel provided loans and 
direct payments to an employee of an issuer that had an important 
role in selecting the underwriter. See SEC Litigation Release No. 
14397 (January 23, 1995) regarding SEC v. Terry D. Busbee and 
Preston C. Bynum.
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Background

    In April 1995, the Board published for comment draft rule G-38 
(``April 1995 Draft Rule'').\9\ The April 1995 Draft Rule would have 
required dealers to have written agreements with consultants and to 
disclose such arrangements to issuers and to the public through 
disclosure to the Board. It defined the term ``consultant'' very 
broadly, and included, among others, persons that acted as ``finders'' 
for municipal securities business or that lobbied state and local 
government officials. The term also included persons who engaged in 
legal, accounting or financial advisory services if such persons were 
engaged, even in part, because they could assist a dealer in efforts to 
obtain or retain municipal securities business with an issuer, and 
included persons engaged by a dealer at the request or direction of the 
issuer (e.g., underwriter's counsel).

    \9\ MSRB Reports, Vol. 15, No. 1 (April 1995) at 3-10.
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    While most of the commenters responding to the April 1995 Draft 
Rule supported the Board's goal of making additional information on 
consultants available to the market, many expressed concern that the 
definition of consultant was too broad and included a number of 
categories of persons who did not perform ``traditional'' consulting 
roles or services.\10\ The Board carefully considered these and other 
concerns and suggestions expressed by the commenters, and adopted the 
proposed rule change. Proposed rule G-38 differs in certain respects 
from the April 1995 Draft Rule, particularly with regard to the 
definition of consultant. By making such changes, the Board believes 
that the proposed rule effectively addresses concerns raised by the 
commenters without sacrificing the Board's goal of making information 
about consultants available to issuers and the public.

    \10\ A summary of these comments is discussed infra Section 
II.C.
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Summary of Proposed Rule G-38

Definition of Consultant
    Proposed rule G-38 defines consultant as any person used by a 
dealer to obtain or retain municipal securities business through direct 
or indirect communication by such person with an issuer on the dealer's 
behalf where the communication is undertaken by such person in exchange 
for, or with the understanding of receiving, payment from the dealer or 
any other person.\11\ The definition specifically excludes ``municipal 
finance professionals,'' as that term is defined in rule G-37(g)(iv), 
because such individuals are covered by the requirements of rule G-37. 
The definition also excludes any person whose sold basis of 
compensation from the dealer is the actual provision of legal advice, 
accounting or engineering assistance in connection with the municipal 
securities business that the dealer is seeking to obtain or retain. The 
exclusion would apply, for example, to a lawyer retained to conduct a 
legal analysis on a particular transaction contemplated by the dealer, 
or to review local regulations; an accountant retained to conduct a tax 
analysis or to scrutinize financial reports; or an engineer retained to 
perform a technical review or feasibility study. The exemption is 
intended to ensure that professionals who are engaged by the dealer 
solely to perform substantive work in connection with municipal 
securities business are not brought within the definition of consultant 
as long as their compensation is in consideration of only those 
professional services actually 

[[Page 62278]]
provided in connection with such municipal securities business. 
However, any attorney or other professional used by the dealer as a 
``finder'' for municipal securities business would be considered a 
consultant under the proposed rule.

    \11\ ``Person'' is defined in Section 3(a)(9) of the Securities 
Exchange Act of 1934 as ``a natural person, company, government, or 
political subdivision, agency, or instrumentality of a government.''
    ``Municipal securities business'' has the same meaning as in 
rule G-37(g)(vii), i.e., (A) the purchase of a primary offering (as 
defined in rule A-13(d)) of municipal securities from the issuer on 
other than a competitive bid basis (i.e., negotiated underwriting); 
(B) the offer or sale of a primary offering of municipal securities 
on behalf of any issuer (i.e., private placement); (C) the provision 
of financial advisory or consultant services to or on behalf of an 
issuer with respect to a primary offering of municipal securities on 
other than a competitive basis; or (D) the provision of remarketing 
agent services to or on behalf of an issuer with respect to a 
primary offering of municipal securities on other than a competitive 
bid basis.
    ``Payment'' has the same meaning as in rule G-37(g)(viii), i.e., 
any gift, subscription, loan, advance, or deposit of money or 
anything of value.
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Written Agreement
    Proposed rule G-38 requires dealers who use consultants to evidence 
the consulting arrangement in writing (referred to as a ``Consultant 
Agreement''), and that, at a minimum, the writing must include the 
name, company, role and compensation arrangement of each consultant 
used by the dealer. Such written agreements must be entered into before 
the consultant engages in any direct or indirect communication with an 
issuer on the dealer's behalf.
Disclosure to Issuers
    Proposed rule G-38 requires each dealer to disclose to an issuer 
with which it is engaging or seeking to engage in municipal securities 
business, in writing, information on consulting arrangements relating 
to that issuer. The written disclosure must include, at a minimum, the 
name, company, role and compensation arrangements with the consultant 
or consultants. Dealers are required to make such written disclosures 
prior to the issuer's selection of any dealer in connection with the 
municipal securities business sought, regardless of whether the dealer 
making the disclosure ultimately is the one to obtain or retain that 
business. Thus, while dealers have an obligation to disclose their 
consulting arrangements to all issuers from which they are seeking 
municipal securities business, they have more leeway in the timing of 
their disclosures as long as the disclosure is made before the issuer 
selects a dealer for the municipal securities business sought.
Disclosure to the Board
    Proposed rule G-38 requires dealers to submit to the Board, on a 
quarterly basis, reports of all consultants used by the dealer. For 
each consultant, dealers must report, in the prescribed format, the 
consultant's name, company, role and compensation arrangement, as well 
as the dollar amount of any payment made to the consultant during the 
quarterly reporting period. If any payment made during the reporting 
period is related to the consultant's efforts on the dealer's behalf 
which resulted in particular municipal securities business, whether the 
municipal securities business was completed during that or a prior 
reporting period, then the dealer must separately identify that 
business and the dollar amount of the payment. In addition, as long as 
the dealer continues to use the consultant to obtain or retain 
municipal securities business (i.e., has a continuing arrangement with 
the consultant), the dealer must report information concerning such 
consultant every quarter, whether or not compensation is paid to the 
consultant during the reporting period. The Board believes that the 
reporting of these continuing consulting arrangements each quarter will 
assist enforcement agencies and the public in their review of such 
arrangements.
    For ease of compliance and reporting, the Board has determined to 
delete the current reporting requirements regarding consultants from 
rule G-37. It also has determined to merge the reporting requirements 
for both rules into a single form--Form G-37/G-38. Dealers must submit 
two copies of such reports on proposed Form G-37/G-38.\12\ The 
quarterly due dates are the same as the due dates currently required 
under the rule G-37 (i.e., within 30 calendar days after the end of 
each calendar quarter, which corresponds to each January 31, April 30, 
July 31, and October 31). Finally, consistent with current rule G-37, 
dealers are required to submit these reports to the Board by certified 
or registered mail, or some other equally prompt means that provides a 
record of sending.\13\ The Board will then make these documents 
available to the public for inspection and photocopying at its Public 
Access Facility in Alexandria, Virginia, and for review by agencies 
charged with enforcement of Board rules.

    \12\ Proposed Form G-37/G-38 is included in Exhibit 3 to the 
proposed rule change, along with instructions for filing the Form. 
In addition to the new rule G-38 consultant reporting requirements, 
Form G-37/G-38 includes revisions to the rule G-37 political 
contribution reporting requirements. Such revisions include, for 
each contribution, a required notation of the category of the 
contributor (e.g., municipal finance professional or executive 
officer) and the amount of the contribution, as well as a separate 
section for the reporting of ``payments'' to political parties 
distinct from ``contributions'' to issuer officials.
    \13\ For ease of compliance, the Board has included the Rule G-
37 Filing Procedures within the language of rule G-37, and has 
included the Rule G-38 Filing Procedures within the language of new 
rule G-38.
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Recordkeeping Requirements
    To facilitate compliance with, and enforcement of, proposed rule G-
38, the Board also proposes to amend existing rules G-8 and G-9, 
concerning recordkeeping and record retention, respectively. The 
proposed amendments to rule G-8 require dealers to maintain: (i) A 
listing of the name, company, role and compensation arrangement of each 
consultant; (ii) a copy of each Consultant Agreement; (iii) a listing 
of the compensation paid in connection with each Consultant Agreement; 
(iv) where applicable, a listing of the municipal securities business 
obtained or retained through the activities of each consultant; (v) a 
listing of the issuers and a record of disclosures made to such issuers 
concerning each consultant used by the dealer to obtain or retain 
municipal securities business with each such issuer; and (vi) the date 
of termination of any consultant arrangement. The amendment to rule G-9 
requires dealers to maintain these records for a six-year period.
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act, which provides that the Board's rules 
shall:

    Be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, setting, processing information with respect 
to, and facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market 
in municipal securities, and, in general, to protect investors and 
the public interest.

    The proposed rule change serves a number of the Board's enumerated 
purposes, including promoting just and equitable principles of trade, 
by ensuring that dealers compete for, and are awarded, municipal 
securities business on the basis of merit, and not political or 
financial influence. Such healthy competition will act to lower 
artificial barriers to those dealers not willing or able to hire 
consultants to obtain or retain municipal securities business, thereby 
maintaining the integrity of the municipal securities market, as well 
as the public trust and confidence that is essential to the long-term 
health and liquidity of the market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act since the proposed rule change 
would apply equally to all brokers, dealers and municipal securities 
dealers. The Board believes that the proposed rule change will improve 
competition in the awarding of municipal securities business by 
ensuring that dealers compete for, and are awarded, such business on 
the basis of merit, not political or financial influence.

[[Page 62279]]


C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    The Board received 17 comment letters in response to its April 1995 
Draft Rule from the following commenters.\14\

    \14\ MSRB Reports, Vol. 15, No. 1 (April 1995) at 3-10. Copies 
of the Notice Requesting Comment and the comment letters received 
are included in Exhibit 2.

A.G. Edwards & Sons, Inc.
American Government Financial Services Company
American Institute of Certified Public Accounts
Artemis Capital Group
Broward County, FL Finance and Administrative Services Dept.
Chapman and Cutler
Chemical Securities, Inc.
Gilmore & Bell
Goldman Sachs & Co.
Government Finance Officers Association
JP Morgan Securities Inc.
Morgan Stanley & Co., Inc.
National Association of Bond Lawyers
Public Securities Association
Seattle-Northwest Securities Corporation
Smith Barney Inc.
Willkie Farr & Gallagher

Summary and Discussion of Comments

    The April 1995 Draft Rule would have required dealers (1) to have 
written agreements with persons who are used by a dealer for the 
purpose of seeking to obtain or retain municipal securities business, 
and (2) to disclose such arrangements with consultants directly to 
issuers and to the public through disclosure to the Board.
Necessity of a New Rule
    Certain commenters believe that the April 1995 Draft Rule is 
unnecessary and should not be adopted.\15\ The majority of commenters 
believe that the Board's goals in proposing the rule can more readily 
be accomplished by amending existing rule G-37, on political 
contributions and prohibitions on municipal securities business.\16\ 
One commenter states that ``duplicative regulation should be avoided'' 
noting that rules G-37 and G-20 already address the use of consultants 
by dealers for impermissible purposes.\17\ This commenter states that:

    \15\ Gilmore & Bell; Goldman Sachs.
    \16\ A.G. Edwards; Artemis; Broward County; Chemical; GFOA; 
Gilmore & Bell; JP Morgan; PSA; and Smith Barney.
    \17\ Gilmore & Bell.
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    To the extent the market sees Rule G-38 as a rule without a 
needed purpose and as increasing compliance costs without any 
corresponding benefit, it will erode overall market support for the 
more important efforts to reform and improve the municipal 
securities markets * * *. Changes are occurring rapidly in the 
regulation of municipal securities, and there may be considerable 
merit in allowing the market to respond to Rule G-37, the [SEC's] 
1994 Interpretive Release and similar efforts to see if they are 
effective in limiting influence peddling in the industry before 
additional rules are adopted.\18\

    \18\ Id.

    Another commenter believes that in attempting to address concerns 
about the possible circumvention of rules G-37 and G-20, the April 1995 
Draft Rule ``is overly broad, mandating disclosure about a host of 
professionals whose activities and terms of engagement raise no 
legitimate specter of `pay-to-play' abuses and often constitute 
proprietary and confidential business arrangements.'' \19\

    \19\ Goldman Sachs.
---------------------------------------------------------------------------

    One commenter ``strongly believes that proposed rule G-38 is not 
necessary'' and argues that the rule ``would seriously impair and 
discourage the traditional business relationships among professionals 
in the industry which have made the municipal securities market 
uniquely efficient in raising capital for states and localities.'' \20\ 
This commenter believes that ``[i]n lieu of an additional and 
duplicative regulatory reporting regime'' the Board should amend rule 
G-37 to ``target those consulting relationships that are used for the 
exclusive purpose of retaining or obtaining municipal securities 
business.'' \21\ In this regard, the commenter recommends that the 
Board provide a focused definition of consultant, as more fully 
discussed below.

    \20\ PSA.
    \21\ Id.
---------------------------------------------------------------------------

    One of the commenters states that, pursuant to the requirements of 
rule G-37, basic information is filed with the MSRB about consultants 
with whom a dealer has a business relationship.\22\ Thus, this 
commenter questions the need for the April 1995 Draft Rule, ``which 
will impose significant new compliance burdens that will increase 
issuer borrower costs.'' \23\ The commenter suggests that the Board 
review rule G-37 and Form G-37 ``to determine whether they might be 
modified to capture additional information.'' \24\ Instead of a new 
rule, the commenter favors vigorous enforcement of existing Board rules 
for deterring improper conduct in the municipal securities industry.

    \22\ GFOA.
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

    One commenter believes that the April 1995 Draft Rule will create 
confusion with existing disclosure requirements under rule G-37, and 
that any required disclosures relating to consultant activity should be 
embodied in the same rule.\25\ Thus, this commenter suggests amending 
rule G-37 or, in the alternative, removing the consultant disclosure 
requirements currently under rule G-37 and incorporating them into a 
modified version of the April 1995 Draft Rule.

    \25\ A.G. Edwards.
---------------------------------------------------------------------------

Board Response
    In response to commenters' concerns, the Board has modified the 
April 1995 Draft Rule, particularly with regard to the definition of 
consultant, as more fully discussed below. In addition, the Board is 
proposing to delete from rule G-37 the current disclosure requirements 
regarding consultants and to include all such requirements under new 
rule G-38. The Board also is proposing to replace Form G-37 with a new 
Form G-37/G-38, to consolidate dealers' reporting requirements under 
both rules G-37 and G-38. The Board believes that, by modifying the 
definition of consultant and including all disclosure requirements 
within a single rule, the proposed rule effectively addresses concerns 
raised by the commenters, including those relating to the need for a 
new rule, without sacrificing the Board's goal of making information 
about consultants available to issuers and the public in order to 
ensure the integrity of the municipal securities market.
Definition of ``Consultant''
    The April 1995 Draft Rule defined ``consultant'' as any person, 
other than an employee or partner of a dealer, who is used by a dealer 
for the purpose of seeking to obtain or retain municipal securities 
business, including any person performing services for such dealer at 
the request or direction of an issuer. Fifteen of the 17 commenters 
expressed concern over this definition.\26\ In general, the commenters 
are opposed to extending the definition to the following:

    \26\ A.G. Edwards; AICPA; Artemis; Broward County; Chapman & 
Cutler; Chemical; GFOA; Gilmore & Bell; Goldman Sachs; JP Morgan; 
Morgan Stanley; NABL; PSA; Seattle-Northwest; and Smith Barney.

    Professional service providers who are not actively engaged in 
assisting the underwriter to obtain or retain municipal securities 
business (e.g., an accounting firm retained to conduct a tax 
analysis; a certified public 

[[Page 62280]]
accountant retained to provide audit and attestation services; and a 
law firm retained to conduct a legal analysis on a particular 
transaction contemplated).\27\

    \27\ A.G. Edwards; PSA. PSA does not believe that ``persons or 
firms which offer other professional services commonly employed in a 
municipal securities transaction should be treated as consultants 
merely because a . . . dealer engages in conversations or 
discussions with such persons or firms about concepts or ideas which 
might be offered to an issuer to achieve or encourage a particular 
financing.'' PSA argues that the definition ``is so broad as to 
interfere with traditional and appropriate methods of developing new 
business opportunities.''
---------------------------------------------------------------------------

    Professionals designated by an issuer to provide services to the 
dealer (e.g., underwriter's counsel).\28\

    \28\ Artemis; GFOA; Gilmore & Bell; JP Morgan; Morgan Stanley; 
and NABL. NABL believes that the rule ``should make clear that 
providers of substantive professional advice and services are not 
`consultants' . . . and that a law firm which is selected as counsel 
to the underwriter, even if `designated' as such by the issuer, does 
not become a `consultant' to the underwriter. . . .'' The GFOA 
states that ``there are many instances where issuers make 
designations using merit-based criteria and it would not be 
appropriate to assume that such `designated' persons should be 
treated as if they were used by a dealer to obtain or retain 
business . . .'' and that the April 1995 Draft Rule should 
distinguish between ``merit-based and nonmerit-based designations.'' 
Broward County shares this position. Gilmore & Bell is ``not 
comfortable with the entire concept of calling issuer-designated 
persons `consultants' to the dealer. . . .'' They believe that the 
``whole concept of a consultant under the Rule is someone who 
assists the dealer in obtaining or retaining municipal securities 
business. In no sense is an issuer-designated representative of the 
dealer a person who helped the dealer get the business; rather, that 
issuer-designated person or firm is imposed on the dealer as a 
condition to participating in the offering.'' Morgan Stanley does 
not believe that issuer-designated professionals should be defined 
as consultants. ``Far from helping dealers to solicit or win 
business, issuer-designated professionals are all too often imposed 
on dealers * * *.'' Morgan Stanley supports the disclosure of such 
relationships, and suggests removing such persons from the scope of 
the definition and adding a disclosure requirement to a separate 
section of the draft rule. JP Morgan also supports the disclosure of 
such relationships ``once an underwriting has been won, * * * but 
that in no way should these * * * professionals be deemed to be 
`consultants' to the dealer.'' A.G. Edwards, on the other hand, 
believes that even those persons who may be engaged by the dealer as 
a ``precondition'' to obtaining an issuer's business (e.g., 
underwriter's counsel designated by the issuer), ``are the type of 
`consultants' to which the disclosure rule should apply.''
---------------------------------------------------------------------------

    Professional from whom a dealer seeks substantive or technical 
advice in connection with an issuer presentation with no intention 
of seeking their intercession with the issuer (e.g., engineers who 
perform technical reviews or feasibility studies; lawyers who review 
local regulations; and accountants who scrutinize financial 
reports).\29\

    \29\ Morgan Stanley; PSA; and Smith Barney.
---------------------------------------------------------------------------

    Any individual retained as a consultant but treated by a dealer 
as a municipal finance professional (e.g., a limited partner or 
other retired employee of the dealer).\30\

    \30\ Goldman Sachs. Presumably the dealer has deemed the person 
to be subject to rules G-37 and G-20, and is recording information 
on political contributions and gifts and gratuities, as required by 
those rules.
---------------------------------------------------------------------------

    Lobbyists who are not acting to obtain or retain business (e.g., 
a lobbyist employed to keep the dealer apprised of legislation that 
could impact the dealer or its issuer clients).\31\

    \31\ Seattle-Northwest.
---------------------------------------------------------------------------

    PSA recommends the following definition of consultant:

    Any person, other than a municipal finance professional, who is 
employed by the broker, dealer or municipal securities dealer on an 
exclusive basis with respect to either an issuer or a particular 
transaction to obtain or retain municipal securities business, 
provided that such employment (A) includes any direct or indirect 
communication with the issuer by such person which is made on behalf 
of the broker, dealer or municipal securities dealer to obtain or 
retain such municipal securities business, and (B) is undertaken 
with the understanding of receiving compensation from such broker, 
dealer or municipal securities dealer.

    Another commenter is concerned about the Board's definition of 
consultant because ``any third party with whom a dealer discusses any 
issue which might bear on the firm's decision to seek business could 
qualify as a consultant. After all, since firms are in business to do 
business, they have little reason to talk to anyone unless it is to 
help get business.'' \32\ This commenter endorses PSA's definition of 
consultant, and believes that at least two factors are relevant to the 
creation of a consulting relationship: (1) The person will actively 
promote the underwriter--and only that underwriter--to an issuer; and 
(2) the person will be compensated in some way by the underwriter. Two 
other commenters also endorse PSA's proposed definition of consultant, 
and believe that it should be incorporated into rule G-37.\33\ Another 
commenter, without criticizing the commenter's proposed definition, 
recommends a modified version thereof.\34\ On the other hand, Morgan 
Stanley is critical of certain elements of PSA's definition.\35\ With 
respect to the definition proposed in the April 1995 Draft Rule, this 
commenter argues that that definition inappropriately applies to three 
groups of professionals: (1) Professionals designated by an issuer to 
provide services to the dealer; (2) professionals from whom a dealer 
seeks substantive or technical advice in connection with an issuer 
presentation with no intention of seeking their intercession with the 
issuer; and (3) ``professionals who may in fact recommend a broker-
dealer to an issuer--on the basis of substantive professional 
familiarity and respect and not on the expectation or promise of quid 
pro quo recompense.'' Morgan Stanley is concerned that the Board's 
definition could ``cause disruptions in an industry currently 
undergoing contraction * * * [and] may lead larger firms, with other 
sources of revenue, finally to conclude that the burden of ensuring 
municipal market compliance outweights the benefit of what, frankly, is 
currently a marginal business for many of them.'' Morgan Stanley 
believes the definition of consultant ``should be restored to its 
common-sense meaning in the context of the municipal securities 
business. * * * [and] should reflect * * * the two essential elements 
of disclosable consulting relationships in the municipal securities 
business: compensation and the proposed intercession with an issuer by 
the consultant in exchange for such compensation.'' \36\ The commenter 
notes that its proposed definition incorporates ``not only direct but 
also indirect consultant use and issuer intercession and * * * 
[alludes] to the possibility of compensation from persons other than 
the dealer.'' Thus, Morgan Stanley recommends the following definition 
of consultant:

    \32\ Smith Barney.
    \33\ Chemical Securities; JP Morgan.
    \34\ Artemis recommends a version that would not include the 
elements of exclusivity or indirect communication with the issuer.
    \35\ Morgan Stanley opposes PSA's requirement for 
``exclusivity'' which ``is intended to disqualify a relationship 
under the definition if a putative consultant has also been retained 
to solicit the same business on behalf of another firm.'' Morgan 
Stanley does not understand ``why exclusivity makes any difference. 
* * * [and is concerned that] the phrase could be read to disqualify 
a consultant who is soliciting business from more than one issuer 
and a consultant hired by two dealers to solicit the same piece of 
business on their joint behalf.'' Morgan Stanley also is concerned 
that PSA's proposal, which would limit the definition of consultant 
to persons hired ``with respect to either an issuer or a particular 
transaction,'' will ``inappropriately limit the number of 
consultants required to be disclosed * * * [for example,] by 
excluding consultants who are hired not with respect to particular 
issuers and transactions but according to other organizing 
principles: by type of transaction (e.g., student loan deals), by 
type of issuer, by geographic area * * *.''
    \36\ Morgan Stanley further suggests defining ``compensation'' 
to mirror the definition of ``payment'' under rule G-37.
---------------------------------------------------------------------------

    Any person or entity used, directly or indirectly, by a broker, 
dealer or municipal securities dealer to obtain or retain municipal 
securities business through direct or indirect intercession by such 
person or entity with the relevant municipal issuer on behalf of 
such broker, dealer or municipal securities dealer where such 
intercession is undertaken by such person or entity in exchange for, 
or with the understanding of receiving, payment (as defined in rule 
G-37) from such broker, dealer or municipal securities dealer or any 
other person.


[[Page 62281]]

    Several other commenters share Morgan Stanley's view that 
compensation is a relevant factor in determining the existence of a 
consulting relationship. For example, one of the commenters does not 
believe the draft rule should apply to ``persons who are merely engaged 
by a dealer in connection with municipal securities business * * * [but 
rather] should apply only to persons engaged by a dealer with the 
expectation of receiving compensation for seeking to obtain or retain 
municipal securities business.'' \37\ Another commenter believes that 
``a dealer may `use' a person in a broad sense (and in a perfectly 
permissible sense) without that person being a consultant to the dealer 
in any common sense meaning of the word.'' \38\ But if a dealer 
compensates a person for services in obtaining or retaining municipal 
securities business, ``then obviously such person is working for the 
dealer and a `consulting' relationship exists. * * *'' \39\ In this 
regard, the commenter argues that, at a minimum, the definition of 
consultant should include any person who is paid or compensated (rather 
than ``used'') by a dealer for the purpose of seeking to obtain or 
retain municipal securities business. Another commenter notes that such 
compensation ``can take various forms, such as payment of a finder's 
fee, a percentage of revenues or fees earned on the transaction, a fee 
for services in excess of the industry standard for such services, and 
political contributions.'' \40\

    \37\ A.G. Edwards.
    \38\ Gilmore & Bell.
    \39\ Id.
    \40\ Artemis.
---------------------------------------------------------------------------

    One of the commenters believes the definition should extend to 
private entities that construct or develop facilities from the proceeds 
of municipal financings, including nursing home and retirement center 
projects, housing issues, and land-based development financings.\41\ 
This commenter believes that ``it is quite common for such private 
parties, after making large political contributions, to bring their own 
finance teams, including underwriters, onto the scene and to pressure 
issuers to use those teams. * * * [t]hus, the private parties can be 
viewed as acting on behalf of the underwriters. * * * ''

    \41\ American Government Financial Services.
---------------------------------------------------------------------------

Board Response
    In response to the commenters' concerns over the definition of 
consultant in the April 1995 Draft Rule, the proposed rule now defines 
consultant as any person used by a dealer to obtain or retain municipal 
securities business through direct or indirect communication by such 
person with an issuer on the dealer's behalf where the communication is 
undertaken by such person in exchange for, or with the understanding of 
receiving, payment from the dealer or any other person. The definition 
specifically excludes ``municipal finance professionals,'' as that term 
is defined in rule G-37(g)(iv), because such individuals are covered by 
the requirements of rule G-37. The definition also excludes any person 
whose sole basis of compensation from the dealer is the actual 
provision of legal advice, accounting or engineering assistance in 
connection with the municipal securities business that the dealer is 
seeking to obtain or retain. The exclusion would apply, for example, to 
a lawyer retained to conduct a legal analysis on a particular 
transaction contemplated by the dealer, or to review local regulations; 
an accountant retained to conduct a tax analysis or to scrutinize 
financial reports; or an engineer retained to perform a technical 
review or feasibility study. The exemption is intended to ensure that 
professionals who are engaged by the dealer solely to perform 
substantive work in connection with municipal securities business are 
not brought within the definition of consultant as long as their 
compensation is in consideration of only those professional services 
actually provided in connection with such municipal securities 
business. However, any attorney or other professional used by the 
dealer as a ``finder'' for municipal securities business would be 
considered a consultant under the proposed rule.
    Also, in response to certain commenters' concerns, the Board has 
eliminated ``issuer-designated'' professionals from the definition of 
consultant. The Board agrees with these commenters that persons who are 
engaged by a dealer at the request or direction of the issuer (e.g., 
underwriter's counsel) are not, in fact, consultants because they do 
not assist the dealer in obtaining or retaining municipal securities 
business. However, the Board continues to believe that the subject of 
issuer involvement in the underwriting process merits review, and will 
address this subject, including the question of requiring disclosure of 
issuer-designated persons, at a future time.
Requirement of a Written Agreement
    The April 1995 Draft Rule would have required dealers to have 
written agreements with their consultants before the consultants could 
provide any services on their behalf. The April 1995 Draft Rule would 
have provided that the ``Consultant Agreement'' must indicate the role 
to be performed by the consultant and the compensation arrangement. One 
of the commenters opposes the requirement of a written agreement, 
arguing that it could ``hinder the effective and timely rendering of 
legal services due to the proposed rule's prohibition of services until 
the execution of a contract. The prospect of depriving a client of 
substantive legal advice for any reason, and even for a modest 
timeframe, is by itself troubling.'' \42\ Another commenter also 
opposes this requirement, arguing that whether or not a consultant and 
a dealer enter into a written agreement ``is a business decision best 
left to the interested parties.'' \43\ One commenter, while not opposed 
to memorializing traditional consultant agreements, believes that the 
content of such agreements ``is best left to private negotiation 
between the parties, and not subject to any specific regulatory 
strictures.'' \44\ Another commenter shares this view.\45\

    \42\ Goldman Sachs.
    \43\ PSA.
    \44\ A.G. Edwards.
    \45\ Chemical Securities.
---------------------------------------------------------------------------

    A number of commenters are concerned about the timing of the 
requirement of a written agreement. One commenter ``strongly objects'' 
to the requirement that a written agreement be in place before using 
the services of professional service providers, such as lawyers, 
accountants, and printers, and believes that such a requirement ``will 
disrupt traditional and legitimate business relationships and impede 
the ability of dealers to respond to issuer's needs, particularly in 
the case of ad-hoc inquiries from issuers in response to which dealers 
routinely make use of professional providers such as lawyers or 
accountants.'' \46\ Another commenter states that ``it would be a legal 
and logistical nightmare if every firm was required to enter into a 
contract with the entire universe of persons and entities who provide 
information to underwriters in the normal course of business. It would 
be much less burdensome--though still in our view an unnecessary 
intrusion into business relationships--to limit the requirement of a 
written agreement to those situations in which the firm is retaining a 
third party to promote the firm to an issuer for a fee or other 
compensation.'' \47\

    \46\ A.G. Edwards.
    \47\ Smith Barney.

[[Page 62282]]

---------------------------------------------------------------------------

    Other commenters support the requirement of a written 
agreement.\48\ One of these commenters believes such a requirement 
represents a way of discouraging the hiring of consultants solely for 
their personal or political influence with issuers.\49\ However, this 
commenter conditions its support on the Board limiting the definition 
of consultant.\50\

    \48\ Artemis; Morgan Stanley.
    \49\ Morgan Stanley.
    \50\ In its Request for Comments, the Board asked whether it 
should require that all written agreements with consultants be 
approved by the head of the dealer's municipal finance group and the 
general counsel's office. Morgan Stanley supports such a 
requirement, while Chemical ``believes it is not beneficial or 
necessary. . . .'' Artemis supports a requirement that the agreement 
be approved by the head of the municipal finance group.
---------------------------------------------------------------------------

Board Response
    The requirement of a written agreement embodied in proposed rule G-
38 is similar to the April 1995 Draft Rule, and requires dealers who 
use consultants to evidence the consulting arrangement in writing 
(referred to as a ``Consultant Agreement''). At a minimum, the writing 
must include the name, company, role and compensation arrangement of 
each consultant used by the dealer. Such written agreements must be 
entered into before the consultant engages in any direct or indirect 
communication with an issuer on the dealer's behalf. Although certain 
commenters were opposed to the requirement of a written agreement, the 
Board believes that this requirement is necessary to ensure that 
dealers are aware of arrangements that their branch offices or local 
personnel may have with consultants. The requirement also will assist 
dealers in developing mechanisms to monitor such arrangements, and will 
assist enforcement agencies to inspect for compliance with rule G-38. 
With regard to commenters' concern over the timing of this requirement 
(i.e., that a written agreement must be entered into before the 
consultant provides any services on behalf of the dealer), the Board 
believes that by limiting the scope of the definition of consultant (as 
discussed above) and by revising the timing of the agreement (i.e., 
before any communication by the consultant with an issuer on the 
dealer's behalf), it has ameliorated many, if not all, of these 
concerns.
Disclosure of Consulting Arrangements to Issuers
    The April 1995 Draft Rule would have required dealers to disclose 
to issuers in writing all consultants with which they have entered into 
a Consultant Agreement in connection with an effort to obtain or retain 
municipal securities business with that issuer, along with the basic 
terms of the Consultant Agreement. The April 1995 Draft Rule required 
dealers to make such disclosures when they become involved in the 
issuer's process for selecting a dealer for municipal securities 
business, whether or not the issuer requests such information in a 
Request for Proposal.
    Most commenters agree that disclosure to issuers of consulting 
arrangements is appropriate. However, one of these commenters believes 
that the timing of the disclosure requires clarification.\51\ This 
commenter notes that financing ideas frequently are discussed 
informally prior to the beginning of ``the issuer's selection 
process,'' and that it would be ``imprudent to stifle'' such 
discussion.\52\ Similarly, another commenter supports disclosure to 
issuers, but is concerned that the timing of such disclosures ``is too 
vague.'' \53\ This commenter believes that ``it is sufficient to 
require that the disclosure be made at least prior to a dealer's 
acceptance of business from an issuer, on the theory that at that time 
the issuer is still in a position to rescind the award of business if 
the disclosed facts are sufficiently unpalatable.'' \54\ The commenter 
also believes that ``[l]imiting the disclosure obligation to 
consultants with whom the dealer has already entered into an agreement 
* * * would seem to create unnecessary timing issues as well as 
unnecessary opportunities for manipulation.'' \55\ Accordingly, the 
commenter proposes extending the disclosure requirement to all 
consultants used by the dealer in connection with the relevant issuer 
or the relevant securities offering, regardless of the status of the 
written agreement between them.

    \51\ PSA. Artemis shares this view.
    \52\ PSA.
    \53\ Morgan Stanley.
    \54\ Id.
    \55\ Id.
---------------------------------------------------------------------------

    One of the commenters believes that the disclosure of consultant 
relationships should only be made upon the request of the issuer, and 
notes that issuers can include a request for such information in their 
Request for Proposal and that if the issuer wants additional 
information, it can simply ask the dealer for further details.\56\ The 
commenter also believes that ``a specific description of a consultant's 
role is difficult to set forth at the onset of a relationship'' and 
therefore disclosure of a consultant relationship should include only a 
general description of the role to be performed by the consultant.\57\ 
Furthermore, the commenter believes that certain information, such as 
the details of the compensation arrangement, should remain 
confidential.

    \56\ Chemical Securities.
    \57\ Id.
---------------------------------------------------------------------------

    Another commenter believes that disclosure to the public is of 
greater importance than disclosure to issuers; ``[i]ssuers are aware of 
the activities of consultants; the public often is not. The most 
powerful tool for preserving the integrity of the market is the public 
disclosure by the MSRB of the consulting relationships reported to 
it.'' \58\ However, the commenter believes that consultants hired on 
the dealer's initiative should be disclosed to an issuer and the Board 
``only when (i) the issuer is engaged in a formal process of either 
reviewing its underwriting relationships or placing a specific piece of 
debt and (ii) the dealer is actually selected for the program or the 
specific underwriting.'' \59\ The commenter states that ``this two-part 
test will result in meaningful information regarding the actual 
involvement of consultants in completed municipal finance transactions 
being made available.'' \60\ Another commenter also is concerned about 
disclosure reaching the public domain, and states that any disclosure 
to issuers should be made to their governing bodies ``for inclusion in 
the publicly available records thereof'' otherwise the goal of public 
disclosure of consultant relationship can easily be frustrated.\61\

    \58\ JP Morgan.
    \59\ Id.
    \60\ Id.
    \61\ Willkie Farr.
---------------------------------------------------------------------------

Board Response
    In response to commenters' concerns, particularly over timing, the 
Board has modified the proposed rule's requirement concerning 
disclosure of consulting arrangements to issuers. Proposed rule G-38 
now requires each dealer to disclose to an issuer with which it is 
engaging or seeking to engage in municipal securities business, in 
writing, information on consulting arrangements relating to such 
issuer. The written disclosure must include, at a minimum, the name, 
company, role and compensation arrangement with the consultant or 
consultants. Dealers are required to make such written disclosures no 
later than the issuer's selection of any dealer in connection with the 
municipal securities business sought, regardless of whether the dealer 
making the disclosure ultimately is the one to obtain or retain that 
business. 

[[Page 62283]]
Thus, while dealers have an obligation to disclose their consulting 
arrangements to all issuers from which they are seeking municipal 
securities business, they have more leeway in the timing of their 
disclosures as long as the disclosure is made before the issuer selects 
a dealer for the municipal securities business sought. However, the 
Board cautions dealers that the time period set forth in the proposed 
rule represents the last possible opportunity to comply with the 
disclosure requirement, and therefore strongly recommends that dealers 
make such disclosures as early as possible. For example, a dealer 
seeking certain municipal securities business may not be aware of the 
issuer's selection of another dealer for that business. So too, an 
issuer may select a pool or group of dealers from which the issuer 
intends to choose underwriters for particular issues over the next few 
years. If a dealer has used a consultant to help secure any of this 
business, the Board believes that dealers should make their required 
disclosures to issuers as soon as possible to ensure that the 
disclosure is received by the issuer prior to the selection of any 
dealer for the municipal securities business.
Disclosure of Consulting Arrangements to the Public Through Disclosure 
to the Board
    The April 1995 Draft Rule would have required a dealer to submit 
reports to the Board of all consultants with which the dealer entered 
into Consultant Agreements, not just those consultants that are 
connected with particular municipal securities business awarded during 
the reporting period (i.e., as currently required under rule G-37). 
These reports would have been submitted on Form G-38 on a quarterly 
basis, within one month after the end of each calendar quarter. Form G-
38 would have required dealers to list the names of all consultants and 
complete for each consultant an Attachment to Form G-38 that provides 
in the prescribed format the consultant's company, the role to be 
performed by the consultant, and the compensation arrangement. Dealers 
also would have been required to report all dollar amounts paid to each 
consultant during the reporting period and, if any amounts paid were 
connected with particular municipal securities business, such issue and 
the amount paid would have been separately identified.
    A number of commenters believe that disclosures to the Board should 
be merged with the reporting requirements of rule G-37.\62\ In the 
alternative, two of these commenters suggest removing the disclosure 
requirements from rule G-37 and incorporating them into a modified 
version of the April 1995 Draft Rule.\63\ One such commenter believes 
that ``consolidation and combination is sensible not only from an 
administrative and compliance point of view but will help ensure * * * 
consistency in terminology and interpretation in this complex area.'' 
\64\

    \62\ A.G. Edwards; Artemis; Chemical; GFOA; PSA; and Smith 
Barney.
    \63\ A.G. Edwards; Morgan Stanley.
    \64\ Morgan Stanley.
---------------------------------------------------------------------------

    Another commenter notes that rule G-37 currently requires 
disclosure of consulting relationships if business is obtained or 
retained, i.e., ``after the fact.'' \65\ This commenter believes that 
the public would benefit if information were available ``before a piece 
of business was awarded or a transaction completed'' and thus 
recommends that dealers be required to report all consulting 
relationships entered into by (or ongoing with) firms during quarterly 
reporting periods, regardless of whether business is obtained during 
that reporting period.\66\ Similarly, another commenter believes that 
dealers should be required to report all consultant arrangements 
whether or not such arrangements result in the awarding of business to 
the dealer.\67\ And another commenter also supports disclosure of ``all 
existing business consulting arrangements * * * whether or not they 
have resulted in a particular transaction. * * *'' \68\ This commenter 
further suggests that ``such `bulk disclosure' be organized by 
reference to the jurisdictions (from largest to smallest) in which each 
consultant is directly or indirectly employed to operate and, if 
applicable, to the issuers with which such consultant is employed, 
directly or indirectly, to intercede.'' \69\ Finally, the commenter 
supports linking particular consulting relationships with particular 
transactions in order to avoid ``a blizzard of accurate but general 
information [that] could conceal more than it reveals.'' \70\

    \65\ Smith Barney.
    \66\ Id.
    \67\ Chemical Securities.
    \68\ Morgan Stanley.
    \69\ Id.
    \70\ Id.
---------------------------------------------------------------------------

    One of the commenters suggests that dealers be required to report 
``a continuing arrangement, rather than report it repeatedly, each 
quarter.'' \71\ Another commenter ``believes that dealers should be 
required to list continuing arrangements each quarter and to note when 
any such arrangement has concluded * * *. However, if the compensation 
arrangements remain the same * * * [the commenter recommends] that 
dealers not be required to restate these terms quarterly.'' \72\

    \71\ Chemical Securities.
    \72\ Artemis.
---------------------------------------------------------------------------

Board Response
    The proposed rule's requirement concerning disclosure to the Board 
is similar to the April 1995 Draft Rule. The proposed rule requires 
dealers to submit to the Board, on a quarterly basis, reports of all 
consultants used by the dealer. For each consultant, dealers must 
report, in the prescribed format, the consultant's name, company, role 
and compensation arrangement, as well as the dollar amount of any 
payment made to the consultant during the quarterly reporting period. 
If any payment made during the reporting period is related to the 
consultant's efforts on the dealer's behalf which resulted in 
particular municipal securities business, whether the municipal 
securities business was completed during that or a prior reporting 
period, then the dealer must separately identify that business and the 
dollar amount of the payment. In addition, as long as the dealer 
continues to use the consultant to obtain or retain municipal 
securities business (i.e., has a continuing arrangement with the 
consultant), the dealer must report information concerning such 
consultant every quarter, whether or not compensation is paid to the 
consultant during the reporting period. The Board believes that the 
reporting of these continuing consulting arrangements each quarter will 
assist enforcement agencies and the public in their review of such 
arrangements.
    As recommended by certain commenters, the Board has determined, for 
ease of compliance and reporting, to delete the current reporting 
requirements regarding consultants from rule G-37. It also has 
determined to merge the reporting requirements of both rules G-37 and 
G-38 into a single form--Form G-37/G-38. Dealers must submit two copies 
of such reports on proposed Form G-37/G-38.\73\ The quarterly due dates 
are the same as the due dates currently required under rule G-37 (i.e. 
within 30 calendar days after the end of each calendar quarter, which 
corresponds to each January 31, April 30, July 31, and October 31). 
Finally, consistent with current rule G-37, 

[[Page 62284]]
dealers are required to submit these reports to the Board by certified 
or registered mail, or some other equally prompt means that provides a 
record of sending.\74\ The Board will then make these documents 
available to the public for inspection and photocopying at its Public 
Access Facility in Alexandria, Virginia, and for review by agencies 
charged with enforcement of Board rules.

    \73\ Proposed Form G-37/G-38 is included in Exhibit 3 to the 
proposed rule change, along with instructions for filing the Form.
    \74\ For ease of compliance, the Board has included the Rule G-
37 Filing Procedures within the language of rule G-37, and has 
included the Rule G-38 Filing Procedures within the language of new 
rule G-38.
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Recordkeeping Requirements
    To facilitate compliance with, and enforcement of, proposed rule G-
38, the Board also proposes to amend existing rules G-8 and G-9, 
concerning recordkeeping and record retention, respectively. The 
proposed amendments to rule G-8 require dealers to maintain: (i) A 
listing of the name, company, role and compensation arrangement of each 
consultant; (ii) a copy of each Consultant Agreement; (iii) a listing 
of the compensation paid in connection with each Consultant Agreement; 
(iv) where applicable, a listing of the municipal securities business 
obtained or retained in connection with each Consultant Agreement; (v) 
a listing of the issuers and a record of disclosures made to such 
issuers concerning consultants used by the dealer to obtain or retain 
municipal securities business with each such issuer; and (vi) the date 
of termination of any consultant arrangement. The amendment to rule G-9 
requires dealers to maintain these records for a six-year period.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(A) By order approve such proposed rule change, or (B) institute 
proceedings to determine whether the proposed rule change should be 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. The Commission requests that, in 
addition to any general comments concerning whether the proposed rule 
change is consistent with Section 15(b)(2)(C) of the Act, commentators 
address whether the proposed definition of consultant needs to be 
amended to encompass instances in which third parties initiate contact 
with prospective underwriters to offer their services in obtaining or 
retaining municipal securities business through direct or indirect 
communications by such person with an issuer official. Persons making 
written submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549. Copies of the submissions, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those they may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of the filing 
will also be available for inspection and copying at the Board's 
principal offices. All submissions should refer to File No. SR-MSRB-95-
15 and should be submitted by December 26, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority, 17 U.S.C. 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29513 Filed 12-4-95; 8:45 am]
BILLING CODE 8010-01-M