[Federal Register Volume 61, Number 52 (Friday, March 15, 1996)]
[Notices]
[Pages 10828-10831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6233]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36950; File No. SR-MSRB-96-02]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Municipal Securities 
Rulemaking Board Relating to Interpretation of Rule G-38 on Consultants

March 11, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, notice is 
hereby given that on February 29, 1996,\1\ the Municipal Securities 
Rulemaking Board (``Board'' or ``MSRB'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') a proposed rule change 
as described in Items I, II, and III below, which Items have been 
prepared by the Board. The purpose of

[[Page 10829]]
the proposed rule change is to provide interpretative guidance 
concerning rule G-38 on consultants. The Board has designated this 
proposal as constituting a stated policy, practice, or interpretation 
with respect to the meaning, administration, or enforcement of an 
existing rule of the Board under Section 19(b)(3)(A) of the Act, which 
renders the proposal effective upon receipt of this filing by the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\ On March 7, 1996, 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 Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated March 7, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Board is filing the proposed rule change to provide 
interpretative guidance concerning rule G-37 on political contributions 
and prohibitions on municipal securities business. Proposed new 
language is in italics.
* * * * *

Rule G-38  Questions and Answers

Consultants

    1. Q: Who is considered a ``consultant'' pursuant to rule G-38?
    A: Rule G-38(a)(i) defines ``consultant'' as any person used by 
a dealer to obtain or retain municipal securities business \2\ 
through direct or indirect communication by such person with an 
issuer on behalf of such dealer 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'' 
of the dealer, 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, accounting or 
engineering advice, services or assistance in connection with the 
municipal securities business that the dealer is seeking to obtain 
or retain.

    \2\ ``Municipal securities business'' as used in rule G-38 has 
the same meaning as in rule G-37(g)(vii): (i) negotiated 
underwriting (if the dealer is a manager or syndicate member); (ii) 
private placement; (iii) the provision of financial advisory or 
consultant services to or on behalf of an issuer (on a negotiated 
bid basis); or (iv) the provision of remarketing agent services (on 
a negotiated bid basis).
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    2. Q: What are examples of persons who would be excluded from 
the definition of consultant for providing legal, accounting or 
engineering advice, services or assistance to a dealer in connection 
with municipal securities business?
    A: 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.
    3. Q: Would an attorney hired by a dealer to conduct a legal 
analysis on a transaction being contemplated by the dealer and then 
subsequently paid a finder's fee by the dealer for bringing that 
municipal securities business to the dealer be considered a 
consultant?
    A: Yes, any attorney or other professional used by the dealer as 
a ``finder'' for municipal securities business is considered a 
consultant pursuant to rule G-38.
    4. Q: Does the definition of consultant also encompass third 
parties who initiate contact with dealers to offer their services in 
obtaining or retaining municipal securities business through direct 
or indirect communication by such person with an issuer official?
    A: Yes. The definition of consultant in rule G-38 does not 
distinguish between instances in which the dealer initiates contact 
with a third party to act as a consultant and instances in which the 
third party initiates contact.
    5. Q: Does the definition of consultant encompass a lobbyist 
hired by the dealer if the only activity the lobbyist engages in on 
behalf of the dealer is to lobby state legislators for legislation 
which grants issuers authority to issue certain types of municipal 
securities?
    A: No; however, if the lobbyist is also used by the dealer to 
obtain or retain municipal securities business through direct or 
indirect communication with an issuer on the dealer's behalf where 
the communication is undertaken for payment from the dealer or any 
other person, then the lobbyist would meet the definition of 
consultant.
    6. Q: If an affiliated company of a bank introduces one of its 
customers (a municipal issuer) to the bank's dealer department for 
purposes of engaging in municipal securities business, and the 
dealer pays the affiliated company for this activity, would the 
affiliated company be a ``consultant'' under rule G-38?
    A: Any person used by a dealer as a ``finder'' for municipal 
securities business would be considered a consultant under rule G-
38. In this example, if the affiliated company is sued by the bank 
dealer to obtain or retain municipal securities business through 
direct or indirect communication by the affiliated company with the 
issuer on the dealer's behalf, and the affiliated company does so 
with the understanding of receiving payment from the dealer, then 
the affiliated company would be a consultant.
    7. Q: Does the definition of consultant encompass a person 
retained by an affiliate or parent of a dealer if any portion of 
that person's activity relates to efforts to obtain municipal 
securities business for the dealer?
    A: Yes, because the definition of consultant includes those who 
receive payment from the dealer or ``any other person'' for use in 
obtaining or retaining municipal securities business through 
communication with an issuer on behalf of the dealer. In such 
instances, the dealer would need to be in compliance with the 
provisions of rule G-38, as discussed below.

Consultant Agreement

    8. Q: Rule G-38 requires dealers to evidence their consulting 
arrangements in writing. What must be included in this Consultant 
Agreement?
    A: The Consultant Agreement must include, at a minimum, the 
name, company, role and compensation arrangement of each consultant 
used by the dealer.
    9. Q: When must the dealer enter into the Consultant Agreement?
    A: The Consultant Agreement 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

    10. Q: Does rule G-38 require a dealer to disclose its 
consulting arrangements to an issuer with which it is engaging or 
seeking to engage in municipal securities business?
    A: Yes; such disclosures must be in writing.
    11. Q: What must be included in these written disclosures to 
issuers?
    A: The written disclosures must include, at a minimum, the name, 
company, role and compensation arrangement with the consultant or 
consultants.
    12. Q: When are dealers required to make their written 
disclosures concerning consultants to issuers?
    A: The written disclosures must be made prior to the issuer's 
selection of any dealer in connection with the municipal securities 
business being sought, regardless of whether the dealer making the 
disclosure ultimately is the one to obtain or retain that business.

Disclosure to the Board

    13. Q: Are dealers required to submit any reports concerning 
their consultants to the Board?
    A: Yes. Dealers must submit to the Board, on a quarterly basis, 
reports of all consultants used by the dealers. These reports must 
be submitted on Form G-37/ G-38.
    14. Q: What information concerning consultants must be included 
on Form G-37/G-38?
    A: For each consultant, dealers must report, in the prescribed 
format (refer to Form G-37/G-38), 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 behalf of the dealer 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.
    15. Q: If a dealer includes information concerning a particular 
consultant on a Form G-37/G-38 submission, must the dealer

[[Page 10830]]
continue to submit information concerning this consultant on 
subsequent Form G-37/ G-38 submissions?
    A. 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.
    16. Q: What are the due dates for the submission of Form G-37/G-
38?
    A: The quarterly due dates are within 30 calendar days after the 
end of each calendar quarter (i.e., January 31, April 30, July 31 
and October 31).
    17. Q: Will the Board accept fax transmissions of Form G-37/G-
38?
    A: No. Dealers are required to submit Forms G-37/G-38 to the 
Board by certified or registered mail, or some other equally prompt 
means that provides a record of sending.
    18. Q: Are Forms G-37/G-38 submitted by dealers available to the 
public for review?
    A: Yes. These forms are available to the public for inspection 
and photocopying at the Board's Public Access Facility in 
Alexandria, Virginia, and for review by the agencies charged with 
enforcement of Board rules.
    19. Q: If a dealer has adopted a voluntary ban on political 
contributions and/or does not use consultants, is the dealer still 
required to submit a Form G-37/G-38?
    A: Dealers are required to submit a Form G-37/G-38 to the Board 
if ANY one of the following occurred: (i) reportable political 
contributions or payments to political parties were made during the 
reporting period: (ii) the dealer engaged in municipal securities 
business (as defined in rule G-37(g)(vii)) during the reporting 
period; or (iii) the dealer used consultants during the reporting 
period (i.e., new or continuing relationships with consultants). 
Dealers are not required to submit a Form G-37/G-38 for a reporting 
period if all three of the following conditions are met for that 
particular reporting period: (i) there were no reportable political 
contributions or payments made to political parties; (ii) the dealer 
did not engage in municipal securities business; and (iii) the 
dealer did not use consultants.

Recordkeeping Requirements

    20. Q. What records concerning consultants must dealers 
maintain?
    A: Rule G-8, on books and records, required dealers to 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 dealer to obtain or retain municipal 
securities business with each such issuer; and (vi) the date of 
termination of any consultant arrange.
    21. Q. How long must dealers maintain their records concerning 
consultants?
    A: Rule G-9, on preservation of records, requires dealers to 
maintain their records concerning consultants for a six-year period.
* * * * *

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 comment it received on the proposed rule change. The 
texts 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

    On January 17, 1996, the Commission approved Board rule G-38 on 
consultants.\3\ The Board adopted the rule because it was concerned 
about dealers' increasing use of consultants to obtain or retain 
municipal securities business, notwithstanding the requirements of the 
rule G-37 on political contributions and prohibitions on municipal 
securities business, rule G-20 on gifts and gratuities, and rule G-17 
on fair dealing. Rule G-38 requires dealers to disclose information 
about their consultant arrangements to issuers and the public. 
Recently, the Board has received inquiries from market participants 
concerning the applicability of various provisions of the rule. In 
order to assist the municipal securities industry and, in particular, 
brokers, dealers and municipal securities dealers in understanding and 
complying with the provisions of the rule G-38, the Board has 
determined to publish this notice of interpretation which sets forth, 
in question-and-answer format, general guidance on rule G-38. The Board 
will continue to monitor the application of rule G-38, and, from time 
to time, will publish additional notices of interpretations, as 
necessary.

    \3\ Securities Exchange Act Release No. 36727 (Jan. 17, 1996), 
61 FR 1955 (Jan. 24, 1996). The rule will become effective on March 
18, 1996.
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    The Board believes that 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, settling, 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.

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

    Because the proposed rule change would apply equally to all 
brokers, dealers and municipal securities dealers, 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.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A)(i) of the Act and subparagraph (e) or Rule 19b-4 
thereunder because the rule change constitutes a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the Board.
    At any time within 60 days of the filing of a rule change pursuant 
to Section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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 submission, 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

[[Page 10831]]
Commission and any person, other than those that 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 principal office of the Board. All 
submissions should refer to File No. SR-MSRB-96-02 and should be 
submitted by April 5, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6233 Filed 3-14-96; 8:45 am]
BILLING CODE 8010-01-M