[Federal Register Volume 62, Number 237 (Wednesday, December 10, 1997)]
[Notices]
[Pages 65114-65115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-32230]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39391; File No. SR-MSRB-97-8]


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

December 3, 1997.
    On November 13, 1997, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change (File No. 
SR-MSRB-97-8), pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder. The proposed rule 
change is described in Items I, II, and III below, which Items have 
been prepared by the board. 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.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Board is filing herewith a notice of interpretation concerning 
Rule G-38 on consultants (hereafter referred to as ``the proposed rule 
change''). The proposed rule change is as follows:

Rule G-38 Questions and Answers

Bank Affiliates and Definition of Payment

    Q: A bank and its employees communicate with an issuer on behalf 
of an affiliated dealer to obtain municipal securities business for 
that dealer. In return, the bank and its employees receive certain 
``credits'' from the dealer. These credits, which do not involve any 
direct or indirect cash payments from the dealer to the bank or its 
employees, are used for internal purposes to identify the source of 
business referrals. Are the credits considered a ``payment'' under 
rule G-38 thereby requiring the dealer to designate the bank or its 
employees as consultants and comply with the requirements of rule G-
38?
    A: Rule G-38 defines a 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 behalf of 
the dealer where the communication is undertaken by the

[[Page 65115]]

person in exchange for, or with the understanding of receiving, 
payment from the dealer or any other person.\2\ The term payment, as 
used in rule G-38, means any gift, subscription, loan, advance, or 
deposit of money or anything of value. The absence of an immediate 
transfer of funds or anything of value to an affiliate or individual 
employed by the afilitate would not exclude the credits from the 
definition of payment if such credits eventually (e.g., at the end 
of the fiscal year) result in compensation to the affiliate or 
inficiual employed by the affiliate for referring municipal 
securities business to the dealer. In this regard, the compensation 
may be in the form of cash (e.g., a bonus) or non-cash. In either 
case, if the dealer or any other person \3\ eventually gives 
anything of value (i.e., make a ``payment'') to the affiliate or 
individual based, even in part, on the referral, then the affiliate 
or individual is a consultant for purposes of rule G-38 and the 
dealer must comply with the various requirements of the rule. For 
additional guidance in this area, you may wish to review Q&A number 
6 and 7 (dated February 28, 1996) in the MSRB Manual following Rule 
G-38, as well as Q&A number 4 (dated December 7, 1994) in the MSRB 
Manual following Rule G-37.
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    \2\ Municipal finance professionals and any person whose sole 
basis of compensation is the actual provision of legal, accounting 
or engineering advice services or assistance are expected from the 
definition of consultant.
    \3\ The Securities Exchange Act of 1934 (the ``Act'') defines 
the term ``person'' as a ``natural person, company, government, or 
political subdivision, agency, or instrumentality of a government.'' 
Board rule D-1 provides that unless the contest otherwise 
specifically requires, the terms used in Board rules shall have the 
same meanings as set forth in the Act.
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* * * * *

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 purposed of and basis for the propose rule change and 
discussed any comments 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.\4\ 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 Rule 
G-37\5\ on political contributions and prohibitions on municipal 
securities business, Rule G-20\6\ on gifts and gratuities, and Rule G-
17\7\ 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 definition of payment, as used in Rule G-
38, and whether bank affiliates and their employees may, under certain 
circumstances, be deemed consultants for purposes 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 Rule G-38, the Board has determined to publish this 
third notice of interpretation which sets forth, in question-and-answer 
format, general guidance on Rule G-38.\8\ The Board will continue to 
monitor the application of Rule G-38, and, from to time, will publish 
additional notices of interpretations, as necessary.
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    \4\ Securities Exchange Act Release No. 36727 (Jan. 17, 1996); 
61 FR 1955 (Jan. 24, 1996). The rule became effective on March 18, 
1996. See also MSRB Manual, General Rules, Rule G-38 (CCH) para. 
3686.
    \5\ MSRB Manual, General Rules, Rule G-37 (CCH) para. 3681.
    \6\ MSRB Manual, General Rules, Rule G-20 (CCH) para. 3596.
    \7\ MSRB Manual, General Rules, Rule G-17 (CCH) para. 3581.
    \8\ See Securities Exchange Act Release No. 36950 (March 11, 
1996); 61 FR 10828 (March 15, 1996) and Securities Exchange Act 
Release No. 37997 (Nov. 29, 1996); 61 FR 64781 (Dec. 6, 1996).
    See also MSRB Reports Vol. 16, No. 2 (June 1996) at 3-5; and 
Vol. 17, No. 1 (Jan. 1997) at 15.
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    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act.\9\
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    \9\ Section 15B(b)(2)(C) states in pertinent part that the rules 
of the Board ``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.''
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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, because it would apply equally 
to all brokers, dealers and municipal securities dealers.

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 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 and Rule 19b-4(e) thereunder, which 
renders the proposal effective upon receipt of this filing by the 
Commission.\10\
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    \10\ 17 CFR 240.19b-4(e)(1).
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    At any time within sixty days of the filing of this proposed rule 
change, the Commission may summarily abrogate such 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, N.W., Washington, D.C. 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 
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 Board's principal offices. 
All submissions should refer to File No. SR-MSRB-97-8 and should be 
submitted by December 31, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-32230 Filed 12-9-97; 8:45 am]
BILLING CODE 8010-01-M