[Federal Register Volume 63, Number 95 (Monday, May 18, 1998)]
[Notices]
[Pages 27337-27339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13096]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39983; File No. SR-MSRB-97-9]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Municipal Securities Rulemaking Board 
Relating to Rule G-38 on Consultants

May 12, 1998.
    On March 18, 1998,\1\ 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-97-9), pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed 
rule change and Amendment No. 1 are hereafter referred to collectively 
as the ``proposed rule change.'' The proposed rule change is described 
in Items I, II, and III below, which Items have been prepared by the 
Board. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ The Board initially submitted this proposal on November 24, 
1997. However, a substantive amendment was requested to modify and 
clarify ambiguous timing issues in the proposed rule language. The 
Board filed Amendment No. 1 on March 18, 1998.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
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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 proposed rule change consisting of 
an amendment to Rule G-38 on consultants. The proposed rule change 
would give brokers, dealers and municipal securities dealers 
(collectively referred to as ``dealers'') the option of disclosing 
their consulting arrangements to issuers, pursuant to section (c) of 
the rule, on either an issue-specific or issuer-specific basis. Below 
is the text of the proposed rule change. Additions are italicized; 
deletions are in brackets.
Rule G-38. Consultants
    (a)-(b) No change.
    (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 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 either:
    (i) prior to the selection of any broker, dealer or municipal 
securities dealer in connection with [such] the particular municipal 
securities business being sought[.]; or
    (ii) at or prior to the consultant's first direct or indirect 
communication with the issuer for any municipal securities business 
being sought. Each broker, dealer or municipal securities dealer shall 
promptly advise the issuer, in writing, of any change in the 
information disclosed, pursuant to this subsection (ii), on each 
consulting arrangement relating to such issuer. In addition, each 
broker, dealer or municipal securities dealer disclosing information 
pursuant to this subsection (ii) shall update such information by 
notifying each issuer in writing within one year of the previous 
disclosure made to such issuer concerning each consultant's name, 
company, role and compensation arrangement, even where the information 
has not changed; provided, however, that this annual update requirement 
shall not apply where the broker, dealer or municipal securities dealer 
has ceased to use the consultant, directly or indirectly, to attempt to 
obtain or retain municipal securities business with the particular 
issuer.
    (d) No change.
* * * * *

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

    Rule G-38, on consultants, requires dealers: (1) To have written 
agreements with certain individuals who are used by a dealer, directly 
or indirectly, to obtain or retain municipal securities business 
(``consultants''), and (2) to disclose such consulting arrangements 
directly to issuers and to the public through disclosure to the Board. 
Section (c) of the rule currently requires that each dealer disclose, 
in writing, to each issuer with which the dealer is engaging or is 
seeking to engage in municipal securities business, information on 
consulting arrangements relating to such issuer. The information to be 
disclosed includes the name, company, role and compensation arrangement 
of any consultant used, directly or indirectly, to obtain or retain 
municipal securities business with each such issuer. Dealers are 
required to make such disclosures prior to the issuer's selection of 
any dealer in connection with the particular municipal securities 
business sought.
    It has come to the Board's attention that this issue-specific 
nature of the disclosure requirement can create compliance problems for 
dealers in the case of frequent issuers of municipal securities as well 
as in the co-manager selection process. For example, an issuer may 
bring new issues to market several times a month, and if a dealer is 
using a consultant to obtain a syndicate slot in each such issue, the 
dealer is required to disclose the same information to the same issuer 
month after month and possibly week after week. In addition, the Board 
has learned that dealers who use a consultant to help obtain co-manager 
business sometimes have difficulty complying with Rule G-38(c) because, 
unlike the lead manager, a co-manager may learn of its selection for 
that business after the selection of the lead manager, thereby making 
it impossible for the dealer to disclose its consulting arrangements 
prior to the issuer's selection of any dealer, as required by the rule.
    While the Board believes that the timing of the issue-specific 
disclosure requirement in Rule G-38(c) is appropriate in the vast 
majority of cases, the Board recognizes that it can be a problem in the 
context of frequent issuers of municipal securities and in the co-
manager selection process. Thus, the Board has determined to amend Rule 
G-38(c) to give dealers the option of disclosing their consulting 
arrangements to issuers on either an issue-specific or issuer-specific 
basis.

[[Page 27338]]

Pursuant to the amendment, if a dealer chooses to disclose information 
regarding a consulting arrangement on an issuer-specific basis, the 
dealer must submit the information, in writing, to the issuer at or 
prior to the consultant's first direct or indirect communication with 
that issuer for any municipal securities business.\4\ To ensure that 
such information, once disclosed, remains current, the amendment also 
requires dealers to (1) promptly notify the issuer, in writing, of any 
change in the information disclosed; and (2) update issuers, in 
writing, within one year of the previous disclosure of each 
consultant's name, company, role and compensation arrangement, even 
where such information has not changed.\5\ Of course, this annual 
updating requirement would cease to apply if the dealer is no longer 
using the consultant, directly or indirectly, to attempt to obtain or 
retain municipal securities business with a particular issuer(s).
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    \4\ In contrast, the Board believes that disclosures made by a 
dealer on an issue-specific basis should continue to be required 
prior to the issuer's selection of any dealer for the particular 
municipal securities business being sought.
    \5\ Pursuant to Rule G-8(a)(xviii) on recordkeeping, dealers are 
required to maintain records of all disclosures made pursuant to 
Rule G-38(c). This would apply to disclosures made pursuant to the 
amendment.
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    The Board submitted Amendment No. 1 in response to concerns 
expressed by Commission staff to provide that dealers disclosing 
information on an issuer-specific basis shall do so ``at or prior to 
the consultant's first direct or indirect communication with the issuer 
for any municipal securities business being sought.'' \6\ Amendment No. 
1 also clarifies that the annual updating requirement for dealers 
disclosing information on an issuer-specific basis is keyed off the 
previous full disclosure of the consultant's name, company, role and 
compensation arrangement (and not any interim disclosure of changes to 
such information).
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    \6\ The amendment originally would have required that such 
disclosures be made ``within three business days of the consultant's 
first direct or indirect communication with the issuer, but in any 
event prior to the issuer's selection of such broker, dealer or 
municipal securities dealer for any municipal securities business 
being sought.'' See supra note 1.
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    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act.\7\ The Board believes that the 
proposed rule change will facilitate compliance with Rule G-38, thereby 
protecting investors and the public interest.
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    \7\ Section 15B(b)(2)(C) states 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.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change would 
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

    In June 1997, the Board published a draft amendment to Rule G-38(c) 
for industry comment.\8\ In response, the Board received comment 
letters from three dealers.\9\ One of these commenters expressed its 
belief that the amendment ``is helpful and may simplify the reporting 
process.'' \10\ The other two commenters also supported the draft 
amendment.\11\ One commenter stated that ``the proposed changes will 
greatly simplify the disclosure process when multiple transactions 
develop as the result of a consultant's activities with an 
issuer.''\12\ However, this commenter recommended that the draft 
amendment require dealers to advise the issuer of any material change 
in the information disclosed; the commenter believes that this will 
obviate the need for dealers to file amended disclosure reports 
relating to, for example, an insignificant change to a consultant's 
role or to a minor change in the name of the consultant's organization. 
The Board believes that adopting the commenter's recommendation would 
introduce a subjective element to the disclosure requirement and would 
result in differing interpretations as to what is ``material.'' For 
example, by incorporating this subjective standard, the Board could not 
ensure that issuers would be advised of changes in the consultant's 
name, company, role and compensation arrangement--information which is 
required to be disclosed to issuers pursuant to Rule G-38(c). Thus, the 
Board has declined to adopt the commenter's recommendation.
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    \8\ MSRB Reports, Vol. 17, No. 2 (June 1997) at 17-18. The draft 
amendment would have required dealers that disclose information on 
their consulting arrangements on an issuer-specific bases to make 
such disclosures ``within three business days of the consultant's 
first direct or indirect communication with the issuer, but in any 
event prior to the issuer's selection of such broker, dealer or 
municipal securities dealer for any municipal securities business 
being sought.'' As discussed above, the Board submitted Amendment 
No. 1 in response to concerns expressed by Commission staff 
regarding the timing of this provision. Thus, the proposed rule 
change provides that dealers disclosing information on issuer-
specific basis shall do so ``at or prior to the consultant's first 
direct or indirect communication with the issuer for any municipal 
securities business being sought.''
    \9\ A.G. Edwards, Rauscher Pierce Refsnes, Inc., and Smith 
Barney.
    \10\ Rauscher Pierce Refsnes, Inc.
    \11\ A.G. Edwards and Smith Barney.
    \12\ A.G. Edwards.
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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, including whether the proposed rule 
change is consistent with the Act. 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 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-97-9 and should be 
submitted by June 8, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

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[[Page 27339]]

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-13096 Filed 5-15-98; 8:45 am]
BILLING CODE 8010-01-M