[Federal Register Volume 63, Number 193 (Tuesday, October 6, 1998)]
[Notices]
[Pages 53739-53740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26722]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40499; File No. SR-MSRB-97-9]


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

September 29, 1998.
    On March 18, 1998,\1\ the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change and Amendment No. 1 (SR-MSRB-97-
9) hereafter referred to collectively as the ``proposed rule change.'' 
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. Notice of the proposed rule change appeared in the Federal 
Register on May 18, 1998.\4\ The Commission received no comment letters 
concerning the proposed rule change. The Commission is approving the 
proposed rule change.
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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.
    \4\ See Securities Exchange Act Release No. 39983 (May 12, 
1998), 63 FR 27337.
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I. Description of Proposal

    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. 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. 
The Board amended this rule to 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.
    According to the Board, this issue-specific disclosure requirement 
has created compliance problems for dealers in cases where issuers of 
municipal securities frequently bring new issues to market 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. Furthermore, 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 timing of the issue-specific disclosure requirement in 
Rule G-38(c) is appropriate in the majority of cases, it can be a 
problem in the context of frequent issuers of municipal securities and 
in the co-manager selection process. Thus, Rule G-38(c) has been 
amended to give dealers the option of disclosing their consulting 
arrangements to issuers on either an issue-specific or issuer-specific 
basis. Pursuant to the amendment, if a dealer chooses to disclose 
information regarding a consulting arrangement on an issuer-specific 
basis,\5\ 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.'' 
\6\
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    \5\ In contrast, disclosures made by a dealer on an issue-
specific basis continue to be required prior to the issuer's 
selection of any dealer for the particular municipal securities 
business being sought.
    \6\ The initial proposal would have required that such 
disclosures be made ``within three business days of the consultant's 
first direct or indirect communication with the issuer.'' However, 
the Commission requested that the timing requirement be more 
stringent. Thus, the Board filed Amendment No. 1, eliminating the 
dealers' three day disclosure window and replacing it with the 
current language. See note 1, supra.

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[[Page 53740]]

    To ensure that information on consultant arrangements, 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.\7\ Amendment No. 1 clarifies that the annual updating 
requirement for dealers disclosing information on an issuer-specific 
basis is triggered by the previous full disclosure of the consultant's 
name, company, role and compensation arrangement (and not any interim 
disclosure of changes to such information). However, 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.
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    \7\ 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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II. Discussion

    The Commission believes the proposed rule change is consistent with 
the Act and the rules and regulations promulgated thereunder.\8\ 
Specifically, the Commission believes that approval of the proposed 
rule change is consistent with Section 15B(b)(2)(C) \9\ of the Act. The 
Commission is satisfied that the amendments to Rule G-38(c) provide the 
necessary relief to dealers from the heretofore stringent application 
of the rule while still essentially maintaining the rule's original 
intent and purpose. Prior to this proposed rule change, some dealers 
had difficulty meeting the ``any dealer'' requirement of the rule, 
because they had no way of knowing when the lead manager was selected. 
In cases where it is difficult to determine when a dealer is chosen 
(i.e., co-manager selection), the amended rule provides an option for 
the dealer to disclose its consulting relationship before the specific 
dealer is selected.
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    \8\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. As a result of this 
amendment, municipal securities dealers should experience a decline 
in the number of disclosures required to be made to issuers 
regarding their consulting arrangements. A decline in required 
disclosure should translate to a decline in costs associated with 
these filings, thus allowing dealers to allocate resources to other 
areas. The implementation of this amendment should also enhance 
dealers' efficiency as recordkeeping and compliance become less 
burdensome. 15 U.S.C. 78c(f).
    \9\ Section 15B(b)(2)(C) requires the Commission to determine 
that the Board's rules are 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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    The Commission understands that the timing of disclosure 
requirements had to be changed to make the rule more workable. However, 
the Commission was concerned that the initial amendment weakened the 
original goal of the rule (i.e., for dealers to provide complete, 
timely disclosure concerning their consulting arrangements to issuers 
so that issuers can evaluate all potential underwriters before making a 
final decision). Given the rule's goal, the Commission believed that 
the initial proposal, allowing the dealer to make its disclosures 
within three days after the consultant had contacted the issuer,\10\ 
would have greatly lessened the effectiveness of the rule. Thus, the 
Commission requested Amendment No. 1 to close potential compliance 
loopholes in the dealers' disclosure requirements and align the 
proposal with the rule's intent. The Commission believes Amendment No. 
1 preserves the original intent and purpose of the rule and stymies any 
potential collusive activity by dealers and their consultants to 
circumvent Rule G-37.
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    \10\ See note 6, supra.
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III. Conclusion

    For the above reasons, the Commission believes that the proposed 
rule change is consistent with the provisions of the Act, and in 
particular with Section 15B(b)(2)(C).

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-MSRB-97-9) is hereby 
approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-26722 Filed 10-5-98; 8:45 am]
BILLING CODE 8010-01-M