[Federal Register Volume 65, Number 68 (Friday, April 7, 2000)]
[Notices]
[Pages 18401-18405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8650]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42608; File No. SR-MSRB-00-05]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; 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

April 3, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 18402]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 2, 2000, 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 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).
    \2\ 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 MSRB is proposing a notice of interpretation, in question and 
answer format, concerning MSRB Rule G-38, on consultants. The purpose 
of the proposed rule change is to provide interpretative guidance 
concerning MSRB Rule G-38. The proposed rule change is as follows:

Rule G-38  Questions and Answers Concerning Information about 
Consultants' Political Contributions and Payments to State and Local 
Political Parties

General Requirements of New Amendments

    1. Q: What are the new amendments to rule G-38 about?
    A: The amendments will require dealers to collect from their 
consultants, and to disclose to the Board on revised Form G-37/G-38, 
information regarding certain contributions to issuer officials and 
certain payments to state and local political parties made by such 
consultants.
    2. Q: What political contributions and political party payments are 
subject to the new reporting requirement?
    A: This depends upon whether the consultant is an individual or a 
company. If the consultant is an individual, then the contributions and 
payments that are covered (to the extent reportable under the rule) are 
those of (1) that individual and (2) any political action committee 
controlled by such individual. If the consultant is a company, then the 
contributions and payments that are covered (to the extent reportable 
under the rule) are those of (1) that company, (2) any partner, 
director, officer or employee of such company who communicates with an 
issuer to obtain municipal securities business on behalf of the dealer, 
and (3) any political action committee controlled by such company or 
any of the individuals identified in the immediately preceding clause 
(2).
    3. Q: May the dealer enter into a Consultant Agreement with either 
an individual or a company? \3\
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    \3\ The MSRB changed the text of question three from, ``May the 
dealer choose whether the consultant is an individual or a 
company?'' See letter from Ronald W. Smith, Senior Legal Associate, 
MSRB, to Katherine England, Assistant Director, Division of Market 
Regulation (``Division''), SEC, dated March 30, 2000.
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    A: Yes, provided that the dealer must enter into a Consultant 
Agreement with the actual party that is serving as the consultant. For 
example, if the consultant is in effect a company with several 
employees making actual contact with issuers on the dealer's behalf, a 
Consultant Agreement entered into only with one of these employees may 
not, depending upon all the relevant facts and circumstances, satisfy 
the requirement that the dealer enter into a Consultant Agreement with 
the consultant.
    4. Q: Must a Consultant Agreement include any provisions regarding 
a consultant's reportable political contributions and reportable 
political party payments?
    A: Yes. A dealer is required to include within its Consultant 
Agreement a provision to the effect that the consultant agrees to 
provide the dealer each calendar quarter with either (1) a listing of 
reportable political contributions to official(s) of an issuer and 
reportable payments to political parties of states and political 
subdivisions during such quarter, or (2) a report that no reportable 
political contributions or reportable political party payments were 
made during such quarter, as appropriate.
    5. Q: Which contributions to issuer officials made by consultants 
are reportable under the rule?
    A: Rule G-38(a)(vi) defines the term ``reportable political 
contribution'' to mean, if the consultant has had direct or indirect 
communication with an issuer on behalf of the dealer or obtain or 
retain municipal securities business for such dealer, a political 
contribution to an official(s) of such issuer made by any contributor 
referred to in rule G-38(b)(i) (see Question and Answer number 2) 
during the period beginning six months prior to such communication and 
ending six months after such communication.
    6. Q: Which payments to state and local political parties made by 
consultants are reportable under the rule?
    A: Rule G-38(a)(vii) defines the term ``reportable political party 
payment'' to mean, if a political party of a state or political 
subdivision operates within the geographic area (e.g., city, county and 
state parties) of an issuer with which the consultant has had direct or 
indirect communication to obtain or retain municipal securities 
business on behalf of the dealer, a payment to such party made by any 
contributor referred to in rule G-38(b)(i) (see Question and Answer 
number 2) during the period beginning six months prior to such 
communication and ending six months after such communication.
    7. Q: Is there a de minimis exception for the reporting of 
political contributions and political party payments?
    A: Yes. The de minimis exception for contributions to official(s) 
of an issuer provides that a consultant need not provide to a dealer 
information about contributions of the consultant (but only if the 
consultant is an individual) or by any partner, director, officer or 
employee of the consultant (if the consultant is a company) who 
communicates with issuers to obtain municipal securities business on 
behalf of the dealer made to any official of an issuer for whom such 
individual is entitled to vote if such individual's contributions, in 
total, are not in excess of $250 to each official of such issuer, per 
election.
    Similarly, the de minimis exception for political party payments 
provides that a consultant need not provide to a dealer information 
about payments of the consultant to political parties of a state or 
political subdivision (but only if the consultant is an individual) or 
by any partner, director, officer or employee of the consultant (if the 
consultant is a company) who communicates with issuers to obtain 
municipal securities business on behalf of the dealer and who is 
entitled to vote in such state or political subdivision if the payments 
made by the individual, in total, are not in excess of $250 per 
political party, per year.
    Again, the de minimis exception applies only to contributions or 
payments by individuals. There is no de minimis exception for 
contributions by the consultant if it is a company or for any PAC 
controlled by the company or individuals covered by the rule.
    8. Q: If a consultant makes political contributions during a 
particular quarter but these contributions do not meet the definition 
of ``reportable political contribution'' as defined in rule G-38, is 
the consultant required to report any information about its political 
contributions to the dealer?

[[Page 18403]]

    A: The consultant is required to report to the dealer that it made 
no reportable political contributions during the quarter.
    9. Q: With respect to a particular issuer, if a consultant is 
communicating with one individual but has made a contribution to a 
different individual, would the consultant report this contribution to 
the dealer? For example, if the dealer is seeking municipal securities 
business from City A and its consultant communicates with the Mayor of 
the City, would a non-de minimis political contribution to the City's 
Comptroller (an official of the issuer) have to be reported?
    A: Yes. A consultant must report and a dealer must disclose 
contributions with respect to those ``issuers'' from which a consultant 
is seeking municipal securities business on behalf of the dealer, 
regardless of whether contributions are going to and communications are 
occurring with the same or different personnel within that particular 
issuer.
    10. Q: What is the date that establishes the obligation for the 
collection of reportable political contributions and reportable 
political party payments?
    A: The date of the consultant's communication with the issuer to 
obtain or retain municipal securities business on behalf of the dealer 
is the key date with respect to determining whether a contribution or 
payment is reportable. For the quarter in which a consultant first 
communicates with the issuer, the dealer is required to collect from 
the consultant its reportable political contributions and reportable 
political party payments for such quarter and, pursuant to the six-
month look-back, for the six-month period preceding such first 
communication.
    11. Q: How do the ``look-back'' and ``look-forward'' provisions 
operate?
    A: Pursuant to the look-back provision, a consultant must disclose 
to the dealer the reportable political contributions and reportable 
political party payments made by the consultant during the six months 
prior to the date of the consultant's communication with the issuer. 
These contributions and payments become reportable in the calendar 
quarter in which the consultant first communicates with the issuer. Of 
coursed, any reportable political contributions and reportable 
political party payments made during the period that the consultant 
continues to communicate with the issuer are required to be disclosed. 
Once communication with an issuer ceases, the consultant still must 
disclose information with respect to reportable political contributions 
and reportable political party payments made during the ensuing six 
months pursuant to the look-forward provision. Contributions and 
payments made simultaneously with or after the consultant's first 
communication with the issuer are reportable in the calendar quarter in 
which they are made.
    12. Q: When does the requirement cease for a dealer to collect 
contribution and payment information from its consultants?
    A: The requirement ceases when a consultant agreement has been 
terminated. Of course, dealers should not attempt to avoid the 
requirements of rule G-38 by terminating a consultant relationship 
after directing or soliciting the consultant to make a political 
contribution to an issuer official after such termination. Rule G-37(d) 
prohibits a dealer from doing any act indirectly which would result in 
a violation of rule G-37 if done directly by the dealer. Thus, a dealer 
may violate rule G-37 by engaging in municipal securities business with 
an issuer after directing or soliciting any person to make a 
contribution to an official of such issuer.

``Reasonable Efforts'' Provision

    13. Q: What is the reasonable efforts provision contained in rule 
G-38?
    A: This provision provides that a dealer will not be found to have 
violated rule G-38 if the dealer fails to receive from its consultants 
all required information about reportable political contributions and 
reportable political party payments and thus fails to report such 
information to the Board if the dealer can demonstrate that it used 
reasonable efforts in attempting to obtain the necessary information.
    14. Q: What must a dealer do to avail itself of the reasonable 
efforts provision?
    A: A dealer must: (1) state in the Consultant Agreement that Board 
rules require disclosure of consultant contributions to issuer 
officials and payments to state and local political parties; (2) send 
quarterly reminders to its consultants of the deadline for their 
submissions to the dealer of contribution and payment information; (3) 
include language in the Consultant Agreement to the effect that: (a) 
the Consultant Agreement will be terminated if, for any calendar 
quarter, the consultant fails to provide the dealer with information 
about its reportable contributions or payments, or a report noting that 
the consultant made no reportable contributions or payments, and such 
failure continues up to the date to be determined by the dealer but no 
later than the date by which the dealer is required to send Form G-37/
G-38 to the Board with respect to the next succeeding calendar quarter, 
such termination to be effective upon the date the dealer must send its 
Form G-37/G-38 to the Board, and (b) the dealer may not make any 
further payments to the consultant, including payments owed for 
services performed prior to the date of termination, as of the date of 
such termination; and (4) enforce the Consultant Agreement provisions 
described above in a full and timely manner and indicate the reason for 
and date of the termination on its Form G-37/G-38 for the applicable 
quarter.
    15. Q: If a dealer does not include the termination and non-payment 
provisions in a Consultant Agreement or enforce any such provision that 
may be contained in the Consultant Agreement, would this constitute a 
violation of rule G-38?
    A: No. Failure to follow the requirements of the reasonable efforts 
provision would not result in a violation of rule G-38; however, the 
dealer would be precluded from invoking the reasonable efforts 
provision as a defense against a possible violation for failing to 
disclose consultant contribution information which the consultant may 
have withheld from the dealer. Of course, whether or not a dealer would 
be charged with a violation of rule G-38 for failure to disclose 
consultant contribution information would depend upon a review of the 
facts and circumstances of the individual case by the appropriate 
regulatory agency.

Disclosure on Form G-37/G-38

    16. Q: What information concerning consultants' political 
contributions and payments to political parties is \4\ required to be 
reported to the Board on Form G-37/G-38?
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    \4\ The MSRB changed ``are'' to ``is.'' See letter from Ronald 
W. Smith, Senior Legal Associate, MSRB, to Katherine England, 
Assistant Director, Division, SEC, dated March 2, 2000.
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    A: Forms G-37/G-38 shall include the following information to the 
extent required to be obtained for a calendar quarter: (1) the name and 
title (including any city/county/state or political subdivision) of 
each official of an issuer and political party receiving reportable 
political contributions or reportable political party payments, listed 
by state, and contribution or payment amounts made and the contributor 
category; or (2) if applicable, a statement that the consultant 
reported that no reportable political contributions or reportable 
political payments were made; or (3) if applicable, a statement that 
the

[[Page 18404]]

consultant failed to provide any report of information to the dealer 
concerning reportable political contributions or reportable political 
party payments.
    17. Q: Does a dealer have a reporting obligation if a consultant 
fails to provide a report for a particular quarter?
    A: Yes. The dealer must disclose on Form G-37/G-38 if the 
consultant has failed to provide it with a report of its reportable 
political contributions and reportable political party payments.
    18. Q: In listing consultants' reportable political contributions 
and reportable political party payments on Form G-37/G-38, how are the 
contributors to be identified?
    A: By contributor category (i.e., company, individual, company 
controlled PAC or individual controlled PAC).
    19. Q: How should look-back contributions and payments be disclosed 
on Form G-37/G-38?
    A: Dealers must disclose, in addition to the other required 
information, the calendar quarter and year of any reportable political 
contributions and reportable political party payments that were made 
prior to the calendar quarter for which the form is being completed. 
Look-back contributions and payments should be disclosed on the Form G-
37/G-38 for the quarter in which the consultant has first communicated 
with an issuer to obtain municipal securities business on behalf of the 
dealer.

Recordkeeping

    20. Q: What records concerning consultants' political contributions 
and payments to political parties are required to be maintained?
    A: Rule G-8(a)(xviii) requires a dealer to maintain: (1) Records of 
each reportable political contribution, (2) records of each reportable 
political party payment, (3) records indicating, if applicable, that a 
consultant made no reportable political contributions or no reportable 
political party payments, and (4) a statement, if applicable, that a 
consultant failed to provide any report of information to the dealer 
concerning reportable political contributions or reportable political 
party payments.

Effective Date of Requirements Concerning Consultants' Political 
Contributions and Payments to State and Local Political Parties

    21. Q: What is the effective date of the amendments to rule G-38 
concerning the disclosure of consultants' reportable political 
contributions and reportable political party payments?
    A: The amendments will become effective on April 1, 2000. On the 
Forms G-37/G-38 for the second quarter of 2000 (required to be sent to 
the Board by July 31, 2000) dealers are required to disclose their 
consultants' reportable political contributions and reportable 
political party payments for the second quarter of 2000 and include, if 
applicable, reportable political contributions and reportable political 
party payments made since October 1, 1999 pursuant to the six-month 
look-back provision.

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 MSRB 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 MSRB 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

1. Purpose
    On January 17, 1996, the Commission approved Board rule G-38, on 
consultants.\5\ 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, 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. On 
December 7, 1999, the Commission approved amendments to rules G-38, G-
37 and G-8, on books and records, as well as revisions to the 
attachment page to Form G-37/G-38.\6\ The amendments require dealers to 
obtain from their consultants information on the consultants' political 
contributions and payments to state and local political parties and to 
report such information to the Board on Form G-37/G-38. The amendments 
will become effective on April 1, 2000. 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 fifth notice of 
interpretation which sets forth, in question-and-answer format, general 
guidance on the amendments that will become effective on April 1, 
2000.\7\ 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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    \5\ Securities Exchange Act Release No. 36727 (January 17, 
1996), 61 FR 1955 (1996). The rule became effective on March 18, 
1996.
    \6\ Securities Exchange Act Release No. 42205 (December 7, 
1999), 64 FR 69808 (1999).
    \7\ For previous notices, see MSRB Reports, Vol. 16, No. 2 (June 
1996) at 3-5; Vol. 17, No. 1 (January 1997) at 15; Vol. 18, No. 2 
(August 1998) at 13; and Vol. 19, No. 2 (April 1999) at 23. See also 
MSRB Rule Book (January 1, 2000) at 208-211.
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IV. Statutory Basis
    The MSRB represents that the proposed rule change is consistent 
with Section 15B(b)(2)(C) of the Act \8\ because it is 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.\9\
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    \8\ 15 U.S.C. 78o-4(b)(2)(C).
    \9\ In reviewing the proposed rule change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB 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 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

    The MSRB has neither solicited nor received written comments on the 
proposed rule change.

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

    The foregoing rule change, which constitutes a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule imposed by the 
Exchange, has become effective pursuant to Section 19(b)(3)(A) of the 
Act \10\ and subparagraph (f)(1) of Rule

[[Page 18405]]

19b-4 thereunder.\11\ At any time within 60 days of the filing of the 
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.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(1).
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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 20549-0609. 
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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room. Copies of such filing also will 
be available for inspection and copying at the principal office of the 
MSRB. All submissions should refer to File No. SR-MSRB-00-05 and should 
be submitted by April 28, 2000.
    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-8650 Filed 4-6-00; 8:45 am]
BILLING CODE 8010-01-M